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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2007

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission file number: 001-33438



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NEUROGESX, INC.

(Exact name of
registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 94-3307935                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                                     |  |           
|---------------------------------------------------- |  | ----------
|981 Industrial Blvd, Suite F. San Carlos, California |  | 94070     
|(Address of principal executive offices)             |  | (Zip Code)

Registrants telephone number, including area code: (650) 508-2116



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Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated file ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x

Number of shares of common stock, $0.001 par value, outstanding as of July 31, 2007: 13,431,947



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##### Table of Contents

NEUROGESX, INC.

(A DEVELOPMENT STAGE COMPANY)

TABLE OF CONTENTS FOR FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2007



|                                                                                                                                                                                 |  |     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                                                                 |  | Page
|PART I. FINANCIAL INFORMATION                                                                                                                                                    |  | 1   
|Item 1. Financial Statements (unaudited)                                                                                                                                         |  | 1   
|Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006                                                                                                  |  | 1   
|Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006, and the period from May 28, 1998 (date of inception) to June 30, 2007 |  | 2   
|Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006, and the period from May 28, 1998 (date of inception) to June 30, 2007           |  | 3   
|Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                                                                 |  | 4   
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                    |  | 11  
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                                                                               |  | 19  
|Item 4. Controls and Procedures                                                                                                                                                  |  | 19  
|                                                                                                                                                                                 | 
|PART II. OTHER INFORMATION                                                                                                                                                       |  | 20  
|Item 1. Legal Proceedings                                                                                                                                                        |  | 20  
|Item 1A. Risk Factors                                                                                                                                                            |  | 20  
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                              |  | 39  
|Item 3. Defaults Upon Senior Securities                                                                                                                                          |  | 39  
|Item 4. Submission of Matters to a Vote of Security Holders                                                                                                                      |  | 39  
|Item 5. Other Information                                                                                                                                                        |  | 40  
|Item 6. Exhibits                                                                                                                                                                 |  | 41  
|                                                                                                                                                                                 | 
|SIGNATURES                                                                                                                                                                       |  | 42  
|                                                                                                                                                                                 | 
|EXHIBIT INDEX                                                                                                                                                                    |  | 43  



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS (Unaudited)
|------- | --------------------------------

NeurogesX, Inc.

(A Development Stage Company)

Condensed Consolidated Balance Sheets

(in thousands)



|                                                                                             |  |              |          |   |                  |   |          |  
|-------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                             |  | June 30,2007 |          |   | December 31,2006 |  
|                                                                                             |  | (unaudited)  |          |   | (Note 1)         |  
|Assets                                                                                       |  |              |          |   |                  |   |          |  
|Current assets:                                                                              |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                    |  | $            | 16,960   |   |                  | $ | 11,908   |  
|Short term investments                                                                       |  |              | 30,886   |   |                  |   | 1,994    |  
|Prepaid expenses and other current assets                                                    |  |              | 999      |   |                  |   | 659      |  
|                                                                                             |  |              |          |   |                  |   |          |  
|Total current assets                                                                         |  |              | 48,845   |   |                  |   | 14,561   |  
|Property and equipment, net                                                                  |  |              | 142      |   |                  |   | 159      |  
|Other assets                                                                                 |  |              | 77       |   |                  |   | 98       |  
|                                                                                             |  |              |          |   |                  |   |          |  
|Total assets                                                                                 |  | $            | 49,064   |   |                  | $ | 14,818   |  
|                                                                                             |  |              |          |   |                  |   |          |  
|Liabilities, Redeemable Convertible Preferred Stock and Stockholders Equity
(Deficit)       |  |              |          |   |                  |   |          |  
|Current Liabilities:                                                                         |  |              |          |   |                  |   |          |  
|Accounts payable                                                                             |  | $            | 2,210    |   |                  | $ | 1,675    |  
|Accrued compensation                                                                         |  |              | 266      |   |                  |   | 199      |  
|Accrued research and development                                                             |  |              | 1,521    |   |                  |   | 1,133    |  
|Other accrued expenses                                                                       |  |              | 539      |   |                  |   | 990      |  
|Preferred stock warrant liability                                                            |  |              |         |   |                  |   | 7,549    |  
|Notes payablecurrent portion                                                                |  |              | 3,820    |   |                  |   | 2,437    |  
|                                                                                             |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                    |  |              | 8,356    |   |                  |   | 13,983   |  
|Notes payablenon-current portion                                                            |  |              | 4,678    |   |                  |   | 6,737    |  
|                                                                                             |  |             
|Commitments and contingencies                                                                |  |              |          |   |                  |   |          |  
|Redeemable convertible preferred stock                                                       |  |              |         |   |                  |   | 116,164  |  
|                                                                                             |  |             
|Stockholders equity (deficit):                                                              |  |              |          |   |                  |   |          |  
|Common stock                                                                                 |  |              | 14       |   |                  |   | 1        |  
|Additional paid-in capital                                                                   |  |              | 183,031  |   |                  |   | 5,505    |  
|Deferred stock-based compensation                                                            |  |              | (21      | ) |                  |   | (45      | )
|Accumulated other comprehensive income                                                       |  |              | 35       |   |                  |   |         |  
|Deficit accumulated during the development stage                                             |  |              | (147,029 | ) |                  |   | (127,527 | )
|                                                                                             |  |              |          |   |                  |   |          |  
|Total stockholders equity (deficit)                                                         |  |              | 36,030   |   |                  |   | (122,066 | )
|                                                                                             |  |              |          |   |                  |   |          |  
|Total liabilities, redeemable convertible preferred stock and stockholders equity (deficit) |  | $            | 49,064   |   |                  | $ | 14,818   |  
|                                                                                             |  |              |          |   |                  |   |          |  

See accompanying notes.



1



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##### Table of Contents

NeurogesX, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Operations

(in thousands, except share
and per share data)

(unaudited)



|                                                                                                   |  |                             |           |   |                           |   |         |                                                 |  |   |           |   |  |      |         |   |  |   |          |  
|-------------------------------------------------------------------------------------------------- |  | --------------------------- | --------- | - | ------------------------- | - | ------- | ----------------------------------------------- |  | - | --------- | - |  | ---- | ------- | - |  | - | -------- | -
|                                                                                                   |  | Three Months Ended June 30, |           |   | Six Months Ended June 30, |   |         | Period fromMay 28, 1998 (inception) to June 30, | 
|                                                                                                   |  | 2007                        |           |   | 2006                      |   |         | 2007                                            |  |   | 2006      |   |  | 2007 |        
|Operating expenses:                                                                                |  |                             |           |   |                           |   |         |                                                 |  |   |           |   |  |      |         |   |  |   |          |  
|Research and development(1)                                                                        |  | $                           | 5,990     |   |                           | $ | 4,600   |                                                 |  | $ | 12,185    |   |  | $    | 9,409   |   |  | $ | 82,251   |  
|General and administrative(2)                                                                      |  |                             | 1,416     |   |                           |   | 1,474   |                                                 |  |   | 3,069     |   |  |      | 2,467   |   |  |   | 24,487   |  
|                                                                                                   |  |                             |           |   |                           |   |         |                                                 |  |   |           |   |  |      |         |   |  |   |          |  
|Total operating expenses                                                                           |  |                             | 7,406     |   |                           |   | 6,074   |                                                 |  |   | 15,254    |   |  |      | 11,876  |   |  |   | 106,738  |  
|                                                                                                   |  |                             |           |   |                           |   |         |                                                 |  |   |           |   |  |      |         |   |  |   |          |  
|Loss from operations                                                                               |  |                             | (7,406    | ) |                           |   | (6,074  | )                                               |  |   | (15,254   | ) |  |      | (11,876 | ) |  |   | (106,738 | )
|Interest income                                                                                    |  |                             | 465       |   |                           |   | 137     |                                                 |  |   | 667       |   |  |      | 270     |   |  |   | 2,909    |  
|Interest expense                                                                                   |  |                             | (317      | ) |                           |   |        |                                                 |  |   | (649      | ) |  |      |        |   |  |   | (1,356   | )
|Other income (expense), net                                                                        |  |                             | 301       |   |                           |   | (162    | )                                               |  |   | 360       |   |  |      | (51     | ) |  |   | (2,940   | )
|                                                                                                   |  |                             |           |   |                           |   |         |                                                 |  |   |           |   |  |      |         |   |  |   |          |  
|Net loss before cumulative effect of change in accounting principle                                |  |                             | (6,957    | ) |                           |   | (6,099  | )                                               |  |   | (14,876   | ) |  |      | (11,657 | ) |  |   | (108,125 | )
|Cumulative effect of change in accounting principle                                                |  |                             |          |   |                           |   |        |                                                 |  |   |          |   |  |      |        |   |  |   | (32      | )
|                                                                                                   |  |                             |           |   |                           |   |         |                                                 |  |   |           |   |  |      |         |   |  |   |          |  
|Net loss                                                                                           |  |                             | (6,957    | ) |                           |   | (6,099  | )                                               |  |   | (14,876   | ) |  |      | (11,657 | ) |  |   | (108,157 | )
|Accretion of redeemable convertible preferred stock                                                |  |                             | (1,188    | ) |                           |   | (2,606  | )                                               |  |   | (4,626    | ) |  |      | (4,986  | ) |  |   | (38,872  | )
|                                                                                                   |  |                             |           |   |                           |   |         |                                                 |  |   |           |   |  |      |         |   |  |   |          |  
|Loss attributable to common stockholders                                                           |  | $                           | (8,145    | ) |                           | $ | (8,705  | )                                               |  | $ | (19,502   | ) |  | $    | (16,643 | ) |  | $ | (147,029 | )
|                                                                                                   |  |                             |           |   |                           |   |         |                                                 |  |   |           |   |  |      |         |   |  |   |          |  
|Net loss per common share  basic and diluted:                                                     |  |                             |           |   |                           |   |         |                                                 |  |   |           |   |  |      |         |   |  |   |          |  
|Loss per share attributable to common stockholders                                                 |  | $                           | (0.99     | ) |                           | $ | (25.48  | )                                               |  | $ | (4.37     | ) |  | $    | (49.92  | ) |  |   |          |  
|                                                                                                   |  |                             |           |   |                           |   |         |                                                 |  |   |           |   |  |      |         |   |  |   |          |  
|Shares used to compute basic and diluted loss per common share attributable to common stockholders |  |                             | 8,215,875 |   |                           |   | 341,652 |                                                 |  |   | 4,457,988 |   |  |      | 333,413 |   |  |   |          |  
|                                                                                                   |  |                             |           |   |                           |   |         |                                                 |  |   |           |   |  |      |         |   |  |   |          |  
|                                                                                                  
|Non-cash stock-based compensation expense included in operating expenses:                          | 
|(1) Research and development                                                                       |  | $                           | 176       |   |                           | $ | 160     |                                                 |  | $ | 525       |   |  | $    | 264     |   |  |   |          |  
|(2) General and administrative                                                                     |  |                             | 25        |   |                           |   | 854     |                                                 |  |   | 506       |   |  |      | 1,238   |   |  |   |          |  
|                                                                                                   |  |                             |           |   |                           |   |         |                                                 |  |   |           |   |  |      |         |   |  |   |          |  
|                                                                                                   |  | $                           | 201       |   |                           | $ | 1,014   |                                                 |  | $ | 1,031     |   |  | $    | 1,502   |   |  |   |          |  
|                                                                                                   |  |                             |           |   |                           |   |         |                                                 |  |   |           |   |  |      |         |   |  |   |          |  

See accompanying notes.



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NeurogesX, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



|                                                                                        |  |                           |         |   |                                               |   |         |      |  |   |          |  
|--------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | --------------------------------------------- | - | ------- | ---- |  | - | -------- | -
|                                                                                        |  | Six Months Ended June 30, |         |   | Period fromMay 28, 1998(inception) toJune 30, |  
|                                                                                        |  | 2007                      |         |   | 2006                                          |   |         | 2007 | 
|Operating activities:                                                                   |  |                           |         |   |                                               |   |         |      |  |   |          |  
|Net loss                                                                                |  | $                         | (14,876 | ) |                                               | $ | (11,657 | )    |  | $ | (108,157 | )
|Adjustments to reconcile net loss to net cash used in operating activities:             |  |                           |         |   |                                               |   |         |      |  |   |          |  
|Depreciation and amortization                                                           |  |                           | 47      |   |                                               |   | 117     |      |  |   | 1,323    |  
|Amortization of debt issuance costs                                                     |  |                           | 99      |   |                                               |   |        |      |  |   | 195      |  
|Amortization of investment premiums                                                     |  |                           | (202    | ) |                                               |   | 1       |      |  |   | 140      |  
|Stock based compensation                                                                |  |                           | 1,031   |   |                                               |   | 1,502   |      |  |   | 6,224    |  
|Loss on disposal of fixed assets                                                        |  |                           |        |   |                                               |   |        |      |  |   | 88       |  
|Revaluation of preferred stock warrant liability                                        |  |                           | (360    | ) |                                               |   | 51      |      |  |   | 2,888    |  
|Changes in operating assets and liabilities:                                            |  |                           |         |   |                                               |   |         |      |  |   |          |  
|Other current assets                                                                    |  |                           | (340    | ) |                                               |   | 64      |      |  |   | (999     | )
|Other assets                                                                            |  |                           |        |   |                                               |   |        |      |  |   | (116     | )
|Accounts payable                                                                        |  |                           | 535     |   |                                               |   | (675    | )    |  |   | 2,210    |  
|Accrued compensation                                                                    |  |                           | 67      |   |                                               |   | 7       |      |  |   | 266      |  
|Accrued research and development                                                        |  |                           | 388     |   |                                               |   | (50     | )    |  |   | 1,521    |  
|Other accrued expenses                                                                  |  |                           | (379    | ) |                                               |   | 458     |      |  |   | 235      |  
|                                                                                        |  |                           |         |   |                                               |   |         |      |  |   |          |  
|Net cash used in operating activities                                                   |  |                           | (13,990 | ) |                                               |   | (10,182 | )    |  |   | (94,182  | )
|                                                                                        |  |                           |        
|Investing activities:                                                                   |  |                           |         |   |                                               |   |         |      |  |   |          |  
|Purchases of short-term investments                                                     |  |                           | (32,158 | ) |                                               |   | (1,253  | )    |  |   | (101,986 | )
|Proceeds from maturities of short-term investments                                      |  |                           | 3,502   |   |                                               |   | 3,272   |      |  |   | 70,996   |  
|Purchases of property and equipment                                                     |  |                           | (29     | ) |                                               |   | (47     | )    |  |   | (1,552   | )
|                                                                                        |  |                           |         |   |                                               |   |         |      |  |   |          |  
|Net cash (used in)/provided by investing activities                                     |  |                           | (28,685 | ) |                                               |   | 1,972   |      |  |   | (32,542  | )
|                                                                                        |  |                           |        
|Financing activities:                                                                   |  |                           |         |   |                                               |   |         |      |  |   |          |  
|Proceeds from notes payable                                                             |  |                           |        |   |                                               |   |        |      |  |   | 11,092   |  
|Repayment of notes payable                                                              |  |                           | (754    | ) |                                               |   |        |      |  |   | (2,281   | )
|Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs |  |                           | 10,083  |   |                                               |   | 9,558   |      |  |   | 96,187   |  
|Proceeds from issuance of common stock                                                  |  |                           | 38,398  |   |                                               |   | 63      |      |  |   | 38,686   |  
|                                                                                        |  |                           |         |   |                                               |   |         |      |  |   |          |  
|Net cash provided by financing activities                                               |  |                           | 47,727  |   |                                               |   | 9,621   |      |  |   | 143,684  |  
|                                                                                        |  |                           |        
|Net increase in cash and cash equivalents                                               |  |                           | 5,052   |   |                                               |   | 1,411   |      |  |   | 16,960   |  
|Cash and cash equivalents, beginning of period                                          |  |                           | 11,908  |   |                                               |   | 10,031  |      |  |   |         |  
|                                                                                        |  |                           |         |   |                                               |   |         |      |  |   |          |  
|Cash and cash equivalents, end of period                                                |  | $                         | 16,960  |   |                                               | $ | 11,442  |      |  | $ | 16,690   |  
|                                                                                        |  |                           |         |   |                                               |   |         |      |  |   |          |  
|Supplemental cash flow information:                                                     |  |                           |         |   |                                               |   |         |      |  |   |          |  
|Cash paid for interest                                                                  |  | $                         | 462     |   |                                               | $ |        |      |  | $ | 1,035    |  
|                                                                                        |  |                           |         |   |                                               |   |         |      |  |   |          |  

See accompanying notes.



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NEUROGESX, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. The Company

Nature of Operation and Basis of Preparation

NeurogesX, Inc. (the Company), is a biopharmaceutical company focused on developing and commercializing novel pain management therapies. The Companys initial focus is on chronic peripheral
neuropathic pain. The Companys lead product candidate, NGX-4010, a synthetic capsaicin-based topical patch designed to manage pain associated with peripheral neuropathic pain conditions, has completed two pivotal phase 3 clinical trials that
have met their primary endpoints, one in postherpetic neuralgia (PHN) and one in HIV-distal sensory polyneuropathy (HIV-DSP).

The Company was founded as Advanced Analgesics, Inc. on May 28, 1998 and changed its name to NeurogesX, Inc. in September 2000. In January 2007, the Companys board of directors approved the reincorporation
of the Company into Delaware. The Company was previously a California corporation. The reincorporation was completed in February 2007. The Company is located in San Carlos, California. Since its inception, the Company has devoted substantially all
of its efforts to the development of NGX-4010, establishing its offices, recruiting personnel, performing business and financial planning, and raising capital. Accordingly, the Company is considered to be in the development stage.

Principles of Consolidation

The accompanying
financial statements include the accounts of the Company and its wholly-owned subsidiary, NeurogesX UK Limited, which was incorporated as of June 1, 2004. NeurogesX UK Limited was established for the purposes of conducting clinical trials in
the UK and marketing approval submission in Europe. The subsidiary has no assets other than the initial formation capital totaling one Pound Sterling.

Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information on the same basis as the annual financial statements and with instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited condensed interim financial statements include all
adjustments (consisting only of normal recurring adjustments) that management believes are necessary for the fair statement of the balances and results for the periods presented. These unaudited condensed interim financial statement results are not
necessarily indicative of results to be expected for the full fiscal year or any future interim period.

The balance sheet at
December 31, 2006 has been derived from the audited consolidated financial statements at that date. The unaudited condensed consolidated interim financial statements and related disclosures have been prepared with the presumption that users of
the unaudited condensed consolidated interim financial statements have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 2006 contained in the Companys Form S-1, effective May 1, 2007.



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##### Table of Contents

Initial Public Offering

The Company completed its initial public offering (IPO) and sold 4,000,000 shares of common stock at $11.00 per share on May 7, 2007. Gross proceeds from the offering totaled $44.0 million. The net
offering proceeds to us, after deducting estimated expenses of approximately $5.9 million, totaled $38.1 million. Upon closing of the IPO, all of the outstanding shares of the Companys redeemable convertible preferred stock converted to
8,722,013 shares of the Companys common stock.

Reverse Stock Split

On April 13, 2007, the Company effected a 1-for-15 reverse split of its common stock. All common stock share and per share amounts have been
retroactively restated to reflect the reverse stock split in the accompanying consolidated financial statements and notes for all periods presented.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 2. Summary of Significant Accounting Policies

Stock-Based
Compensation

Effective January 1, 2006 the Company adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-Based Payments(SFAS No. 123R), using the prospective transition method. Under the prospective transition method, beginning January 1, 2006, compensation cost recognized includes:
(a) compensation cost for all share-based payments granted prior to, but not yet vested as of December 31, 2005, based on the intrinsic value in accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS
No. 123R. All awards granted, modified, or settled after the date of adoption are accounted for using the measurement, recognition, and attribution provisions of SFAS No. 123R.

The Company recognized stock-based compensation expense as follows (in thousands):



|                               |  |                             |     |                          |   |       |  |      |       |  |   |      
|------------------------------ |  | --------------------------- | --- | ------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                               |  | Three Months Ended June 30, |     | Six Months Ended June30,
|                               |  | 2007                        |     | 2006                     |   | 2007  |  | 2006
|Research and development       |  | $                           | 176 |                          | $ | 160   |  | $    | 525   |  | $ | 264  
|General and administrative     |  |                             | 25  |                          |   | 854   |  |      | 506   |  |   | 1,238
|                               |  |                             |     |                          |   |       |  |      |       |  |   |      
|Total stock-based compensation |  | $                           | 201 |                          | $ | 1,014 |  | $    | 1,031 |  | $ | 1,502
|                               |  |                             |     |                          |   |       |  |      |       |  |   |      



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##### Table of Contents

The components of stock-based compensation expense are as follows (in thousands):



|                                                                                                   |  |                            |      |                          |      |   |       |  |   |       |   |  |   |      
|-------------------------------------------------------------------------------------------------- |  | -------------------------- | ---- | ------------------------ | ---- | - | ----- |  | - | ----- | - |  | - | -----
|                                                                                                   |  | Three Months EndedJune 30, |      | Six Months EndedJune 30,
|                                                                                                   |  | 2007                       |      |                          | 2006 |   | 2007  |  |   | 2006 
|Share based payments granted subsequent to December 31, 2005 under SFAS No. 123R                   |  | $                          | 349  |                          |      | $ | 71    |  | $ | 739   |   |  | $ | 121  
|Compensation expense related to nonemployee options and variable accounting for stock-based awards |  |                            | (151 | )                        |      |   | 940   |  |   | (92   | ) |  |   | 1,375
|Compensation expense related to forgiveness of non-recourse promissory notes                       |  |                            |     |                          |      |   |      |  |   | 379   |   |  |   |     
|Amortization of deferred stock-based compensation                                                  |  |                            | 3    |                          |      |   | 3     |  |   | 5     |   |  |   | 6    
|                                                                                                   |  |                            |      |                          |      |   |       |  |   |       |   |  |   |      
|Total stock-based compensation                                                                     |  | $                          | 201  |                          |      | $ | 1,014 |  | $ | 1,031 |   |  | $ | 1,502
|                                                                                                   |  |                            |      |                          |      |   |       |  |   |       |   |  |   |      

The following table shows the assumptions used to compute stock-based compensation expense for the
stock options granted to employees and directors and for the Companys Employee Stock Purchase Plan (ESPP) during the three and six-month periods June 30, 2007 and 2006 using the Black-Scholes valuation model:



|                                           |  |                             |  |                           |  |            |  |           
|------------------------------------------ |  | --------------------------- |  | ------------------------- |  | ---------- |  | ----------
|                                           |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|                                           |  | 2007                        |  | 2006                      |  | 2007       |  | 2006      
|Dividend yield                             |  | 0%                          |  | 0%                        |  | 0%         |  | 0%        
|Volatility for stock options               |  | 71%                         |  | 77%                       |  | 71  77%   |  | 77%       
|Volatility for ESPP                        |  | 44  61%                    |  |                          |  | 44  61%   |  |          
|Expected life (in years) for stock options |  | 6.0                         |  | 6.0                       |  | 6.0        |  | 6.0       
|Expected life (in years) for ESPP          |  | 0.5  1.0                   |  |                          |  | 0.5  1.0  |  |          
|Risk-free interest rate                    |  | 4.8%                        |  | 5.0%                      |  | 4.6  4.8% |  | 4.6  5.0%

All stock option awards to non-employees are accounted for at the fair value of the consideration
received or the fair value of the equity instrument issued, as calculated using the Black-Scholes model, in accordance with SFAS No. 123R and Emerging Issues Task Force (EITF) Consensus No. 96-18, Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. The option arrangements are subject to periodic remeasurement over their vesting terms.

The following table shows the assumptions used to compute stock-based compensation expense for stock options granted to non-employees during the three
and six-month periods ended June 30, 2007 and 2006 using the Black-Scholes valuation model:



|                         |  |                             |  |                           |  |            |  |           
|------------------------ |  | --------------------------- |  | ------------------------- |  | ---------- |  | ----------
|                         |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|                         |  | 2007                        |  | 2006                      |  | 2007       |  | 2006      
|Dividend yield           |  | 0%                          |  | 0%                        |  | 0%         |  | 0%        
|Volatility               |  | 71%                         |  | 77%                       |  | 71  77%   |  | 77%       
|Expected life (in years) |  | 6.8  9.0                   |  | 5.4  9.5                 |  | 6.8  9.0  |  | 5.4  9.8 
|Risk-free interest rate  |  | 5.0  5.1%                  |  | 5.1%                      |  | 4.5  5.1% |  | 4.7  5.1%



6



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##### Table of Contents

Comprehensive Loss

The Company reports comprehensive loss and its components as part of total stockholders equity. Comprehensive loss is comprised of net loss and unrealized gains (losses) on available-for-sale investments. There
were no material differences between net loss and comprehensive loss for the three and six-month periods ended June 30, 2007 and 2006.

Net Loss
Per Share

Basic loss per share is calculated by dividing the loss applicable to common stockholders by the weighted-average number
of common shares outstanding during the period less the weighted average unvested common shares subject to repurchase and without consideration for common stock equivalents. Diluted loss per common share is computed by dividing the loss applicable
to common stockholders by the weighted-average number of common share equivalents outstanding for the period less the weighted average unvested common shares subject to repurchase and dilutive common stock equivalents for the period determined using
the treasury-stock method. For purposes of this calculation, warrants and options to purchase common stock as well as preferred stock, prior to our IPO, are considered to be common stock equivalents but have been excluded from the calculation of
diluted net loss per share as their effect is anti-dilutive.



|                                                                                                                               |  |                                                |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------- | --------- | - | ------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                                                               |  | Three Months Ended June 30,                    |           |   | Six Months Ended June 30, |  
|                                                                                                                               |  | 2007                                           |           |   | 2006                      |   |           | 2007 |  |   | 2006      |  
|                                                                                                                               |  | (in thousands except share and per share data) |          
|Historical                                                                                                                     |  |                                                |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Numerator:                                                                                                                     |  |                                                |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Net loss                                                                                                                       |  | $                                              | (6,957    | ) |                           | $ | (6,099    | )    |  | $ | (14,876   | ) |  | $ | (11,657   | )
|Accretion of redeemable convertible preferred stock                                                                            |  |                                                | (1,188    | ) |                           |   | (2,606    | )    |  |   | (4,626    | ) |  |   | (4,986    | )
|                                                                                                                               |  |                                                |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Loss applicable to common stockholders                                                                                         |  | $                                              | (8,145    | ) |                           | $ | (8,705    | )    |  | $ | (19,502   | ) |  | $ | (16,643   | )
|                                                                                                                               |  |                                                |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Denominator:                                                                                                                   |  |                                                |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Weighted-average common shares outstanding                                                                                     |  |                                                | 8,217,645 |   |                           |   | 344,704   |      |  |   | 4,461,271 |   |  |   | 336,215   |  
|Less: Weighted-average unvested common shares subject to repurchase                                                            |  |                                                | (1,770    | ) |                           |   | (3,052    | )    |  |   | (3,283    | ) |  |   | (2,802    | )
|                                                                                                                               |  |                                                |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Denominator for basic and diluted loss per share applicable to common stockholders                                             |  |                                                | 8,215,875 |   |                           |   | 341,652   |      |  |   | 4,457,988 |   |  |   | 333,413   |  
|                                                                                                                               |  |                                                |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Basic and diluted loss per share applicable to common stockholders                                                             |  | $                                              | (0.99     | ) |                           | $ | (25.48    | )    |  | $ | (4.37     | ) |  | $ | (49.92    | )
|                                                                                                                               |  |                                                |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|                                                                                                                               |  |                                                |           |  
|Historical outstanding dilutive securities not included in diluted loss per share applicable to common stockholder
calculation |  |                                                |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Redeemable convertible preferred stock                                                                                         |  |                                                |          |   |                           |   | 7,378,338 |      |  |   |          |   |  |   | 7,378,338 |  
|Options to purchase common stock                                                                                               |  |                                                | 826,714   |   |                           |   | 832,071   |      |  |   | 826,714   |   |  |   | 832,071   |  
|Warrants outstanding                                                                                                           |  |                                                | 59,573    |   |                           |   | 676,174   |      |  |   | 59,573    |   |  |   | 676,174   |  
|                                                                                                                               |  |                                                |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|                                                                                                                               |  |                                                | 886,287   |   |                           |   | 8,886,583 |      |  |   | 886,287   |   |  |   | 8,886,583 |  
|                                                                                                                               |  |                                                |           |   |                           |   |           |      |  |   |           |   |  |   |           |  

Recently Issued Accounting Standards

In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities  Including an amendment of FASB



7



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##### Table of Contents

Statement No. 115(SFAS No. 159). SFAS No. 159 expands the use of fair value accounting to many financial instruments and
certain other items. The fair value option is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. We do not expect that the adoption of SFAS No. 159 will have a material impact on our financial position and results of operations.

In June 2007, the EITF issued Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services To Be Used in Future Research
and Development Activities (EITF 07-3), which concluded that nonrefundable advance payments for goods or services to be received in the future for use in research and development activities should be deferred and capitalized.
The capitalized amounts should be expensed as the related goods are delivered or services are performed. Such capitalized amounts should be charged to expense if expectations change such that the goods will not be delivered or services will not be
delivered. The provisions of EITF 07-3 are effective for new contracts entered into during fiscal years beginning after December 15, 2007. The consensus may not be applied to earlier periods and early adoption is not permitted. We do not expect
that the adoption of EITF 07-3 will have a material impact on our financial position and results of operations.

Note 3. Commitments and Contingencies

Operating Leases

The
Company leases its office facilities and certain office equipment under operating leases. The Companys lease for its office facilities, as amended, expires on September 30, 2007.

Note 4. Preferred Stock Warrant Liability and Redeemable Convertible Preferred Stock

In January and February 2007, the Company issued a total of 13,444,450 shares of Series C2 preferred stock at $0.75 per share upon exercise of warrants resulting in aggregate net cash proceeds of approximately
$10,083,000. As a result of this transaction, the Company recognized approximately $59,000 as other income related to the change in fair value of the warrant liability on the date of the transaction and reclassified approximately $6,763,000 from
preferred stock warrant liability to preferred stock.

In May 2007, the Company completed its IPO as a result of which all of the existing
shares of the Companys preferred stock were converted to common stock. At the time of the completion of the IPO, the Company had outstanding warrants to purchase 33,600 shares of its Series A preferred stock, 20,000 shares of its Series B
preferred stock, and 840,000 shares of its Series C2 preferred stock. Upon closing of the Companys IPO, warrants to purchase 893,600 shares of the Companys preferred stock were converted into warrants to purchase 59,573 shares of the
Companys common stock, of which at June 30, 2007, warrants to purchase 56,000 shares of the Companys common stock automatically exercise in the event of an acquisition of the Company. The Company performed a final remeasurement to
determine the fair value of such financial instruments prior to the conversion. The resulting fair value of $426,000 was reclassified to additional paid-in capital.

For the three and six months ended June 30, 2007, the Company recorded approximately $301,000 and $360,000, respectively, reflected as other income for the decrease in fair value of all preferred stock warrants.
For the three and six months ended June 30, 2006, the Company recorded approximately $51,000 and $162,000, respectively, reflected as other expense for the increase in fair value of all preferred stock warrants.

The Company values its warrants using the Black-Scholes valuation method. The assumptions used in valuing these warrants are presented in the table
below:



8



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##### Table of Contents

|                        |  |                                           |  |                               
|----------------------- |  | ----------------------------------------- |  | ------------------------------
|                        |  | Period fromApril 1, 2007 toMay 7, 2007    |  | Three MonthsEnded June 30,2006
|Expected dividend yield |  | 0%                                        |  | 0%                            
|Expected volatility     |  | 73%                                       |  | 59% 77%                      
|Expected life           |  | 6.2  6.8                                 |  | 2.3  7.6                     
|Risk-free interest rate |  | 4.6%                                      |  | 5.0  5.2%                    
|                        |  |                                          
|                        |  | Period fromJanuary 1, 2007 to May 7, 2007 |  | Six MonthsEnded June 30, 2006 
|Expected dividend yield |  | 0%                                        |  | 0%                            
|Expected volatility     |  | 59  74%                                  |  | 54  77%                      
|Expected life           |  | 1.6  6.8                                 |  | 1.0  7.9                     
|Risk-free interest rate |  | 4.6  4.9%                                |  | 4.8  5.2%                    

Note 5. Stockholders Equity (Deficit)

Common Stock

The Company completed its IPO and sold 4,000,000 shares of common stock at
$11.00 per share on May 7, 2007. Gross proceeds from the offering totaled $44.0 million. The net offering proceeds to us, after deducting estimated expenses of approximately $5.9 million, totaled $38.1 million. Upon closing of the IPO, all of
the outstanding shares of the Companys redeemable convertible preferred stock converted to 8,722,013 shares of the Companys common stock.

In connection with the Series C2 preferred stock financing and the exercise of warrants associated with the Series C2 preferred stock offering, the Company committed to issue to a consultant a total of 33,333 shares
of common stock from November 2005 through February 2007. These shares were issued in the three months ended June 30, 2007 and the aggregate value of approximately $291,000 was recorded in additional paid-in capital.

Deferred Stock-Based Compensation

Prior to
the adoption of SFAS No. 123R as of January 1, 2006 and in accordance with the requirements of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, the Company has recorded deferred stock-based
compensation for the difference between the exercise price of the stock options at the date of grant and the re-assessed fair value of the Companys common stock on the date of grant. This deferred compensation is amortized to stock
compensation expense on a straight-line basis over the period during which the options vest, generally four years. Cancellations of approximately $7,000 and $1,000 were recorded during the three-month periods ended June 30, 2007 and 2006,
respectively. Cancellations of approximately $9,000 and $8,000 were recorded during the six-month periods ended June 30,



9



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##### Table of Contents

2007 and 2006, respectively. Amortization of deferred stock-based compensation was approximately $3,000 in each of the three months ended June 30, 2007
and 2006. Amortization of deferred stock-based compensation was approximately $5,000 and $6,000 in the six-month periods ended June 30, 2007 and 2006, respectively.

Notes Receivable from Stockholders

In January 2007, the Companys board of directors
forgave all outstanding non-recourse promissory notes from certain current and former officers of the Company in the amount of $379,000, including accrued interest, that was recorded as part of stock based compensation. These non-recourse promissory
notes were issued in exchange for the exercise of stock options to purchase an aggregate 128,886 shares of common stock and in exchange for 140,000 shares of the Companys common stock issued under restricted stock purchase agreements.

2000 Stock Incentive Plan and 2007 Stock Plan

During the three months ended June 30, 2007, the Company granted 55,750 options to employees and members of the board of directors with a fair value of approximately $281,000 that is expected to be recognized
over a period of approximately one to four years. During the three months ended June 30, 2006, the Company granted 46,499 options to employees with a fair value of approximately $328,000 that was expected to be recognized over a period of
approximately three to four years.

During the six months ended June 30, 2007, the Company granted 175,074 options to employees and
members of the board of directors with a fair value of approximately $1,728,000 that is expected to be recognized over a period of approximately one to four years. During the six months ended June 30, 2006, the Company granted 234,784 options
to employees and members of the board of directors with a fair value of approximately $1,043,000 that was expected to be recognized over a period of approximately three to four years.

Note 6. Income Taxes

We adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109 (FIN No. 48) on January 1, 2007. As a result of the implementation of FIN No. 48, we recognized no material adjustment in the liability
for unrecognized income tax benefits. At the adoption date of January 1, 2007, we had $1,428,236 of unrecognized tax benefits, none of which would affect our effective tax rate if recognized.

We recognize interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2007, we have no accrued interest or
penalties related to uncertain tax positions.

The tax years 2000 to 2006 remain open to examination by one or more of the major taxing
jurisdictions to which we are subject.

The Company does not anticipate that total unrecognized tax benefits will significantly change due
to the settlement of audits and the expiration of statute of limitations prior to June 30, 2008.



10



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report.
Operating results are not necessarily indicative of results that may occur in future periods.

This report contains forward-looking
statements that are based upon current expectations within the meaning of the Private Securities Reform Act of 1995. We intend that such statements be protected by the safe harbor created thereby. Forward-looking statements involve risks and
uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to, statements about or
relating to:



| |  |  | the filing for regulatory approvals and the timing of such filings;
| | - |  | -------------------------------------------------------------------



| |  |  | the successful completion of clinical trials with respect to NeurogesX lead product candidate, NGX-4010;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | potential receipt of product candidate regulatory approval;
| | - |  | -----------------------------------------------------------



| |  |  | losses, costs, expenses, expenditures and cash flows;
| | - |  | -----------------------------------------------------



| |  |  | the sufficiency of existing resources to fund our operations into late 2008;
| | - |  | ----------------------------------------------------------------------------



| |  |  | the scope and size of research and development efforts and programs, including potential increases in focus on development of additional product candidates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | potential competitors and competitive products;
| | - |  | -----------------------------------------------



| |  |  | discussions with potential partners
| | - |  | -----------------------------------



| |  |  | expected pricing pressures in connection with potential future sales of NGX-4010;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | capital requirements and our needs for additional financing;
| | - |  | ------------------------------------------------------------



| |  |  | future payments under lease obligations and equipment financing lines;
| | - |  | ----------------------------------------------------------------------



| |  |  | expected future sources of revenue and capital; and
| | - |  | ---------------------------------------------------



| |  |  | our plans with respect to the scope of our insurance coverage.
| | - |  | --------------------------------------------------------------

Such forward-looking statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to:



| |  |  | difficulties or delays in development, testing, obtaining regulatory approval for, and undertaking production and marketing of our drug candidates, including
difficulties or delays in patient enrollment for our clinical trials;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unexpected adverse side effects or inadequate therapeutic efficacy of our drug candidates that could slow or prevent product approval (including the risk that
current and past results of clinical trials or preclinical studies are not indicative of future results of clinical trials);
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | positive results in clinical trials may not be sufficient to obtain U.S. Food and Drug Administration, or FDA, or European regulatory approval;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



11



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##### Table of Contents

| |  |  | physician or patient reluctance to use NGX-4010, if approved, or the inability of physicians to obtain sufficient reimbursement for procedures using NGX-4010;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to obtain additional financing if necessary;
| | - |  | --------------------------------------------------------



| |  |  | changing standards of care and the introduction of products by competitors or alternative therapies for the treatment of indications we target;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the uncertainty of protection for our intellectual property, through patents, trade secrets or otherwise; and
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | potential infringement of the intellectual property rights or trade secrets of third parties.
| | - |  | ---------------------------------------------------------------------------------------------

Overview

We are a biopharmaceutical company focused
on developing and commercializing novel pain management therapies. We are assembling a portfolio of pain management product candidates and are developing innovative new therapies based on known chemical entities. Our initial focus is on chronic
peripheral neuropathic pain, including postherpetic neuralgia, or PHN, painful HIV-distal sensory polyneuropathy, or HIV-DSP, and painful diabetic neuropathy, or PDN. Our most advanced product candidate, NGX-4010, a synthetic capsaicin-based topical
patch designed to manage pain associated with peripheral neuropathic pain conditions, has completed two pivotal Phase 3 clinical trials that have met their primary endpoints, one in PHN and one in HIV-DSP. The results demonstrated that a single 30
or 60 minute application of NGX-4010, depending on the indication, may provide at least 12 weeks of clinically-meaningful pain relief. We expect to file a marketing authorization application, or MAA, in Europe for NGX-4010 in 2007 based upon
existing clinical trial data. If the safety and efficacy of NGX-4010 are confirmed by one or more of our two ongoing pivotal Phase 3 clinical trials, we intend to file a new drug application, or NDA, in the United States in 2008. We are developing a
non-patch liquid formulation of synthetic capsaicin, NGX-1998, and an opioid analgesic for use in managing pain associated with other chronic pain conditions, such as cancer pain. We currently have no products approved for commercial sale and have
not generated any revenues. We hold all worldwide commercial rights to our product candidates and are actively engaged in partnering discussions in anticipation of potential European product approval and launch.

We were incorporated in 1998 as Advanced Analgesics, Inc., and commenced operations in 2000 as NeurogesX, Inc. From inception through 2001 our primary
activities were related to formulation development and preclinical studies of our lead product candidate NGX-4010. Since 2002, our focus has expanded to include clinical development of our lead product candidate, NGX-4010, establishing sources of
supply and manufacturing processes for NGX-4010 and more recently, the initiation of clinical and preclinical evaluation of new product candidates, such as NGX-1998 and an opioid analgesic prodrug platform.

We are a development stage company. To date, we have not generated any revenues and have funded our operations primarily by selling equity securities and
establishing debt facilities. We have incurred significant losses since our inception. As of June 30, 2007, we had a deficit accumulated during the development stage of approximately $147.0 million, of which approximately $38.9 million
represents non cash charges for the accretion of redeemable convertible preferred stock. We expect our operating losses to increase over the next several years as we continue clinical development of NGX-4010, seek regulatory approvals and, if these
efforts are successful, commence commercialization activities. During this time, we also intend to increase our focus on preclinical and clinical development of additional product candidates including NGX-1998 and our opioid analgesic, and
potentially other product candidates which may be internally developed or acquired.



12



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##### Table of Contents

Critical Accounting Policies and Significant Judgments and Estimates

As of the date of the filing of this quarterly report, we believe that there have been no material changes to our critical accounting policies during the
three months ended June 30, 2007 compared to those discussed in our Final Prospectus dated May 1, 2007. Certain of our accounting policies require the use of management judgment and estimates and actual results may differ from those
estimates. A discussion of recently issued accounting standards can be found in Note 2 of the unaudited condensed consolidated financial statements.

Stock-Based Compensation

The following tables show the assumptions used to compute
stock-based compensation expense for stock options granted to employees and nonemployees and for our Employee Stock Purchase Plan during the three and six months ended June 30, 2007 and 2006 using the Black-Scholes option valuation method:



|                                           |  |                             |  |                           |  |            |  |           
|------------------------------------------ |  | --------------------------- |  | ------------------------- |  | ---------- |  | ----------
|Employees:                                 |  |                             |  |                           |  |            |  |           
|                                           |  |                            
|                                           |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|                                           |  | 2007                        |  | 2006                      |  | 2007       |  | 2006      
|Dividend yield                             |  | 0%                          |  | 0%                        |  | 0%         |  | 0%        
|Volatility for stock options               |  | 71%                         |  | 77%                       |  | 71- 77%    |  | 77%       
|Volatility for ESPP                        |  | 44  61%                    |  |                          |  | 44  61%   |  |          
|Expected life (in years) for stock options |  | 6.0                         |  | 6.0                       |  | 6.0        |  | 6.0       
|Expected life (in years) for ESPP          |  | 0.5  1.0                   |  |                          |  | 0.5  1.0  |  |          
|Risk-free interest rate                    |  | 4.8%                        |  | 5.0%                      |  | 4.6  4.8% |  | 4.6  5.0%



|                        |  |                             |  |                           |  |           |  |           
|----------------------- |  | --------------------------- |  | ------------------------- |  | --------- |  | ----------
|Non-employees:          |  |                             |  |                           |  |           |  |           
|                        |  |                            
|                        |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|                        |  | 2007                        |  | 2006                      |  | 2007      |  | 2006      
|Expected dividend yield |  | 0%                          |  | 0%                        |  | 0%        |  | 0%        
|Expected volatility     |  | 71%                         |  | 77%                       |  | 71  77%  |  | 77%       
|Expected life           |  | 6.8  9.0                   |  | 5.4  9.5                 |  | 6.8  9.0 |  | 5.4 9.8  
|Risk-free interest rate |  | 5.0  5.1%                  |  | 5.1%                      |  | 4.5 5.1% |  | 4.7  5.1%

We recognized stock-based compensation expense, which includes fair value of options granted since
January 1, 2006 under Statement of Financial Accounting Standards No. 123R, Share-Based Payments, amortization of deferred stock compensation, the costs of variable awards to consultants and forgiven notes receivable and related
interest, as follows (in thousands):



|                               |  |                             |     |                           |   |       |  |      |       |  |   |      
|------------------------------ |  | --------------------------- | --- | ------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                               |  | Three Months Ended June 30, |     | Six Months Ended June 30,
|                               |  | 2007                        |     | 2006                      |   | 2007  |  | 2006
|Research and development       |  | $                           | 176 |                           | $ | 160   |  | $    | 525   |  | $ | 264  
|General and administrative     |  |                             | 25  |                           |   | 854   |  |      | 506   |  |   | 1,238
|                               |  |                             |     |                           |   |       |  |      |       |  |   |      
|Total stock-based compensation |  | $                           | 201 |                           | $ | 1,014 |  | $    | 1,031 |  | $ | 1,502
|                               |  |                             |     |                           |   |       |  |      |       |  |   |      

Estimation of Fair Value of Warrants to Purchase Redeemable Convertible Preferred Stock

We accounted for warrants to purchase redeemable convertible preferred stock pursuant to the Financial Accounting Standards Board
Staff Position, or FSP, No. 150-5, Issuers Accounting under



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Statement No. 150 for Freestanding Warrants and Other similar Instruments on Shares that are Redeemable, or, which required us to classify these
warrants as current liabilities and to adjust the value of these warrants to their fair value at the end of each reporting period. We estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option
valuation model, based on the estimated market value of the underlying redeemable convertible preferred stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates and expected dividends on and
expected volatility of the price of the underlying redeemable convertible preferred stock. These estimates, especially the market value of the underlying redeemable convertible preferred stock and the expected volatility, are highly judgmental.

Upon the closing of our initial public offering, or IPO, on May 7, 2007, all outstanding warrants to purchase shares of preferred
stock were converted to warrants to purchase shares of our common stock and, as a result, are no longer subject to FSP No. 150-5. The then-current aggregate fair value of these warrants of approximately $426,000 was reclassified from
liabilities to additional paid-in capital, a component of stockholders equity (deficit), and we have ceased to record any further periodic fair value adjustments.

Results of Operations

Our research and development expenses consist of internal costs, primarily
employee salaries and benefits, allocated facility and other overhead costs and external costs, primarily expenses related to our clinical trials, such as clinical research organizations and clinical investigators, as well as expenses related to
formulation development, manufacturing process development and non-clinical studies.

Since our inception, NGX-4010 has accounted for in
excess of 90% of our external research and development expenses and in the three and six-month periods ended June 30, 2007 these expenses totaled approximately $3.9 million and $8.0 million, respectively. We commence tracking the separate,
external costs of a project when we determine that a project has a reasonable chance of entering clinical development. We use our internal research and development resources across several projects and many resources are not attributable to specific
projects. Accordingly, we do not account for our internal research and development costs on a project basis. However, we believe that the proportion of our internal costs associated with NGX-4010 compared to other research and development programs
would be similar to that reflected in our external expenses.

The process of conducting preclinical testing and clinical trials necessary
to obtain FDA approvals is costly and time consuming. The probability of success for each product candidate and clinical trial may be affected by a variety of factors, including, among others, patient enrollment, manufacturing capabilities,
successful clinical results, our funding, and competitive and commercial viability. As a result of these and other factors, we are unable to determine the duration and completion costs of current or future clinical stages of our product candidates
or when or to what extent we will generate revenues from commercialization and sale of any of our product candidates. Currently we are primarily focused on completing the development of our lead product candidate, NGX-4010, for patients with PHN and
HIV-DSP. Our plans currently anticipate filing an MAA in 2007 and filing an NDA in the United States in 2008. We anticipate that our overall research and development expenditures may increase in the coming quarter or two as we near completion of our
currently ongoing phase 3 studies in PHN and HIV-DSP and as we continue to increase our spending in support of planned regulatory filings both in Europe and in the U.S. As we move into 2008 through at least the first half of 2008, we anticipate that
our research and development expenses may be lower as our focus may shift to the planning and initiation of our clinical programs in PDN and NGX-1998.

Our general and administrative expenses consist primarily of salaries and benefits, professional fees related to our administrative, finance, human resource, legal and information technology functions, marketing



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expenses, costs associated with our status as a public company and patent costs. In addition, general and administrative expenses include allocated facility,
basic operational and support costs and insurance costs. We anticipate that our general and administrative expenses will increase in real dollars and also as a percentage of total expenses throughout 2007 and over the next several years. The
increase in real dollar expenses is likely to be attributable to increasing marketing activities in anticipation of, and upon receipt of, required regulatory approvals, the costs of hiring and deploying a sales force in the United States to support
a commercial launch of our product, should we achieve FDA approval, and the costs of being a public company, as well as the need to add additional personnel in all of the key functional areas that support growth of our general operations, including
accounting and finance, legal and human resources.

Comparison of Three Months Ended June 30, 2007 and 2006



|                                    |  |                                    |        |   |                    |   |        |                      |  |   |       |   |  |     |   
|----------------------------------- |  | ---------------------------------- | ------ | - | ------------------ | - | ------ | -------------------- |  | - | ----- | - |  | --- | --
|                                    |  | Three MonthsEnded June 30,         |        |   | Increase(Decrease) |   |        | % Increase(Decrease) | 
|                                    |  | 2007                               |        |   | 2006               |   |        |                     
|                                    |  | (in thousands, except percentages) |       
|Research and development expenses   |  | $                                  | (5,990 | ) |                    | $ | (4,600 | )                    |  | $ | 1,390 |   |  | 30  | % 
|General and administrative expenses |  |                                    | (1,416 | ) |                    |   | (1,474 | )                    |  |   | (58   | ) |  | (4  | )%
|Interest income                     |  |                                    | 465    |   |                    |   | 137    |                      |  |   | 328   |   |  | 239 | % 
|Interest expense                    |  |                                    | (317   | ) |                    |   |       |                      |  |   | 317   |   |  |    |   
|Other income (expense), net         |  |                                    | 301    |   |                    |   | (162   | )                    |  |   | 463   |   |  | 286 | % 

Research and Development Expenses. Research and development expenses increased
approximately $1.4 million, or 30%, to $6.0 million in the three months ended June 30, 2007 from $4.6 million for the same period in 2006. Research and development expenses increased primarily as a result of a $0.8 million increase in clinical
study costs associated with NGX-4010. Although we were actively engaged in two phase 3 studies in each of these three-month periods, the size and complexity of the studies in the 2007 quarter were greater, resulting in increased costs. The remainder
of the increase in research and development expenses is attributable to a $0.3 million increase in regulatory costs, a $0.2 million increase in quality assurance costs, both of which are attributable to preparation for our MAA filing expected in
late 2007 as well as a $0.1 increase in costs related to our NGX-1998, primarily related to toxicology work on NGX-1998, and our new product development efforts.

General and Administrative Expenses. General and administrative expenses decreased approximately $0.1 million, or 4%, to $1.4 million in the three months ended June 30, 2007 from $1.5 million in the three
months ended June 30, 2006. Within general and administrative expenses, non-cash stock-based compensation decreased in the June 30, 2007 quarter by approximately $0.8 million. This decrease was offset by a $0.3 million increase in
marketing expenses as we began to build out our marketing infrastructure with the hiring of a senior level marketing executive in June 2006 as well as activities related to conventions and symposia as we begin the process of market education for
NGX-4010, a $0.3 million increase in legal, accounting and other professional services associated with being a public company and a $0.2 million increase in salary and employee related expense in connection with our continued build out of
infrastructure in support of both general growth and the additional requirements of being a public company.

Interest income.
Interest income increased approximately $0.3 million, or 239%, to $0.5 million in the three months ended June 30, 2007. This increase was primarily attributable to an increase in invested assets due to both the completion of our IPO on
May 7, 2007 as well as the exercise of preferred stock warrants in the first quarter of 2007.



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Interest expense. Interest expense increased approximately $0.3 million to $0.3 million in the
three months ended June 30, 2007 due to our borrowing approximately $10.0 million under certain notes payable in the third quarter of 2006. There was no debt outstanding in the first half of 2006 and, consequently, we had no interest expense in
the three months ended June 30, 2006.

Other income (expense), net. Other income (expense), net increased approximately $0.5
million, or 286%, to approximately $0.3 million in income in the three months ended June 30, 2007 from approximately $0.2 million in expense for the same period in 2006. This increase was attributable to the revaluation of our preferred stock
warrant liability.

Comparison of Six Months Ended June 30, 2007 and 2006



|                                    |  |                                    |         |   |                    |   |                     |   |  |   |       |  |     |  
|----------------------------------- |  | ---------------------------------- | ------- | - | ------------------ | - | ------------------- | - |  | - | ----- |  | --- | -
|                                    |  | Six Months EndedJune 30,           |         |   | Increase(Decrease) |   | %Increase(Decrease) |  
|                                    |  | 2007                               |         |   | 2006               |   |                     |  
|                                    |  | (in thousands, except percentages) |        
|Research and development expenses   |  | $                                  | (12,185 | ) |                    | $ | (9,409              | ) |  | $ | 2,776 |  | 30  | %
|General and administrative expenses |  |                                    | (3,069  | ) |                    |   | (2,467              | ) |  |   | 602   |  | 24  | %
|Interest income                     |  |                                    | 667     |   |                    |   | 270                 |   |  |   | 397   |  | 147 | %
|Interest expense                    |  |                                    | (649    | ) |                    |   |                    |   |  |   | 649   |  |    |  
|Other income (expense), net         |  |                                    | 360     |   |                    |   | (51                 | ) |  |   | 411   |  | 806 | %

Research and Development Expenses. Research and development expenses increased
approximately $2.8 million, or 30%, to $12.2 million in the six months ended June 30, 2007 from $9.4 million for the same period in 2006. Research and development expenses increased primarily as a result of a $1.4 million increase in clinical
study costs primarily due to the higher costs associated with conducting our Phase 3 study in HIV-DSP due to the large number of patients enrolled and the costs of conducting this study internationally. Additional increases in the six months ended
June 30, 2007 were attributable to a $0.6 million increase in regulatory expenses and a $0.4 million increase in quality assurance expenses as we began preparations of our MAA filing in Europe for NGX-4010, a $0.3 million increase in
manufacturing costs associated with NGX-4010 as we worked to complete our product development activities in advance of our MAA filing, a $0.3 million increase in development work related to new product areas including initiating toxicology studies
and small scale studies under an exploratory IND for NGX-1998 as well as research associated with our opioid prodrug program and a $0.3 million increase in non-cash stock-based compensation. These increases were offset by a $0.4 million decrease in
nonclinical costs associated with NGX-4010 as the majority of our nonclinical activities for this product candidate were completed in 2006.

General and Administrative Expenses. General and administrative expenses increased approximately $0.6 million, or 24%, to $3.1 million in the six months ended June 30, 2007 from $2.5 million for the same period in 2006. The
increase was due to a $0.6 million increase in marketing and related expenses as we began to build our general and marketing infrastructure, performed market analyses and began market education efforts in preparation for potential product approval
and launch of NGX-4010. Additional increases included a $0.4 million increase in general and administrative salaries and related expenses, a $0.4 million increase in professional fees, including legal and accounting fees, all primarily related to
infrastructure development and public company costs. These increases were offset by a $0.7 million decrease in non-cash stock-based compensation expense primarily due to the fact that variable accounting for stock-based awards ceased with the
forgiveness of certain notes payable in January 2007.

Interest income. Interest income increased approximately $0.4 million, or
147%, to $0.7 million in the six months ended June 30, 2007 from $0.3 million for the same period in 2006. This increase was primarily attributable to an increase in invested assets, due to both the completion of our IPO on May 7, 2007 as
well as the exercise of preferred stock warrants in the first quarter of 2007. Also contributing to the increase in interest income was an increase in the rate of return on invested assets.



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Interest expense.Interest (expense) increased approximately $0.6 million to $0.6 million in the
six months ended June 30, 2007 due to our borrowing approximately $10.0 million under certain notes payable in the third quarter of 2006. There was no debt outstanding in the first half of 2006 and consequently, we had no interest expense in
the six months ended June 30, 2006.

Other income (expense), net. Other income (expense), net, increased approximately $0.4
million to $0.4 million in income in the six months ended June 30, 2007 from $0.1 million in expense in the same period in 2006. This increase is attributable to the revaluation of our preferred stock warrant liability.

Liquidity and Capital Resources

Since our inception
through June 30, 2007, we have financed our operations primarily through the private placement and a public offering of our equity securities and, to a lesser extent, through debt facilities. Through June 30, 2007, we have received
approximately $134.9 million from the sale of our equity securities, net of issuance costs. As of June 30, 2007, we had approximately $47.8 million in cash, cash equivalents and short-term investments. On May 7, 2007, we completed an IPO
of our common stock which resulted in net cash proceeds, after deducting total estimated expenses including underwriting discounts and commissions and other-offering related expenses, of approximately $38.1 million. Our cash and investment balances
are held in a variety of interest bearing instruments including obligations of U.S. government agencies, corporate bonds, commercial paper and money market funds. Cash in excess of immediate operational requirements is invested in accordance with
our investment policy primarily with a view to liquidity and capital preservation.

Net cash used in operating activities was approximately
$14.0 million and $10.2 million during the six months ended June 30, 2007 and 2006, respectively. Net cash used in each of these periods was primarily a result of external research and development expenses, internal personnel costs associated
with our research and development programs and infrastructure costs supporting our research and development activities. Included in net cash used in operating activities are net changes in assets and liabilities affecting cash, including accounts
payable and accrued research and development expenses that are primarily dependent upon our research and development activities as well as the timing of our payments to our suppliers, vendors and employees.

Net cash used in investing activities was approximately $28.7 million during the six months ended June 30, 2007 and net cash provided by investing
activities was approximately $2.0 million during the six months ended June 30, 2006. Investing activities consist primarily of purchases and sales of marketable securities and capital equipment purchases. Net cash used in investing activities
was significantly higher in the six months ended June 30, 2007 compared to the same period in 2006 due to the investment of a majority of the net proceeds generated from our IPO in short-term investments. Purchases of property and equipment
were not significant during these periods. However, we expect property and equipment expenditures to increase over the next 12 to 18 months as a result of the relocation of our corporate headquarters upon expiration of our current lease in September
2007 as well as capital requirements to support increased personnel as we continue to build our organization in anticipation of the commercial launch of NGX-4010.

Net cash provided by financing activities was approximately $47.7 million and $9.6 million during the six months ended June 30, 2007 and 2006 respectively. Financing activities consisted primarily of net proceeds
from the sale of our equity securities including common and preferred stock and the exercise of options and warrants underlying these securities offset by principal repayments on our venture loan agreements which were entered into in July 2006.



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Our future capital uses and requirements depend on numerous forward-looking factors. These factors
include but are not limited to the following:



| |  |  | the progress of our clinical trials;
| | - |  | ------------------------------------



| |  |  | our ability to establish and maintain strategic collaborations, including licensing and other arrangements that we have or may establish;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs and timing of regulatory approvals;
| | - |  | ---------------------------------------------



| |  |  | the costs of establishing manufacturing, sales or distribution capabilities;
| | - |  | ----------------------------------------------------------------------------



| |  |  | the success of the commercialization of our products;
| | - |  | -----------------------------------------------------



| |  |  | the costs involved in enforcing or defending patent claims or other intellectual property rights; and
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the extent to which we acquire or invest in other products, technologies and businesses.
| | - |  | ----------------------------------------------------------------------------------------

We believe that our existing cash and investments will be sufficient to meet our projected operating requirements into late 2008. To date, however, we
have incurred recurring net losses and negative cash flows from operations. Until we can generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources generated from the proceeds of
offerings of our equity securities as well as potentially through the sale of other equity securities, strategic collaboration agreements and debt financing. However, we may not be successful in obtaining collaboration agreements, or in receiving
milestone or royalty payments under those agreements. In addition, we cannot be sure that our existing cash and investment resources will be adequate or that additional financing will be available when needed or that, if available, financing will be
obtained on terms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale back or eliminate some or all of our development programs, relinquish some or even all rights to product candidates at an earlier stage
of development or renegotiate less favorable terms than we would otherwise choose. Failure to obtain adequate financing also may adversely affect our ability to continue in business. If we raise additional funds by issuing equity securities,
substantial dilution to existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios
that may restrict our ability to operate our business.

Off-Balance Sheet Arrangements

Since inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable
interest entities.

Contractual Obligations

There have been no material changes to our disclosures regarding contractual obligations set forth in our Registration Statement on Form S-1 (Registration No. 333-140501).



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We believe there has been no material change in our exposure to market risk from that discussed in our Registration Statement on Form S-1 (Registration No. 333-140501).



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

(a) Evaluation of disclosure
controls and procedures

Our management evaluated, with the participation and under the supervision of our Chief Executive Officer and our
Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer
have concluded, subject to the limitations described below, that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission, or SEC, rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely
decisions regarding required disclosures.

(b) Changes in internal control over financial reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In connection with our fiscal 2006 financial statement audit, our independent registered public accounting firm informed us that
they had identified two material weaknesses in our internal controls as defined by the American Institute of Certified Public Accountants. A material weakness is a reportable condition in which our internal controls do not reduce to a low level the
risk that misstatements caused by error or fraud in amounts that are material to our audited financial statements may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.

The material weaknesses reported related to having insufficient personnel resources with sufficient technical accounting expertise within
our accounting function.

While these material weaknesses have not been fully mitigated, subsequent to the completion of our IPO we have
undertaken certain actions including increasing the staffing in the accounting function and adding technical expertise in financial and SEC accounting and reporting as well as improving certain of our internal controls and processes surrounding key
financial accounting areas.

(c) Limitations on the Effectiveness of Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls are
met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are
designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met.



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PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

None.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Our future operating results may vary
substantially from anticipated results due to a number of factors, many of which are beyond our control. The following discussion highlights some of these factors and the possible impact of these factors on future results of operations. You should
carefully consider these factors before making an investment decision. If any of the following factors actually occur, our business, financial condition or results of operations could be harmed. In that case, the price of our common stock could
decline, and you could experience losses on your investment.

Risks Related to our Business

Our success depends substantially on our ability to obtain U.S. regulatory approval for our lead product candidate, NGX-4010.

Our success depends substantially on our most advanced product candidate, NGX-4010, a dermal patch containing a high-concentration of synthetic
capsaicin. NGX-4010 has been evaluated in two completed Phase 3 clinical trials for the management of pain associated with PHN, one of which did not meet its primary endpoint, and one completed Phase 3 clinical trial for the management of pain
associated with HIV-DSP. We are in the process of undertaking one additional pivotal Phase 3 clinical trial for each indication. The FDA generally requires successful completion of at least two adequate and well-controlled Phase 3 clinical trials
for each indication for which we seek marketing approval before submission of an NDA. We may not have adequate financial or other resources to pursue this product candidate for either or both indications through the clinical trial process or through
commercialization. The successful outcome of our ongoing Phase 3 clinical trial for painful HIV-DSP, and the required capital expenditure for such trial, depends in part on our ability to successfully complete enrollment in such trial on a timely
basis. Similarly, even though our Phase 3 clinical trial for PHN completed enrollment, the ultimate expenditure associated with such trial is currently unknown, and our ability to successfully complete such trial is subject to the risks associated
with the clinical development process stated below. Additionally, the ongoing trials may not achieve positive results, and, even if the results are positive, may not adequately support the results of any corresponding earlier trial. If we fail to
complete our clinical trials for NGX-4010, or if these clinical trials fail to demonstrate with substantial evidence that NGX-4010 is both safe and effective, we will not be able to commercialize the product in the United States and our business
will be significantly harmed, we may be unable to become profitable or continue our operations and our stock price will be adversely affected. We anticipate that we will seek FDA approval for NGX-4010 only after we have successfully met the primary
endpoints of the ongoing Phase 3 trials for both PHN and HIV-DSP indications, the last of which is expected to be completed no earlier than the first half of 2008. We may, however, seek FDA approval for NGX-4010 initially for only one indication,
which could delay our seeking approval of the second indication which would limit our initial sales to that one indication which may negatively impact our expected revenues or the rate of growth of revenues in the near term.



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We may not be successful in obtaining European regulatory approval for NGX-4010.

We expect to submit an MAA for NGX-4010 to the European Medicines Agency, or EMEA, in 2007. We will be relying on published
scientific literature for certain basic research data and there can be no assurance that the European authorities will accept that these literature references satisfy the MAA requirements for such data. We expect to request marketing authorization
for a broad indication of peripheral neuropathic pain for NGX-4010 based on the results of our two completed Phase 3 clinical trials that met their primary endpoints, one for the treatment of PHN and the other for the treatment of HIV-DSP. We may be
unable to obtain such marketing authorization or the marketing authorization, if obtained, may not be as broad as we would like. For example, the EMEA may, like the FDA, only approve NGX-4010 for particular neuropathic pain indications for which we
submit sufficient data, rather than accepting such data as supportive of a broad marketing authorization for peripheral neuropathic pain in general. The EMEA may determine that the data we submit are not sufficient for a favorable opinion and may
halt or delay the approval process. If NGX-4010 does not receive European marketing authorization, we will not be able to commercialize the product in Europe. Consequently, our ability to generate revenue will be significantly harmed, we may be
unable to become profitable or continue our operations and our stock price will be adversely affected.

Our clinical trials may fail
to demonstrate adequately the safety and efficacy of our product candidates, which could prevent or delay regulatory approval and commercialization.

Before obtaining regulatory approvals for the commercial sale of NGX-4010 or any other product candidates, we must demonstrate through lengthy, complex and expensive preclinical testing and clinical trials that the
product is both safe and effective for use in each target indication. Clinical trial results from the study of neuropathic pain are inherently difficult to predict. The primary measure of pain is subjective patient feedback, which can be influenced
by factors outside of our control, and can vary widely from day to day for a particular patient, and from patient to patient and site to site within a clinical study. The results we have obtained in completed clinical trails may not be predictive of
results from our ongoing or future trials. Additionally, we may suffer significant setbacks in advanced clinical trials, even after promising results in earlier studies.

Some of our trial results have been negatively affected by factors that had not been fully anticipated prior to our examination of the trial results. For example, we have observed a significant placebo
effect within our control groupsa phenomenon in which a sham treatment or, in the case of our studies, a low-dose capsaicin treatment that we believed would not be effective, results in a beneficial effect based on the patients
expectations about the treatment rather than the treatment itself. We have also observed a gender difference in how patients experience pain and respond to both the treatment and the low concentration control. Although we have modified our protocols
in ongoing studies to address these factors, there can be no assurance that these modifications will be adequate or that these or other factors that we may or may not be aware of or anticipate, will not have a negative effect on the results of our
ongoing clinical trials, which could significantly disrupt our efforts to obtain regulatory approvals and commercialize our product candidates. Furthermore, we may voluntarily suspend or terminate our clinical trials if at any time we believe that
they present an unacceptable safety risk to patients. In our completed Phase 3 trials there have been three serious adverse events (totaling less than 1%) related to NGX-4010, two related to pain and one case of hypertension. In our PHN studies C108
and C110, more cardiac adverse events occurred in subjects treated with NGX-4010 than subjects receiving the control patch. Evaluation of these adverse events did not indicate that they were treatment related. In our most recent PHN study, C116, a
similar number of cardiovascular events occurred in the NGX-4010 and control groups. However, future late stage clinical trials in a larger patient population could reveal more frequent, more severe or additional side effects that were not seen or
deemed unrelated in earlier studies, any of which could interrupt, delay or halt clinical trials of our product candidates and could



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result in the FDA or other regulatory authorities stopping further development of or denying approval of our product candidates. Based on results at any
stage of clinical trials, we may decide to repeat or redesign a trial, modify our regulatory strategy or even discontinue development of one or more of our product candidates.

A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after
obtaining promising results in earlier trials. If our product candidates are not shown to be both safe and effective in clinical trials, the resulting delays in developing other compounds and conducting associated preclinical testing and clinical
trials, as well as the potential need for additional financing, would have a material adverse effect on our business, financial condition and results of operations.

We cannot predict whether regulatory agencies will determine that the data from our clinical trials support marketing approval.

The FDAs and EMEAs decisions to approve NGX-4010 will depend on our ability to demonstrate with substantial clinical evidence, through
well-controlled clinical trials, that NGX-4010 is effective, as measured statistically by comparing the overall improvement in pain in actively-treated patients against improvement in pain in the control group. However, there is a possibility that
our data may be statistically significant, but that the actual clinical benefit of the NGX-4010 treatment may not be considered to be significant. Consequently, we believe that the FDA will consider additional data, such as a responder
analysis and other secondary endpoints when evaluating whether our product can be approved. We believe that the FDA views responders as patients who experience at least a 30% reduction in overall pain. The EMEA standard for reduction in
overall pain is between 30% to 50%. We cannot predict whether the regulatory agencies will find that our trial results provide compelling responder or other secondary endpoint data. Even if we believe that the data from our trials will
support marketing approval in the United States or in Europe, we cannot predict whether the agencies will agree with our analysis and approve our applications.

Even if clinical trials for NGX-4010 in treatment of PHN and HIV-DSP are successful, our clinical trials for other indications, including PDN, may not succeed, which would adversely impact our long term success.

We have not prepared for or conducted any NGX-4010 clinical trials for indications other than PHN, HIV-DSP and PDN. We are in
Phase 2 for the use of NGX-4010 for the management of PDN. PDN represents a much larger market opportunity than either PHN or HIV-DSP, and unless we successfully complete required clinical trials and obtain regulatory approvals for the use of
NGX-4010 for PDN patients, our long term ability to succeed will be significantly and negatively impacted. We believe that, as was the case with PHN and HIV-DSP, we will have to conduct two successful Phase 3 trials for future indications, including
PDN, before we can obtain approval to market our product candidates for such indications.

Results of clinical trials of NGX-4010 for
patients with PHN and HIV-DSP do not necessarily predict the results of clinical trials involving other indications. NGX-4010 may fail to show desired safety and efficacy for management of pain associated with PDN and other indications, despite
results from earlier clinical trials involving PDN, PHN and HIV-DSP. Any failure or significant delay in completing clinical trials for NGX-4010 with PDN and other indications, or in receiving regulatory approval involving such indications, may
significantly harm our business.



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Delays in the commencement or completion of clinical testing could result in increased costs to us
and delay our ability to generate revenues.

We do not know whether ongoing or planned clinical trials will begin on time or be
completed on schedule, if at all. The commencement and completion of clinical trials can be disrupted for a variety of reasons, including difficulties in:



| |  |  | recruiting and enrolling patients to participate in a clinical trial;
| | - |  | ---------------------------------------------------------------------



| |  |  | obtaining regulatory approval to commence a clinical trial;
| | - |  | -----------------------------------------------------------



| |  |  | reaching agreement on acceptable terms with prospective clinical research organizations and trial sites;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | manufacturing sufficient quantities of a product candidate; and
| | - |  | ---------------------------------------------------------------



| |  |  | obtaining institutional review board approval to conduct a clinical trial at a prospective site.
| | - |  | ------------------------------------------------------------------------------------------------

A clinical trial may also be suspended or terminated by us, the FDA or other regulatory authorities due to a number of factors, including:



| |  |  | failure to conduct the clinical trial in accordance with regulatory requirements or in accordance with our clinical protocols;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unforeseen safety issues; or
| | - |  | ----------------------------



| |  |  | inadequate patient enrollment or lack of adequate funding to continue the clinical trial.
| | - |  | -----------------------------------------------------------------------------------------

In addition, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes, which
could impact the cost, timing or successful completion of a clinical trial. If we experience delays in the commencement or completion of our clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to
generate product revenues will be delayed. Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also lead to the denial of regulatory approval of a product candidate.

We rely on third parties to conduct our clinical trials. If these third parties do not perform as contractually required or otherwise expected, we
may not be able to obtain regulatory approval for our product candidates.

We do not currently conduct clinical trials on our own,
and instead rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to assist us with our clinical trials. We are also required to comply with regulations and standards,
commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the trial participants are adequately protected. If
these third parties do not successfully carry out their duties to us or regulatory obligations or meet expected deadlines, if the third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the
failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our preclinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory
approval for our product candidates.



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We must enter into an agreement with, and depend upon, one or more partners to assist us in
commercializing our lead product candidate, NGX-4010, in Europe.

Because of our limited financial and other resources, we must
actively seek and enter into a collaboration with one or more European partners to assist us in our planned European NGX-4010 launch, if marketing approval is granted. Any collaboration agreement we enter into may contain unfavorable terms, for
example, with respect to product candidates covered, control over decisions and responsibilities, termination rights, payment, and other significant terms. Our ability to receive any significant revenue from our product candidates covered by the
collaboration agreement will be dependent on the efforts of our collaboration partner and may result in lower levels of income to us than if we marketed our product candidates entirely on our own. The collaboration partner may not fulfill its
obligations or commercialize our product candidates as quickly as we would like. We could also become involved in disputes with our partner, which could lead to delays in or termination of our commercialization programs and time-consuming and
expensive litigation or arbitration. If a collaboration partner terminates or breaches its agreement with us, or otherwise fails to complete its obligations in a timely manner, the chances of successfully developing or commercializing our product
candidates would be materially and adversely affected.

Additionally, depending upon the collaboration partner that we choose, other
companies that might otherwise be interested in developing products with us could be less inclined to do so because of our relationship with the collaboration partner. If our ability to work with present or future strategic partners or collaborators
is adversely affected as a result of our collaboration agreement, our business prospects may be limited and our financial condition may be adversely affected.

If we are unable to establish a sales, marketing and distribution infrastructure or enter into collaborations with partners to perform these functions, we will not be successful in commercializing our product
candidates.

In order to commercialize any of our product candidates successfully, we must either acquire or internally develop a
capable sales, marketing and distribution infrastructure or enter into collaborations with partners to perform these services for us. The acquisition or development of a capable sales, marketing and distribution infrastructure will require
substantial resources, which may divert the attention of our management and key personnel and negatively impact our product development efforts. We intend to enter into partnering, co-promotion and other distribution arrangements for
commercialization outside the United States. While we currently intend to develop a direct sales and marketing organization in the United States for NGX-4010, because we believe that we can best serve our target customers with a focused, specialty
sales force, our strategy may change and we may instead, seek a collaboration partner. Factors that may inhibit our efforts to develop an internal sales, marketing and distribution infrastructure include:



| |  |  | our inability to recruit and retain adequate numbers of effective sales and marketing personnel;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the inability of sales personnel to obtain access to or convince adequate numbers of physicians to prescribe our products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive
product lines; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unforeseen costs and expenses associated with creating a sales and marketing organization.
| | - |  | ------------------------------------------------------------------------------------------



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We also may not be able to enter into collaborations on acceptable terms, if at all, and we may face
competition in our search for partners with whom we may collaborate. If we are not able to build a sales, marketing and distribution infrastructure or collaborate with a partner to perform these functions, we may be unable to commercialize our
product candidates successfully, which would adversely affect our business and financial condition.

Our product candidates may never
achieve market acceptance even if we obtain regulatory approvals.

Even if we receive regulatory approvals for the commercial sale
of our product candidates, the commercial success of these product candidates will depend on, among other things, their acceptance by physicians and patients. Market acceptance of, and demand for, any product that we develop and commercialize will
depend on many factors, including:



| |  |  | our ability to provide acceptable evidence of safety and efficacy;
| | - |  | ------------------------------------------------------------------



| |  |  | our ability to obtain sufficient third-party insurance coverage or reimbursement;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | availability, relative cost and relative efficacy of alternative and competing treatments;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the effectiveness of our or our collaborators sales, marketing and distribution strategy; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | publicity concerning our products or competing products and treatments.
| | - |  | -----------------------------------------------------------------------

If our product candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business.

If physicians are not adequately reimbursed for their time and services in administering NGX-4010, it is likely that they will not prescribe
NGX-4010.

Because many persons suffering from PHN are elderly, in order for NGX-4010 to be economically viable for this indication
in the United States, we will need Medicare coverage for NGX-4010 in the United States if and when NGX-4010 is approved by the FDA for commercialization. The Medicare program may determine that NGX-4010 is not reasonable and necessary
for Medicare beneficiaries or is reasonable and necessary only under limited circumstances. If the Medicare program were to determine that NGX-4010 is not reasonable and necessary for Medicare beneficiaries and deny or significantly limit
reimbursement for NGX-4010, our business would be harmed, not only because the Medicare population is a substantial portion of our target market, but also because the Medicare programs determination would likely affect the determination of
many private payors.

Even if NGX-4010 is covered by the Medicare program, we cannot determine whether that coverage will be primarily
under Medicare Part B or Medicare Part D. Although products administered by a physician, as we expect NGX-4010 will be, are ordinarily covered by Medicare Part B, and Medicare Part B also reimburses the physician for services in
administering the product, Medicare Part B does not currently provide reimbursement for the use of topical patches in the treatment of peripheral neuropathic pain. Changing the current policy as it applies to NGX-4010 and obtaining Part B
coverage is important to our future success, and there is a substantial possibility that our efforts to achieve such a change in a policy will not be successful. Lidoderm, a self-administered topical patch, is covered under Medicare Part D, the
outpatient prescription drug benefit that took effect in 2006. Part D may provide reimbursement for NGX-4010, but we do not view Part D coverage as being as favorable as Part B coverage, because each Part D plan establishes its
own formulary and may or may not decide to include NGX-4010, or if it does, may seek to



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negotiate significantly lower prices in order to include the product in their formularies. Additionally, Part D does not include reimbursement for the
physicians administration of the product. Patient preparation and NGX-4010 application time is significant and may take two hours or longer, which significantly impacts a physicians ability to see other patients and, consequently, the
physicians revenue. If physicians are not adequately reimbursed for their time and services in administering NGX-4010, it is likely that they will not prescribe NGX-4010, which would significantly impair our ability to obtain revenues.

We also will need to obtain approvals for payment for NGX-4010 from private insurers, including managed care organizations. We expect that
private insurers will consider the efficacy, cost-effectiveness and safety of NGX-4010 in determining whether to reimburse for NGX-4010 therapy and at what level. Obtaining these approvals will be a time consuming and expensive process and we may
not receive adequate reimbursement of NGX-4010 from private insurers.

We expect to experience pricing pressures in connection with the
sale of NGX-4010, if approved, and our potential future products, due to the trend toward programs and legislation aimed at reducing healthcare costs, as well as the increasing influence of managed care organizations. In some foreign countries,
particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to direct governmental control and to drug reimbursement programs with varying price control mechanisms. In these countries, pricing
negotiations with governmental authorities can take six to twelve months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a
clinical trial that compares the cost-effectiveness of NGX-4010 to other currently available therapies. If reimbursement for NGX-4010 is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels, our business would be
materially harmed.

We have no manufacturing capabilities and depend on other parties for our manufacturing operations. If these
manufacturers fail to meet our requirements and strict regulatory requirements, our product development and commercialization efforts may be materially harmed.

We currently depend on four contract manufacturers as single source suppliers for the components of our NGX-4010 product candidate: synthetic capsaicin, the topical patch, the associated cleansing gel and the fully
assembled NGX-4010 treatment kit. To date, we have entered into long term commercial supply agreements for the topical patch and our cleansing gel, but have not yet entered into long term supply agreements with either of our other contract
manufacturers and these manufacturers could terminate their relationships with us at any time and for any reason. If our relationship with any of these manufacturers is terminated, or if any manufacturer is unable to produce required quantities on a
timely basis or at all, our operations would be delayed and our business harmed.

Our reliance on contract manufacturers exposes us to
additional risks, including:



| |  |  | failure of our current and future manufacturers to comply with strictly-enforced regulatory requirements;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | failure to manufacture to our specifications, or to deliver sufficient quantities in a timely manner;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the possibility that we may terminate a contract manufacturer and need to engage a replacement;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the possibility that our current and future manufacturers may not be able to manufacture our product candidates and products without infringing the intellectual
property rights of others;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the possibility that our current and future manufacturers may not have adequate intellectual property rights to provide for exclusivity and prevent competition; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | insufficiency of intellectual property rights to any improvements in the manufacturing processes or new manufacturing processes for our products.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

Any of these factors could result in significant delay or suspension of our clinical trials, regulatory submissions,
receipt of required approvals or commercialization of our products and harm our business.

We face potential product liability
exposure, and if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.

The use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought
against us by consumers, health care providers, pharmaceutical companies or others selling our products. If we cannot successfully defend ourselves against these claims, we will incur substantial liabilities. Regardless of merit or eventual outcome,
liability claims may result in:



| |  |  | decreased demand for our product candidates;
| | - |  | --------------------------------------------



| |  |  | impairment of our business reputation;
| | - |  | --------------------------------------



| |  |  | withdrawal of clinical trial participants;
| | - |  | ------------------------------------------



| |  |  | costs of related litigation;
| | - |  | ----------------------------



| |  |  | substantial monetary awards to patients or other claimants;
| | - |  | -----------------------------------------------------------



| |  |  | loss of revenues; and
| | - |  | ---------------------



| |  |  | the inability to commercialize our product candidates.
| | - |  | ------------------------------------------------------

Although we currently have product liability insurance coverage for our clinical trials with limits that we believe are customary and adequate to provide us with coverage for foreseeable risks associated with our
product candidate development efforts, our insurance coverage may not reimburse us or may be insufficient to reimburse us for the actual expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the
future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of commercial products if we obtain
marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing.

We face substantial competition which may result in others discovering, developing or commercializing products before or more successfully than us.

If NGX-4010 receives marketing approval, it will compete against well-established products marketed by large pharmaceutical
companies with far greater name recognition and resources than we have. NGX-4010 will also compete with medications used off-label. The most directly-competitive currently-marketed products in the United States are Lidoderm, an FDA-approved 5%
lidocaine topical patch for the treatment of PHN marketed by Endo Pharmaceuticals, and Neurontin and Lyrica, oral anti-convulsants,



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marketed by Pfizer for use in the treatment of PHN. In addition to these branded drugs, the FDA has approved gabapentin for use in the treatment of PHN.
Gabapentin is marketed by multiple generic manufacturers, and is the most widely-prescribed drug in the United States for treatment of neuropathic pain. Pfizer has also received FDA approval of Lyrica for the treatment of PDN, epilepsy indications
and general anxiety disorder. The FDA has approved Cymbalta from Eli Lilly for use in the treatment of PDN, depression and general anxiety disorder.

Prior to any market launch, competition may become stronger and more direct and products in development, including products that we are unaware of, may compete with NGX-4010. There are many other companies working to
develop new drugs and other therapies to treat pain in general and neuropathic pain in particular, including GlaxoSmithKline, Merck, Novartis AG, UCB, Pfizer and Eli Lilly. Many of the compounds in development by such companies are already marketed
for other indications, such as anti-depressants or anti-seizure drugs. We are also aware of a small, privately-held specialty pharmaceutical company that has begun early development of a high-concentration capsaicin patch for the treatment of PHN,
for which the FDA has granted orphan drug designation, as well as early development of a local anesthetic patch for the treatment of PHN, HIV-DSP and PDN. If this company successfully completes its development efforts without violation of our
intellectual property rights, it would compete against us. If it were granted orphan exclusivity and was approved by the FDA in an indication that we are attempting to gain approval for before our product candidate is approved, it would
significantly harm our ability to commercialize NGX-4010. In addition, physicians employ other interventional procedures, such as nerve stimulation or nerve blocks, to treat patients with difficult to treat neuropathic pain conditions. Furthermore,
new developments, including the development of other drug technologies and methods of preventing the incidence of disease, such as vaccines, occur in the biopharmaceutical industry at a rapid pace. Any of these developments may render our product
candidates obsolete or noncompetitive.

Many of our potential competitors, either alone or together with their partners, have substantially
greater financial resources, research and development programs, clinical trial and regulatory experience, expertise in prosecution of intellectual property rights, and manufacturing, distribution and sales and marketing capabilities. As a result of
these factors, our competitors may:



| |  |  | develop product candidates and market products that are less expensive, safer, more effective or involve more convenient treatment procedures than our future
products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | commercialize competing products before we can launch any of our product candidates;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | initiate or withstand substantial price competition more successfully than we can;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | have greater success in recruiting skilled scientific workers from the limited pool of available talent;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | more effectively negotiate third-party licenses and strategic alliances; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | take advantage of acquisition or other opportunities more readily than we can.
| | - |  | ------------------------------------------------------------------------------

The life sciences industry is characterized by rapid technological change. If we fail to stay at the forefront of technological change we may be unable to compete effectively.



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Even if our product candidates receive regulatory approval, they will be subject to ongoing
regulatory requirements and may face regulatory or enforcement action.

Any product candidate for which we receive regulatory
approval, together with our third-party manufacturing facilities and processes, post-approval clinical data, and advertising and promotional activities for the product, will be subject to significant review and ongoing and changing regulation by the
FDA, the EMEA and other regulatory agencies. Failure to comply with regulatory requirements may subject us to administrative and judicially-imposed sanctions. These may include warning letters, adverse publicity, civil and criminal penalties,
injunctions, product seizures or detention, product recalls, total or partial suspension of production, and refusal to approve pending product marketing applications.

Even if we receive regulatory approval to market a particular product candidate, the approval could be conditioned on us conducting additional costly post-approval studies or could limit the indicated uses included in
our labeling. Moreover, the product may later cause adverse effects that limit or prevent its widespread use, force us to withdraw it from the market or impede or delay our ability to obtain regulatory approvals in additional countries.

We have limited experience in regulatory affairs.

We have limited experience in preparing, submitting and prosecuting regulatory filings including NDAs, MAAs and other applications necessary to gain regulatory approvals. Moreover, some of our product candidates are
based on novel applications of therapies that have not been extensively tested in humans, and the regulatory requirements governing these types of products may be less well defined or more rigorous than for conventional products. As a result of
these factors, in comparison to our competitors, we may require more time and incur greater costs to obtain regulatory approvals of products that we develop, license or acquire.

Our fast track designation for development of NGX-4010 for treatment of painful HIV-associated neuropathy may not actually lead to a
faster development or regulatory review or approval process.

A product intended for the treatment of a serious or life-threatening
condition that demonstrates the potential to address unmet medical needs for such a condition may be submitted to the FDA for fast track designation. Although we received fast track designation from the FDA for NGX-4010 for the treatment
of HIV-DSP, there is no assurance that we will experience a faster development process, review or approval, compared to conventional FDA standards, or that the product will be approved at all. The FDA may also withdraw our fast track designation if
it believes that the designation is no longer supported by data from our clinical development program.

We may not be able to obtain
or maintain orphan drug exclusivity for NGX-4010.

The FDA granted us orphan drug status with regard to NGX-4010 for the treatment
of HIV-DSP. If a product that has orphan drug designation subsequently receives FDA approval for the indication for which it has such designation, the product is entitled to orphan exclusivitythat is, for seven years, the FDA may not approve
any other applications to market the same drug for the same indication, except in very limited circumstances. We may be unable to obtain orphan drug designations for any additional product candidates or exclusivity for any of our product candidates,
or our potential competitors may obtain orphan drug exclusivity for capsaicin-based products competitive with our product candidates before we do, in which case we may be excluded from that market for the exclusivity period. In addition, orphan drug
designation previously granted may be withdrawn under certain circumstances. Even if we obtain orphan drug exclusivity for any of our product candidates, we may not be able to maintain it if a competitive product is shown to be



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clinically superior to our product. Although obtaining FDA approval to market a product with orphan exclusivity can be advantageous, there can be no
assurance that it would provide us with a significant commercial advantage.

We may not be able to obtain Hatch-Waxman Act marketing
exclusivity or equivalent regulatory data exclusivity protection in other jurisdictions for NGX-4010.

We intend to rely, in part,
on Hatch-Waxman exclusivity for the commercialization of NGX-4010 in the United States. The Hatch-Waxman Act provides five-year marketing exclusivity to the first applicant to gain approval of an NDA under specific provisions of the Food, Drug and
Cosmetic Act for a product using an active ingredient that the FDA has not previously approved. While we believe that the FDA has not approved another product containing the active ingredient of NGX-4010, synthetic capsaicin, there can be no
assurance that NGX-4010 will be able to qualify for Hatch-Waxman exclusivity. This market exclusivity will not prevent the FDA from approving a competitors NDA if the competitors NDA is based on studies it has performed and not on our
studies.

There can be no assurance that European authorities will grant data exclusivity to NGX-4010, because it does not contain a new
active molecule. Even if European data exclusivity is granted for NGX-4010, that may not protect us from direct competition. Given the well-established use of capsaicin as a pain reliever, a competitor with a generic version of NGX-4010 may be able
to obtain approval of their product during NGX-4010s period of data exclusivity, by submitting an MAA with a less than full package of preclinical and clinical data.

We depend on our key personnel. If we are not able to retain them, our business will suffer.

We are highly dependent on the principal members of our management and scientific staff. The competition for skilled personnel among biopharmaceutical
companies in the San Francisco Bay Area is intense and the employment services of our scientific, management and other executive officers are terminable at-will. If we lose one or more of these key employees, our ability to implement our business
strategy successfully could be seriously harmed. Replacing key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to
develop, gain regulatory approval of and commercialize products successfully. We do not carry key man life insurance on any of our key personnel.



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Our management and auditors have identified material weaknesses in our internal controls that, if
not properly remediated, could result in material misstatements in our financial statements and the inability of our management to provide its report on the effectiveness of our internal controls as required by the Sarbanes-Oxley Act of 2002, for
years ending December 31, 2008 and thereafter, either of which could cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our stock.

In connection with our fiscal 2006 financial statement audit, our accounting firm informed us that they had identified material weaknesses in our
internal controls as defined by the American Institute of Certified Public Accountants.

The material weaknesses reported relate to having
insufficient personnel resources with sufficient technical accounting expertise within our accounting function.

We are taking remedial
measures to improve the effectiveness of our internal controls. Specifically, we will be:



| |  |  | strengthening our internal staffing to accommodate public company requirements; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | engaging an outside compliance consulting firm to advise us on improving our internal controls and systems.
| | - |  | -----------------------------------------------------------------------------------------------------------

The existence of material weaknesses is an indication that there is a more than remote likelihood that a material misstatement of our financial
statements will not be prevented or detected in a future period, and the process of designing and implementing effective internal controls and procedures is a continuous effort that requires us to expend significant resources to maintain a system of
internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that the measures we have taken or will take in the future will remediate the material weaknesses noted by our independent public
accounting firm or that we will implement and maintain adequate controls over our financial processes and reporting in the future. In addition, we cannot assure you that additional material weaknesses or significant deficiencies in our internal
controls will not be discovered in the future. If we fail to develop and maintain effective controls and procedures, we may be unable to provide the required financial information in a timely and reliable manner or otherwise comply with the
standards applicable to us as a public company and we may not be able to provide a report on the effectiveness of our internal controls for the year ending December 31, 2008, or later. Any failure by us to timely provide the required financial
information or provide a report on the effectiveness of our internal controls could materially and adversely impact our financial condition and the market value of our securities.

Risks Related to Our Finances and Capital Requirements

We have incurred operating losses in
each year since inception and expect to continue to incur substantial and increasing losses for the foreseeable future.

We have
not generated any revenue to date and we have incurred operating and net losses each year since our inception in 1998. Our net loss for the six months ended June 30, 2007 was approximately $14.9 million. As of June 30, 2007 we had an
accumulated deficit of approximately $147.0 million. We expect to incur increasing losses for several years, as we develop, seek regulatory approvals for and commercialize NGX-4010, and continue other research and development activities. If NGX-4010
fails in clinical trials, does not gain regulatory approval or does not achieve market acceptance, we will not generate any revenue. We cannot assure you that we will be profitable even if we commercialize NGX-4010. If we fail to achieve and
maintain profitability, or if we are unable to fund our continuing losses, you could lose all or part of your investment.



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We will require substantial additional funding and may be unable to raise capital when needed,
which would force us to delay, reduce or eliminate our development programs or commercialization efforts.

We expect our negative
cash flows from operations to continue at least until we obtain regulatory approval for and are able to commercialize NGX-4010, which we believe will not occur until 2008, at the earliest. Our audit report in our 2006 consolidated financial
statements contains an explanatory paragraph stating that our recurring net losses, negative cash flows from operations and net capital deficiency raise substantial doubt about our ability to continue as a going concern. We believe, based on our
current operating plan and the proceeds from our IPO completed in May 2007, that our cash, cash equivalents and marketable securities will be sufficient to fund our operations into late 2008. The development and regulatory approval of NGX-4010 and
other product candidates and the acquisition and development of additional products or product candidates by us, as well as the development of our sales and marketing capabilities, will require the commitment of substantial funds. Our future capital
requirements will depend on, and could increase significantly as a result of, many factors, including:



| |  |  | the rate of progress and cost of our clinical trials and other development activities;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the costs and timing of regulatory approval;
| | - |  | --------------------------------------------



| |  |  | the costs of establishing or contracting for sales and marketing capabilities;
| | - |  | ------------------------------------------------------------------------------



| |  |  | the extent to which we acquire or in-license new products, technologies or businesses;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the effect of competing technological and market developments; and
| | - |  | ------------------------------------------------------------------



| |  |  | the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.
| | - |  | -------------------------------------------------------------------------------------------------------------------

We intend to seek additional funding through strategic alliances or through public or private sales of our equity securities. In addition, we may obtain
equipment leases and may pursue opportunities to obtain debt financing in the future. There can be no assurance, however, that strategic alliances, additional equity or debt financing will be available on reasonable terms, if at all. If adequate
funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our then existing or planned development, commercialization or expansion activities.

Raising additional funds by issuing securities or through licensing arrangements may cause dilution to existing stockholders, restrict our
operations or require us to relinquish proprietary rights.

To the extent that we raise additional capital by issuing equity
securities, our existing stockholders ownership will be diluted. Any debt financing we enter into may involve covenants that restrict our operations. These restrictive covenants may include limitations on additional borrowing and specific
restrictions on the use of our assets, as well as prohibitions on our ability to create liens, pay dividends, redeem our stock or make investments. In addition, if we raise additional funds through licensing arrangements, it may be necessary to
relinquish potentially valuable rights to our potential products or proprietary technologies, or grant licenses on terms that are not favorable to us.



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Risks Related to our Intellectual Property

The commercial success, if any, of NGX-4010 depends, in part, on the rights we have under certain patents.

The commercial success, if any, of NGX-4010 depends, in part, on a device patent granted in the United States and a device patent granted in Hong Kong
and certain countries of Europe concerning the use of a dermal patch for high-concentration capsaicin delivery for the treatment of neuropathic pain. We exclusively license these patents, as well as related pending patent applications in Canada and
Europe, from the University of California. We do not currently own, and do not have rights under this license to any issued patents that cover NGX-4010 outside Europe, Hong Kong or the United States.

We also license a method patent granted in the United States from the University of California concerning the delivery of high-concentration capsaicin
for the treatment of neuropathic pain. Two of the three inventors named in the method patent did not assign their patent rights to the University of California. As a result, our rights under this patent are non-exclusive. Anesiva, a company focused
on the development and commercialization of treatments for pain, including injection or infiltration of capsaicin for post-surgical pain, osteoarthritis or interdigital neuroma, has licensed from one of the non-assigning inventors the right to use
the technology under the method patent. There can be no assurances that other entities will not similarly obtain rights to use the technology under the method patent. If other entities license the right to use this patent, we may face more products
competitive with NGX-4010 and our business will suffer. There may also be claims of inventorship with respect to patents and patent applications we may have in the past licensed or may in the future license, including those licensed from the
University of California, which could also result in a loss of exclusivity and further competition.

If we are unable to maintain and
enforce our proprietary rights, we may not be able to compete effectively or operate profitably.

Our commercial success will
depend, in part, on obtaining and maintaining patent protection, trade secret protection and regulatory protection (such as Hatch-Waxman protection or orphan drug designation) of our proprietary technology and information as well as successfully
defending against third-party challenges to our proprietary technology and information. We will be able to protect our proprietary technology and information from use by third parties only to the extent that valid and enforceable patents, trade
secrets or regulatory protection cover them and we have exclusive rights to utilize them.

Our commercial success will continue to depend
in part on the patent rights we own, the patent rights we have licensed, the patent rights of our collaborators and suppliers and the patent rights we plan to obtain related to future products we may market. Our success also depends on our and our
licensors, collaborators and suppliers ability to maintain these patent rights against third-party challenges to their validity, scope or enforceability. Further, we do not fully control the patent prosecution of our licensed
patent applications. There is a risk that our licensors will not devote the same resources or attention to the prosecution of the licensed patent applications as we would if we controlled the prosecution of the patent applications, and the resulting
patent protection, if any, may not be as strong or comprehensive as if we had prosecuted the applications ourselves.

The patent positions
of biopharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies
patents has emerged to date in the United States. The patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the
value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. For example:



| |  |  | we or our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | we or our licensors might not have been the first to file patent applications for these inventions;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | others may independently develop similar or alternative technologies or duplicate any of our technologies;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | it is possible that none of our pending patent applications or the pending patent applications of our licensors will result in issued patents;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our issued patents and the issued patents of our licensors may not provide a basis for commercially viable products, or may not provide us with any competitive
advantages, or may be challenged and invalidated by third parties;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not develop additional proprietary technologies or product candidates that are patentable; or
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | the patents of others may have an adverse effect on our business.
| | - |  | -----------------------------------------------------------------

We also rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we seek to protect
confidential information, in part, by confidentiality agreements with our employees, consultants, contractors, or scientific and other advisors, they may unintentionally or willfully disclose our information to competitors. If we were to enforce a
claim that a third party had illegally obtained and was using our trade secrets, it would be expensive and time consuming, and the outcome would be unpredictable. In addition, courts outside the United States are sometimes less willing to protect
trade secrets.

If we are not able to defend the patent or trade secret protection position of our technologies and product candidates,
then we will not be able to exclude competitors from developing or marketing competing products, and we may not generate enough revenue from product sales to justify the cost of development of our product candidates and to achieve or maintain
profitability.

If we are sued for infringing intellectual property rights of other parties, such litigation will be costly and time
consuming, and an unfavorable outcome would have a significant adverse effect on our business.

Although we believe that we would
have valid defenses to allegations that our current product candidates, production methods and other activities infringe the valid and enforceable intellectual property rights of any third parties of which we are aware, we cannot be certain that a
third party will not challenge our position in the future. Other parties may own patent rights that might be infringed by our products or other activities. For example, in June 2005, Winston Laboratories sent us a letter informing us of their U.S.
patent related to cis-capsaicin, and suggesting that our synthetic capsaicin formulation could infringe this patent. We responded in August 2005 by denying any infringement. In 2007, Winston has reiterated its claim and offered to discuss a license
to its patent. We have responded by denying infringement. We believe that our products, if commercialized, will not infringe the Winston patent, which is due to expire in 2009, but may be extended under certain circumstances. There has been, and we
believe that there will continue to be, significant litigation and demands for licenses in our industry regarding patent and other intellectual property



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rights. Our competitors or other patent holders may assert that our products and the methods we employ are covered by their patents. These parties could
bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay
research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.

As a result of patent
infringement claims, or in order to avoid potential claims, we may choose to seek, or be required to seek, a license from the third party and would most likely be required to pay license fees or royalties or both. These licenses may not be available
on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be non-exclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be prevented from commercializing a product,
or be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms. This could harm our business
significantly.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other
intellectual property rights.

The cost to us of any litigation or other proceedings relating to intellectual property rights, even
if resolved in our favor, could be substantial. Some of our potential competitors may be better able to sustain the costs of complex patent litigation because they have substantially greater resources. Uncertainties resulting from the initiation and
continuation of any litigation could have a material adverse effect on our ability to continue our operations. Should third parties file patent applications, or be issued patents claiming technology also claimed by us in pending applications, we may
be required to participate in interference proceedings in the U.S. Patent and Trademark Office to determine priority of invention which could result in substantial costs to us or an adverse decision as to the priority of our inventions. An
unfavorable outcome in an interference proceeding could require us to cease using the technology or to license rights from prevailing third parties. There is no guarantee that any prevailing party would offer us a license or that we could acquire
any license made available to us on commercially acceptable terms.

If we fail to comply with our obligations in the agreements under
which we license development or commercialization rights to products or technology from third parties, we could lose license rights that are important to our business.

We are a party to a number of technology licenses that are important to our business and expect to enter into additional licenses in the future. For
example, we hold licenses from The University of California and LTS Lohmann Therapie-Systeme AG under patents and patent applications relating to NGX-4010, our lead product candidate. These licenses impose various commercialization, milestone
payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license, in which event we would not be able to market products covered by the license, including
NGX-4010.

We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged
trade secrets of their former employers.

Many of our employees were previously employed at universities or other biotechnology or
pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets
or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to



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paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper
or prevent our ability to commercialize certain potential products, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

Risks Related to our Common Stock

We expect that our stock price will fluctuate significantly, and you may not be able to resell your shares at or above your investment price.

The stock market has experienced significant volatility, particularly with respect to pharmaceutical, biotechnology and other life sciences company stocks. The volatility of pharmaceutical, biotechnology and other
life sciences company stocks often does not relate to the operating performance of the companies represented by the stock. Factors that could cause volatility in the market price of our common stock include, but are not limited to:



| |  |  | results from and any delays related to the clinical trials for our product candidates;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | failure or delays in entering additional product candidates into clinical trials;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | our ability to obtain regulatory approvals and develop and market new and enhanced product candidates on a timely basis;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | announcements by us or our collaborators or competitors of new commercial products, clinical progress or the lack thereof, significant contracts, commercial
relationships or capital commitments;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | issuance of new or changed securities analysts reports or recommendations for our stock;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | delay in entering, or termination of, strategic partnership relationships;
| | - |  | --------------------------------------------------------------------------



| |  |  | third-party healthcare reimbursement policies or determinations;
| | - |  | ----------------------------------------------------------------



| |  |  | actual or anticipated quarterly variations in our results of operations or those of our collaborators or competitors;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | developments or disputes concerning our intellectual property or other proprietary rights;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | commencement of, or our involvement in, litigation;
| | - |  | ---------------------------------------------------



| |  |  | changes in governmental regulations or in the status of our regulatory approvals;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | market conditions in the life sciences sector;
| | - |  | ----------------------------------------------



| |  |  | any major change in our board or management; and
| | - |  | ------------------------------------------------



| |  |  | general economic conditions and slow or negative growth of our markets.
| | - |  | -----------------------------------------------------------------------



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We will incur increased costs and demands upon management as a result of complying with the laws
and regulations affecting public companies, which could affect our operating results.

As a public company, we will incur
significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with corporate governance
requirements, including requirements under the Sarbanes-Oxley Act, as well as new rules implemented by the SEC and the NASDAQ Stock Market LLC. We expect these rules and regulations to increase our legal and financial compliance costs and to make
some activities more time-consuming and costly. We also expect these new rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy
limits and coverage or incur substantially higher costs to obtain the same or similar coverage than used to be available. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or
as our executive officers.

Future sales of shares by existing stockholders could cause our stock price to decline.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market
after the lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. Based on shares outstanding as of July 31, 2007, we have outstanding a total of 13,431,947 shares
of common stock. Of these shares, only the 4,000,000 shares of common stock sold by us in our recent offering will be freely tradable, without restriction, in the public market. Our underwriters, however, may, in their sole discretion, permit our
officers, directors and other current stockholders who are subject to the contractual lock-up to sell shares prior to the expiration of the lock-up agreements.

We expect that the lock-up agreements pertaining to our IPO will expire on our about November 1, 2007 although those lock-up agreements may be extended for up to an additional 34 days under certain circumstances.
After the lock-up agreements expire, based on shares outstanding as of December 31, 2006, up to an additional 8,040,570 shares of common stock will be eligible for sale in the public market, 6,209,274 of which are held by directors, executive
officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act and various vesting agreements. In addition, 681,228 shares of common stock that are subject to outstanding options as of
December 31, 2006 will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. If these additional shares are
sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

If
the ownership of our common stock continues to be highly concentrated, it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline.

Our executive officers, directors and their affiliates beneficially own or control approximately 37.6% of the outstanding shares
of our common stock (after giving effect the exercise of all outstanding vested and unvested options and warrants), as of July 31, 2007. Accordingly, these executive officers, directors and their affiliates, acting as a group, will have
substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate
transactions. These stockholders may also delay or prevent a change of control of us, even if such a change of control would benefit our other stockholders. The significant concentration of stock ownership may adversely affect the trading price of
our common stock due to investors perception that conflicts of interest may exist or arise.



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Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition
of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our certificate of incorporation and bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include a classified board of directors, a prohibition on actions by
written consent of our stockholders and the ability of our board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the
Delaware General Corporation Law, which prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Although we believe these provisions collectively provide for an opportunity to receive higher
bids by requiring potential acquirors to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our
stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.

We have paid no cash dividends on any of our classes of capital stock to date, have contractual restrictions against paying cash
dividends and currently intend to retain our future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be an investors sole source of gain for the foreseeable
future.



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|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

2000 Stock
Incentive Plan

During the three months ended June 30, 2007, we issued an aggregate of 104 shares of common stock to an employee
pursuant to the exercise of a stock option under our 2000 Stock Incentive Plan at an exercise price of $2.55 per share for an aggregate consideration of approximately $265.

The sale of securities under our 2000 Stock Incentive Plan was deemed to be exempt from registration in reliance in Rule 701 promulgated under
Section 3(b) under the Securities Act as a transaction pursuant to a compensatory benefit plan or a written contract relating to compensation.

Initial Public Offering and Use of Proceeds

We registered our common stock, par value $0.001 per share, on a Registration
Statement on Form S-1 (Registration No. 333-140501), for an IPO that was declared effective on May 1, 2007. On May 7, 2007 we completed the IPO by selling 4.0 million shares at $11.00 per share. Gross proceeds from the offering
were $44.0 million. Total expenses for this offering were approximately $5.9 million, which included underwriting discounts and commissions of approximately $3.1 million and $2.8 million in other offering-related expenses. The net offering proceeds
to us, after deducting total estimated expenses were approximately $38.1 million. The underwriters of the IPO were Morgan Stanley & Co. Incorporated, Pacific Growth Equities, LLC, Lazard Capital Markets LLC and Susquehanna Financial Group,
LLLP.

As of June 30, 2007, approximately $3.0 million of the proceeds of the offering had been used to fund the continued development
of our lead product candidate NGX-4010, $0.6 million in the development of our new product initiatives, NGX-1998 and our opioid prodrug platform, and $1.2 million for general corporate purposes including the repayment of notes payable, in accordance
with their scheduled amortization. The remaining net proceeds have been invested in accordance with our investment policies. There have been no material changes to our planned use of proceeds from our IPO as described in our final prospectus dated
May 1, 2007 filed with the SEC pursuant to Rule 424(b)(4).

The foregoing amounts represent our best estimate of our use of proceeds
for the period indicated. No such payments were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or to our affiliates other than payments to officers for salaries and other
compensation and payments to non-employee directors as compensation for board or board committee service in the ordinary course of business.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

In
April 2007, our stockholders authorized by written consent submitted in March 2007 the following actions:



| |  |  | the adoption of our Amended and Restated Certificate of Incorporation to become effective in connection with our IPO;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



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| |  |  | the adoption of our Amended and Restated Bylaws to become effective upon completion of our IPO;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the allocation of existing members of our board of directors as Class I, II or III directors effective as of the completion of our IPO as follows:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



|           |  |                                             
|---------- |  | --------------------------------------------
|Class I:   |  | Daniel K. Turner and Alix Marduel;          
|Class II:  |  | Robert Nelsen and Jean-Jacques Bienaimé; and
|Class III: |  | Neil Kurtz and Anthony DiTonno;             



| |  |  | the adoption of our 2007 Stock Plan;
| | - |  | ------------------------------------



| |  |  | the adoption of our 2007 Employee Stock Purchase Plan;
| | - |  | ------------------------------------------------------



| |  |  | the waiver of certain registration and notice rights of holders of our preferred stock in connection with our IPO;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | the election to convert all issued and outstanding shares of preferred stock into shares of Common Stock in connection with our IPO;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the approval of the form of indemnification agreement for our officers and directors; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | the approval of a 1-for-15 reverse split of our common stock.
| | - |  | -------------------------------------------------------------

All such actions were effected pursuant to written consent of our stockholders in compliance with Section 228 of the Delaware General Corporation Law.

This written consent was adopted on April 3, 2007 by holders of 368,820 shares of our common stock out of 664,875 shares issued and outstanding, and
6,122,709 shares out of 8,722,013 shares of our preferred stock issued and outstanding. These numbers represent post-reverse split, as-converted shares voted.

The terms of the Class I directors listed above expire at the first regularly scheduled annual meeting of stockholders after the consummation of our IPO. The terms of the Class II and Class III directors listed above
expire at each successive regularly scheduled meeting of stockholders thereafter, respectively.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



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##### Table of Contents

|ITEM 6. | EXHIBITS
|------- | --------



|              |  |                                                                                                                                                               
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                           
|3.1           |  | Amended and Restated Certificate of Incorporation. (1)                                                                                                        
|              | 
|3.2           |  | Amended and Restated Bylaws. (1)                                                                                                                              
|              | 
|4.1           |  | Specimen Common Stock Certificate. (1)                                                                                                                        
|              | 
|4.2           |  | Third Amended and Restated Investors Rights Agreement by and between Registrant and certain stockholders, dated as of November 14, 2005. (1)                 
|              | 
|4.3           |  | Warrant to Purchase Series A Preferred Stock by and between Registrant and Silicon Valley Bank, dated as of December 14, 2000. (1)                            
|              | 
|4.4           |  | Warrant to Purchase Series B Preferred Stock by and between Registrant and Silicon Valley Bank, dated as of May 1, 2002. (1)                                  
|              | 
|4.5           |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between Registrant and Horizon Technology Funding Company II LLC, dated as of July 7, 2006. (1)
|              | 
|4.6           |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between Registrant and Horizon Technology Funding Company II LLC, dated as of July 7, 2006. (1)
|              | 
|4.7           |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between Registrant and Oxford Finance Corporation, dated as of July 7, 2006. (1)               
|              | 
|4.8           |  | Form of First Warrant to Purchase Series C2 Preferred Stock. (1)                                                                                              
|              | 
|4.9           |  | Form of Second Warrant to Purchase Series C2 Preferred Stock. (1)                                                                                             
|              | 
|10.1          |  | 2007 Stock Plan. (1)                                                                                                                                          
|              | 
|10.2          |  | 2007 Employee Stock Purchase Plan. (1)                                                                                                                        
|              | 
|31.1          |  | Certification of the Chief Executive Officer.                                                                                                                 
|              | 
|31.2          |  | Certification of the Chief Financial Officer                                                                                                                  
|              | 
|32.1          |  | Certification of the Chief Executive Officer and Chief Financial Officer                                                                                      

---

|(1) | Incorporated by reference from our registration statement on Form S-1, registration number 333-140501, declared effective by the Securities and Exchange Commission on May 1,
2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                       |  |  |  |                                                                     
|---------------------- |  |  |  | --------------------------------------------------------------------
|Dated: August 13, 2007 |  |  |  | NEUROGESX, INC.                                                     
|                       |  |  |  | (Registrant)                                                        
|                       |  | 
|                       |  |  |  | /s/ Anthony A. DiTonno                                              
|                       |  |  |  | Anthony A. DiTonno                                                  
|                       |  |  |  | President and Chief Executive Officer (Principal
Executive Officer) 
|                       |  | 
|                       |  |  |  | /s/ Stephen F. Ghiglieri                                            
|                       |  |  |  | Stephen F. Ghiglieri                                                
|                       |  |  |  | Chief Financial Officer (Principal Financial and
Accounting Officer)



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EXHIBIT INDEX



|              |  |                                                                                                                                                               
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                           
|3.1           |  | Amended and Restated Certificate of Incorporation. (1)                                                                                                        
|              | 
|3.2           |  | Amended and Restated Bylaws. (1)                                                                                                                              
|              | 
|4.1           |  | Specimen Common Stock Certificate. (1)                                                                                                                        
|              | 
|4.2           |  | Third Amended and Restated Investors Rights Agreement by and between Registrant and certain stockholders, dated as of November 14, 2005. (1)                 
|              | 
|4.3           |  | Warrant to Purchase Series A Preferred Stock by and between Registrant and Silicon Valley Bank, dated as of December 14, 2000. (1)                            
|              | 
|4.4           |  | Warrant to Purchase Series B Preferred Stock by and between Registrant and Silicon Valley Bank, dated as of May 1, 2002. (1)                                  
|              | 
|4.5           |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between Registrant and Horizon Technology Funding Company II LLC, dated as of July 7, 2006. (1)
|              | 
|4.6           |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between Registrant and Horizon Technology Funding Company II LLC, dated as of July 7, 2006. (1)
|              | 
|4.7           |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between Registrant and Oxford Finance Corporation, dated as of July 7, 2006. (1)               
|              | 
|4.8           |  | Form of First Warrant to Purchase Series C2 Preferred Stock. (1)                                                                                              
|              | 
|4.9           |  | Form of Second Warrant to Purchase Series C2 Preferred Stock. (1)                                                                                             
|              | 
|10.1          |  | 2007 Stock Plan. (1)                                                                                                                                          
|              | 
|10.2          |  | 2007 Employee Stock Purchase Plan. (1)                                                                                                                        
|              | 
|31.1          |  | Certification of the Chief Executive Officer.                                                                                                                 
|              | 
|31.2          |  | Certification of the Chief Financial Officer                                                                                                                  
|              | 
|32.1          |  | Certification of the Chief Executive Officer and Chief Financial Officer                                                                                      

---

|(1) | Incorporated by reference from our registration statement on Form S-1, registration number 333-140501, declared effective by the Securities and Exchange Commission on May 1,
2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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