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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended September 30, 2009

or



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

Commission file number: 001-33438





NEUROGESX, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 94-3307935                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|2215 Bridgepointe Parkway, Suite 200 San Mateo, California     |  | 94404                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             

Registrants telephone number, including area code: (650) 358-3300





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 has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  | x  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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 October 31, 2009: 17,644,035









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##### Table of Contents

NEUROGESX, INC.

TABLE OF CONTENTS FOR FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2009



|                              |  |          |  |                                                                                                                  |  |     
|----------------------------- |  | -------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |          |  |                                                                                                                  |  | Page
|PART I. FINANCIAL INFORMATION |  | 1       
|                              |  |          | 
|                              |  | Item 1.  |  | Financial Statements (unaudited)                                                                                 |  | 1   
|                              |  |          |  | Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008                             |  | 1   
|                              |  |          |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 
30, 2009 and 2008 |  | 2   
|                              |  |          |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and
2008            |  | 3   
|                              |  |          |  | Notes to Condensed Consolidated Financial Statements                                                             |  | 4   
|                              |  | Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 15  
|                              |  | Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                       |  | 25  
|                              |  | Item 4T. |  | Controls and Procedures                                                                                          |  | 25  
|                              | 
|PART II. OTHER INFORMATION    |  | 26      
|                              |  |          | 
|                              |  | Item 1.  |  | Legal Proceedings                                                                                                |  | 26  
|                              |  | Item 1A. |  | Risk Factors                                                                                                     |  | 26  
|                              |  | Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                      |  | 47  
|                              |  | Item 3.  |  | Defaults Upon Senior Securities                                                                                  |  | 47  
|                              |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                              |  | 47  
|                              |  | Item 5.  |  | Other Information                                                                                                |  | 47  
|                              |  | Item 6.  |  | Exhibits                                                                                                         |  | 48  
|                              | 
|SIGNATURES                    |  | 49      
|                              | 
|EXHIBIT INDEX                 |  | 50      



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##### Table of Contents

PART I. FINANCIAL INFORMATION



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

NeurogesX, Inc.

Condensed Consolidated Balance Sheets

(in thousands)



|                                           |  |                   |          |   |                  |   |          |  
|------------------------------------------ |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                           |  | September 30,2009 |          |   | December 31,2008 |  
|                                           |  | (unaudited)       |          |   | (Note 1)         |  
|Assets                                     | 
|Current assets:                            |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                  |  | $                 | 48,468   |   |                  | $ | 10,435   |  
|Short-term investments                     |  |                   | 8,516    |   |                  |   | 14,071   |  
|Prepaid expenses and other current assets  |  |                   | 776      |   |                  |   | 412      |  
|Restricted cash                            |  |                   | 40       |   |                  |   | 40       |  
|                                           |  |                   |          |   |                  |   |          |  
|Total current assets                       |  |                   | 57,800   |   |                  |   | 24,958   |  
|Property and equipment, net                |  |                   | 380      |   |                  |   | 468      |  
|Restricted cash                            |  |                   | 160      |   |                  |   | 160      |  
|Other assets                               |  |                   |         |   |                  |   | 4        |  
|                                           |  |                   |          |   |                  |   |          |  
|Total assets                               |  | $                 | 58,340   |   |                  | $ | 25,590   |  
|                                           |  |                   |          |   |                  |   |          |  
|Liabilities and Stockholders Equity       | 
|Current liabilities:                       |  |                   |          |   |                  |   |          |  
|Accounts payable                           |  | $                 | 524      |   |                  | $ | 370      |  
|Accrued compensation                       |  |                   | 1,221    |   |                  |   | 1,039    |  
|Accrued license fees                       |  |                   | 1,213    |   |                  |   |         |  
|Accrued research and development           |  |                   | 190      |   |                  |   | 1,067    |  
|Other accrued expenses                     |  |                   | 1,208    |   |                  |   | 540      |  
|Deferred revenue                           |  |                   | 7,242    |   |                  |   |         |  
|Notes payable  current portion            |  |                   | 740      |   |                  |   | 2,833    |  
|                                           |  |                   |          |   |                  |   |          |  
|Total current liabilities                  |  |                   | 12,338   |   |                  |   | 5,849    |  
|Non-current liabilities:                   |  |                   |          |   |                  |   |          |  
|Deferred revenue                           |  |                   | 41,426   |   |                  |   |         |  
|Notes payable  non-current portion        |  |                   |         |   |                  |   | 191      |  
|Deferred rent                              |  |                   | 332      |   |                  |   | 276      |  
|                                           |  |                   |          |   |                  |   |          |  
|Total non-current liabilities              |  |                   | 41,758   |   |                  |   | 467      |  
|                                           |  |                  
|Commitments and contingencies              |  |                   |          |   |                  |   |          |  
|                                           |  |                  
|Stockholders equity:                      |  |                   |          |   |                  |   |          |  
|Common stock                               |  |                   | 18       |   |                  |   | 18       |  
|Additional paid-in capital                 |  |                   | 211,155  |   |                  |   | 209,370  |  
|Deferred stock-based compensation          |  |                   |         |   |                  |   | (2       | )
|Accumulated other comprehensive income     |  |                   | 4        |   |                  |   | 32       |  
|Accumulated deficit                        |  |                   | (206,933 | ) |                  |   | (190,144 | )
|                                           |  |                   |          |   |                  |   |          |  
|Total stockholders equity                 |  |                   | 4,244    |   |                  |   | 19,274   |  
|                                           |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity |  | $                 | 58,340   |   |                  | $ | 25,590   |  
|                                           |  |                   |          |   |                  |   |          |  

See accompanying notes.



1



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NeurogesX, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)



|                                                                          |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                          |  | Three Months EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |  
|                                                                          |  | 2009                            |            |   | 2008                           |   |            | 2009 |  |   | 2008       |  
|Collaboration revenue                                                     |  | $                               | 119        |   |                                | $ |           |      |  | $ | 119        |   |  | $ |           |  
|                                                                          |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Operating expenses:                                                       |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Research and development(1)                                               |  |                                 | 3,557      |   |                                |   | 3,653      |      |  |   | 8,664      |   |  |   | 13,607     |  
|General and administrative(2)                                             |  |                                 | 3,269      |   |                                |   | 2,677      |      |  |   | 8,062      |   |  |   | 8,027      |  
|                                                                          |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                                  |  |                                 | 6,826      |   |                                |   | 6,330      |      |  |   | 16,726     |   |  |   | 21,634     |  
|                                                                          |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Loss from operations                                                      |  |                                 | (6,707     | ) |                                |   | (6,330     | )    |  |   | (16,607    | ) |  |   | (21,634    | )
|Interest income                                                           |  |                                 | 3          |   |                                |   | 212        |      |  |   | 48         |   |  |   | 1,001      |  
|Interest expense                                                          |  |                                 | (52        | ) |                                |   | (183       | )    |  |   | (240       | ) |  |   | (640       | )
|Other income (expense), net                                               |  |                                 |           |   |                                |   | (12        | )    |  |   | 10         |   |  |   | 26         |  
|                                                                          |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net loss                                                                  |  | $                               | (6,756     | ) |                                | $ | (6,313     | )    |  | $ | (16,789    | ) |  | $ | (21,247    | )
|                                                                          |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net loss per share                                      |  | $                               | (0.38      | ) |                                | $ | (0.36      | )    |  | $ | (0.95      | ) |  | $ | (1.21      | )
|                                                                          |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Shares used to compute basic and diluted net loss per share               |  |                                 | 17,617,209 |   |                                |   | 17,538,886 |      |  |   | 17,588,832 |   |  |   | 17,508,094 |  
|                                                                          |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                                          |  |                                 |            |  
|                                                                          |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Non-cash stock-based compensation expense included in operating expenses: |  |                                 |            |   |                               
|(1)    Research and development                                           |  | $                               | 148        |   |                                | $ | 183        |      |  | $ | 596        |   |  | $ | 597        |  
|(2)    General and administrative                                         |  |                                 | 576        |   |                                |   | 190        |      |  |   | 1,025      |   |  |   | 570        |  
|                                                                          |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                                          |  | $                               | 724        |   |                                | $ | 373        |      |  | $ | 1,621      |   |  | $ | 1,167      |  
|                                                                          |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  

See accompanying notes.



2



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NeurogesX, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



|                                                                                          |  |                                |         |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                          |  | Nine Months EndedSeptember 30, |        
|                                                                                          |  | 2009                           |         |   | 2008 |  
|Operating activities                                                                      |  |                                |         |   |      |   |         |  
|Net loss                                                                                  |  | $                              | (16,789 | ) |      | $ | (21,247 | )
|Adjustments to reconcile net loss to net cash provided by/(used in) operating activities: |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                                             |  |                                | 139     |   |      |   | 131     |  
|Amortization of debt issuance costs                                                       |  |                                | 70      |   |      |   | 149     |  
|Amortization/accretion of investment premiums/(discounts), net                            |  |                                | 80      |   |      |   | (679    | )
|Stock-based compensation                                                                  |  |                                | 1,621   |   |      |   | 1,167   |  
|(Gain) on sales of short-term investments                                                 |  |                                |        |   |      |   | (31     | )
|Loss on disposal of fixed assets                                                          |  |                                |        |   |      |   | 5       |  
|Changes in operating assets and liabilities:                                              |  |                                |         |   |      |   |         |  
|Prepaid expenses and other current assets                                                 |  |                                | (358    | ) |      |   | (39     | )
|Accounts payable                                                                          |  |                                | 154     |   |      |   | (849    | )
|Accrued compensation                                                                      |  |                                | 182     |   |      |   | 329     |  
|Accrued research and development                                                          |  |                                | (877    | ) |      |   | (118    | )
|Accrued license fees                                                                      |  |                                | 1,213   |   |      |   |        |  
|Deferred revenue                                                                          |  |                                | 48,668  |   |      |   |        |  
|Deferred rent                                                                             |  |                                | 140     |   |      |   | 123     |  
|Other accrued expenses                                                                    |  |                                | 586     |   |      |   | (879    | )
|                                                                                          |  |                                |         |   |      |   |         |  
|Net cash provided by/(used in) operating activities                                       |  |                                | 34,829  |   |      |   | (21,938 | )
|                                                                                          |  |                                |         |   |      |   |         |  
|Investing activities                                                                      |  |                                |         |   |      |   |         |  
|Purchases of short-term investments                                                       |  |                                | (16,555 | ) |      |   | (50,288 | )
|Proceeds from maturities of short-term investments                                        |  |                                | 22,001  |   |      |   | 37,360  |  
|Proceeds from sales of short-term investments                                             |  |                                |        |   |      |   | 21,967  |  
|Proceeds from disposal of property and equipment                                          |  |                                |        |   |      |   | 2       |  
|Purchases of property and equipment                                                       |  |                                | (51     | ) |      |   | (203    | )
|                                                                                          |  |                                |         |   |      |   |         |  
|Net cash provided by investing activities                                                 |  |                                | 5,395   |   |      |   | 8,838   |  
|                                                                                          |  |                                |         |   |      |   |         |  
|Financing activities                                                                      |  |                                |         |   |      |   |         |  
|Repayment of notes payable                                                                |  |                                | (2,350  | ) |      |   | (2,966  | )
|Proceeds from issuance of warrants                                                        |  |                                |        |   |      |   | 14      |  
|Proceeds from issuance of common stock                                                    |  |                                | 159     |   |      |   | 2,374   |  
|                                                                                          |  |                                |         |   |      |   |         |  
|Net cash (used in) financing activities                                                   |  |                                | (2,191  | ) |      |   | (578    | )
|                                                                                          |  |                                |         |   |      |   |         |  
|Net increase/(decrease) in cash and cash equivalents                                      |  |                                | 38,033  |   |      |   | (13,678 | )
|Cash and cash equivalents, beginning of period                                            |  |                                | 10,435  |   |      |   | 31,478  |  
|                                                                                          |  |                                |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                  |  | $                              | 48,468  |   |      | $ | 17,800  |  
|                                                                                          |  |                                |         |   |      |   |         |  
|Supplemental cash flow information                                                        |  |                                |         |   |      |   |         |  
|Cash paid for interest                                                                    |  | $                              | 165     |   |      | $ | 521     |  
|                                                                                          |  |                                |         |   |      |   |         |  

See accompanying notes.



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NEUROGESX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. The Company

Nature of Operations

NeurogesX, Inc. (the Company) is a biopharmaceutical company focused on developing and commercializing novel pain management
therapies. The Company is assembling a portfolio of pain management product candidates based on known chemical entities to develop innovative new therapies which the Company believes may offer substantial advantages over currently available
treatment options. The Companys initial focus is on the management of chronic peripheral neuropathic pain conditions. The Companys most advanced product candidate, Qutenza (formerly NGX-4010), a dermal patch containing a high
concentration of synthetic capsaicin, is designed to manage pain associated with peripheral neuropathic pain conditions. In May 2009, Qutenza received a marketing authorization (MA) in the European Union for the treatment of peripheral
neuropathic pain in non-diabetic adults, alone or in combination with other medicinal products for pain. In June 2009, the Company entered into a Distribution, Marketing and License Agreement (the Astellas Agreement) with Astellas Pharma
Europe Ltd. (Astellas or Collaboration Partner), under which Astellas was granted an exclusive license to commercialize Qutenza in the European Economic Area, which includes the 27 countries of the European Union, Iceland,
Norway, and Liechtenstein as well as Switzerland, certain countries in Eastern Europe, the Middle East and Africa (Licensed Territory).

In the United States, the Company submitted to the U.S. Food and Drug Administration (FDA) a new drug application (NDA) for Qutenza for the management of pain associated with
postherpetic neuralgia (PHN) in October 2008, which was filed by the FDA in December 2008. The Companys NDA was originally given a Prescription Drug User Fee Act (PDUFA) date of August 16, 2009. However, on
August 5, 2009, the FDA extended the PDUFA date to November 16, 2009 to provide time for a full review of a submission made to the FDA in late July 2009. The submission contained various data and analyses provided in response to FDA
requests.

The Company was incorporated in California as Advanced Analgesics, Inc. on May 28, 1998 and changed its name
to NeurogesX, Inc. in September 2000. In February 2007, the Company reincorporated into Delaware. The Company is located in San Mateo, California. During the three months ended September 30, 2009, the Company transitioned out of 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. 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 (GAAP) for interim financial information on the
same basis as the annual consolidated financial statements and in accordance 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 GAAP for
complete financial statements. The unaudited condensed consolidated interim financial statements include all adjustments (consisting only of normal recurring



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NEUROGESX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



adjustments) that management believes are necessary for the fair statement of the balances and results for the periods presented. These unaudited condensed consolidated 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, 2008 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 such information have read or have access to the audited consolidated financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December 31, 2008 contained in the Companys 2008 Form 10-K. The Company has evaluated its subsequent events for disclosure in this Quarterly Report on Form 10-Q
through November 9, 2009, the date in which these financial statements were issued.

Use of Estimates

The preparation of financial statements in conformity with GAAP 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

Inventory

The Company will capitalize future costs associated with inventory to be sold in the United States, including internal and external costs of manufacture, and the cost of acceptance and release of products
which are approved for sale. Internal costs primarily consist of supply chain management and quality assurance. External costs primarily include the cost of product manufacture, as charged by our third party manufacturers as well as transportation
and packaging costs. Purchase of material from our third party manufacturers is either recorded as research and development expense if these materials are received prior to FDA approval or, if they are received after FDA approval such materials will
be recorded as Inventory at such time that title is transferred. As of September 30, 2009, Qutenza was not an approved product in the United States, and accordingly, costs associated with product manufacturing for the U.S. market have been
recorded as research and development expense on the Companys statement of operations.

Prepaid Collaboration Supplies

Costs to manufacture product for supply to Astellas under its supply agreement, including internal labor costs and third party
manufacturing, packaging and transportation costs, for products which have been approved for sale, are classified as prepaid collaboration supplies, which is included in Prepaid expenses and other current assets on the Companys balance sheet,
until such time as those supplies are delivered to Astellas. Upon delivery to Astellas, the net profit or loss on such amounts are recorded as a component of Collaboration revenue on the Companys statement of operations, net of the
reimbursement for those expenses due from the collaboration partner. The Company expects the net profit or loss on collaboration supplies will not be material.

Revenue Recognition

NeurogesX entered into the Astellas Agreement
which provides for an exclusive license for the promotion, distribution and marketing of Qutenza in the Licensed Territory, an option to license NGX-1998, a product candidate that is a non-patch liquid formulation of capsaicin, in the Licensed
Territory, participation on a joint steering committee and, through a related supply



5



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NEUROGESX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



agreement entered into with Astellas (the Supply Agreement), supply of product until direct supply arrangements between Astellas and third party manufacturers are established, which
the Company anticipates may be within 18 to 24 months of the execution of the Astellas Agreement. Revenue under this arrangement includes upfront non-refundable fees and may also include further option payments for the development of and
license to NGX-1998, milestone payments upon achievement of certain product sales levels and royalties on product sales. Reported revenue will also include net profit or loss in connection with the Supply Agreement, which the Company expects to be
immaterial.

Revenue recognized from collaborative agreements is based upon the provisions of Codification Topic 605 (Staff
Accounting Bulletin, or SAB, No. 104, Revenue Recognition), Codification Topic 808 (Emerging Issues Task Force (EITF), Issue No. 07-1, Accounting for Collaboration Arrangements (EITF 07-1)), and
Codification Topic 605-25 (EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21)).

In accordance with Codification Topic 605-25 (EITF 00-21), multiple element arrangements are analyzed to determine whether the various performance obligations, or elements, can be separated or whether they must be accounted for as a single
unit of accounting. The determination of whether an element can be separated or accounted for as a single unit of accounting is based on the availability of evidence with regard to standalone value of each element. If the fair value of all
undelivered performance obligations can be determined, then all obligations would then be accounted for separately as performed. If any element is considered to either: 1) not have standalone value or 2) have standalone value but the fair value of
any of the undelivered performance obligations are not determinable, then any undelivered elements of the arrangement would then be accounted for as a single unit of accounting and the multiple elements would be grouped and recognized as revenue
over the longest estimated performance obligation period.

Significant management judgment is required in determining the
level of effort required under an arrangement and the period over which the performance obligations are estimated to be completed. In addition, if the Company is involved in a joint steering committee as part of a multiple element arrangement that
is accounted for as a single unit of accounting, an assessment is made as to whether the involvement in the steering committee constitutes a performance obligation or a right to participate.

Revenue recognition of non-refundable upfront license fees commences when there is a contractual right to receive such payment, the contract
price is fixed or determinable, the collection of the resulting receivable is reasonably assured and there are no further performance obligations under the license agreement.

With respect to the Astellas Agreement and related agreements, the Company views this arrangement as a multiple element arrangement with the
key elements consisting of an exclusive license to Qutenza in the Licensed Territory, an obligation to conduct certain development activities associated with NGX-1998, participation on a joint steering committee and supply of Qutenza components to
Astellas until such time that Astellas can establish a direct supply relationship with product vendors. Because not all of these elements have both standalone value and objective and reliable evidence of fair value, the Company is accounting for
such elements as a single unit of accounting in accordance with Codification Topic 605-25 (EITF 00-21). Further, the agreement provides the Companys mandatory participation in a joint steering committee, which the Company believes represents a
substantive performance obligation and also the estimated last delivered element under the Astellas Agreement and related agreements. Therefore, the Company will recognize revenue associated with upfront payments and license fees ratably over the
term of the joint steering committee performance obligation. The Company estimates this performance obligation will be delivered ratably through June 2016.



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NEUROGESX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



At the inception of the Astellas Agreement, the upfront license fees were subject to a
refund right, which expired upon transfer of the Companys MA for Qutenza in the European Union to Astellas. During the three months ended September 30, 2009, the transfer of the MA to Astellas was completed and therefore the upfront
license fees became non-refundable and revenue recognition of the upfront license fees commenced in this period.

Milestone
revenue upon achievement of certain product sales levels and royalty revenue on net sales of products will be recognized as earned in accordance with contract terms, when third party results are reported and collection is reasonably assured.

In the financial statements, Collaboration revenue represents revenue associated with the Astellas Agreement and related
agreements, including amortization of up-front fees and payments associated with the licensing option for NGX-1998, milestone revenue upon achievement of certain product sales levels, royalty revenue on net sales of products, and net profit or loss
on collaboration supplies. Deferred revenue arises from the excess of cash received or receivable over cumulative revenue recognized over the term of the Companys continuing obligations.

Stock-Based Compensation

The Company recognizes stock-based compensation cost as follows:



| |  |  | 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 GAAP that existed prior to Codification Topic 718.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 Codification Topic 718 (Statement of Financial Accounting Standards No. 123R, Share-Based Payment).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All awards granted, modified, or settled after the date of adoption are accounted for using the measurement, recognition, and attribution provisions of Codification Topic 718. The Company has elected to
use the Black-Scholes option valuation model to estimate the fair value of stock options. Stock compensation expense relating to options with acceleration of vesting dependant upon the achievement of milestones is recognized over a period which is
the shorter of:



| |  |  | the Companys evaluation of the probability of achievement of each respective milestone and the related estimated date of achievement; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the otherwise stated time-based vesting period.
| | - |  | -----------------------------------------------



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NEUROGESX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



The following tables show the assumptions used to compute stock-based compensation
expense for stock options granted to employees and members of the board of directors and the assumptions used to compute stock-based compensation expense for the Companys Employee Stock Purchase Plan (ESPP) for the three and
nine-month periods ended September 30, 2009 and 2008 using the Black-Scholes valuation model:



|                         |  |                                 |  |                                |  |            |  |           
|------------------------ |  | ------------------------------- |  | ------------------------------ |  | ---------- |  | ----------
|                         |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|                         |  | 2009                            |  | 2008                           |  | 2009       |  | 2008      
|Stock Options            |  |                                 |  |                                |  |            |  |           
|Expected dividend yield  |  | 0%                              |  | *                             |  | 0%         |  | 0%        
|Expected volatility      |  | 67%                             |  | *                             |  | 67  70%   |  | 70%       
|Expected life (in years) |  | 6.0                             |  | *                             |  | 6.0        |  | 6.0       
|Risk-free interest rate  |  | 2.9%                            |  | *                             |  | 1.8  2.9% |  | 3.1  3.4%
|                         |  |                                 |  |                               
|ESPP                     |  |                                 |  |                                |  |            |  |           
|Expected dividend yield  |  | 0%                              |  | 0%                             |  | 0%         |  | 0%        
|Expected volatility      |  | 56  89%                        |  | 56  68%                       |  | 56  89%   |  | 44  68%  
|Expected life (in years) |  | 0.2  1.0                       |  | 0.5  1.0                      |  | 0.2  1.0  |  | 0.5  1.0 
|Risk-free interest rate  |  | 0.2  2.1%                      |  | 1.9  3.6%                     |  | 0.2  2.1% |  | 1.9  5.0%



|* | No stock options were granted in the three months ended September 30, 2008.
|- | ---------------------------------------------------------------------------

Comprehensive Loss

The Company reports comprehensive loss and its
components as part of total stockholders equity. Comprehensive loss is comprised of net loss and changes in unrealized gains (losses) on available-for-sale investments. For the three and nine months ended September 30, 2009 and 2008,
comprehensive loss was as follows:



|                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                     |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                     |  | 2009                            |        |   | 2008                           |   |        | 2009 |  |   | 2008    |  
|Net loss                             |  | $                               | (6,756 | ) |                                | $ | (6,313 | )    |  | $ | (16,789 | ) |  | $ | (21,247 | )
|Changes in unrealized gains (losses) |  |                                 | 2      |   |                                |   | 2      |      |  |   | (28     | ) |  |   | 4       |  
|                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total comprehensive loss             |  | $                               | (6,754 | ) |                                | $ | (6,311 | )    |  | $ | (16,817 | ) |  | $ | (21,243 | )
|                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

The fluctuation in accumulated other comprehensive income represents the net change
in fair value of the Companys investments as a result of changes in interest rates and other factors affecting fair value and as a result of sales of investments prior to their maturities. The cumulative effect of these periodic fluctuations
is reflected as accumulated other comprehensive income on the Companys balance sheet.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss attributable 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 of common stock equivalents. Diluted net loss per share is computed by dividing the net loss attributable to common
stockholders by the weighted-average number of common share and share equivalents outstanding for the period, less the weighted average unvested common shares subject to repurchase. For purposes of this calculation, warrants and options to purchase
common stock are considered to be common equivalent shares but have been excluded from the calculation of diluted net loss per share as their effect is anti-dilutive.



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NEUROGESX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



|                                                                    |  |                                                |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------------- |  | ---------------------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                    |  | Three Months EndedSeptember 30,                |            |   | Nine Months EndedSeptember 30, |  
|                                                                    |  | 2009                                           |            |   | 2008                           |   |            | 2009 |  |   | 2008       |  
|                                                                    |  | (in thousands except share and per share data) |           
|Numerator:                                                          |  |                                                |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net loss                                                            |  | $                                              | (6,756     | ) |                                | $ | (6,313     | )    |  | $ | (16,789    | ) |  | $ | (21,247    | )
|                                                                    |  |                                                |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Denominator:                                                        |  |                                                |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Weighted-average common shares outstanding                          |  |                                                | 17,617,314 |   |                                |   | 17,540,078 |      |  |   | 17,589,171 |   |  |   | 17,509,600 |  
|Less: Weighted-average unvested common shares subject to repurchase |  |                                                | (105       | ) |                                |   | (1,192     | )    |  |   | (340       | ) |  |   | (1,506     | )
|                                                                    |  |                                                |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Denominator for basic and diluted net loss per share                |  |                                                | 17,617,209 |   |                                |   | 17,538,886 |      |  |   | 17,588,832 |   |  |   | 17,508,094 |  
|                                                                    |  |                                                |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net loss per share                                |  | $                                              | (0.38      | ) |                                | $ | (0.36      | )    |  | $ | (0.95      | ) |  | $ | (1.21      | )
|                                                                    |  |                                                |            |   |                                |   |            |      |  |   |            |   |  |   |            |  



|                                                                                                                      |  |               |  |          
|--------------------------------------------------------------------------------------------------------------------- |  | ------------- |  | ---------
|                                                                                                                      |  | September 30,
|                                                                                                                      |  | 2009          |  | 2008     
|Outstanding securities not included in diluted net loss per share calculation as their impact would be
anti-dilutive: |  |               |  |          
|Options to purchase common stock                                                                                      |  | 2,090,536     |  | 1,420,550
|Warrants outstanding                                                                                                  |  | 1,265,846     |  | 1,265,846
|Common stock subject to repurchase                                                                                    |  |              |  | 1,087    
|                                                                                                                      |  |               |  |          
|                                                                                                                      |  | 3,356,382     |  | 2,687,483
|                                                                                                                      |  |               |  |          

Recently Issued Accounting Standards

Adopted in 2009

In April 2009, the FASB issued two Staff Positions (FSPs) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of
securities. Codification Topic 320 (FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments), provides guidance that an entity should evaluate whether a) it intends to sell or b) it will be required to
sell a debt security when evaluating whether an impairment is other than temporary. This FSP also establishes criteria for when to recognize a write-down through earnings versus other comprehensive income. Codification Topic 825 (FSP FAS 107-1 and
APB 28-1 , Interim Disclosures about Fair Value of Financial Instruments, expands the fair value disclosures required for all financial instruments within the scope of Codification Topic 825 (SFAS No. 107, Disclosures about Fair Value
of Financial Instruments), to interim periods. Both of these Codification Topics are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of these Codification Topics did not have a material impact on
the Companys financial position or results of operations.

In May 2009, the FASB issued Codification Topic 855 (SFAS
No. 165, Subsequent Events (SFAS No. 165), which establishes general standards of accounting for, and requires disclosure of, events that occur after the balance sheet date but before financial statements are issued or
are available to be issued. The Company adopted the provisions of Codification Topic 855 for the quarter ended June 30, 2009. The adoption of Codification Topic 855 did not have a material effect on the Companys financial position or
results of operations.

In June 2009, the FASB issued Accounting Standards Update No. 2009-01, Generally Accepted
Accounting Principles,(Codification Topic 105) which establishes the FASB Accounting Standards Codification (Codification) as the single source of authoritative U.S. GAAP. The Codification is not intended to change GAAP, but it will
change the way GAAP is organized and presented. The Codification is effective for the quarter ended September 30, 2009. The adoption of the Codification did not have a material effect on the Companys financial position or results of
operations. In order to facilitate an easier transition to the Codification, the Company has provided Codification cross-references next to each reference to the standard issued and adopted prior to the adoption of the Codification.

In December 2007, Codification Topic 808 (EITF Issue 07-1, Accounting for Collaborative Arrangements(EITF 07-1)) was
issued, which applies to collaborative arrangements where no separate legal entity exists and in which the parties are active participants and are exposed to significant risks and rewards that depend on the success of the activity. This issue, among
other things, requires certain income statement presentation of transactions with third parties and of payments between parties to the collaborative



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NEUROGESX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



arrangement, along with disclosure about the nature and purpose of the arrangement. The provisions of Codification Topic 808 are effective for fiscal years beginning on or after December 15,
2008. The Company adopted Codification Topic 808 on January 1, 2009. The adoption of Codification Topic 808 did not have a material impact on the Companys financial position or results of operations.

FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, (FSP No. 157-2) delayed the effective
date of Codification Topic 820 (SFAS No. 157, Fair Value Measurements (SFAS No. 157)), for non-financial assets and non-financial liabilities except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. The Company adopted FSP No. 157-2 on January 1, 2009. Since the Company does not currently have assets or liabilities
that are required to be measured on a non-recurring basis, the adoption of FSP No. 157-2 did not have a material impact on the Companys financial position or results of operations.

Not Yet Adopted

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition (ASC Topic 605)  Multiple-Deliverable Revenue Arrangements(ASU
2009-13). This guidance modifies previous guidance for multiple element arrangements by allowing the use of the best estimate of selling price in the absence of vendor-specific objective evidence (VSOE) or
third party evidence (TPE) of selling price for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price is not available. In addition,
the residual method of allocating arrangement consideration is no longer permitted. This ASU is effective for fiscal years beginning on or after June 15, 2010 and early adoption is permitted beginning in interim periods ended September 30,
2009. The Company is currently evaluating the impact of adopting this ASU on its financial position and results of operations.

Note 3.
License Agreements

COLLABORATION AGREEMENT  ASTELLAS

In June 2009, NeurogesX entered into the Astellas Agreement for an exclusive license to commercialize Qutenza in the Licensed Territory. The
Astellas Agreement provided for an upfront payment for past development and the commercialization rights granted, of 30,000,000 Euro, or $41,817,000. In addition, the agreement provided for an upfront payment of 5,000,000 Euro, or $6,970,000, for
future development expenses and an option to license NGX-1998, a product candidate in Phase 1 development. Other elements of the Astellas Agreement include future milestone payments of up to 65,000,000 Euro if certain predefined sales thresholds of
the products licensed under the agreement are met and royalties, as a percentage of net sales of products under the agreement, with such royalties starting in the high teens and escalating into the mid twenties as revenues increase. The Company is
participating on a joint steering committee with Astellas to oversee the development and commercialization activities related to Qutenza and NGX-1998 during the term of the agreement, not to exceed ten years. On the seventh anniversary of the
Astellas Agreement, the Company has the unilateral right to opt-out of participation on the joint steering committee. The Astellas Agreement further provides that upon delivery of certain data related to NGX-1998, Astellas may pay two additional
NGX-1998 option payments totaling 5,000,000 Euro. Subsequent to Astellas exercise of the option to exclusively license NGX-1998 in the Territory, both companies would cooperate on Phase III clinical trials and will share such costs equally.

As of September 30, 2009, the Company recorded deferred revenue totaling $48,668,000, of which $7,242,000 is reflected
as the current portion of deferred revenue. The Astellas upfront license fee and option payments are accounted for as a single unit of accounting, and accordingly, such payments will be recognized ratably through June 2016, which is the
Companys estimate of its



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NEUROGESX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



substantive performance obligation period related to the joint steering committee. The Company commenced recognizing revenue related to the upfront and option payments upon transfer of the MA for
Qutenza to Astellas, which occurred in September 2009 and accordingly recognized approximately $119,000 as Collaboration revenue in the three and nine month periods ended September 30, 2009. Subsequent option exercise payments received, if any,
are expected to be recognized ratably over the remaining estimated period of performance.

The agreement will remain effective
on a country-by-country and product-by-product basis until the later of ten years after the first commercial sale, expiration or abandonment of the last valid patent claim or expiration of all applicable periods of regulatory exclusivity. Astellas
may terminate the agreement for any reason without penalty, consequence or compensation on a country-by-country and product-by-product basis upon written notice to the Company.

Pursuant to the Supply Agreement, the Company has agreed to provide Astellas with a sufficient supply of Qutenza to support their
commercialization efforts until Astellas can establish a direct supply relationship with product vendors. These products will be charged to Astellas at the Companys direct Cost of Goods without markup for profit. The Company will
report amounts received from product transactions under Codification Topic 808 (EITF 07-1), net of direct costs incurred as a component of Collaboration revenue. The Company expects the net profit or loss on collaboration supplies will not be
material.

UNIVERSITY OF CALIFORNIA

In October 2000 and as amended, the Company licensed certain patents from the University of California (UC) for
high-concentration capsaicin for neuropathic pain. Under the terms of the agreement, the Company is required to pay royalties on net sales of the licensed product up to a maximum of $1,000,000 per annum as well as a percentage of upfront and
milestone payments received by the Company from sublicensing the Companys rights under the agreement (Sublicense Fee). As a result of the Astellas license payment received in July 2009, the Company recorded the $1,213,000
sublicense fee to research and development expense during the quarter, which is payable to UC in the first quarter of 2010.

LTS LOHMANN THERAPIE-SYSTEME AG

In January 2007, the Company entered into a Commercial Supply and
License Agreement (LTS Agreement) with LTS Lohmann Therapie-Systeme AG (LTS) to manufacture commercial and clinical supply of Qutenza. Under the terms of the agreement, the Company is required to pay a transfer price for
product purchased as well as a royalty on net sales of product purchased under the LTS Agreement. Additionally, upon first market approval of Qutenza, the Company is required to make a one time milestone payment of 100,000. During the three
months ended June 30, 2009, the Company received market approval of Qutenza in the European Union and as a result, paid LTS the one time milestone payment of 100,000, or approximately $140,000, which was charged to research and
development expense.



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NEUROGESX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Note 4. Cash and Cash Equivalents and Short-Term Investments

The following are summaries of the Companys cash, cash equivalents and short-term investments (in thousands):



|                            |  |               |        |                      |   |                       |  |                     |   |  |   |       
|--------------------------- |  | ------------- | ------ | -------------------- | - | --------------------- |  | ------------------- | - |  | - | ------
|                            |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Estimated FairValue
|As of September 30, 2009:   |  |               |        |                      |   |                       |  |                     |   |  |   |       
|Cash and money market funds |  | $             | 6,659  |                      | $ |                      |  | $                   |  |  | $ | 6,659 
|U.S. Treasury securities    |  |               | 50,321 |                      |   | 4                     |  |                     |  |  |   | 50,325
|                            |  |               |        |                      |   |                       |  |                     |   |  |   |       
|                            |  | $             | 56,980 |                      | $ | 4                     |  | $                   |  |  | $ | 56,984
|                            |  |               |        |                      |   |                       |  |                     |   |  |   |       
|Reported as:                |  |               |        |                      |   |                       |  |                     |   |  |   |       
|Cash and cash equivalents   |  |               |        |                      |   |                       |  |                     |   |  | $ | 48,468
|Short-term investments      |  |               |        |                      |   |                       |  |                     |   |  |   | 8,516 
|                            |  |               |        |                      |   |                       |  |                     |   |  |   |       
|                            |  |               |        |                      |   |                       |  |                     |   |  | $ | 56,984
|                            |  |               |        |                      |   |                       |  |                     |   |  |   |       
|As of December 31, 2008:    |  |               |        |                      |   |                       |  |                     |   |  |   |       
|Cash and money market funds |  | $             | 9,933  |                      | $ |                      |  | $                   |  |  | $ | 9,933 
|U.S. Treasury securities    |  |               | 14,541 |                      |   | 32                    |  |                     |  |  |   | 14,573
|                            |  |               |        |                      |   |                       |  |                     |   |  |   |       
|                            |  | $             | 24,474 |                      | $ | 32                    |  | $                   |  |  | $ | 24,506
|                            |  |               |        |                      |   |                       |  |                     |   |  |   |       
|Reported as:                |  |               |        |                      |   |                       |  |                     |   |  |   |       
|Cash and cash equivalents   |  |               |        |                      |   |                       |  |                     |   |  | $ | 10,435
|Short-term investments      |  |               |        |                      |   |                       |  |                     |   |  |   | 14,071
|                            |  |               |        |                      |   |                       |  |                     |   |  |   |       
|                            |  |               |        |                      |   |                       |  |                     |   |  | $ | 24,506
|                            |  |               |        |                      |   |                       |  |                     |   |  |   |       

At September 30, 2009 and December 31, 2008, the contractual maturities of
all of the Companys investments were less than one year. During the three and nine months ended September 30, 2008, the Company received approximately $8,218,000 and $21,967,000, respectively, in gross proceeds from the sales of certain
short-term investments in commercial paper, corporate debt and asset-backed securities. As a result of these sales, during the three months ended September 30, 2008, the Company recognized a loss of approximately $7,000 and during the nine
months ended September 30, 2008, the Company recognized a net gain of approximately $31,000, both of which were recorded as other income. These gains and losses were computed on a specific identification basis. The Company did not sell any of
its investments prior to maturity during the three and nine months ended September 30, 2009.

Note 5. Fair Value Measurements

The Company adopted the provisions of Codification Topic 820 (SFAS No. 157) effective January 1, 2008. The standard
describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities.



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NEUROGESX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



In accordance with Codification Topic 820, the following table represents the
Companys financial assets (cash equivalents and short-term investments) measured at fair value on a recurring basis and their level within the fair value hierarchy as of September 30, 2009 and December 31, 2008 (in thousands):



|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|--------------------------------------------------------------------------------- |  | ---------------------------------------------------------- | ------ | ----------------------------------------- | - | -------------------------------------- |  | ----- | - |  | - | ------
|                                                                                  |  | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |        | SignificantOtherObservableInputs(Level 2) |   | SignificantUnobservableInputs(Level 3) |  | Total
|Fair Value Measurements at September 30, 2009:                                    |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Components of cash equivalents and short-term investments measured at fair value: |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Money market funds                                                                |  | $                                                          | 6,287  |                                           | $ |                                       |  | $     |  |  | $ | 6,287 
|U.S. Treasury securities                                                          |  |                                                            | 50,325 |                                           |   |                                       |  |       |  |  |   | 50,325
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Total financial assets measured at fair value                                     |  | $                                                          | 56,612 |                                           | $ |                                       |  | $     |  |  |   | 56,612
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Components of cash and cash equivalents not measured at fair value:               |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Operating cash                                                                    |  |                                                            |        |                                           |   | 372                                   
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Total cash and cash equivalents and short-term investments                        |  |                                                            |        |                                           |   |                                        |  |       |   |  | $ | 56,984
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Fair Value Measurements at December 31, 2008:                                     |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Components of cash equivalents and short-term investments measured at fair value: |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Money market funds                                                                |  | $                                                          | 9,496  |                                           | $ |                                       |  | $     |  |  | $ | 9,496 
|U.S. Treasury securities                                                          |  |                                                            | 14,573 |                                           |   |                                       |  |       |  |  |   | 14,573
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Total financial assets measured at fair value                                     |  | $                                                          | 24,069 |                                           | $ |                                       |  | $     |  |  |   | 24,069
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Components of cash and cash equivalents not measured at fair value:               |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Operating cash                                                                    |  |                                                            |        |                                           |   | 437                                   
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Total cash and cash equivalents and short-term investments                        |  |                                                            |        |                                           |   |                                        |  |       |   |  | $ | 24,506
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       

Note 6. Stockholders Equity

2007 Stock Plan

During the nine months ended September 30, 2009, the Company granted options to purchase a total of 817,142 shares of the Companys common stock to employees and members of the board of
directors with a fair value of approximately $1,312,000 that is expected, as of September 30, 2009 to be amortized through 2013. During the nine months ended September 30, 2008, the Company granted options to purchase a total of 420,750
shares of the Companys common stock to employees and members of the board of directors with a fair value of approximately $1,319,000 that is expected, as of September 30, 2009, to be amortized through 2012.

Of the options granted during the nine months ended September 30, 2009, options to purchase a total of 256,892 shares of the
Companys common stock were granted to executive officers as part of their 2008 bonus consideration. In an effort to conserve the Companys cash resources, all executive officers were paid 50% of the earned 2008 bonus amount in the form of
cash, with the remainder paid in stock options. The fair value of these stock options was approximately $202,000 and was recorded during the nine months ended September 30, 2009 as these options were vested in full upon grant.



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##### Table of Contents

NEUROGESX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Note 7. Income Taxes

The Company anticipates a net operating loss for the year 2009. The Company recorded no federal or California income tax expense for the nine
months ended September 30, 2009.

During the second quarter of 2009, the Company entered into the Astellas Agreement and
recorded deferred revenue of approximately $48,787,000. For tax purposes, the Company will elect to use the deferral method under Revenue Procedure 2004-34. Under Revenue Procedure 2004-34, the deferral method allows taxpayers to defer advanced
payments to the next succeeding year to the extent that the advance payments are not recognized in the taxable year of receipt.

For the nine months ended September 30, 2009, the total amount of unrecognized tax benefits has not significantly changed from that which was disclosed in the Companys 2008 Form 10-K. These unrecognized tax benefits, if
recognized, would not affect the effective tax rate for the periods prior to September 30, 2009 and there were no interest or penalties accrued related to uncertain tax positions.

The Company files income tax returns in the U.S. federal and California state tax jurisdictions. The tax years 2002 to 2008 remain open to
examination by the U.S. and California tax authorities. The Company does not anticipate the total unrecognized tax benefits will change significantly due to the settlement of audits and the expiration of statute of limitations within the next 12
months.

Note 8. Commitments and Contingencies

During the nine months ended September 30, 2009 the Company issued non-cancellable purchase orders to its suppliers of the various components of Qutenza. These purchase orders, which represent both
supply to Astellas as well as potentially saleable product for the U.S. market, if Qutenza is approved, totaled approximately $776,000, approximately half of which is expected to be reimbursed to the Company by Astellas upon delivery of such
components. The Company will record these amounts in its financial statements when title has transferred to the Company.



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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 timing of U.S. Food and Drug Administrations, or FDA, review of the new drug application, or NDA, for Qutenza that was submitted in October
2008 and the potential receipt of correspondence from the FDA by the extended Prescription Drug User Fee Act, or PDUFA, date;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of potential launch of Qutenza by Astellas Pharma Europe Ltd., or Astellas, in the European Union;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | the expected activities and obligations of us and Astellas under the Distribution, Marketing and License Agreement, or the Astellas Agreement;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | potential milestone and royalty payments under the Astellas Agreement;
| | - |  | ----------------------------------------------------------------------



| |  |  | the sufficiency of existing resources to fund our operations for at least the next twelve months;
| | - |  | -------------------------------------------------------------------------------------------------



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



| |  |  | the timing of launch of Qutenza in the United States;
| | - |  | -----------------------------------------------------



| |  |  | our plans for establishing a commercial infrastructure including a United States sales force, distribution channels and marketing and manufacturing
capabilities;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | efforts to expand the scope of indications in which our capsaicin-based product candidates are used;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | plans associated with NGX-1998 including potential for advancing the development program in 2010;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | potential additional partners for Qutenza in the United States or other markets and for our acetaminophen and opioid prodrug product candidates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the scope and size of research and development efforts and programs, including with respect to development of additional product candidates;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the potential benefits of, and markets for, our product candidates;
| | - |  | -------------------------------------------------------------------



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##### Table of Contents

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



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



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



| |  |  | patents and our and others intellectual property;
| | - |  | --------------------------------------------------



| |  |  | time period estimates serving as a basis for revenue recognition in connection with the Astellas Agreement; and
| | - |  | ---------------------------------------------------------------------------------------------------------------



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

We undertake no obligation to, and expressly disclaim any obligation to, revise or update the forward-looking statements made herein or the risk factors whether as a result of new information, future
events or otherwise. Forward-looking statements involve risks and uncertainties, which are more fully described in the section of this quarterly report entitled Risk Factors, 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 in
the United States and difficulties or delays in Astellas launch of Qutenza in the European Union;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our or Astellas inability to meet respective obligations under the Astellas Agreement;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | our inability to obtain additional financing;
| | - |  | ---------------------------------------------



| |  |  | our inability to establish a sales, marketing and distribution infrastructure;
| | - |  | ------------------------------------------------------------------------------



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



| |  |  | positive results in clinical trials may not be sufficient to obtain FDA approval;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | potential for delays in or the inability to complete commercial partnership relationships;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | physician or patient reluctance to use Qutenza, if approved, or payer coverage for Qutenza and for the procedure to administer it, which may impact
physician utilization of Qutenza;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ---------------------------------------------------------------------------------------------



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##### Table of Contents

The following discussion should be read in conjunction with the section of this quarterly
report entitled Risk Factors.

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 based on known chemical entities to develop innovative new therapies which we believe may offer substantial advantages over currently available treatment options. Our initial focus is on the management of
chronic peripheral neuropathic pain conditions. Our most advanced product candidate, Qutenza, a dermal patch containing a high concentration of synthetic capsaicin, is designed to manage pain associated with peripheral neuropathic pain conditions.
In May 2009, Qutenza received marketing approval in the European Union for the treatment of peripheral neuropathic pain in non-diabetic adults, alone or in combination with other medicinal products for pain. In June 2009, we entered into the
Astellas Agreement, where we granted Astellas the exclusive right to promote, distribute and market Qutenza in the European Economic Area, or EEA, as well as certain countries in Eastern Europe, the Middle East and Africa, which we refer to as the
Licensed Territory.

We submitted to the FDA an NDA for Qutenza for the management of pain associated with postherpetic
neuralgia, or PHN, in October 2008 which was filed by the FDA in December 2008. Our NDA was originally given a PDUFA date of August 16, 2009. However, on August 5, 2009, the FDA extended the PDUFA date to November 16, 2009 to provide
time for a full review of a submission made to the FDA in late July 2009. The submission contained various data and analyses provided in response to FDA requests.

Our earlier stage product candidate pipeline consists of:



| |  |  | NGX-1998, a non-patch liquid formulation of capsaicin for potential use in neuropathic pain conditions;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | NGX-1576, NGX-9674 and NGX-5752, prodrugs of acetaminophen for potential use in acute pain including traumatic pain, post-surgical pain and fever; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | NGX-6052, an opioid prodrug for potential use in chronic pain indications.
| | - |  | --------------------------------------------------------------------------

NGX-1998 has completed three Phase 1 studies and we are currently planning the design and timing of this program, activities for which may
resume in 2010. The other product candidates are all in the pre-clinical stage of development and activities relating to such other product candidates are currently suspended while we seek development partners. Other than the rights granted to
Astellas, we hold commercial rights to our product candidates in all markets including the United States. Further, we are currently seeking development partners for our acetaminophen and opioid prodrug product candidates.

To date, we have not generated any significant revenues and have funded our operations primarily by selling equity securities, establishing
debt facilities and through a collaboration agreement with Astellas. We have incurred significant losses since our inception. We had cash, cash equivalents and short-term investments totaling $57.0 million at September 30, 2009 and during the
nine months ended September 30, 2009, we used approximately $14.0 million in operating activities after adjusting for cash inflows resulting from the Astellas Agreement, and approximately $2.4 million in repayment of our notes payable. We
expect to continue to incur annual operating losses over the next several years and those losses may increase as we continue our efforts to gain FDA approval, prepare for potential commercialization and, if approved, commercialize Qutenza in the
United States. Additionally, we expect to resume development of NGX-1998 and potentially our other product candidates. With respect to our notes payable, at September 30, 2009, the outstanding balance was approximately $0.8 million. This
balance is scheduled to be fully repaid by January 2010.



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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 September 30, 2009 compared to those discussed in our 2008 Form 10-K, filed on March 26, 2009, other than those discussed below:

Revenue Recognition

We entered into the Astellas Agreement in June of 2009, which grants Astellas an exclusive license to promote, distribute and market Qutenza in the Licensed Territory, grants an option to exclusively
license NGX-1998 (a non-patch liquid formulation of capsaicin) in the Licensed Territory, obligates us to participate on a joint steering committee and through a related supply agreement entered into along with the Astellas Agreement, requires us to
supply Qutenza components to Astellas until direct supply arrangements are established between Astellas and the manufacturers of such components. Revenue under this arrangement includes upfront non-refundable fees and may also include further
option payments for the development of and license to NGX-1998, milestone payments upon achievement of certain product sales levels, as well as royalties on product sales, and net profit or loss on collaboration supplies.

We view the Astellas Agreement and related agreements as a multiple element arrangement with the key elements consisting of an exclusive
license to Qutenza in the Licensed Territory, an obligation to conduct certain development activities associated with NGX-1998, participation on a joint steering committee, and supply of Qutenza components to Astellas until such time that Astellas
can establish a direct supply relationship with product vendors, which we anticipate may occur between 18 to 24 months from the execution of the Astellas Agreement. Because not all of these elements have both standalone value and objective and
reliable evidence of fair value, we are accounting for them as a single unit of accounting in accordance with Codification Topic 605-25 (Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables). Further, as
the Astellas Agreement provides for a joint steering committee and we believe that our involvement in that committee is a substantive performance obligation under the arrangement, we plan to recognize revenue associated with upfront payments and
future license fees related to NGX-1998, if any, ratably over the term of the performance obligations with respect to the joint steering committee, which we estimate to be the last delivered item in the arrangement. We have estimated this
performance obligation to be delivered ratably through June 2016. At the inception of the arrangement, the upfront license fees were subject to a refund right, which expired upon transfer of the Companys marketing authorization, or MA, for
Qutenza in the European Union to Astellas. During the three months ended September 30, 2009, the transfer of the MA to Astellas was completed and therefore revenue recognition of the upfront license fee commenced in this period.

Results of Operations

In accordance with our revenue recognition policy, we commenced recording revenue for the upfront payments from Astellas when such payments became nonrefundable. In the three months ended
September 30, 2009, the upfront payments received from Astellas of approximately $48.8 million became nonrefundable as a result of our transfer of the MA to Astellas, and we recorded approximately $0.1 million to Collaboration revenue in the
three and nine month periods ended September 30, 2009. These payments are expected to be recognized to revenue over the remaining service period of the joint steering committee, on a straight line basis. Our mandatory service under the joint
steering committee expires in June 2016.

Upon launch of Qutenza by Astellas, we expect to commence recording royalty revenue
based upon net sales of Qutenza in the Astellas Territory. We currently anticipate that Qutenza may be launched in certain countries of the European Union in the first half of 2010.



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Our research and development expenses consist of internal and external costs. Our internal
costs are primarily employee salaries and benefits, contract employee expense, non-cash stock compensation expense, allocated facility and other overhead costs. Our external costs are primarily expenses related to the development of product
candidates including formulation development, manufacturing process development, non-clinical studies, clinical trial costs, such as the cost of clinical research organizations and clinical investigators, milestone payments to our licensors in
connection with the use of certain intellectual property, and costs associated with preparation and filing of regulatory submissions. Additionally, external and internal costs related to manufacturing and quality assurance activities for production
batches of our active pharmaceutical ingredient, patches and cleansing gel, which are destined for commercial sale in the United States, are recorded to research and development expense if delivery of such components occurs prior to FDA approval.

Since our inception, Qutenza has accounted for over 90% of our external research and development expenses. Specifically, in
the nine months ended September 30, 2009 and 2008, our external research and development costs totaled $3.3 million and $6.4 million, respectively, and of these amounts 98% and 85%, respectively, were incurred in programs related to Qutenza. 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, over time, we believe that our internal costs are expended on our development projects generally
in proportion to our external development costs for such project relative to total external development costs.

The process of
conducting preclinical testing and clinical trials necessary to obtain marketing approvals in the United States and other regions 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, through regulatory approval, of our lead product candidate, Qutenza, for patients with PHN in the United States and are planning the entry into phase 2 of NGX-1998. We submitted an NDA in the United States for Qutenza
for the management of pain associated with PHN in October 2008, and the NDA was filed by the FDA in December 2008. Our NDA was originally given a PDUFA date of August 16, 2009. However, in response to certain requests from the FDA, we have
provided additional data and analyses which was classified by the FDA as a major amendment to the NDA. As a result of this amendment, on August 5, 2009, the FDA notified us that it was extending the PDUFA date to November 16, 2009 to
provide time for a full review of the submission. When we do receive a response from the FDA on our NDA, we anticipate receiving either an approval or a complete response letter from the FDA on our NDA. A complete response letter may describe any
activities which may be required to gain approval or may indicate that a product candidate is not approvable.

We anticipate
that our overall research and development expenses, excluding non-cash stock-based compensation expense, may begin to increase over the next few quarters, perhaps significantly as we invest in pre-commercialization infrastructure including
establishment of pharmacovigilence and medical affairs functions and other market support related activities and as we potentially resume development activities for NGX-1998 and our other development programs.

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 expenses, commercialization preparedness costs, costs associated with our status as a public company and patent costs. In addition, general and administrative



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expenses include allocated facility, basic operational and support costs and insurance costs. We anticipate that our general and administrative expenses will increase in the fourth quarter of
2009 and continue to increase over the next several years, if Qutenza is approved in the United States. These increases are 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 and infrastructure costs 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 September 30, 2009 and 2008



|                                    |  |                                    |        |   |                    |   |        |                      |  |   |      |   |  |     |   
|----------------------------------- |  | ---------------------------------- | ------ | - | ------------------ | - | ------ | -------------------- |  | - | ---- | - |  | --- | --
|                                    |  | Three Months EndedSeptember 30,    |        |   | Increase(Decrease) |   |        | % Increase(Decrease) | 
|                                    |  | 2009                               |        |   | 2008               |   |        |                     
|                                    |  | (in thousands, except percentages) |       
|Collaboration revenue               |  | $                                  | 119    |   |                    | $ |       |                      |  | $ | 119  |   |  |    |   
|Research and development expenses   |  |                                    | (3,557 | ) |                    |   | (3,653 | )                    |  |   | (96  | ) |  | (3  | )%
|General and administrative expenses |  |                                    | (3,269 | ) |                    |   | (2,677 | )                    |  |   | 592  |   |  | 22  | % 
|Interest income                     |  |                                    | 3      |   |                    |   | 212    |                      |  |   | (209 | ) |  | (99 | )%
|Interest expense                    |  |                                    | (52    | ) |                    |   | (183   | )                    |  |   | (131 | ) |  | (72 | )%

Collaboration Revenue. Collaboration revenue of approximately $0.1 million
recorded in the three months ended September 30, 2009 reflects the amortization of upfront payments pursuant to the Astellas Agreement. Commencement of revenue recognition in the three months ended September 30, 2009 resulted from
completion of the transfer from NeurogesX to Astellas of the MA for Qutenza in the European Union in September 2009.

Research and Development Expenses. Research and development expenses decreased approximately $0.1 million, or 3%, to $3.6 million for the three months ended September 30, 2009 from $3.7 million for the same period in 2008.
During the three months ended September 30, 2009, we recorded a charge of approximately $1.2 million associated with a sublicense fee payable to the University of California in connection with the receipt of upfront payment from Astellas to
license Qutenza. Excluding this sublicense fee expense, our research and development expenses decreased approximately $1.3 million, or 35%, from the same period in 2008 as a result of our decision to reduce our development expenses related to
potential label expansion of Qutenza as well as our other product candidate programs. We undertook these efforts to preserve cash resources to support our regulatory submissions processes in both the United States and the European Union and to
devote resources to certain pre-commercialization activities. Specifically, our research and development expenses, adjusted to exclude the sublicense fee payable to the University of California, declined primarily as a result of a $0.6 million
decrease in employee related costs commensurate with our reduced clinical trial activity and a $0.4 million decrease in spending related to NGX-1998 and our earlier stage product candidates. Additional decreases include a $0.1 million reduction in
regulatory expenses associated with the preparation of our NDA in 2008 and support for our marketing authorization application, or MAA, a $0.1 million decrease in quality assurance expenses associated with clinical trial activity in 2008 and a $0.1
million decrease in manufacturing related costs.

General and Administrative Expenses. General and administrative
expenses increased approximately $0.6 million, or 22%, to $3.3 million for the three months ended September 30, 2009 from $2.7 million for the same period in 2008. The year over year change was due to a $0.4 million increase in non-cash
stock-based compensation expense which was primarily associated with the grant of fully vested stock options to certain officers of the Company and a $0.3 million increase in employee related marketing and general and administrative expenses. These
increases were partially offset by a $0.1 million decrease in professional fees, including legal and accounting fees. Our pre-commercialization activities, while consistent on a year over year basis, showed an increased focus on pricing and
reimbursement related activities.



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Interest income. Interest income decreased approximately $0.2 million, or 99%, to
less than $0.1 million for the three months ended September 30, 2009 from $0.2 million for the same period in 2008. The year over year change was primarily attributable to a decline in the rate of return on our invested assets as rates declined
in the market, in general, and as we moved our invested assets to investments of lower relative risk in light of events in the credit markets.

Interest expense. Interest expense decreased approximately $0.1 million, or 72%, to $0.1 million for the three months ended September 30, 2009 from $0.2 million for the same period in 2008.
This decrease was related to the reduction in the outstanding principal balance of notes payable as a result of the scheduled payoff and repayment of principal on the remaining outstanding notes payable.

Comparison of Nine Months Ended September 30, 2009 and 2008



|                                    |  |                                    |        |   |                    |   |         |                      |  |   |        |   |  |     |   
|----------------------------------- |  | ---------------------------------- | ------ | - | ------------------ | - | ------- | -------------------- |  | - | ------ | - |  | --- | --
|                                    |  | Nine Months EndedSeptember 30,     |        |   | Increase(Decrease) |   |         | % Increase(Decrease) | 
|                                    |  | 2009                               |        |   | 2008               |   |         |                     
|                                    |  | (in thousands, except percentages) |       
|Collaboration revenue               |  | $                                  | 119    |   |                    | $ |        |                      |  | $ | 119    |   |  |    |   
|Research and development expenses   |  |                                    | (8,664 | ) |                    |   | (13,607 | )                    |  |   | (4,943 | ) |  | (36 | )%
|General and administrative expenses |  |                                    | (8,062 | ) |                    |   | (8,027  | )                    |  |   | 35     |   |  |    |   
|Interest income                     |  |                                    | 48     |   |                    |   | 1,001   |                      |  |   | (953   | ) |  | (95 | )%
|Interest expense                    |  |                                    | (240   | ) |                    |   | (640    | )                    |  |   | (400   | ) |  | (63 | )%

Collaboration Revenue. Collaboration revenue of approximately $0.1 million
recorded in the nine months ended September 30, 2009 reflects the amortization of upfront payments received pursuant to the Astellas Agreement. Commencement of revenue recognition in the three months ended September 30, 2009 resulted from
completion of the transfer from NeurogesX to Astellas of the MA for Qutenza in the European Union in September 2009.

Research and Development Expenses. Research and development expenses decreased approximately $4.9 million, or 36%, to $8.7 million for the nine months ended September 30, 2009 from $13.6 million for the same period in 2008. The
year over year change was attributable to, in part, a decision to reduce our development expenses related to potential label expansion of Qutenza as well as our other product candidate programs, partially offset by a sublicense fee payable to the
University of California. Specifically, our research and development expenses declined primarily as a result of a $2.7 million decrease in clinical study costs associated with Qutenza. During the nine months ended September 30, 2009, we
conducted a small-scale study in response to an FDA request, whereas in the same period in 2008, we were in the process of winding down our most recent Phase 3 clinical trial. Also contributing to the year over year change was a $1.7 million
decrease in employee related costs commensurate with our reduced clinical trial activity. Additional decreases include a $0.8 million decrease in spending related to NGX-1998 and our earlier stage product candidates as these programs were deferred
to preserve cash resources, a $0.5 million reduction in regulatory expenses associated with the preparation of our NDA in 2008 and support for our MAA, a $0.2 million decrease related to manufacturing related costs and a $0.2 million decrease in
external quality assurance costs associated with clinical trial activity in 2008. These decreases were partially offset by a charge of approximately $1.2 million associated with a sublicense fee payable to the University of California in connection
with the receipt of upfront payment from Astellas to license Qutenza and a charge of approximately $0.1 million in connection with the one-time payment to our manufacturer of Qutenza patches as a result of receiving MAA approval.



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General and Administrative Expenses. General and administrative expenses increased
less than $0.1 million to $8.1 million for the nine months ended September 30, 2009 from $8.0 million for the same period in 2008. The year over year change was due to $0.5 million increase in non-cash stock-based compensation expense primarily
associated with the grant of fully vested stock options to certain of our officers and a $0.1 million increase in general and administrative employee related expenses. These increases were partially offset by a $0.6 million decrease in certain
pre-commercialization activities due to focused spending on pricing and reimbursement initiatives and other key activities in support of potential launch of Qutenza in the United States.

Interest income. Interest income decreased approximately $1.0 million, or 95%, to less than $0.1 million for the nine months ended
September 30, 2009 from $1.0 million for the same period in 2008. The year over year change was primarily attributable to a decline in the rate of return on our invested assets as rates declined in the market, in general, and as we moved our
invested assets to investments of lower relative risk in light of events in the credit markets.

Interest expense.
Interest expense decreased approximately $0.4 million, or 63%, to $0.2 million for the nine months ended September 30, 2009 from $0.6 million for the same period in 2008. This decrease was related to the reduction in the outstanding principal
balance of notes payable as a result of the scheduled payoff and repayment of principal on the remaining outstanding notes payable.

Changes in Financial Condition

As a result of the execution of the Astellas Agreement and the license and
option fees of $48.8 million received from Astellas in the quarter ended September 30, 2009, $41.4 million was reported as deferred revenue, a non-current liability, and $7.2 million was reported as deferred revenue, a current liability. The
total deferred revenue balance of $48.6 million at September 30, 2009 is being recognized as revenue on a straight-line basis through June 2016.

Liquidity and Capital Resources

Since our inception through
September 30, 2009, we have financed our operations primarily through private placements and a public offering of our equity securities and, to a lesser extent, through debt facilities. Through September 30, 2009, we have received
approximately $158.8 million from the sale of our equity securities, net of issuance costs. On May 7, 2007, we completed an initial public offering of our common stock which resulted in net cash proceeds, after deducting total expenses
including underwriting discounts and commissions and other-offering related expenses, of approximately $38.1 million. On December 28, 2007 we completed the first closing of a private placement of our common stock and warrants resulting in net
cash proceeds of $21.5 million and on January 3, 2008, we completed the second and final closing of this private placement of our common stock and warrants resulting in additional net cash proceeds of $2.3 million.

As of September 30, 2009, we had approximately $57.0 million in cash, cash equivalents and short-term investments. We also had
working capital, adjusted to exclude the current portion of non-cash deferred revenue of approximately $7.2 million, of $52.7 million. Our cash and investment balances are typically held in a variety of interest bearing instruments including
corporate bonds, commercial paper, money market funds and obligations of U.S. government agencies. Cash in excess of immediate operational requirements is invested in accordance with our investment policy primarily with a view to capital
preservation and liquidity. Further, to reduce portfolio risk, our investment policy specifies a concentration limit of 10% in any one issuer or group of issuers of corporate bonds or commercial paper at the time of purchase. In response to a broad
based tightening of credit and worsening economic environment in the fourth quarter of 2008, and to protect the principal balances and maintain liquidity of our investments, we converted all of our investment holdings into U.S. Treasury or money
market funds consisting of only U.S. Treasury securities as of



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September 30, 2009. Our sales of investments in other than U.S. Treasury securities in 2008 were generally conducted at or near cost, however certain individual investments were sold at
either a gain or loss that were not material individually or in the aggregate.

Net cash provided by operating activities was
approximately $34.8 million during the nine months ended September 30, 2009 and net cash used in operating activities was approximately $21.9 million during the nine months ended September 30, 2008. Net cash used in the 2008 period 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. Net cash provided by
operating activities in the 2009 period was primarily a result of the receipt of upfront payments from Astellas under the Astellas Agreement, partially offset by our net loss during the period. Included in net cash provided by and used in operating
activities are net changes in assets and liabilities affecting cash. After adjusting for the affects of the Astellas payment, our net cash used in operating activities would have been approximately $14.0 million. We anticipate that operating
expenses and cash use will likely increase in the fourth quarter and into next year, if Qutenza is approved on or near the extended PDUFA date of November 16, 2009, as our spending associated with pre-commercialization activities accelerate and
we potentially begin activities associated with the NGX-1998 development program.

Net cash provided by investing activities
was approximately $5.4 million and $8.8 million during the nine months ended September 30, 2009 and 2008, respectively. Investing activities consist primarily of the purchase, sale and maturity of marketable securities. The net cash provided by
investing activities during both periods reflected maturities and sales of marketable securities in excess of the amount purchased during those periods. Purchases of property and equipment were not significant during these periods. We expect that
property and equipment expenditures may increase, particularly if our NDA for Qutenza is approved by the FDA. Such increase is expected to relate to the capital needs for infrastructure to support commercial operations.

Net cash used in financing activities was approximately $2.2 million and $0.6 million during the nine months ended September 30, 2009
and 2008, respectively. Financing activities consisted of principal repayments on our notes payable in both periods. However, these principal repayments were offset in the 2008 period by net proceeds from the sale of our common stock and warrants.

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



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



| |  |  | the conduct of manufacturing activities;
| | - |  | ----------------------------------------



| |  |  | the costs of carrying out our obligations under our commercial arrangement with Astellas;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | the scope and cost of pre-commercial and commercial activities including, but not limited to, costs associated with pharmacovigilence and medical
affairs activities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs of establishing sales and marketing infrastructure, distribution capabilities and potentially a sales force;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



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



| |  |  | the costs and timing of post-approval regulatory commitments, if any;
| | - |  | ---------------------------------------------------------------------



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| |  |  | the progress of our development programs including the number, size and scope of clinical trials and non-clinical development;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------------

At September 30, 2009, we had approximately $57.0 million in cash, cash equivalents and short-term investments and the balance of our
notes payable totaled approximately $0.8 million. During the nine months ended September 30, 2009, after adjusting for the upfront fees collected from Astellas, we used a total of approximately $14.0 million in operating activities and
approximately $2.4 million in the repayment of notes payable. We currently anticipate that our cash uses for the remainder of the year and beyond will likely increase as a result of increases in our pre-commercialization and product launch
activities for Qutenza in the United States if approved by the FDA, and to a lesser extent as a result of the potential resumption of development activities related to NGX-1998 and potentially our other development programs. We anticipate that our
existing cash and investments will be sufficient to meet our projected operating requirements through at least the next twelve months.

To date, we have incurred recurring net losses and negative cash flows from operations. Until we can generate significant cash from our operations, if ever, we expect to continue to fund our operations with existing cash resources generated
from the proceeds of offerings of our equity securities and proceeds from one or more collaboration agreements as well as potentially through royalty monetization, debt financing or the sale of other equity securities. However, we may not be
successful in obtaining additional 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 or potentially eliminate some or all of our development
programs, relinquish some or even all rights to product candidates at an earlier stage of development or negotiate less favorable terms than we would otherwise choose. Failure to obtain adequate financing also may adversely affect the launch of our
product candidates, if approved for marketing, or 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 2008 Form 10-K, filed on March 26, 2009.



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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 Form 10-K filed for the year ended December 31, 2008, other than those set forth below:

Foreign Currency Exchange Rate Risk

Our third party manufacturers including the manufacturer of our active pharmaceutical ingredient, trans-capsaicin, the manufacturer of Qutenza and the manufacturer of our cleansing gel, are located in
countries outside the United States. As a result, we may experience changes in product supply costs as a result of changes in exchange rates between the U.S. dollar and the local currency where the manufacturing activities occur. In addition, as we
oversee scale up to supply Astellas with our product components for commercial sale in the European Union and to supply the U.S. market if regulatory approval is received, our exposure to foreign currency exchange rates, primarily the Euro, will
increase.

Amounts paid to us by Astellas under the Astellas Agreement may be based in Euro or other currency which will then
be converted to U.S. dollars before payment to us. To the extent that these potential receipts are greater than our net payable exposure in Euro to our suppliers mentioned above, and to the extent that the timing of these potential payments and
receipts differ, we will have a net receivable exposure in Euro if Qutenza is launched in the European Union and certain other foreign territories.

We currently do not engage in foreign currency hedging activities as the short-term exposure to fluctuations in foreign currency is relatively small.



|ITEM 4T. | 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.

(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
|-------- | ------------

You
should consider carefully the risk factors described below, and all other information contained in or incorporated by reference in this Quarterly Report on Form 10-Q before making an investment decision. If any of the following risks actually occur,
they may materially harm our business, financial condition, operating results or cash flows. As a result, the market price of our common stock could decline, and you could lose all or part of your investment. Additional risks and uncertainties that
are not yet identified or that we think are immaterial may also materially harm our business, operating results or financial condition and could result in a complete loss of your investment.

Risks Related to our Business

Our success depends on our ability to obtain U.S. regulatory approval for our lead product candidate, Qutenza.

Our success depends substantially on obtaining United States regulatory approval for our most advanced product candidate, Qutenza, a dermal patch containing a high concentration of synthetic capsaicin. Regulatory approval in the United
States requires the completion of extensive non-clinical and clinical evaluation of a product candidate to demonstrate substantial evidence of safety and efficacy of the product candidate, as well as development of manufacturing processes which
demonstrate the ability to reliably and consistently produce the product candidate under current Good Manufacturing Practice regulations. Each of these elements of our Qutenza development program include certain judgments of applicable regulatory
requirements of what will ultimately be deemed acceptable to the regulatory authority including the FDAs evaluation of additional data, such as a responder analysis and other secondary endpoints when evaluating whether our product
can be approved. The FDA in reviewing our application will evaluate all components of that program including conducting audits of clinical sites used in our clinical trials and inspecting our manufacturing sites to ensure compliance with regulatory
requirements. There can be no assurance that any or all aspects of our development program or our manufacturing processes will satisfy the regulatory requirements for approval, the failure of which to do so would significantly delay or even prevent
approval of our product candidate and seriously harm our ability to generate significant revenue. During its review of our NDA, the FDA has requested certain additional information from us, including responses to specific questions, additional
clinical data and analyses and updates of certain data to current standards of presentation. Response to certain of these requests were deemed a major amendment and resulted in the FDA extending our PDUFA date by three months to November 16,
2009. There can be no assurance that the FDA will not make further requests for information or data from us in connection with the review of our NDA for Qutenza, that we will be able to respond to such requests in a timely manner, or at all, or that
the FDA will not call for further extensions of the PDUFA date in connection with any further information or data submissions. Further, there can be no assurance that information previously provided in response to the FDAs requests adequately
addresses their inquiry.

Qutenza has been evaluated in three completed Phase 3 clinical trials for the management of pain
associated with PHN, one of which did not meet its primary endpoint, and two completed Phase 3 clinical trials for the management of pain associated with HIV-distal sensory polyneuropathy, or HIV-DSP, one of which did not meet its primary endpoint.
The FDA generally requires successful completion of at least two adequate



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and well-controlled Phase 3 clinical trials for each indication for which we seek marketing approval before submission of an NDA. Although our analyses of two Phase 3 studies in PHN indicated
that their primary endpoints were met, the FDA may not agree with our analyses and may require that we complete additional studies or perform other activities to support an approval of the PHN indication. If we do not receive marketing approval from
the FDA we will not be able to commercialize Qutenza in the United States. Further, if the FDA delays approval as a result of requirements to conduct additional clinical studies, remediation of manufacturing deficiencies, or for other reasons,
commercialization of Qutenza could be significantly delayed. We may not have adequate financial or other resources to pursue this product candidate through regulatory approval or through commercialization. Significant delay or the inability to
commercialize Qutenza in the United States would significantly harm our business and as a result we may be unable to become profitable or continue our operations, or, even if we are able to commercialize in the United States, there can be no
assurance that we can become profitable. As a consequence of any of these factors, our stock price would be adversely affected. We have filed an NDA with the FDA for Qutenza for PHN. We are continuing to evaluate whether to seek approval for Qutenza
in HIV-DSP and whether additional studies would be necessary to achieve such an approval. If we decide to seek approval in HIV-DSP, we would do so no sooner than after the FDA has completed its review of the PHN NDA submission, which we anticipate
may occur by the extended PDUFA date of November 16, 2009, but could be significantly longer. Further, we may decide not to conduct further Qutenza studies in HIV-DSP and ultimately may not seek approval of Qutenza in the HIV-DSP indication, in
which case our potential revenues could be negatively impacted.

We will require substantial additional funding and may
be unable to raise capital when needed.

We had cash, cash equivalents and short-term investments totaling $57.0
million at September 30, 2009 and during the nine months ended September 30, 2009, after adjusting for the upfront fees collected from Astellas, we used a total of approximately $14.0 million in operating activities and approximately $2.4
million in the repayment of notes payable. We expect our negative cash flows from operations to continue beyond potential regulatory approval in the United States and product launch of Qutenza and there can be no assurance that we will ever achieve
positive cash flows from operations. We believe, based on our current operating plan that our cash, cash equivalents and short-term investments will be sufficient to fund our operations through at least the next twelve months. However, our planned
activities beyond 2009 including the ongoing initiatives associated with the establishment of a sales and marketing organization to launch Qutenza, if approved, in the United States, support of our obligations under our commercial arrangement with
Astellas, and continuing our development programs for NGX-1998 and our other development programs will require substantial additional funding. There can be no assurance that additional funding will be available on terms that are acceptable, if at
all.

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 efforts may be negatively affected, we may not be able to obtain regulatory approval for our product candidates and our and our collaboration
partners commercialization efforts may be materially harmed.

We currently depend on three contract
manufacturers as single source suppliers for the components of our Qutenza product candidate: synthetic capsaicin, the dermal patch and the associated cleansing gel. We have entered into long term commercial supply agreements for these components.
In addition we anticipate entering into long-term agreements for the assembly of the Qutenza treatment kits in the United States as well as certain materials used in the manufacture of our products. If we are unable to enter into long term
relationships with these suppliers, 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.



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Reliance on contract manufacturers exposes us to additional risks, including:



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



| |  |  | failure of current and future manufacturers to complete the development and scale-up of the manufacturing process including adequately analyzing and
documenting the source and chemical make-up of ingredients that make up our product candidate and the ability to reliably and consistently produce the product candidate under current Good Manufacturing Practice regulations;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the possibility that 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.

Before a new drug can
be marketed in the United States, three consecutive manufacturing runs have to be completed and those manufacturing runs need to be validated to ensure that manufacturing processes are reliable. Required validation of the manufacturing processes of
our third party suppliers to secure FDA approval for Qutenza has not yet been completed. While our plans contemplate having these process validations complete in 2009, if validation of our third party supplier manufacturing processes is delayed or
if our suppliers fail to complete the requisite validation batches, even if all other aspects of our NDA are approvable by the FDA, commercial sales in the United States may need to be delayed until validation can be successfully completed, if at
all.

Because our third party manufacturers operate outside of the United States, and many of the raw materials and the labor
that are used to manufacture our product candidates are based in foreign countries, we may experience currency exchange rate risks, even though, in some instances our contracts are denominated in U.S. dollars. We do not currently engage in forward
contracts to hedge this currency risk and as a result, may suffer adverse financial consequences as a result of this currency risk.

Materials used by these entities to manufacture our product candidates originate outside the United States, including certain materials which may be sourced from China and India. The FDA has increased its diligence with regard to foreign
sourced materials and manufacturing processes which may result in increased costs of maintaining foreign manufacturing and could lengthen or delay the regulatory review process required to gain approval for our product candidates and could
potentially prevent approval of our product candidates.

Furthermore, we are currently required to supply Qutenza to Astellas
under our Supply Agreement with Astellas. As a result, the foregoing risks to us related to supply of Qutenza and its components could also harm Astellas ability to commercialize Qutenza in



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the Licensed Territory. Whether we supply Qutenza to Astellas or Astellas enters into direct supply arrangements with our suppliers, Astellas ability to generate revenue and in turn our
ability to generate royalty and sales-milestone revenue, would be impacted by these foregoing risks relating to manufacturing.

Our success will depend, in part, on the successful efforts of our collaboration partner in the European Union, certain countries in Eastern Europe, the Middle East and Africa.

The success of sales of Qutenza in the Licensed Territory will be dependent on Astellas ability to successfully launch and
commercialize Qutenza pursuant to the Astellas Agreement we entered in June 2009. The manner in which Qutenza is launched, including the timing of launch in each country of the European Union and the pricing that will be established in each such
country, will have a significant impact on the ultimate success of Qutenza in the European Union, and ultimately the success of overall commercial arrangement with Astellas. If launch of commercial sales of Qutenza in the Licensed Territory is
delayed or prevented, our revenues will suffer and our stock price will decline. Further, if launch and resulting sales of Qutenza are not deemed successful, our stock price will decline. The outcome of Astellas commercialization efforts could
also have an effect on investors perception of potential sales of Qutenza in the United States, if approved by the FDA, which could also cause a decline in our stock price.

The Astellas Agreement provides for Astellas to be responsible for conducting certain studies for Qutenza in the European Union, both to
satisfy post-marketing commitments that were made in conjunction with the Qutenza MA and to carry out in support of Astellas commercialization plans for Qutenza in the Licensed Territory. The planning and execution of these studies will be
primarily the responsibility of Astellas, and may not be carried out in accordance with our indicated preferences, and, even if carried out in accordance with such preferences, may yield results that are detrimental to Astellas sales of
Qutenza in the Licensed Territory or detrimental in our efforts to develop or commercialize Qutenza outside the Licensed Territory, including in the United States. We and Astellas may attempt to design such studies with a view toward having the
resulting data be supportive of other regulatory and commercial efforts in both the European Union and the United States, such as potential label expansion studies that may be carried out with respect to use of Qutenza to treat pain associated with
painful diabetic neuropathy, or PDN. However, such studies may have limited or no utility to support such efforts.

To date,
the only portion of the Licensed Territory in which regulatory approval for Qutenza has been obtained is the European Economic Area. Other regulatory jurisdictions in the Licensed Territory may require further clinical and manufacturing activities
to gain approval for sales of Qutenza in these countries. There can be no assurance that these activities will be successful and that approval in these countries will be obtained in a timely manner, if at all. Further, there can be no assurance that
such clinical or manufacturing activities will not negatively impact the regulatory processes in the European Economic Area, United States or other markets where regulatory approval of Qutenza may have been obtained or may be in the process of being
sought.

The Astellas Agreement requires us to expend resources in support of our commercial relationship with Astellas.
Although we believe that our contractual arrangement with Astellas provides for reimbursement for many of these activities, the time and financial costs of managing such a relationship is expected to be significant and to occur at a time when we are
preparing for the potential commercialization of Qutenza in the United States, if approved. As a result, our cost of operations are likely to increase as we hire additional personnel and contract with third-parties to assist us in setting up and
maintaining the infrastructure necessary to support our commercial relationship with Astellas in addition to our own pre-commercialization efforts.

The Supply Agreement we entered into in connection with the Astellas Agreement requires us to supply components of Qutenza to Astellas at the same cost we obtain such components from our third-party
manufacturers. Because we have never overseen



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commercial manufacturing processes and quantities of these components, we may incur non-reimbursable costs related to manufacturing scale up, quality assurance and release, which could negatively
impact our financial results. Such Supply Agreement also provides for Astellas to enter into direct supply relationships with our current suppliers to replace the need for us to provide Astellas with pass-through supply of Qutenza components. There
can be no assurance that the establishment of such separate supply relationships will not negatively impact our ability to obtain our own supply of Qutenza components in support of our potential commercialization of Qutenza in the United States or
other markets outside the Licensed Territory that we seek to commercialize.

The Astellas Agreement grants to Astellas an
option to exclusively license our second generation product, NGX-1998. In connection with this option, we are required to prepare a development plan for NGX-1998 and achieve certain objectives. After completion of an initial set of objectives,
Astellas may make an additional payment to us to retain its option to license NGX-1998 until further agreed upon development of NGX-1998 has been performed by us. Upon completion of these objectives, Astellas may elect to make a final payment to us
in order to exercise its option. If Astellas determines not to make one of these payments, the option to license NGX-1998 will expire, Astellas will not be required to provide further funding for NGX-1998, and NeurogesX would be precluded from
marketing NGX-1998 in the Licensed Territory for a period of time. If Astellas fails to exercise its options with respect to NGX-1998, we will be unable to generate revenues from potential sales of NGX-1998 in the Licensed Territory, and our
business will be harmed.

Astellas commercialization of Qutenza in the Licensed Territory may result in lower levels of
income to us than if we marketed Qutenza in the Licensed Territory on our own. Astellas may not fulfill its obligations or commercialize Qutenza as quickly as we would like. We could also become involved in disputes with Astellas, which could lead
to delays in or termination of the Astellas Agreement and time-consuming and expensive litigation or arbitration. If Astellas 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 Qutenza would be materially and 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 have entered into the Astellas Agreement to market Qutenza in the Licensed Territory, and we may enter into additional
partnering or 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 Qutenza because we believe that we can best serve
our target customers with a focused, specialty sales force, we are currently evaluating the potential for commercializing Qutenza in the United States with a collaboration partner. Our establishment of Astellas as our collaboration partner for the
Licensed Territory could limit the potential collaboration options we have for the United States and other countries, or could render potential collaborators less inclined to enter into an agreement with us because of such relationship. Similarly,
if we enter into an agreement with a collaboration partner in the United States, such agreement may negatively impact our ability to seek additional strategic relationships. Factors that may inhibit our efforts to develop an internal sales,
marketing and distribution infrastructure and ability to commercialize our product candidates successfully include:



| |  |  | lack of available financial resources;
| | - |  | --------------------------------------



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| |  |  | 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.
| | - |  | ------------------------------------------------------------------------------------------

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 they obtain regulatory approvals.

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



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



| |  |  | the ability to obtain adequate pricing and sufficient insurance coverage and reimbursement;
| | - |  | -------------------------------------------------------------------------------------------



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



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



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



| |  |  | the ability to produce product in commercial quantities sufficient to meet demand.
| | - |  | ----------------------------------------------------------------------------------

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 Qutenza, it is likely that they will not
prescribe Qutenza.

Because many people suffering from PHN are elderly, in order for Qutenza to be economically viable
for this indication in the United States, we will need Medicare coverage for Qutenza, if Qutenza is approved by the FDA for marketing. Medicare policymakers or local contractors that process claims for Medicare may determine that Qutenza is not
reasonable and necessary for Medicare beneficiaries or is reasonable and necessary only under limited circumstances. If Medicare policymakers or a significant portion of contractors determine that Qutenza is not reasonable and necessary
for and deny or significantly limit reimbursement for Qutenza, our business would be harmed, not only because Medicare beneficiaries represent a substantial portion of our target market, but also because Medicares coverage decisions would
likely affect the determination of many state Medicaid programs and private payors.



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Even if Qutenza is covered by Medicare, 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 Qutenza will be, are ordinarily covered by Medicare Part B, which 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. Obtaining coverage for Qutenza and its related administration under Part B
is important to our future success, and there is a possibility that our efforts to achieve such a change in a policy will not be successful or if successful, will likely take one or more years to achieve. Any delay in achieving reimbursement under
Part B will have a negative impact on our ability to generate revenues.

Part D may provide reimbursement for
Qutenza, 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 Qutenza, or if it does, may seek to 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, although such services may be covered under existing
evaluation and management codes available for reimbursement of office visits. Patient preparation and Qutenza 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 Qutenza, it is likely that they will not prescribe Qutenza, which would significantly impair our
ability to obtain revenues.

We also will need to obtain favorable coverage and reimbursement decisions for Qutenza from
private insurers, including managed care organizations. We expect that private insurers will consider the efficacy, cost-effectiveness and safety of Qutenza in determining whether to provide reimbursement for Qutenza and at what level. Obtaining
these coverage and reimbursement decisions will be a time consuming process requiring substantial resources and we may not receive adequate reimbursement of Qutenza from private insurers.

We expect to experience pricing pressures in connection with the sale of Qutenza, 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 many foreign countries, particularly the countries of the European Union, the pricing of prescription
drugs is subject to direct governmental control and is influenced by drug reimbursement programs that employ a variety of price control mechanisms. In these countries, pricing negotiations with governmental authorities or reimbursement programs can
take 6 to 12 months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we or our collaborators may be required to conduct additional studies, such as a study to
evaluate the cost-effectiveness of Qutenza compared to other currently available therapies. If reimbursement for Qutenza is unavailable, delayed or limited in scope or amount or if pricing is set at unsatisfactory levels, our business would be
materially harmed.

Even if our product candidates receive regulatory approval, they will be subject to ongoing
regulatory requirements, including possible commitments to perform post market authorization activities, and may face regulatory or enforcement action.

Any product candidate for which regulatory approval is obtained will be subject to significant review and ongoing and changing regulation by the FDA, the European Medicines Agency, or EMEA, and other
regulatory agencies. These ongoing regulatory requirements may include, but are not limited to:



| |  |  | obtaining additional post-approval clinical study data,
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| |  |  | regulatory review of advertising, promotional and education activities for the product;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | establishment and monitoring of pharmacovigilance programs; and
| | - |  | ---------------------------------------------------------------



| |  |  | periodic regulatory agency inspections and reviews of third-party manufacturing facilities and processes.
| | - |  | ---------------------------------------------------------------------------------------------------------

Failure to comply with regulatory requirements may subject us or our collaborative partner 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 regulatory approval to market a particular product candidate is obtained, the approval could be
conditioned on conducting additional costly post-approval studies or could limit the indicated uses included in such products labeling. For example, our MA in the European Union requires the conduct of certain post authorization commitments
including ongoing evaluations of safety of Qutenzas use in the labeled indications as well as clinical evaluation in patients with PDN, although the timing of clinical evaluations in PDN has not yet been determined. These studies may prove
difficult and expensive to complete and their results may identify safety, efficacy or other issues related to Qutenzas use that could hinder or prevent commercialization efforts. Moreover, the product may later be found to cause adverse
effects that limit or prevent its widespread use, force us or our partner to withdraw it from the market or impede or delay the ability to obtain regulatory approvals in additional countries.

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.



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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 in advance of commercial launch of the product. However, we may be unable to obtain commercially reasonable product liability
insurance for any products approved for marketing.

Our products are expected to face substantial competition which may
result in others discovering, developing or commercializing products before or more successfully than us or our collaborators.

Qutenza is expected to compete against more established products marketed by large pharmaceutical companies with far greater name recognition and resources than we or Astellas have. Qutenza is also expected to compete with medications that
are potentially prescribed for off-label use. 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
Lyrica, an oral anti-convulsant, marketed by Pfizer for use in the treatment of PHN. In addition to these branded drugs, the FDA has approved gabapentin (Neurontin) for use in the treatment of PHN. Gabapentin is marketed by Pfizer and 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, fibromyalgia, epilepsy and general anxiety disorder. The
FDA has approved Cymbalta from Eli Lilly for use in the treatment of PDN, general anxiety disorder, depression and fibromyalgia.

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 Qutenza. 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, Newron Pharmaceuticals S.p.A, Depomed Inc., Novartis AG, UCB S.A, 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. 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 products or 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 than we and Astellas do. 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
current and future products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | commercialize competing products before we or Astellas can launch any of our products;
| | - |  | --------------------------------------------------------------------------------------



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



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

We may not be able to
maintain orphan drug exclusivity for Qutenza in PHN and HIV-DSP or obtain orphan designation in additional indications or product candidates.

We intend to rely, in part, on the market exclusivity afforded orphan drugs for the commercialization of Qutenza in the United States. The FDA has granted us orphan drug status with regard to Qutenza for
the treatment of PHN as well as 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
based on the same active compound is shown to be 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 data exclusivity or equivalent
regulatory data exclusivity protection in other jurisdictions for Qutenza.

In addition, we may be able to rely, in
part, on Hatch-Waxman exclusivity for Qutenza in the United States. The Hatch-Waxman Act provides five years of data exclusivity to the first applicant to gain approval of an NDA under Section 505(b) of the Food, Drug and Cosmetic Act for a new
chemical entity. A drug qualifies as a new chemical entity if the FDA has not previously approved any other drug containing the same active ingredient. Hatch-Waxman provides data exclusivity by prohibiting abbreviated new drug applications, or
ANDAs, and 505(b)(2) applications, which are marketing applications where the applicant does not own or have a legal right of reference to all the data required for approval, to be submitted by another company for another version of such drug during
the exclusivity period. Protection under Hatch-Waxman will not prevent the filing or approval of a full NDA under Section 505(b)(1) for the same active ingredient, although the applicant would be required to conduct its own adequate and
well-controlled clinical trials to demonstrate safety and effectiveness. Our NDA for Qutenza was filed as a 505(b)(2) application as our application referenced certain publicly available preclinical data regarding capsaicin. Therefore, if another
product containing the same active ingredient as Qutenza is approved before Qutenza, then our potential approval could be delayed by five years. However, in such event, we believe we can petition the FDA to modify our application to be under
Section 505(b)(1). Such petition would require the FDAs approval, and there can be no assurance that such petition would be granted by the FDA. While we believe that the FDA has not approved another product containing the active
ingredient of Qutenza, a highly pure synthetic capsaicin, there can be no assurance that a competing product containing a synthetic capsaicin will not achieve approval before Qutenza or that Qutenza will be able to qualify for the five-year
Hatch-Waxman exclusivity.

We are aware of a company that may file an NDA for a product candidate that contains a low
concentration of a closely related compound to capsaicin. While we believe that this product, should it be approved by the FDA, may not preclude the granting of data exclusivity under Hatch-Waxman to Qutenza, we can make no assurance to such belief.
If we are unable to achieve data exclusivity, our revenues could be significantly harmed.



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Even though Qutenza has been granted ten-year market exclusivity and eight-year data
exclusivity by the EMEA, there can be no assurance that the exclusivity granted will effectively prevent competition, either generic or otherwise, in the European Union. Such competition could significantly harm our business.

Our fast track designation for development of Qutenza 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 Qutenza for the treatment of HIV-DSP, there is no assurance that, if we decide to file an NDA for Qutenza in HIV-DSP, 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. Further, we anticipate the FDA will, as is the case with other indications, require two successful Phase 3 studies in HIV-DSP to support an approval for that indication, and therefore, we may never seek approval for
HIV-DSP or we will likely need to conduct one or more additional Phase 3 studies prior to submission of an NDA for HIV-DSP. 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.

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 our 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 trials 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, as is the case in our most recent Phase 3 study in HIV-DSP, we have from time to time 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 Although we
design our clinical study protocols to address known factors that may negatively affect our study results, there can be no assurance that our protocol designs will be adequate or that factors that we may or may not be aware of or anticipate, will
not have a negative effect on the results of our clinical trials, which could significantly disrupt our efforts to obtain regulatory approvals and commercialize our product candidates. Furthermore, once a study has commenced, 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 Qutenza,
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 Qutenza than subjects receiving the control patch. Evaluation of these adverse events did not indicate
that they were treatment related. In our most recent PHN studies, C116 and C117, a similar number of subjects in the Qutenza and control groups had cardiac events. However, future late stage clinical trials in other indications or in a larger
patient population could reveal more frequent, more severe or additional side effects that were not seen or deemed unrelated in



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earlier studies, any of which could interrupt, delay or halt clinical trials of our product candidates and could 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.

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 future 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:



| |  |  | availability of financial resources;
| | - |  | ------------------------------------



| |  |  | addressing issues raised by the FDA or European health authorities regarding safety, design, scope and objectives of future clinical studies;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 the entity conducting the trial (us or Astellas, as the case may be), 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 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 may cause a need to amend clinical trial protocols to reflect
these changes, which could impact the cost, timing or successful completion of a clinical trial. If delays are experienced in



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the commencement or completion of a clinical trial, the commercial prospects for our products or product candidates and our ability to generate product revenues may be harmed. 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 or revocation of regulatory approval of a product or product candidate.

We rely on third parties to conduct our non-clinical studies and 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 non-clinical studies and 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 non-clinical and clinical trials. We are also required to comply with regulations and standards, commonly referred to as good clinical practices and good laboratory practices, for conducting, recording and reporting the results of
clinical and non-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 meet their regulatory obligations, meet expected
deadlines, 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 non-clinical development activities or clinical trials may be
extended, delayed, suspended, terminated, or potentially may be required to be performed again. Any of these factors may result in significant delay or failure to obtain regulatory approval for our product candidates.

Even though certain of our clinical trials for Qutenza in treatment of PHN and HIV-DSP have met their primary endpoints, certain other
studies in these indications have not met their primary endpoints and, our clinical trials for other indications, if we or our collaborator decide to conduct them, may not succeed, which would adversely impact our long term success.

We have not prepared for or conducted any Qutenza clinical trials for indications other than PHN, HIV-DSP and PDN. We
have conducted one Phase 2 clinical trial for the use of Qutenza for the management of PDN. PDN represents a much larger market opportunity than either PHN or HIV-DSP, and unless required clinical trials are successfully completed and regulatory
approvals are obtained for the use of Qutenza for PDN patients, Qutenza will not be marketable for this indication in the United States and the European Union and possibly in other countries. If this occurs, our long term ability to succeed may be
significantly and negatively impacted. We believe that to market Qutenza in the United States for future indications, including PDN, we will have to conduct two successful Phase 3 trials for those indications, and that for PDN in particular, we may
be required to perform additional safety studies. We are evaluating our development programs related to PDN in Qutenza and may decide not to conduct studies in PDN beyond those that may be required by post-marketing requirements associated with our
MA. If we decide not to conduct the required number of Phase 3 studies in PDN that meet their primary endpoint, we will not gain approval for Qutenza in this indication, which will significantly harm our ability to potentially generate revenue.

Results of clinical trials of Qutenza for patients with PHN or HIV-DSP do not necessarily predict the results of clinical
trials involving other indications. If additional clinical studies are conducted with Qutenza in PDN or other indications, those studies 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/or HIV-DSP. Any failure or significant delay in completing clinical trials for Qutenza with PDN and other indications, or in receiving regulatory approval involving such
indications, may significantly harm our business.



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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 and maintain regulatory approvals of products that we develop,
license or acquire.

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 and execute 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.

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 significant revenue to date and we have incurred operating and net losses each year since our inception in 1998.
Our net loss for the three months ended September 30, 2009 was approximately $6.8 million. As of September 30, 2009 we had an accumulated deficit of approximately $206.9 million. We had cash, cash equivalents and short-term investments
totaling $57.0 million at September 30, 2009 and for the nine months ended September 30, 2009, after adjusting for the upfront fees collecting from Astellas, we used cash of approximately $14.0 million in operating activities. We expect to
continue to incur losses for several years, as we seek regulatory approval for and commercialize Qutenza, and continue other research and development activities. If Qutenza does not gain regulatory approval in the United States or does not achieve
market acceptance in the United States or the European Union, we will not generate significant product related revenue. We cannot assure you that we will be profitable even if Qutenza is commercialized. 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.

If we
do not raise additional capital, we may be forced to delay; reduce or eliminate our development programs or commercialization efforts.

Our future capital requirements will depend on, and could increase significantly as a result of, many factors, including:



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



| |  |  | the conduct of manufacturing activities including process development and manufacture of commercial product supply and clinical product supply;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs of carrying out our obligations under our commercial arrangement with Astellas;
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| |  |  | the scope and cost of pre-commercial and commercial activities including, but not limited to, costs associated with pharmacovigilence and medical
affairs activities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs of establishing sales and marketing infrastructure, distribution capabilities and potentially a sales force;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



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



| |  |  | the costs and timing of post-approval regulatory commitments, if any;
| | - |  | ---------------------------------------------------------------------



| |  |  | the progress of our development programs including the number, size and scope of clinical trials and non-clinical development;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 intend to seek additional funding through strategic alliances, royalty monetization and/or debt facilities or other financing vehicles
which may include the public or private sales of our equity securities. There can be no assurance, however, that additional funding will be available on reasonable terms, if at all. If adequate funds are not available, we may be required to further
delay, reduce the scope of, or eliminate one or more of our 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.
Royalty monetization structures may require us to give up or assign certain rights to certain current and future assets. 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.

Risks Related to our Intellectual Property

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

The commercial success, if any, of Qutenza depends, in part, on a device patent granted in the United States and device patents granted in Canada, 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 from the University of California. We do not currently own, and do not have rights under this license to any
issued patents that cover Qutenza outside Europe, Hong Kong, Canada and the United States. One or more of the inventors named in the method patent described below may assert a claim of inventorship rights to such patent, which may result in our loss
of exclusive use of this patent. Although we do not believe these individuals are



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co-inventors, there can be no assurance that we would prevail if such a claim were asserted. The absence of exclusive rights to utilize such patent exposes us to a greater risk of direct
competition and could materially harm our business.

In addition to other patents and patent applications which have been
licensed under our agreements with third party manufacturers, including the issued patents and pending applications licensed under our commercial supply agreement for Qutenza, 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 Qutenza and our business will suffer.

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 may 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we or our licensors might not have been the first to file patent applications for these inventions;
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| |  |  | 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 or other
intellectual property rights that might be infringed by our products, trademarks or activities. For example, in June 2005, Winston Laboratories sent us a letter informing us of their U.S. patent related to cis-capsaicin, and suggested
that our synthetic capsaicin formulation could infringe this patent. We responded in August 2005 by denying any infringement. In 2007, Winston reiterated its claim and offered to discuss a license to its patent. We responded by denying
infringement. We believe that our products, if commercialized, will not infringe the Winston patent, which is due to expire in 2009 in the United States and in June 2010 in the European Union, 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 rights. Our competitors or other patent or intellectual property holders may
assert that our products or trademarks and the methods we employ are covered by their intellectual property rights. For example, we recently received a letter indicating a possible trademark conflict for Qutenza from a company claiming that
our trademark was similar to theirs. While we believe that these assertions do not have merit and that we have defenses to them, there can be no assurance that we will be successful in defending our trademark. We intend to continue to use the
Qutenza trademark and to vigorously defend our use of such trademark against such assertions. 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 or possibly prevent us from commercializing our product candidates. Further, if a patent infringement suit were brought against us, we could be



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forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit, or if a trademark infringement suit were brought against
us or our collaboration partner Astellas, we or Astellas could be forced to cease using the name Qutenza in connection with our product.

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, other patent or intellectual property holders 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 Qutenza, 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 Qutenza.

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 paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or
their



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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 an Investment in 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:



| |  |  | delays in the process of seeking or our ability to obtain regulatory approvals;
| | - |  | -------------------------------------------------------------------------------



| |  |  | failure to meet market expectations with respect to potential product launch timing, including, but not limited to, a delay in, or prevention of,
Astellas commercialization activities with respect to Qutenza in the European Union;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | potential inability to preserve or raise sufficient capital to maintain our operations;
| | - |  | ---------------------------------------------------------------------------------------



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



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



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



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



| |  |  | our ability to 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 or the discontinuation of one or more securities
analysts research coverage for our stock;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure to meet revenue estimates and revenue growth rates;
| | - |  | -----------------------------------------------------------



| |  |  | inclusion in or removal from stock indices such as the Russell 3000;
| | - |  | --------------------------------------------------------------------



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------



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| |  |  | 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; and
| | - |  | --------------------------------------------------



| |  |  | any major change in our board or management.
| | - |  | --------------------------------------------

If we fail to meet the requirements for continued listing on the NASDAQ Global Market and do not meet initial listing requirements to transfer to the NASDAQ Capital Market, our common stock could be
delisted from trading, which would adversely affect the liquidity of our common stock and our ability to raise additional capital.

Our common stock is currently listed on the NASDAQ Global Market and to maintain our listing, we must meet certain financial requirements in accordance with the rules of the NASDAQ Stock Market LLC, or
Nasdaq, including, but not limited to, the requirement to maintain a minimum closing bid price of at least $1.00 per share for our common stock and certain other quantitative standards. Although we have maintained our listing status on the NASDAQ
Global Market since our initial listing on May 2, 2007, there can be no assurance that we will maintain our listing on this market in the future if our bid price deteriorates or if we fail to meet other requirements.

On July 17, 2009 we received a Nasdaq Staff Deficiency Letter indicating that, due to the vacancy created by the resignation of our
former chairman of the audit committee of the board of directors, we failed to comply with the Nasdaq Stock Market audit committee composition requirements for continued listing as set forth in Nasdaq Marketplace Rule 5605(c)(2)(A), which requires
that a companys audit committee be comprised of at least three members, each of whom are independent. On August 20, 2009, Bradford S. Goodwin was appointed to the Board of Directors and as Audit Committee Chairman. On August 21, 2009
we received a letter from the Listing Qualifications Staff at Nasdaq which indicated that we had regained compliance with the Nasdaqs audit committee composition requirements for continued listing.

If we are delisted from the NASDAQ Global Market, we can apply to be listed on the NASDAQ Capital Market or other exchanges, which generally
have lower standards for listing. Any potential delisting of our common stock would adversely affect the liquidity of our common stock and our ability to raise additional capital.

We will continue to 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 continue to 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 Securities and Exchange Commission 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.

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 and 5% stockholders beneficially own or control approximately 70% of the outstanding
shares of our common stock as of September 30, 2009 (after giving effect to the exercise of all of their outstanding vested



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options and warrants exercisable within 60 days of such date). Accordingly, these executive officers, directors and their affiliates and significant stockholders 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.

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

The market price of our common stock could
decline as a result of sales by our existing stockholders, including sales by our executive officers, of shares of common stock in the market, or the perception that these sales could occur. These sales might also make it more difficult for us to
sell equity securities at a time and price that we deem appropriate.

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.

Events in the credit markets have, and will continue to,
impact our investment returns.

As a result of events in the credit markets, we have converted all of our investment
holdings into U.S. Treasury securities. As a result of the credit crisis and our shift in investments, we anticipate that our investment returns will be below our historic rates of return. These lower returns will likely continue for some time and
we cannot predict when market conditions will improve and when higher yielding investment options may be available to us.

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
|------- | -----------------------------------------------------------

None.



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

None.



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

None.



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

None.



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



|              |  |                                                                                                                                                                          
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                                      
|              | 
|3.1 (1)       |  | Amended and Restated Certificate of Incorporation.                                                                                                                       
|              | 
|3.2 (1)       |  | Amended and Restated Bylaws.                                                                                                                                             
|              | 
|4.1 (1)       |  | Specimen Common Stock Certificate.                                                                                                                                       
|              | 
|4.2 (1)       |  | Third Amended and Restated Investors Rights Agreement by and between NeurogesX, Inc. and certain stockholders, dated as of November 14, 2005.                           
|              | 
|4.3 (2)       |  | Amendment No. 1 to the Third Amended and Restated Investors Rights Agreement by and between NeurogesX, Inc. and certain stockholders, dated as of December 28, 2007.    
|              | 
|4.4 (1)       |  | Warrant to Purchase Series A Preferred Stock by and between NeurogesX, Inc. and Silicon Valley Bank, dated as of December 14, 2000.                                      
|              | 
|4.5 (1)       |  | Warrant to Purchase Series B Preferred Stock by and between NeurogesX, Inc. and Silicon Valley Bank, dated as of May 1, 2002.                                            
|              | 
|4.6 (1)       |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Horizon Technology Funding Company II LLC, dated as of July 7,
2006.          
|              | 
|4.7 (1)       |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Horizon Technology Funding Company III LLC, dated as of July 7,
2006.         
|              | 
|4.8 (1)       |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Oxford Finance Corporation, dated as of July 7, 2006.                         
|              | 
|4.9 (1)       |  | Form of First Warrant to Purchase Series C2 Preferred Stock.                                                                                                             
|              | 
|4.10 (1)      |  | Form of Second Warrant to Purchase Series C2 Preferred Stock.                                                                                                            
|              | 
|4.11 (2)      |  | Registration Rights Agreement by and between NeurogesX, Inc. and certain investors, dated as of December 23, 2007.                                                       
|              | 
|4.12 (2)      |  | Form of Warrant to Purchase Common Stock.                                                                                                                                
|              | 
|10.1 (3)      |  | 2007 Stock Plan, as amended                                                                                                                                              
|              | 
|31.1          |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                  
|              | 
|31.2          |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                  
|              | 
|32.1          |  | Certifications of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).



|(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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 28, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference from our registration statement on Form S-8, filed with the Securities and Exchange Commission on November 6, 2009.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------



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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: November 9, 2009 |  |  |  |  |  | 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



|               |  |                                                                                                                                                                          
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Description                                                                                                                                                      
|               | 
|3.1 (1)        |  | Amended and Restated Certificate of Incorporation.                                                                                                                       
|               | 
|3.2 (1)        |  | Amended and Restated Bylaws.                                                                                                                                             
|               | 
|4.1 (1)        |  | Specimen Common Stock Certificate.                                                                                                                                       
|               | 
|4.2 (1)        |  | Third Amended and Restated Investors Rights Agreement by and between NeurogesX, Inc. and certain stockholders, dated as of November 14, 2005.                           
|               | 
|4.3 (2)        |  | Amendment No. 1 to the Third Amended and Restated Investors Rights Agreement by and between NeurogesX, Inc. and certain stockholders, dated as of December 28, 2007.    
|               | 
|4.4 (1)        |  | Warrant to Purchase Series A Preferred Stock by and between NeurogesX, Inc. and Silicon Valley Bank, dated as of December 14, 2000.                                      
|               | 
|4.5 (1)        |  | Warrant to Purchase Series B Preferred Stock by and between NeurogesX, Inc. and Silicon Valley Bank, dated as of May 1, 2002.                                            
|               | 
|4.6 (1)        |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Horizon Technology Funding Company II LLC, dated as of July 7,
2006.          
|               | 
|4.7 (1)        |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Horizon Technology Funding Company III LLC, dated as of July 7,
2006.         
|               | 
|4.8 (1)        |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Oxford Finance Corporation, dated as of July 7, 2006.                         
|               | 
|4.9 (1)        |  | Form of First Warrant to Purchase Series C2 Preferred Stock.                                                                                                             
|               | 
|4.10 (1)       |  | Form of Second Warrant to Purchase Series C2 Preferred Stock.                                                                                                            
|               | 
|4.11 (2)       |  | Registration Rights Agreement by and between NeurogesX, Inc. and certain investors, dated as of December 23, 2007.                                                       
|               | 
|4.12 (2)       |  | Form of Warrant to Purchase Common Stock.                                                                                                                                
|               | 
|10.1 (3)       |  | 2007 Stock Plan, as amended                                                                                                                                              
|               | 
|31.1           |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                  
|               | 
|31.2           |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                  
|               | 
|32.1           |  | Certifications of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).



|(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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 28, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference from our registration statement on Form S-8, filed with the Securities and Exchange Commission on November 6, 2009.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------



50