Somaxon Pharmaceuticals, Inc.

S-1/A 1 a12564a5sv1za.htm AMENDMENT NO. 5 TO FORM S-1 Somaxon Pharmaceuticals, Inc.

As filed with the Securities and Exchange Commission on December 14, 2005

Registration No. 333-128871

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 5

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

SOMAXON PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)


Delaware	2834	20-0161599
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

12750 High Bluff Drive, Suite 310

San Diego, CA 92130

(858) 509-3670

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Kenneth M. Cohen

President and Chief Executive Officer

Somaxon Pharmaceuticals, Inc.

12750 High Bluff Drive, Suite 310

San Diego, CA 92130

(858) 509-3670

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:


Scott N. Wolfe, Esq.
Cheston J. Larson, Esq.		Bruce K. Dallas, Esq.
Latham & Watkins LLP		Davis Polk & Wardwell
12636 High Bluff Drive, Suite 400		1600 El Camino Real
San Diego, CA 92130		Menlo Park, CA 94025
(858) 523-5400		(650) 752-2000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

CALCULATION OF REGISTRATION FEE

Proposed Maximum

Amount of

Title of Each Class of

Number of Shares

Offering Price

Aggregate Offering

Registration

Securities to be Registered

Registered(1)

per Share

Price(2)

Fee(3)

Common Stock, $0.0001 par value

5,750,000

$12.00

$69,000,000

$8,121


(1)	Includes 750,000 shares subject to the underwriters’ over-allotment option.

(2)	Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

(3)	Previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information contained in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

PROSPECTUS (Subject to Completion)

Issued December 14, 2005

5,000,000 Shares

COMMON STOCK

Somaxon Pharmaceuticals, Inc. is offering 5,000,000 shares of its common stock. This is our initial public offering, and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $10.00 and $12.00 per share.

We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol “SOMX.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 7.

PRICE $ A SHARE

Underwriting

Proceeds to

Price to

Discounts and

Somaxon

Public

Commissions

Pharmaceuticals

Per Share

Total

We have granted the underwriters the right to purchase up to an additional 750,000 shares of common stock to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 2005.


MORGAN STANLEY	JPMORGAN

PIPER JAFFRAY

THOMAS WEISEL PARTNERS LLC

, 2005

TABLE OF CONTENTS


	Page

Prospectus Summary		1
Risk Factors		7
Special Note Regarding Forward-Looking Statements		25
Use of Proceeds		26
Dividend Policy		26
Capitalization		27
Dilution		29
Selected Financial Data		31
Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Business		39
Management		61
Certain Relationships and Related Party Transactions		78
Principal Stockholders		83
Description of Capital Stock		86
Shares Eligible for Future Sale		90
Material U.S. Federal Tax Considerations to Non-U.S. Holders		92
Underwriters		95
Legal Matters		97
Experts		97
Where You Can Find Additional Information		98
Index to Financial Statements		F-1
EXHIBIT 23.1

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

Until (25 days after commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes included in this prospectus and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

SOMAXON PHARMACEUTICALS, INC.

We are a specialty pharmaceutical company focused on the in-licensing and development of proprietary product candidates for the treatment of diseases and disorders in the fields of psychiatry and neurology. To date, we have in-licensed three product candidates. Our lead product candidate, SILENOR^tm (doxepin hydrochloride), is in Phase III clinical trials for the treatment of insomnia. Our product candidate nalmefene hydrochloride is in a Phase II/III clinical trial for the treatment of pathological gambling and a Phase II clinical trial for smoking cessation. We are also developing a new formulation of acamprosate calcium for the treatment of certain movement disorders. We intend to continue to build a portfolio of product candidates that target psychiatric and neurological diseases and disorders, focusing on products that are currently commercialized outside the United States, approved in the United States but with significant commercial potential for proprietary new uses, new dosages or alternative delivery systems, or in late stages of clinical development.

Our current portfolio consists of the following three product candidates:


	•	**SILENOR™ for Insomnia.** According to the American Psychiatric Association, approximately one-third of adult Americans (approximately 73 million people) are affected by insomnia. One study has found that fewer than 15% of those who suffer from insomnia are treated with prescription medications. We are developing SILENOR^tm for the treatment of insomnia and believe that SILENOR^tm will offer significant benefits over currently available therapies in the insomnia market. We in-licensed the patents and the development and commercial rights to SILENOR^tm and intend to develop the product for the U.S. market. SILENOR^tm is an oral formulation of doxepin at strengths of 1 mg to 6 mg. Doxepin has been marketed and used for over 35 years at dosages from 75 mg to 300 mg per day for the treatment of depression and anxiety. Doxepin has a well-established safety profile and we expect that our targeted dosages will be well tolerated and provide a wide margin of safety. SILENOR^tm is a potent blocker of a set of brain receptors known as H₁ receptors, which are believed to play an important role in the regulation of sleep. The leading approved insomnia medications, Ambien®, Sonata® and Lunesta^tm, work by binding and activating a different set of brain receptors known as GABA receptors. Many of the GABA receptor-activating drugs are deemed to have the potential for abuse and are therefore designated by the U.S. Drug Enforcement Agency, or DEA, as Schedule IV controlled substances, which require additional registration and administrative controls. We have completed two placebo-controlled Phase II clinical trials, one in adults and one in elderly patients with chronic primary sleep maintenance insomnia, and we are currently enrolling patients in Phase III clinical trials. Based on our analysis of the results of our prior clinical trials, we believe that SILENOR^tm will induce and maintain sleep throughout the night, without next-day residual effects, in both adult and elderly patients. We expect initial data from our Phase III clinical trials to be available in mid-2006.

	•	*Nalmefene for Impulse Control and Substance Abuse Disorders.* We are developing nalmefene for the treatment of pathological gambling, an impulse control disorder. We are also evaluating nalmefene for smoking cessation. Nalmefene, an opioid antagonist, is approved and has been used for over 10 years in the United States in an intravenous form for the reversal of opioid drug effects. We in-licensed the North American development and commercial rights to an oral form of nalmefene and patents for its use in the treatment of impulse control disorders, nicotine dependence and other conditions. The impulse control disorder category includes a number of serious conditions, including pathological gambling, kleptomania, pyromania, intermittent explosive disorder and compulsive buying. There are no approved therapies for any of these disorders. The University of Chicago’s 1999


		Gambling Impact and Behavior Study estimates that in the United States alone, there are approximately 2.5 million pathological gamblers, 3 million problem gamblers and an additional 15 million people who are at-risk gamblers. In a multi-center Phase II clinical trial conducted by our licensor, nalmefene was shown to be statistically superior to placebo in limiting gambling behavior and reducing the frequency and intensity of gambling thoughts/urges. Based on these results, we have initiated a confirmatory Phase II/ III clinical trial for pathological gambling. We have also initiated a pilot Phase II clinical trial investigating nalmefene for smoking cessation. We expect results from both trials to be available in late 2006.

	•	*Acamprosate for Movement Disorders.* We are developing acamprosate for the treatment of tardive dyskinesia, a movement disorder which limits a person’s ability to perform activities of daily living and impairs quality of life. In many cases, this disorder is induced by the long-term use of certain drugs prescribed to treat some psychiatric or neurological conditions, such as schizophrenia or Parkinson’s disease. There are currently no approved therapies to treat this disorder. We in-licensed worldwide development and commercial rights for the use of acamprosate in the treatment of movement disorders and other conditions. Our acamprosate program is currently focused on the development of a new patent-protected formulation of the drug, designed to reduce daily dosing requirements and improve tolerability. If we are successful in reformulating the product, we plan to conduct Phase I clinical trials prior to initiating a dose-finding Phase II clinical trial in patients in 2006.

Our Strategy

Our goal is to be a leading specialty pharmaceutical company focused on the in-licensing and development of proprietary product candidates in the fields of psychiatry and neurology. Our near-term strategy is to focus on the regulatory approval of our existing product candidates, and our long-term strategy is to build a portfolio of product candidates that are currently commercialized outside the United States, approved in the United States but with significant commercial potential for proprietary new uses, new dosages or alternative delivery systems, or in late stages of clinical development. Specifically, we intend to:


	•	maximize the value of our lead product candidate, SILENOR^tm;

	•	build a focused sales and marketing organization to target relevant specialists;

	•	pursue the clinical development of our other product candidates; and

	•	acquire or in-license late-stage development products with substantial human clinical experience.

Risks Associated with Our Business

We are a development stage company with no revenues, and our operations to date have generated substantial and increasing needs for cash. Our business and our ability to execute on our business strategy are subject to a number of risks that you should be aware of before you decide to buy our common stock. In particular, you should consider the following risks, which are discussed more fully in “Risk Factors” beginning on page 7:


	•	our near-term success is dependent on the development of our lead product candidate, SILENOR^tm, and we cannot be certain that it will receive regulatory approval or be successfully commercialized;

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

	•	restrictions on our patent rights relating to SILENOR^tm and our other product candidates may limit our ability to prevent third parties from competing against us;

	•	our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval or commercialization;


	•	we rely on third parties to conduct our clinical trials and manufacture our product candidates and cannot be sure that they will successfully carry out their contractual duties or meet expected deadlines;

	•	even if SILENOR^tm is approved by regulatory authorities, we expect intense competition in the insomnia marketplace, and we expect intense competition in the target markets for our other product candidates; and

	•	we may not have the resources to establish a sales and marketing infrastructure to market SILENOR^tm or our other product candidates and we may be unable to enter into collaborations with partners to perform these functions.

Corporate Information

We were incorporated in Delaware in August 2003. Our principal executive offices are located at 12750 High Bluff Drive, Suite 310, San Diego, California 92130, and our telephone number is (858) 509-3670. Our website address is http://www.somaxon.com. The information on, or accessible through, our website is not part of this prospectus. Unless the context requires otherwise, references in this prospectus to “Somaxon,” “we,” “us” and “our” refer to Somaxon Pharmaceuticals, Inc.

We have received a Notice of Allowance from the U.S. Patent and Trademark Office for the intent-to-use trademark application for our corporate name, Somaxon Pharmaceuticals^tm, for use in connection with pharmaceutical preparations for the treatment of neurological, psychiatric and rheumatological disorders. We have obtained foreign trademark registrations for the trademark SOMAXON PHARMACEUTICALS in Japan and Australia and have pending foreign trademark applications for the same mark in Canada and Europe. We have also applied for U.S. Trademark registration for SILENOR^tm and we are developing commercial names for our nalmefene and acamprosate product candidates. This prospectus also includes trademarks of other persons, including Ambien®, Ambien CR^tm, Campral®, Dalmane®, Desyrel®, Lunesta^tm, Luvox®, Paxil®, Prozac®, Requip®, Restoril®, Revex®, Rozerem^tm, Sinequan®, Sonata®, TOPAMAX® and Zyban®.

THE OFFERING


Common stock offered		5,000,000 shares

Common stock to be outstanding after this offering		18,026,300 shares

Use of proceeds		We expect to use the net proceeds from this offering to fund clinical trials for our three development programs, for marketing, general and administrative expenses and for other research and development expenses. See “Use of Proceeds.”

Proposed Nasdaq National Market symbol		SOMX

The number of shares of common stock to be outstanding after this offering is based on 13,026,300 shares outstanding as of September 30, 2005 and excludes:


	•	1,071,180 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2005 at a weighted average exercise price of $2.52 per share;

	•	2,061,320 shares of our common stock reserved for future issuance under our 2005 equity incentive award plan, which will become effective on the day prior to the day on which we become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act (including 61,320 shares of common stock reserved for future grant or issuance under our 2004 equity incentive award plan, which shares will be added to the shares to be reserved under our 2005 equity incentive award plan upon the effectiveness of the 2005 equity incentive award plan); and

	•	300,000 shares of common stock reserved for issuance under our 2005 employee stock purchase plan.

Except as otherwise indicated, all information in this prospectus assumes:


	•	no exercise by the underwriters of their option to purchase up to an additional 750,000 shares of common stock to cover over-allotments;

	•	the filing of our amended and restated certificate of incorporation and amended and restated bylaws upon completion of this offering;

	•	the conversion of all outstanding shares of our preferred stock into 12,241,409 shares of common stock upon completion of this offering; and

	•	a one-for-six reverse stock split of our common stock effected on December 9, 2005.

Three holders of greater than 5% of our shares have indicated an interest in purchasing shares of our common stock in this offering. There can be no assurance as to how much common stock, if any, that these investors may purchase.

SUMMARY FINANCIAL DATA

The following table summarizes our financial data. The summary financial data are derived from our audited financial statements for the period from August 14, 2003 (inception) through December 31, 2003, and the year ended December 31, 2004. Data are also included from our unaudited financial statements for the nine-month periods ended September 30, 2004 and 2005, and for the period from August 14, 2003 (inception) through September 30, 2005. These data should be read together with our financial statements and related notes, “Selected Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The pro forma as adjusted balance sheet data reflect the pro forma balance sheet data at September 30, 2005, adjusted for the sale of 5,000,000 shares of our common stock in this offering at the initial offering price of $11.00 per share (the mid-point of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts, commissions and offering expenses payable by us, and the automatic conversion of all preferred stock into common stock upon completion of this offering.


			August 14,												August 14,
			2003						Nine months						2003
			(inception)						ended						(inception)
			through			Year ended			September 30,						through
			December 31,			December 31,									September 30,
			2003			2004			2004			2005			2005

															(unaudited)
			(unaudited)
			(in thousands, except per share data)
Statement of Operations Data:
Operating expenses:
	License fees		$	519		$	4,038		$	463		$	341		$	4,898
	Research and development			166			7,574			4,463			17,577			25,317
	Marketing, general and administrative expenses			779			2,143			1,563			3,059			5,981
	Remeasurement of Series C warrant liability			—			—			—			5,649			5,649

		Total operating expenses		1,464			13,755			6,489			26,626			41,845

Loss from operations				(1,464	)		(13,755	)		(6,489	)		(26,626	)		(41,845	)
Interest and other income				1			157			92			752			910

		Net loss		(1,463	)		(13,598	)		(6,397	)		(25,874	)		(40,935	)
Accretion of redeemable convertible preferred stock to redemption value				—			—			—			(53	)		(53	)

Net loss attributable to common stockholders			$	(1,463	)	$	(13,598	)	$	(6,397	)	$	(25,927	)	$	(40,988	)

Basic and diluted net loss attributable to common stockholders per share⁽¹⁾			$	(10.03	)	$	(38.08	)	$	(19.78	)	$	(45.83	)
Shares used to calculate net loss attributable to common stockholders per share⁽¹⁾				146			357			323			566
Pro forma basic and diluted net loss per share (unaudited)⁽¹⁾						$	(3.94	)				$	(3.26	)
Shares used to calculate pro forma net loss per share (unaudited)⁽¹⁾							3,449						7,937


(1)	See Note 1 of Notes to Financial Statements for an explanation of the method used to calculate the historical and pro forma net loss per share and the number of shares used in the computation of the per share amounts.


	As of
	September 30, 2005

				Pro Forma
	Actual			As Adjusted

Balance Sheet Data:
Cash, cash equivalents and investments	$	64,224		$	113,506
Working capital		55,388			104,670
Total assets		66,303			115,585
Redeemable convertible preferred stock		64,253			—
Deficit accumulated during the development stage		(40,935	)		(40,935	)
Total stockholders’ equity (deficit)		(8,505	)		105,031

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations or growth prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

Our near-term success is dependent on the success of our lead product candidate, SILENOR^tm (doxepin hydrochloride), and we cannot be certain that it will receive regulatory approval or be successfully commercialized.

SILENOR^tm is currently being evaluated in two Phase III clinical trials for the treatment of insomnia and will require the successful completion of these or other planned Phase III clinical trials before we are able to submit a new drug application, or NDA, to the U.S. Food and Drug Administration, or FDA, for approval. If our Phase III or other clinical trials fail to demonstrate that SILENOR^tm is safe and effective, it will not receive regulatory approval. Even if SILENOR^tm receives FDA approval, it may never be successfully commercialized. In addition, we may have inadequate financial or other resources to pursue this product candidate through the clinical trial process or through commercialization. We do not have patent protection for SILENOR^tm in any jurisdiction outside the United States, which may limit our ability to commercialize SILENOR^tm. Furthermore, the patent protection in the United States for SILENOR^tm for the treatment of insomnia is limited to lower dosages ranging from a lower limit of 0.5 mg to various upper limits up to 20 mg of its active ingredient, doxepin. Doxepin is prescribed at dosages ranging from 75 mg to 300 mg daily for the treatment of depression and anxiety and is available in generic form in strengths as low as 10 mg in capsule form as well as a concentrated liquid form dispensed by a marked dropper and calibrated for 5 mg. As a result, we may face competition from the off-label use of these other dosage forms of generic doxepin. Off-label use occurs when a drug that is approved by the FDA for one indication is prescribed by physicians for a different, unapproved indication. If we are unable to obtain regulatory approval for, or are unable to successfully commercialize, SILENOR^tm, we may be unable to generate revenue, we may be unable to become profitable, and we may be unable to continue our operations.

We expect intense competition in the insomnia marketplace for SILENOR^tm and in the target markets for our other product candidates, and new products may emerge that provide different and/or better therapeutic alternatives for the disorders that our product candidates are intended to treat.

We are developing SILENOR^tm for the treatment of insomnia, which will compete with well established drugs for this indication including Ambien and Sonata, both GABA-acting hypnotics. Recently, Sepracor Inc.’s Lunesta, a GABA-acting hypnotic, Takeda Pharmaceuticals North America, Inc.’s Rozerem, a melatonin receptor antagonist, and Sanofi-Synthélabo Inc.’s Ambien CR, a controlled-release formulation of the current product, Ambien, were approved by the FDA for the treatment of insomnia. An NDA for at least one other product, Neurocrine Biosciences, Inc.’s indiplon, a GABA-acting hypnotic, has reportedly been submitted to the FDA and is under review. Furthermore, the patent for the original form of Ambien, which accounted for $2.0 billion of the $2.6 billion insomnia market in 2004, expires in October 2006. As a result, generic versions of Ambien are expected to reach the market shortly thereafter. Generic versions of Ambien can be expected to be priced significantly lower than approved, branded insomnia products. Sales of all of these drugs may reduce the available market for, and the price we are able to charge for, any product developed by us for these indications.

We are developing nalmefene for the treatment of pathological gambling. Currently, there are no FDA-approved products for this indication. However, controlled clinical trials using the opioid antagonist, naltrexone, which is available in generic form, have demonstrated clinical benefit for patients diagnosed with pathological gambling. Additionally, some controlled clinical trials suggest that selective serotonin reuptake inhibitors, or SSRIs, such as GlaxoSmithKline plc’s Paxil and Solvay Pharmaceuticals, Inc.’s Luvox, may

have a potential clinical effect. TOPAMAX, marketed by Ortho-McNeil Neurologics, Inc., is also being studied for the treatment of pathological gambling.

We are developing acamprosate for the treatment of tardive dyskinesia. There are no FDA-approved products for the treatment of tardive dyskinesia, although several companies are reportedly in Phase II and Phase III clinical trials to evaluate product candidates for this condition. Merck KGaA is investigating sarizotan hydrochloride, a serotonin 5HT1A agonist, in Phase III clinical trials for treatment-associated dyskinesias in patients with Parkinson’s disease. Additionally, Juvantia Pharma Ltd. is investigating fipamezole, an adrenergic antagonist, in Phase II clinical trials for treatment-associated dyskinesias in Parkinson’s disease and Acadia Pharmaceuticals Inc. is investigating ACP-103, a 5-HT_2A inverse agonist, in Phase I clinical trials for levodopa-induced dyskinesias in patients with Parkinson’s disease. These product candidates may be approved by the FDA or other regulatory authorities and commercialized ahead of acamprosate.

The biotechnology and pharmaceutical industries are subject to rapid and intense technological change. We face, and will continue to face, competition in the development and marketing of our product candidates from academic institutions, government agencies, research institutions and biotechnology and pharmaceutical companies. There can be no assurance that developments by others will not render SILENOR^tm or our other product candidates obsolete or noncompetitive. Furthermore, new developments, including the development of other drug technologies and methods of preventing the incidence of disease, occur in the pharmaceutical industry at a rapid pace. These developments may render our product candidates obsolete or noncompetitive.

Compared to us, many of our potential competitors have substantially greater:


	•	capital resources;

	•	research and development resources, including personnel and technology;

	•	regulatory experience;

	•	preclinical study and clinical trial experience;

	•	expertise in prosecution of intellectual property rights; and

	•	manufacturing, distribution and sales and marketing experience.

As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than we or may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates. Our competitors may also develop drugs that are more effective, useful and less costly than ours and may also be more successful than we in manufacturing and marketing their products.

In addition, if we receive regulatory approvals for our products, manufacturing efficiency and marketing capabilities are likely to be significant competitive factors. We currently have no commercial manufacturing capability, sales force or marketing infrastructure. In addition, many of our competitors and potential competitors have substantially greater capital resources, research and development resources, manufacturing and marketing experience and production facilities than we. Many of these competitors also have significantly greater resources for undertaking clinical trials of new pharmaceutical products and obtaining FDA and other regulatory approvals.

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

Delays in the commencement or completion of clinical testing could significantly affect our product development costs. We do not know whether planned clinical trials will begin on time or be completed on

schedule, if at all. The commencement and completion of clinical trials can be delayed for a variety of reasons, including delays related to:


	•	obtaining regulatory approval to commence a clinical trial;

	•	reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

	•	manufacturing sufficient quantities of a product candidate;

	•	obtaining institutional review board approval to conduct a clinical trial at a prospective site;

	•	recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including competition from other clinical trial programs for the same indication as our product candidates; and

	•	retaining patients who have initiated a clinical trial but may be prone to withdraw due to side effects from the therapy, lack of efficacy or personal issues, or who are lost to further follow-up.

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


	•	failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

	•	inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

	•	unforeseen safety issues; or

	•	lack of adequate funding to continue the clinical trial.

Additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to institutional review boards for reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in completion of, or if we terminate, our clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate product revenues will be delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. Even if we are able to ultimately commercialize our product candidates, other therapies for the same indications may have been introduced to the market and established a competitive advantage.

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

Before obtaining regulatory approvals for the commercial sale of any of our product candidates, we must demonstrate through preclinical testing and clinical trials that the product is safe and effective for use in each target indication. To date, we have not successfully completed any Phase III clinical trials and we have not completed all planned preclinical and Phase I clinical trials for each of our product candidates. For example, in addition to our ongoing Phase III clinical trials for SILENOR^tm, we are undertaking several Phase I clinical trials to evaluate the effect of food on the absorption of the drug and the effect of SILENOR^tm when co-administered with other drugs. With regard to nalmefene, we plan to initiate a clinical trial evaluating the product candidate’s effect on the electrocardiogram. With regard to acamprosate, various preclinical and Phase I clinical trials are planned to facilitate the selection and evaluation of a formulation for the product candidate to be tested in subsequent trials. The results from preclinical testing and clinical trials that we have completed may not be predictive of results obtained in future preclinical and clinical trials, and there can be no assurance that we will demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals or result in marketable products. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. If our drug candidates are not shown to be safe and effective in clinical trials, the resulting delays in developing other

compounds and conducting related 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.

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval or commercialization.

Undesirable side effects caused by our product candidates could interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications, and in turn prevent us from commercializing our product candidates and generating revenues from their sale. For example, in a Phase I clinical trial of nalmefene performed by our licensor, two patients were reported by the investigator to have a prolonged QTc interval, which is an electrocardiogram change which, if significantly prolonged, may result in an abnormal heart rhythm with adverse consequences including fainting, dizziness, loss of consciousness and death. In a final report, based on corrected values as determined by the cardiologist responsible for the central laboratory evaluation, these QTc findings were determined to be within the normal range of variation and incorrectly designated as adverse events. As with most new drugs, a Phase I clinical trial to evaluate the effect of nalmefene on the electrocardiogram is planned and we will continue to assess the side effect profile of nalmefene and our other product candidates in our ongoing clinical development program.

In addition, if any of our product candidates receive marketing approval and we or others later identify undesirable side effects caused by the product:


	•	regulatory authorities may require the addition of labeling statements, such as a “black box” warning in the case of SILENOR^tm or a contraindication;

	•	regulatory authorities may withdraw their approval of the product;

	•	we may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product; and

	•	our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product candidate, which in turn could delay or prevent us from generating significant revenues from its sale.

Additionally, the FDA has directed manufacturers of all antidepressant drugs to revise their product labels to include a “black box” warning and expanded warning statements regarding an increased risk of suicidal thinking and behavior in children and adolescents being treated with these agents. SILENOR^tm’s active ingredient, doxepin, is used in the treatment of depression and the package insert includes such a “black box” warning statement. Although SILENOR^tm is not intended to be indicated for or used in the treatment of depression and our proposed insomnia dosage is less than one-tenth of that of doxepin for the treatment of depression, nor do we currently intend to evaluate SILENOR^tm for the treatment of insomnia in children or adolescents, we cannot assure you that a similar warning statement will not be required.

There is no assurance that we will be granted regulatory approval for any of our product candidates.

The clinical trials of our product candidates are, and the manufacturing and marketing of our products will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United States and in other countries where we intend to test and market our product candidates. Prior to marketing, any product developed by us must undergo an extensive regulatory approval process. We have not requested nor received regulatory approval for any product from the FDA or any other regulatory body. This regulatory process, which includes preclinical testing and clinical trials of each compound to establish its safety and efficacy, can take many years and require the expenditure of substantial resources, and may include post-marketing studies and surveillance. Data obtained from preclinical testing and clinical trials are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. In addition, delays or rejections may be encountered based upon changes in FDA policy for drug approval during the

period of product development and FDA regulatory review of each submitted NDA. Similar delays may also be encountered in foreign countries. There can be no assurance that regulatory approval will be obtained for any drugs developed by us. A failure to obtain requisite regulatory approvals or to obtain approvals of the scope requested will delay or preclude us from marketing our products or limit the commercial use of the products, and would have a material adverse effect on our business, financial condition and results of operations.

Even if our product candidates receive regulatory approval, they may still face future development and regulatory difficulties.

Even if U.S. regulatory approval is obtained, the FDA may still impose significant restrictions on a product’s indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. For example, the label ultimately approved for SILENOR^tm, if any, may include a restriction on the term of its use, or it may not include one or more of our intended indications— the treatment of sleep onset, maintenance and duration. Similarly, although doxepin, at higher dosages than we plan to incorporate in SILENOR^tm, is not currently and has never been a Schedule IV controlled substance, we cannot be certain that SILENOR^tm will be a non-scheduled drug until the FDA and the DEA complete their review. Our product candidates will also be subject to ongoing FDA requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information on the drug. In addition, approved products, manufacturers and manufacturers’ facilities are subject to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:


	•	issue warning letters or untitled letters;

	•	impose civil or criminal penalties;

	•	suspend regulatory approval;

	•	suspend any ongoing clinical trials;

	•	refuse to approve pending applications or supplements to approved applications filed by us;

	•	impose restrictions on operations, including costly new manufacturing requirements; or

	•	seize or detain products or require a product recall.

Even if our product candidates receive regulatory approval in the United States, we may never receive approval or commercialize our products outside of the United States.

In order to market any products outside of the United States, we must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the United States as well as other risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding FDA approval in the United States. As described above, such effects include the risks that our product candidates may not be approved for all indications requested, which could limit the uses of our product candidates and have an adverse effect on potential royalties and product sales, and that such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies.

If the manufacturers upon whom we rely fail to produce our products in the volumes that we require on a timely basis, or to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the development and commercialization of, or be unable to meet demand for, our products and may lose potential revenues.

We do not manufacture any of our product candidates, and we do not plan to develop any capacity to do so. Patheon Pharmaceuticals Inc. manufactures clinical supplies of our SILENOR^tm and nalmefene product candidates, and we will also contract with a third party to manufacture our acamprosate product candidate. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up initial production. These problems include difficulties with production costs and yields, quality control, including stability of the product candidate and quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Our manufacturers may not perform as agreed or may terminate their agreements with us. If our manufacturers were to encounter any of these difficulties or otherwise fail to comply with their contractual obligations, our ability to provide product candidates to patients in our clinical trials would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of our clinical trials, increase the costs associated with maintaining our clinical trial program and, depending upon the period of delay, require us to commence new trials at significant additional expense or terminate the trials completely.

We do not have alternate manufacturing plans in place at this time. If we need to change to other commercial manufacturers, the FDA and comparable foreign regulators must approve these manufacturers’ facilities and processes prior to our use, which would require new testing and compliance inspections, and the new manufacturers would have to be educated in or independently develop the processes necessary for the production of our products.

Any of these factors could cause us to delay or suspend clinical trials, regulatory submissions, required approvals or commercialization of our product candidates, entail higher costs or result in our being unable to effectively commercialize our products. Furthermore, if our manufacturers failed to deliver the required commercial quantities of bulk drug substance or finished product on a timely basis and at commercially reasonable prices, we would likely be unable to meet demand for our products and we would lose potential revenues.

In addition, all manufacturers of our products must comply with current good manufacturing practice, or cGMP, requirements enforced by the FDA through its facilities inspection program. These requirements include quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our products may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products.

We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates.

We rely primarily on Synteract, Inc., a CRO, to conduct our clinical trials for our SILENOR^tm and nalmefene product candidates, and we may depend on other CROs and independent clinical investigators to conduct our future clinical trials. CROs and investigators are not our employees, and we cannot control the amount or timing of resources that they devote to our programs. If Synteract, other CROs or independent investigators fail to devote sufficient time and resources to our drug development programs, or if their performance is substandard, it will delay the approval of our FDA applications and our introductions of new products. The CROs with which we contract for execution of our clinical trials play a significant role in the

conduct of the trials and the subsequent collection and analysis of data. Failure of the CROs to meet their obligations could adversely affect clinical development of our products. Moreover, these independent investigators and CROs may also have relationships with other commercial entities, some of which may compete with us. If independent investigators and CROs assist our competitors at our expense, it could harm our competitive position.

Materials necessary to manufacture our product candidates may not be available on commercially reasonable terms, or at all, which may delay the development and commercialization of our product candidates.

We rely on the manufacturers of our product candidates to purchase from third-party suppliers the materials necessary to produce the compounds for our clinical trials and will rely on them for commercial distribution if we obtain marketing approval for any of our product candidates. Suppliers may not sell these materials to our manufacturers at the time we need them or on commercially reasonable terms. We do not have any control over the process or timing of the acquisition of these materials by our manufacturers. Moreover, we currently do not have any agreements for the commercial production of these materials. If our manufacturers are unable to obtain these materials for our clinical trials, product testing and potential regulatory approval of our product candidates would be delayed, significantly impacting our ability to develop our product candidates. If our manufacturers or we are unable to purchase these materials after regulatory approval has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be a shortage in supply, which would materially affect our ability to generate revenues from the sale of our product candidates.

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

To maximize the value of our product candidates, we will need to enter into collaborations with larger pharmaceutical partners to commercialize our products outside of the psychiatric and neurology specialty markets. We may not be able to enter into collaborations on acceptable terms, if at all. We also face competition in our search for partners with whom we may collaborate. By entering into these strategic collaborations, we may rely on our partners for financial resources and for development, commercialization and regulatory expertise. Our partners may fail to develop or effectively commercialize our product candidates because they:


	•	do not have sufficient resources or decide not to devote the necessary resources due to internal constraints, such as limited cash or human resources;

	•	decide to pursue a competitive potential product that had been developed outside of the collaboration; or

	•	cannot obtain the necessary regulatory approvals.

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.

We have obtained limited product liability insurance coverage for our clinical trials with a $5 million annual aggregate coverage limit, and our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

If any of our product candidates for which we receive regulatory approval do not achieve broad market acceptance, the revenues that we generate from their sales will be limited.

The commercial success of our product candidates for which we obtain marketing approval from the FDA or other regulatory authorities will depend upon the acceptance of these products by the medical community and reimbursement of them by third-party payors, including government payors. The degree of market acceptance of any of our approved products will depend on a number of factors, including:


	•	our ability to provide acceptable evidence of safety and efficacy;

	•	relative convenience and ease of administration;

	•	prevalence and severity of any adverse side effects;

	•	limitations or warnings contained in a product’s FDA-approved labeling, including, for example, potential “black box” warnings associated with the active ingredient in SILENOR™;

	•	availability of alternative treatments, including, in the case of SILENOR™, a number of competitive products already approved for the treatment of insomnia or expected to be commercially launched in the near future;

	•	pricing and cost effectiveness;

	•	effectiveness of our or our collaborators’ sales and marketing strategies; and

	•	our ability to obtain sufficient third-party coverage or reimbursement.

If our product candidates are approved but do not achieve an adequate level of acceptance by physicians, health care payors and patients, we may not generate sufficient revenue from these products, and we may not become or remain profitable. In addition, our efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful.

Our failure to successfully acquire, develop and market additional product candidates or approved products would impair our ability to grow.

As part of our growth strategy, we intend to acquire, develop and market additional products and product candidates. Because we neither have, nor currently intend to establish, internal research capabilities, we are dependent upon pharmaceutical and biotechnology companies, university scientists and other researchers to sell or license products to us. The success of this strategy depends upon our ability to identify, select and acquire promising pharmaceutical product candidates and products.

The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of product candidates and approved products. We may not be able to acquire the rights to additional product candidates on terms that we find acceptable, or at all.

Further, any product candidate that we acquire may require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot assure you that any products that we develop or approved products that we acquire will be manufactured or produced profitably, successfully commercialized or widely accepted in the marketplace.

Our business depends on our ability to acquire or in-license products and if we do not successfully acquire or license related product candidates or integrate them into our operations, we may incur unexpected costs and disruptions to our business.

An important part of our business strategy is to continue to develop a pipeline of product candidates by acquiring or in-licensing products, businesses or technologies that we believe are a strategic fit with our business and complement our existing product candidates. Future acquisitions, however, may entail numerous operational and financial risks, including:


	•	exposure to unknown liabilities;

	•	disruption of our business and diversion of our management’s time and attention to develop acquired products or technologies;

	•	incurrence of substantial debt or dilutive issuances of securities to pay for acquisitions;

	•	higher than expected acquisition and integration costs;

	•	increased amortization expenses;

	•	difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;

	•	impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and

	•	inability to retain key employees of any acquired businesses.

We have limited resources to identify and execute the acquisition or in-licensing of third party products, businesses and technologies and integrate them into our current infrastructure. In particular, we may compete with larger pharmaceutical companies and other competitors in our efforts to establish new collaborations and in-licensing opportunities. These competitors likely will have access to greater financial resources than us and may have greater expertise in identifying and evaluating new opportunities. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts.

We are subject to uncertainty relating to health care reform measures and reimbursement policies which, if not favorable to our product candidates, could hinder or prevent our product candidates’ commercial success.

The continuing efforts of the government, insurance companies, managed care organizations and other payors of health care services to contain or reduce costs of health care may adversely affect:


	•	our ability to set a price we believe is fair for our products;

	•	our ability to generate revenues and achieve or maintain profitability;

	•	the future revenues and profitability of our potential customers, suppliers and collaborators; and

	•	the availability of capital.

In the United States, given recent federal and state government initiatives directed at lowering the total cost of health care, Congress and state legislatures will likely continue to focus on health care reform, the cost of prescription drugs and the reform of the Medicare and Medicaid systems. For example, the Medicare Prescription Drug Improvement and Modernization Act of 2003 provides a new Medicare prescription drug benefit scheduled to begin in 2006 and mandates other reforms. While we cannot predict the full outcome of the implementation of this legislation, it is possible that the new Medicare prescription drug benefit, which will be managed by private health insurers and other managed care organizations, will result in additional government reimbursement for prescription drugs, which may make some prescription drugs more affordable but may further exacerbate industry-wide pressure to reduce prescription drug prices. In addition, in certain foreign markets, the pricing of prescription drugs is subject to government control and reimbursement may in some cases be unavailable.

Our ability to commercialize our product candidates successfully will depend in part on the extent to which governmental authorities, private health insurers and other organizations establish appropriate coverage and reimbursement levels for the cost of our products and related treatments. Third-party payors are increasingly challenging the prices charged for medical products and services. Also, legislative proposals to reform health care or reduce government insurance programs may result in lower prices for our product candidates or exclusion of our product candidates from coverage and reimbursement programs. The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could harm our ability to market our products and significantly reduce our revenues from the sale of any approved product.

We will need to increase the size of our organization, and we may experience difficulties in managing growth.

As of September 30, 2005, we had 17 full-time employees. We will need to continue to expand our managerial, operational, financial and other resources in order to manage and fund our operations and clinical trials, continue our development activities and commercialize our product candidates. Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively manage our operations, growth and various projects requires that we:


	•	manage our clinical trials effectively, including our Phase III clinical trials for SILENOR^tm and our Phase II/III clinical trials for nalmefene, which are being conducted at numerous distinct clinical trial sites;

	•	manage our internal development efforts effectively while carrying out our contractual obligations to collaborators and other third parties;

	•	continue to improve our operational, financial and management controls, reporting systems and procedures; and

	•	attract and retain sufficient numbers of talented employees.

We may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve our development and commercialization goals.

We may not be able to manage our business effectively if we are unable to attract and retain key personnel.

We may not be able to attract or retain qualified management and scientific and clinical personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Diego, California area. If we are not able to attract and retain necessary personnel to accomplish our business objectives, we may experience constraints that will impede significantly the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy. In particular, if we lose any members of our senior management team, we may not be able to find suitable replacements, and our business may be harmed as a result.

Our industry has experienced a high rate of turnover of management personnel in recent years. We are highly dependent on the product acquisition, development, regulatory and commercialization expertise of our senior management. If we lose one or more of the members of our senior management team or other key employees, our ability to implement our business strategy successfully could be seriously harmed. Replacing key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key personnel.

In addition, we have scientific and clinical advisors who assist us in formulating our product development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us, or may have arrangements with other companies to assist in the development of products that may compete with ours.

Risks Related to Our Finances and Capital Requirements

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

We are a development-stage company with no revenues, and our operations to date have generated substantial and increasing needs for cash. We expect our negative cash flows from operations to continue until we obtain regulatory approval for SILENOR^tm and are able to commercialize the product candidate ourselves or establish a partnership or collaboration with a pharmaceutical company to broaden the potential reach of sales and marketing efforts for SILENOR^tm. The development and approval of SILENOR^tm and our other product candidates and the acquisition and development of additional products or product candidates by us, as well as the development of our sales and marketing organizations, will require a commitment of substantial funds. Our future capital requirements will depend on, and could increase significantly as a result of, many factors, including:


	•	the terms and timing of any collaborative, licensing and other arrangements that we may establish;

	•	the rate of progress and cost of our clinical trials and other development activities;

	•	the scope, prioritization and number of clinical development programs we pursue;

	•	the costs and timing of regulatory approval;

	•	the costs of establishing or contracting for sales and marketing capabilities;

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

	•	the effect of competing technological and market developments; and

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

We believe, based on our current operating plan, that our cash, cash equivalents and marketable securities as of the consummation of this offering will be sufficient to fund our operations for at least the next twelve months. We intend to seek additional funding through strategic alliances and may seek additional

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

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

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

We have never generated revenues or been profitable, and we may not be able to generate revenues sufficient to achieve profitability.

We are a development-stage company and have not generated any revenues or been profitable since inception, and it is possible that we will not achieve profitability. We incurred net losses of approximately $25.9 million for the nine months ended September 30, 2005 and $13.6 million for the year ended December 31, 2004. We expect to continue to incur significant operating and capital expenditures. As a result, we will need to generate significant revenues to achieve and maintain profitability. We cannot assure you that we will achieve significant revenues, if any, or that we will ever achieve profitability. Even if we do achieve profitability, we cannot assure you that we will be able to sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be materially and adversely affected.

Our quarterly operating results may fluctuate significantly.

We expect our operating results to be subject to quarterly fluctuations. The revenues we generate, if any, and our operating results will be affected by numerous factors, including:


	•	our addition or termination of development programs or funding support;

	•	variations in the level of expenses related to our existing three product candidates or future development programs;

	•	our execution of collaborative, licensing or other arrangements, and the timing of payments we may make or receive under these arrangements;

	•	any intellectual property infringement lawsuit in which we may become involved; and

	•	regulatory developments affecting our product candidates or those of our competitors.

If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.

The use of our net operating loss and tax credit carryforwards may be limited.

Sales of our preferred stock in 2003, 2004 and 2005 and/or shares of common stock in this proposed public offering may result or be deemed to result in a change in control that could result in the limitation of Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, on the use of our net operating loss and tax credit carryforwards. This limitation would allow us to use only a portion of the net operating loss and tax credit carryforwards generated prior to the deemed Section 382 change of control to offset future taxable income, if any, for U.S. federal and state income tax purposes. As of December 31, 2004, we had federal net operating loss carryforwards of approximately $10.5 million and state net operating loss carryforwards of approximately $10.2 million. Federal net operating losses generally carry forward for 20 years from the year generated. The expiration dates for net operating losses vary among states. The majority of our state net operating losses are in California, and these net operating losses will begin to expire in 2013. We have federal research and development tax credits of $288,000 and California research and development tax credits of $332,000. Federal research and development tax credits have a 20 year carry forward period and begin to expire in 2024. California research and development tax credits have no expiration.

Risks Relating to Intellectual Property

The patent rights that we have in-licensed covering SILENOR™ are limited to certain low-dosage strengths in the United States, and our market opportunity for this product candidate may be limited by the lack of patent protection for higher dosage strengths and the lack of patent protection in other territories.

Although we have an exclusive, worldwide license for SILENOR^tm for the treatment of insomnia through the life of the last patent to expire, which is expected to occur in 2020, we do not have patent protection for SILENOR^tm in any jurisdiction outside the United States. In addition, although our licensed patent for the treatment of transient insomnia is scheduled to expire in 2020, our licensed patent for the treatment of chronic insomnia is scheduled to expire in March 2013. Accordingly, a competitor could file an NDA for the development of doxepin for a chronic insomnia indication as early as March 2013. Furthermore, the patent protection in the United States for SILENOR^tm for the treatment of insomnia is limited to lower dosages ranging from a lower limit of 0.5 mg to various upper limits up to 20 mg of the active ingredient, doxepin. Doxepin is prescribed at dosages ranging from 75 mg to 300 mg daily for the treatment of depression and anxiety and is available in generic form in strengths as low as 10 mg in capsule form, as well as in a concentrated liquid form dispensed by a marked dropper and calibrated for 5 mg. As a result, we may face competition from the off-label use of these other dosage forms of generic doxepin. In addition, others may attempt to commercialize low-dose doxepin in the European Union, Canada, Mexico or other markets where we do not have patent protection for SILENOR^tm. Due to the lack of patent protection for doxepin in territories outside the United States and the potential for correspondingly lower prices for the drug in those markets, it is possible that patients will seek to acquire low-dose doxepin in those other territories. The off-label use of doxepin in the United States or the importation of doxepin from foreign markets could adversely affect the commercial potential for SILENOR^tm and adversely affect our overall business and financial results.

We have licensed our product candidates from third parties. If we default on any of our obligations under those licenses, we could lose rights to product candidates that are important to our business.

We license rights to product candidates that are important to our business, and we expect to enter into similar licenses in the future. For instance, we acquired our three product candidates through exclusive licensing arrangements. Under these licenses we are subject to commercialization and development, sublicensing, royalty, insurance and other obligations. If we fail to comply with any of these requirements, or otherwise breach these license agreements, the licensor may have the right to terminate the license in whole or to terminate the exclusive nature of the license. Loss of any of these licenses or the exclusivity rights provided therein could harm our financial condition and operating results. For example, our license agreement for SILENOR^tm requires us to use commercially reasonable efforts to develop, obtain regulatory approval of and commercialize the product candidate. To the extent we are unable to comply with these obligations, the license may be terminated.

Restrictions on our patent rights relating to our product candidates may limit our ability to prevent third parties from competing against us.

Our success will depend on our ability to obtain and maintain patent protection for our products, preserve our trade secrets, prevent third parties from infringing upon our proprietary rights and operate without infringing upon the proprietary rights of others. The patent rights that we have in-licensed relating to our product candidates are limited in ways that may affect our ability to exclude third parties from competing against us if we receive regulatory approval to market these product candidates. In particular, we do not hold composition of matter patents covering the active pharmaceutical ingredients of any of our product candidates. Composition of matter patents on active pharmaceutical ingredients are the strongest form of intellectual property protection for pharmaceutical products as they apply without regard to any method of use or other type of limitation. As a result, competitors who obtain the requisite regulatory approval can offer products with the same active ingredients as our products so long as the competitors do not infringe any method of use or formulation patents that we may hold.

The principal patent protection that covers, or that we expect will cover, our product candidates is method of use patents. This type of patent protects the product only when used or sold for the specified method. However, this type of patent does not limit a competitor from making and marketing a product that is identical to our product for an indication that is outside of the patented method. Moreover, physicians may prescribe such a competitive identical product for off-label indications that are covered by the applicable patents. Although such off-label prescriptions may infringe or contribute to the infringement of method of use patents, the practice is common and such infringement is difficult to prevent or prosecute.

Because products with active ingredients identical to ours have been on the market for many years, there can be no assurance that these other products were never used off-label in such a manner that such prior usage would not affect the validity of our method of use patents. One of our licensed patents is currently involved in post-issuance proceedings in the U.S. Patent and Trademark Office, and no assurance can be given that any claims will survive those proceedings in their current form, or at all.

Patent applications in the United States are confidential for a period of time until they are published, and publication of discoveries in scientific or patent literature typically lags actual discoveries by several months. As a result, we cannot be certain that the inventors of the issued patents that we in-licensed were the first to conceive of inventions covered by pending patent applications or that the inventors were the first to file patent applications for such inventions.

We also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our collaborators, employees and consultants. We also have invention or patent assignment agreements with our employees and certain consultants. There can be no assurance that inventions relevant to us will not be developed by a person not bound by an invention assignment agreement with us. There can be no assurance that binding agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by our competitors.

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

In addition, as is commonplace in the biotechnology industry, we employ individuals who were previously employed at 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. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our business.

Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we and our collaborators are developing products. As the biotechnology and pharmaceutical industry expands and more patents are issued, the risk increases that our potential products may give rise to claims that our products infringe the patent rights of others. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our product candidates or proprietary technologies may infringe.

We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that our product candidates and/or proprietary technologies infringe their intellectual property rights. If one of these patents was found to cover our product candidates, proprietary technologies or their uses, we or our collaborators could be required to pay damages and could be unable to commercialize our product candidates or use our proprietary technologies unless we or they obtained a license to the patent. A license may not be available to us or our collaborators on acceptable terms, if at all. In addition, during litigation, the patent holder could obtain a preliminary injunction or other equitable right which could prohibit us from making, using or selling our products, technologies or methods.

There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries generally. If a third party claims that we or our collaborators infringe its intellectual property rights, we may face a number of issues, including, but not limited to:


	•	infringement and other intellectual property claims which, with or without merit, may be expensive and time-consuming to litigate and may divert our management’s attention from our core business;

	•	substantial damages for infringement, including treble damages and attorneys’ fees, which we may have to pay if a court decides that the product at issue infringes on or violates the third party’s rights;

	•	a court prohibiting us from selling or licensing the product unless the third party licenses its product rights to us, which it is not required to do;

	•	if a license is available from the third party, we may have to pay substantial royalties, fees and/or grant cross-licenses to our products; and

	•	redesigning our products or processes so they do not infringe, which may not be possible or may require substantial funds and time.

We have conducted a search of patents issued to third parties, however no assurance can be given that patents do not exist, have not been filed, or could not be filed or issued, which contain claims covering our products, technology or methods. Because of the number of patents issued and patent applications filed in our field, we believe there is a risk that third parties may allege they have patent rights encompassing our products, technology or methods.

Risks Relating to Securities Markets and Investment in Our Stock

There may not be a viable public market for our common stock.

Prior to this offering, there has been no public market for our common stock, and there can be no assurance that a regular trading market will develop and continue after this offering or that the market price of our common stock will not decline below the initial public offering price. The initial public offering price will be determined through negotiations between us and the representatives of the underwriters and may not be indicative of the market price of our common stock following this offering. Among the factors considered in such negotiations are prevailing market conditions, certain of our financial information, market valuations of other companies that we and the representatives of the underwriters believe to be comparable to us, estimates

of our business potential, the present state of development and other factors deemed relevant. See “Underwriters” for additional information.

Market volatility may affect our stock price and the value of your investment.

Following this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. The market prices for securities of biotechnology and pharmaceutical companies have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:


	•	changes in the regulatory status of SILENOR^TM or our other product candidates, including results of our clinical trials;

	•	announcements of new products or technologies, commercial relationships or other events by us or our competitors;

	•	events affecting our three existing in-license agreements and any future collaborations, commercial agreements and grants;

	•	variations in our quarterly operating results;

	•	changes in securities analysts’ estimates of our financial performance;

	•	regulatory developments in the United States and foreign countries;

	•	fluctuations in stock market prices and trading volumes of similar companies;

	•	sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

	•	additions or departures of key personnel; and

	•	discussion of us or our stock price by the financial and scientific press and in online investor communities.

The realization of any of the risks described in these “Risk Factors” could have a dramatic and material adverse impact on the market price of our common stock. In addition, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Any such litigation brought against us could result in substantial costs and a diversion of management’s attention and resources, which could hurt our business, operating results and financial condition.

Investors purchasing common stock in this offering will incur substantial dilution as a result of this offering and future equity issuances, and, as a result, our stock price could decline.

The initial public offering price for this offering is substantially higher than the pro forma, net tangible book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate dilution of $5.17 per share. This dilution is due in large part to earlier investors having paid substantially less than the initial public offering price when they purchased their shares. Investors purchasing shares of common stock in this offering will contribute approximately 38% of the total amount we have raised since our inception, but will own only approximately 28% of our total common stock immediately following the completion of this offering.

We believe that our existing cash, cash equivalents and short-term investments, together with the net proceeds from this offering, will be sufficient to meet our projected operating requirements for at least the next twelve months. Because we will need to raise additional capital to fund our clinical development programs, among other things, we may conduct substantial additional equity offerings. These future equity issuances, together with the exercise of outstanding options and any additional shares issued in connection with acquisitions, will result in further dilution to investors.

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

We will incur increased costs as a result of changes in laws and regulations relating to corporate governance matters.

As a public reporting company, we will need to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations adopted by the Securities and Exchange Commission and by the Nasdaq Stock Market, including expanded disclosures, accelerated reporting requirements and more complex accounting rules. Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and other requirements will increase our costs and require additional management resources. Additionally, these laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to these laws and regulations and cannot predict or estimate the amount or timing of additional costs we may incur to respond to their requirements.

If our executive officers, directors and largest stockholders choose to act together, they may be able to control our operations and act in a manner that advances their best interests and not necessarily those of other stockholders.

After this offering, our executive officers, directors and holders of 5% or more of our outstanding common stock will beneficially own approximately 66.0% of our common stock. As a result, these stockholders, acting together, will be able to control all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of this group of stockholders may not always coincide with our interests or the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders.

We may allocate the net proceeds from this offering in ways that you and other stockholders may not approve.

We intend to use the net proceeds from this offering:


	•	to fund clinical trials for our three development programs;

	•	for marketing, general and administrative expenses; and

	•	for other research and development expenses.

Our management will, however, have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not necessarily improve our operating results or enhance the value of our common stock.

Future sales of our common stock may cause our stock price to decline.

Our current stockholders hold a substantial number of shares of our common stock that they will be able to sell in the public market in the near future. A large portion of these shares are held by a small number of persons and investment funds. Sales by these stockholders of a substantial number of shares after this offering could significantly reduce the market price of our common stock. Moreover, after this offering, the holders of approximately 12,241,409 shares of common stock issuable upon conversion of preferred stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include these shares in registration statements that we may file for ourselves or other stockholders. The holders of over 99.0% of our outstanding shares of capital stock and shares issuable upon exercise of outstanding options have agreed with the underwriters of this offering to be bound by a 180-day lock-up agreement that prohibits these holders from selling or transferring their stock, other than in specific circumstances. However, Morgan Stanley & Co. Incorporated, on behalf of the underwriters, at its discretion, can waive the restrictions of the lock-up agreement at an earlier time without prior notice or announcement and allow our stockholders to sell their shares of our common stock in the public market. If the restrictions of the lock-up agreement are waived, shares of our common stock will be available for sale into the market, subject only to applicable securities rules and regulations, which may cause our stock price to decline.

We also intend to register all common stock that we may issue under our 2004 equity incentive award plan, our 2005 equity incentive award plan and our 2005 employee stock purchase plan. Effective upon the completion of this offering, an aggregate of 2,000,000 and 300,000 shares of our common stock will be reserved for issuance under our 2005 equity incentive award plan and our 2005 employee stock purchase plan, respectively. These share reserves will also be subject to automatic annual increases in accordance with the terms of the plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described in “Underwriters.” If any of these events cause a large number of our shares to be sold in the public market, the sales could reduce the trading price of our common stock and impede our ability to raise future capital. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, including statements regarding the progress and timing of clinical trials, the safety and efficacy of our product candidates, the goals of our development activities, estimates of the potential markets for our product candidates, estimates of the capacity of manufacturing and other facilities to support our products, our expected future revenues, operations and expenditures and projected cash needs. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. These risks and uncertainties include, among others:


	•	our ability to successfully complete preclinical and clinical development of our product candidates on expected timetables, or at all, which includes enrolling sufficient patients in our clinical trials and demonstrating the safety and efficacy of our product candidates in such trials;

	•	our ability to have manufactured sufficient amounts of our product candidates for clinical trials and, if approved, products for commercialization activities;

	•	our ability to obtain, maintain and successfully enforce adequate patent and other intellectual property protection of our product candidates that may be approved for sale;

	•	the content and timing of submissions to and decisions made by the FDA and other regulatory agencies, including demonstrating to the satisfaction of the FDA the safety and efficacy of our product candidates;

	•	our ability to develop a sufficient sales and marketing force or enter into agreements with third parties to sell and market any of our product candidates that may be approved for sale;

	•	the accuracy of our estimates of the size and characteristics of the markets to be addressed by our product candidates;

	•	the success of our competitors;

	•	our ability to obtain reimbursement for any of our product candidates that may be approved for sale from third-party payors, and the extent of such coverage; and

	•	our ability to raise additional funds in the capital markets, through arrangements with corporate partners or from other sources.

Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” or the negative of those terms, and similar expressions and comparable terminology intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus and, except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus. The forward-looking statements contained in this prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended.

USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $49.3 million from the sale of the shares of common stock offered in this offering, based on an assumed initial public offering price of $11.00 per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) the net proceeds to us from this offering by $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $57.0 million.

The principal purposes for this offering are to fund our development activities, including clinical trials for our three internal development programs, to increase our working capital, to create a public market for our common stock, to increase our ability to access the capital markets in the future, for general corporate purposes and to provide liquidity for our existing stockholders. We may spend a portion of the net proceeds on sales and marketing activities, general and administrative matters and on capital expenditures.

We intend to use approximately $28 to $31 million of the net proceeds from this offering to fund research and development activities, including approximately $19 to $21 million to fund the continued clinical development of SILENOR^tm and approximately $7 to $12 million to fund the further development of our other clinical development programs. However, due to the risks inherent in the clinical trial process and given the stage of development of our programs, we are unable to estimate with any certainty the total costs or when we will incur these costs in the continued development of our product candidates for potential commercialization. We anticipate that the net proceeds from this offering will allow us to complete the clinical trials necessary to support an NDA filing for SILENOR^tm. In addition, we cannot forecast with any degree of certainty which drug candidates will be subject to future collaborative or licensing arrangements, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

Of the remaining $18 to $21 million of the net proceeds from this offering, we anticipate using approximately half to fund other regulatory and development activities and the other half to fund marketing, general and administrative expenses.

We may also use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain rights to such complementary technologies. We have no commitments with respect to any such acquisitions or investments.

The amounts and timing of our actual expenditures will depend on numerous factors, including the progress in, and costs of, our clinical drug programs and the amount and timing of revenues, if any, from our current or future collaborations. We therefore cannot estimate the amount of net proceeds to be used for all of the purposes described above. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the net proceeds. Pending the uses described above, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock and we do not currently intend to pay any cash dividends on our common stock. We expect to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions.

CAPITALIZATION

The following table sets forth our cash, cash equivalents and short-term investments and our capitalization as of September 30, 2005:


	•	on an actual basis; and


	•	on a pro forma as adjusted basis to reflect the conversion of all outstanding shares of our preferred stock into 12,241,409 shares of common stock and our receipt of the estimated net proceeds from this offering, based on an assumed initial public offering price of $11.00 per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus.


				September 30, 2005

							Pro Forma
				Actual			As Adjusted

				(unaudited)
				(in thousands, except
				share and par value data)
Cash, cash equivalents and investments⁽¹⁾				$	64,224		$	113,506

Series C redeemable convertible preferred stock, net of issuance costs; $0.0001 par value; 48,148,455 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding pro forma as adjusted					64,253		$	—
Stockholders’ equity (deficit):
	Preferred stock, $0.0001 par value; no shares authorized, issued or outstanding, actual; 10,000,000 shares authorized, no shares issued or outstanding pro forma as adjusted				—
	Series A convertible preferred stock, $0.0001 par value; 2,300,000 shares authorized, issued and outstanding, actual; no shares authorized issued or outstanding pro forma as adjusted				2,300			—
	Series B convertible preferred stock, net of issuance costs; $0.0001 par value; 23,000,000 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding pro forma as adjusted				22,903			—
	Common stock, $0.0001 par value; 100,000,000 shares authorized; 784,891 shares issued and outstanding, actual; 100,000,000 shares authorized and 18,026,300 shares issued and outstanding pro forma as adjusted				—			2
	Additional paid-in capital⁽¹⁾				11,368			150,105
	Deferred compensation				(4,141	)		(4,141	)
	Deficit accumulated during the development stage				(40,935	)		(40,935	)

		Total stockholders’ equity (deficit)⁽¹⁾			(8,505	)		105,031

			Total capitalization⁽¹⁾	$	55,748		$	105,031

⁽¹⁾

A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) each of cash, cash equivalents and investments, additional paid-in capital, total stockholders’ equity and total capitalization by $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma information discussed above is illustrative only and following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

The number of pro forma as adjusted common shares shown as issued and outstanding in the table is based on the number of shares of our common stock outstanding as of September 30, 2005 and excludes:


	•	1,071,180 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2005 at a weighted average exercise price of $2.52 per share;

	•	2,061,320 shares of our common stock reserved for future issuance under our 2005 equity incentive award plan, which will become effective on the day prior to the day on which we become subject to the reporting requirements of the Exchange Act (including 61,320 shares of common stock reserved for future grant or issuance under our 2004 equity incentive award plan, which shares will be added to the shares to be reserved under our 2005 equity incentive award plan upon the effectiveness of the 2005 equity incentive award plan); and

	•	300,000 shares of common stock reserved for issuance under our 2005 employee stock purchase plan.

DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering. As of September 30, 2005, our pro forma net tangible book value was $55.7 million, or $4.28 per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the total number of shares of our common stock outstanding as of September 30, 2005, after giving effect to the conversion of our preferred stock into common stock upon completion of this offering. After giving effect to our sale in this offering of 5,000,000 shares of our common stock at an assumed initial public offering price of $11.00 per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of September 30, 2005 would have been $105.0 million, or $5.83 per share of our common stock. This represents an immediate increase of net tangible book value of $1.55 per share to our existing stockholders and an immediate dilution of $5.17 per share to investors purchasing shares in this offering. The following table illustrates this per share dilution:


Assumed initial public offering price per share				$	11.00
	Pro forma net tangible book value per share as of September 30, 2005, before giving effect to this offering	$	4.28
	Increase in pro forma net tangible book value per share attributable to investors purchasing shares in this offering		1.55

Pro forma net tangible book value per share after giving effect to this offering					5.83

Dilution in pro forma net tangible book value per share to investors in this offering				$	5.17

A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) our pro forma net tangible book value by $4.7 million, the pro forma net tangible book value per share after this offering by $0.26 per share and the dilution in pro forma net tangible book value per share to investors in this offering by $0.74 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share after giving effect to this offering would be $6.00 per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $5.00 per share.

The following table summarizes, as of September 30, 2005, the differences between the number of shares of common stock purchased from us, after giving effect to the conversion of our preferred stock into common stock, the total effective cash consideration paid, and the average price per share paid by our existing stockholders and by our new investors purchasing stock in this offering at an assumed initial public offering price of $11.00 per share (the mid-point of the price range set forth on the cover page of this prospectus) before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:


		Shares Purchased					Total Consideration					Average
												Price
		Number		Percent			Amount		Percent			Per Share

Existing stockholders before this offering			13,026,300		72.3	%	$	90,628,134		62.2	%	$	6.96
Investors participating in this offering			5,000,000		27.7	%		55,000,000		37.8	%		11.00

	Total		18,026,300		100.0	%	$	145,628,134		100.0	%	$	8.08

A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and

the average price per share paid by all stockholders by $5.0 million, $5.0 million and $0.28, respectively, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, our existing stockholders would own 69% and our new investors would own 31% of the total number of shares of our common stock outstanding after this offering.

The above information assumes no exercise of stock options outstanding as of September 30, 2005. As of September 30, 2005, there were:


	•	1,071,180 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2005 at a weighted average exercise price of $2.52 per share;

	•	2,061,320 shares of our common stock reserved for future issuance under our 2005 equity incentive award plan, which will become effective on the day prior to the day on which we become subject to the reporting requirements of the Exchange Act (including 61,320 shares of common stock reserved for future grant or issuance under our 2004 equity incentive award plan, which shares will be added to the shares to be reserved under our 2005 equity incentive award plan upon the effectiveness of the 2005 equity incentive award plan); and

	•	300,000 shares of common stock reserved for issuance under our 2005 employee stock purchase plan.

SELECTED FINANCIAL DATA

The selected statement of operations data for the period from August 14, 2003 (inception) through December 31, 2003, the year ended December 31, 2004 and the balance sheet data as of December 31, 2003 and 2004 have been derived from our financial statements included elsewhere in this prospectus. The statement of operations data for the nine month periods ended September 30, 2004 and 2005 and the balance sheet data as of September 30, 2005 have been derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements have been prepared on a basis consistent with our audited financial statements and include all adjustments, consisting only of normal recurring adjustments, we consider necessary for the fair statement of the information. Historical results are not necessarily indicative of future results. The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.


			August 14,												August 14,
			2003						Nine Months						2003
			(inception)						Ended						(inception)
			through			Year Ended			September 30,						through
			December 31,			December 31,									September 30,
			2003			2004			2004			2005			2005

															(unaudited)
			(unaudited)
			(in thousands, except per share data)
Statement of Operations Data:
Operating expenses:
	License fees		$	519		$	4,038		$	463		$	341		$	4,898
	Research and development			166			7,574			4,463			17,577			25,317
	Marketing, general and administrative expenses			779			2,143			1,563			3,059			5,981
	Remeasurement of Series C warrant liability			—			—			—			5,649			5,649

		Total operating expenses		1,464			13,755			6,489			26,626			41,845

Loss from operations				(1,464	)		(13,755	)		(6,489	)		(26,626	)		(41,845	)
Interest and other income				1			157			92			752			910

		Net loss		(1,463	)		(13,598	)		(6,397	)		(25,874	)		(40,935	)
Accretion of redeemable convertible preferred stock to redemption value				—			—			—			(53	)		(53	)

Net loss attributable to common stockholders			$	(1,463	)	$	(13,598	)	$	(6,397	)	$	(25,927	)	$	(40,988	)

Basic and diluted net loss attributable to common stockholders per share⁽¹⁾			$	(10.03	)	$	(38.08	)		(19.78	)	$	(45.83	)
Shares used to calculate net loss attributable to common stockholders per share⁽¹⁾				146			357			323			566
Pro forma basic and diluted net loss per share (unaudited)⁽¹⁾						$	(3.94	)				$	(3.26	)
Shares used to calculate pro forma net loss per share (unaudited)⁽¹⁾							3,449						7,937


⁽¹⁾	See Note 1 of the Notes to Financial Statements for an explanation of the method used to calculate the historical and pro forma net loss per common share and the number of shares used in the computation of the per share amounts.


	As of December 31,						As of
							September 30,
	2003			2004			2005

							(unaudited)
	(in thousands)
Balance Sheet Data:
Cash, cash equivalents and investments	$	906		$	12,835		$	64,224
Working capital		811			9,900			55,388
Total assets		919			13,599			66,303
Redeemable convertible preferred stock		—			—			64,253
Deficit accumulated during the development stage		(1,463	)		(15,061	)		(40,935	)
Total stockholders’ equity (deficit)		819			10,274			(8,505	)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Financial Data” and our financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview


	*Background*

We are a specialty pharmaceutical company focused on the in-licensing and development of product candidates for the treatment of diseases and disorders in the fields of psychiatry and neurology. To date, we have in-licensed three product candidates. Our lead product candidate, SILENOR^tm (doxepin hydrochloride), is in Phase III clinical trials for the treatment of insomnia. Our product candidate nalmefene hydrochloride is in a Phase II/III clinical trial for the treatment of pathological gambling and a Phase II clinical trial for smoking cessation. We are also developing a new formulation of acamprosate calcium for the treatment of certain movement disorders. We intend to continue to build a portfolio of product candidates that target psychiatric and neurological diseases and disorders, focusing on products that are currently commercialized outside the United States, approved in the United States but with significant commercial potential for proprietary new uses, new dosages or alternative delivery systems, or in late stages of clinical development.

We were incorporated in August 2003 and are a development-stage company. During 2003, we focused on hiring our executive team and initial operating employees and on licensing our first product, SILENOR^tm. Substantial operations did not commence until 2004. During 2004, we initiated two Phase II clinical trials with SILENOR^tm and entered into license agreements for nalmefene and acamprosate.

We have incurred significant net losses since our inception. As of September 30, 2005, we had an accumulated deficit of approximately $40.9 million. We expect our operating losses to increase for the next several years as we pursue the clinical development of our product candidates and acquire or in-license products, technologies or businesses that are complementary to our own.


	*Revenues*

We have not generated any revenues to date, and we do not expect to generate any revenues from licensing, achievement of milestones or product sales until we execute a partnership or collaboration arrangement or are able to commercialize SILENOR^tm ourselves.


	*Research and Development Expenses*

Our research and development expenses consist primarily of salaries and related employee benefits, costs associated with clinical trials managed by our CROs and costs associated with non-clinical activities, such as regulatory expenses. Our most significant costs are for clinical trials. These expenses include payments to vendors such as clinical research organizations and investigators, clinical supplies and related consulting. Our historical research and development expenses are related predominately to the Phase II clinical trials for SILENOR^tm and for license fees and milestone payments for acquired product development and commercialization rights relating to doxepin and nalmefene.

We have issued stock options to certain of our consultants. The fair value of these options is recorded as stock compensation expense within research and development expense. As described in more detail in Note 1 of Notes to Financial Statements included elsewhere in this prospectus, the fair value of these stock options is periodically remeasured.

We charge all research and development expenses to operations as incurred. We expect our research and development expenses to increase significantly in the future as we continue to develop our product candidates and if we are able to in-license additional product candidates.

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. We use external service providers to conduct our clinical trials and to manufacture our product candidates to be used in clinical trials. These external costs are tracked on a project basis. External costs are accrued as incurred. We incurred $6.5 million, $3.8 million, and $12.0 million of expenses directly related to clinical trials for SILENOR^tm for the year ended December 31, 2004, the nine months ended September 30, 2004, and the nine months ended September 30, 2005, respectively. All other research and development expenses are for other clinical programs.

At this time, due to the risks inherent in the clinical trial process and given the early stage of our product development programs, we are unable to estimate with any certainty the costs we will incur in the continued development of our product candidates for potential commercialization. Clinical development timelines, the probability of success and development costs vary widely. While currently we are focused on advancing each of our product development programs, we anticipate that we will make determinations as to the scientific and clinical success of each product candidate, as well as ongoing assessments as to each product candidate’s commercial potential. In addition, we cannot forecast with any degree of certainty which product candidates will be subject to future partnering, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. As a result, we cannot be certain when and to what extent we will receive cash inflows from the commercialization of our drug candidates.

We expect our development expenses to be substantial and to increase as we continue the advancement of our product development programs. We initiated our first nalmefene clinical trial in August 2005 and initiated Phase III clinical trials for SILENOR^tm in adults and in the elderly in June and September 2005, respectively. The lengthy process of completing clinical trials and seeking regulatory approval for our product candidates requires the expenditure of substantial resources. Any failure by us or delay in completing clinical trials, or in obtaining regulatory approvals, would cause our research and development expense to increase and, in turn, have a material adverse effect on our results of operations.


	*Marketing, General and Administrative*

Our marketing, general and administrative expenses primarily consist of salaries and benefits and professional fees related to our administrative, finance, human resources, legal and internal systems support functions. In addition, marketing, general and administrative expenses include insurance and facilities costs.

After this offering, we anticipate increases in marketing, general and administrative expenses as we add personnel, become subject to the reporting obligations applicable to publicly-held companies, and continue to develop and prepare for the commercialization of our product candidates.


	*Remeasurement of Series C Warrant Liability*

In conjunction with our Series C preferred stock financing, we issued a warrant that provided for the sale of additional shares of Series C redeemable preferred stock at the election by us or by the Series C preferred stock investors. We periodically remeasure the fair value of this warrant and record the resulting expense or income in operating expense. In September 2005, we exercised our right to require the Series C preferred stock investors to purchase additional shares of Series C preferred stock. We recorded a remeasurement of Series C warrant liability of $5.6 million in the nine month period ended September 30, 2005, and because the Series C warrant was exercised in September 2005, we will not record any remeasurement of Series C warrant liability in future periods.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Actual results could differ from those estimates.

While our significant accounting policies are described in more detail in Note 1 of Notes to Financial Statements included elsewhere in this prospectus, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.


	*Accrued Expenses*

We are required to estimate accrued expenses as part of our process of preparing financial statements. This process involves estimating the level of service performed on our behalf and the associated costs incurred in instances where we have not been invoiced or otherwise notified of actual costs. Examples of areas in which subjective judgments may be required include costs associated with the manufacture of clinical materials and services provided by CROs for clinical trials. The date on which services commence, the level of services performed by a given date, and the cost of such services are often subjective determinations. Our principal vendors operate within terms of contracts which establish program costs and estimated timelines. We assess the status of our programs through regular discussions between our program management team and the related vendors. Based on this assessment, we determine the status of our programs in relation to the scope of work outlined in the contracts to establish the amount of expense to be recognized. In the case of clinical trials, the estimated cost normally relates to the projected cost to treat a patient in our trials and we recognize this cost over the estimated term of the study beginning with patient enrollment. As actual costs become known to us, we adjust our accruals. Such changes in estimates may be a material change in our accrual, which could also materially affect our results of operations.


	*License Fees*

Costs related to patents and acquisition of intellectual property are expensed as incurred, since the underlying technology associated with these expenditures is in connection with our development efforts and has no alternative future use.


	*Stock-based Compensation*

We account for employee stock options using the intrinsic value method in accordance with Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and provide pro forma disclosures of net income (loss) as if a fair value method had been applied in measuring compensation expense. Stock compensation expense, which is a non-cash charge, is measured as the excess, if any, of the fair value of our underlying common stock at the date of grant over the amount an employee must pay to acquire such stock. This compensation cost is amortized over the related vesting periods ranging from one to four years.

We determine the fair value of our common stock by evaluating a number of factors, including our financial condition and business prospects, our stage of development and achievement of key technical and business milestones, private and public market conditions, the terms of our private financings and the valuations of similar companies in our industry. Our retrospective analysis of the fair value of our stock prices utilizes a predominantly linear growth assumption and also incorporates significant step-ups in value upon the achievement of major events and underlying market conditions.


	*Series C Net Warrant Liability*

In conjunction with our Series C preferred stock financing, we issued a warrant that provides for the sale of additional shares of Series C redeemable convertible preferred stock at the election by us or the Series C

preferred stock investors. The fair value of each component of this instrument was determined using the Black-Scholes valuation model at the time of grant resulting in the net fair value of Series C warrant liability. The warrant is considered a liability in accordance with guidance provided in FASB Staff Position 150-5, Issuer’s Accounting under Statement 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable. The proceeds received in the Series C preferred stock financing were allocated first to the fair value of the net warrant liability instrument with the remainder to the Series C redeemable convertible preferred stock. In accordance with the guidance provided in EITF No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, we periodically remeasure the fair value of this financing instrument with the resulting expense, or income, recorded within operating expenses.


	*Net Operating Losses and Tax Credit Carryforwards*

At December 31, 2004, we had federal and state net operating loss carryforwards of approximately $10.5 million and $10.2 million, respectively. The federal net operating loss carryforwards begin to expire in 2023 and state net operating loss carryforwards begin to expire in 2013, if not utilized. Under the provisions of Section 382 of the Internal Revenue Code, substantial changes in our ownership may limit the amount of net operating loss carryforwards that can be utilized annually in the future to offset taxable income. A valuation allowance has been established to reserve the potential benefits of these carryforwards in our financial statements to reflect the uncertainty of future taxable income required to utilize available tax loss carryforwards and other deferred tax assets. If a change in our ownership is deemed to have occurred or occurs in the future, our ability to use our net operating loss carryforwards in any fiscal year may be significantly limited.

Results of Operations

Nine Months Ended September 30, 2005 and September 30, 2004

License fees. License fees for the nine months ended September 30, 2004 were $0.5 million as compared to $0.3 million for the nine months ended September 30, 2005. Initial license payments to Biotie and Synchroneuron, totaling $0.3 million, were paid during the nine month period ended September 30, 2004. During the same period in 2005, license payments totaling $0.2 million were paid to Synchroneuron.

Research and Development Expenses. Research and development expenses increased from $4.5 million for the nine months ended September 30, 2004 to $17.6 million for the nine months ended September 30, 2005. The increase was due primarily to CRO and other third-party clinical trial expenses which increased $10.0 million between the nine months ended September 30, 2004 and the nine months ended September 30, 2005. Also during this period, clinical drug manufacturing expenses increased by $1.8 million in support of active clinical studies during the nine months ended September 30, 2005. Increased headcount to support the additional clinical trial activity created additional expenses of $0.5 million for the nine months ended September 30, 2005.

Marketing, General and Administrative Expenses. Marketing, general and administrative expenses increased from $1.6 million for the nine months ended September 30, 2004 to $3.1 million for the same period in 2005. The increase was driven primarily by the adoption of a corporate incentive plan and stock based employee compensation charges. Accrued expense of $0.4 million was recorded in the nine months ended September 30, 2005 for the 2005 corporate incentive plan. Stock based employee compensation expense included in marketing, general and administrative expenses for the nine months ended September 30, 2005 was $0.6 million. There was no incentive plan or stock based employee compensation expense in the nine months ended September 30, 2004.

Remeasurement of Series C Warrant Liability. The Series C preferred stock financing resulted in expense of $5.6 million for the nine months ended September 30, 2005. There was no such warrant expense at September 30, 2004.

Interest and Other Income. Other income increased from $92,000 for the nine months ended September 30, 2004 to $0.8 million for the nine months ended September 30, 2005. We completed our Series B preferred stock financing in June 2004 for total cash proceeds of $23.0 million and our Series C preferred stock

financing in June 2005 for total cash proceeds of $55.0 million, which drove an increase in interest income between the two periods.


	*Year Ended December 31, 2004 and Period from August 2003 (Inception) to December 31, 2003*

Our company was founded in August 2003. During the period from inception to December 31, 2003, we focused on hiring our executive team and initial operating employees and on licensing our first product candidate, SILENOR^tm. Substantial operations did not commence until 2004.

License Fees. License fees from August 2003 (inception) to December 31, 2003 were $0.5 million, consisting of the initial license payment to ProCom One, Inc. for the license of SILENOR^tm. License fees for the year ended December 31, 2004 were $4.0 million, consisting primarily of a $3.2 million payment to BioTie Therapies Corp. for the license of nalmefene, a $0.5 million accrued milestone payment to ProCom One for the license of SILENOR^tm and a $0.1 million initial payment to Synchroneuron, LLC for the license of acamprosate.

Research and Development Expenses. Research and development expenses from inception to December 31, 2003 were $0.2 million and consisted of consulting fees and salaries relating to the development of our clinical strategy for SILENOR^tm. For the year ended December 31, 2004, research and development expenses were $7.6 million, related to the SILENOR^tm Phase II clinical trials conducted during 2004.

Marketing, General and Administrative Expenses. Marketing, general and administrative expenses from inception to December 31, 2003 were $0.8 million, consisting primarily of salaries of $0.3 million, consulting fees of $0.1 million and start-up and related legal expenses of $0.2 million. For the year ended December 31, 2004, marketing, general and administrative expenses were $2.1 million, consisting primarily of salaries of $0.9 million, consulting fees of $0.2 million and legal expenses of $0.4 million.

Liquidity and Capital Resources

Since our inception, our operations have been financed through the private placement of our equity securities. Through September 30, 2005, we received net proceeds of approximately $90 million from the sale of shares of preferred stock and common stock as follows:


	•	from August 2003 to January 2004, we issued and sold a total of 2,300,000 shares of Series A preferred stock for aggregate net proceeds of $2.3 million;

	•	from April 2004 to June 2004, we issued and sold 23,000,000 shares of Series B preferred stock for aggregate net proceeds of $22.9 million;

	•	in June 2005, we issued and sold a total of 40,741,048 shares of Series C preferred stock for aggregate net proceeds of $54.8 million; and

	•	in September 2005, the Series C warrant was exercised and we issued 7,407,407 shares of Series C preferred stock for net proceeds of $10.0 million.

As of September 30, 2005, we had $61.2 million in cash and cash equivalents. We also had short-term investments of $3.0 million as of that date. We have invested a substantial portion of our available cash funds in commercial paper and money market funds placed with reputable financial institutions for which credit loss is not anticipated. We have established guidelines relating to diversification and maturities of our investments to preserve principal and maintain liquidity.

For the nine months ended September 30, 2005, net cash used in operating activities was $13.5 million, compared with $4.1 million for the same period in 2004. The increase in net cash used in operating activities was due primarily to an increase in our net loss driven by increased expenses related to the clinical development of SILENOR^tm and nalmefene and increased salaries and overhead of company personnel.

As a specialty pharmaceutical company focused on acquiring and developing proprietary pharmaceutical product candidates, we have entered into several license agreements to acquire the rights to develop and commercialize three product candidates. Pursuant to these agreements, we obtained exclusive, sublicenseable licenses to the patent rights and know-how for certain indications under the agreements. We generally will

make upfront payments and are required to make additional payments upon the achievement of specific development and regulatory approval milestones. We are also obligated to pay royalties under the agreements until the later of the expiration of the applicable patent or the applicable last date of market exclusivity following the first commercial sale.

The following table describes our commitments to settle contractual obligations in cash as of December 31, 2004:


		Payments Due By Period

		October 2005
		through		2006		2008
		December		through		through		After
		2005		2007		2009		2009		Total

		(in thousands)
Operating lease obligations		$	54	$	171	$	6	$	—	$	231
Minimum payments under license agreements			95		1,730		1,230		7,905		10,960

	Total	$	149	$	1,901	$	1,236	$	7,905	$	11,191

We also enter into agreements with third parties to manufacture our product candidates, conduct our clinical trials and perform data collection and analysis. Our payment obligations under these agreements depend upon the progress of our development programs. Therefore, we are unable to estimate with certainty the future costs we will incur under these agreements. In addition, under our license agreements we are obligated to make revenue-based royalty payments, and additional milestone payments of up to $11.4 million upon the occurrence of certain product-development events. Minimum license payments are subject to increase based on the timing of various milestones and the extent to which the licensed technologies are pursued for other indications. These milestone payments and royalty payments under our license agreements are not included in the table above because we cannot, at this time, determine when or if the related milestones will be achieved or the events triggering the commencement of payment obligations will occur.

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


	•	the progress of our clinical trials;

	•	our ability to establish and maintain strategic collaborations, including licensing and other arrangements that we have or may establish, including milestone payments to ProCom One, BioTie Therapies and/or Synchroneuron;

	•	the costs involved in enforcing or defending patent claims or other intellectual property rights;

	•	the costs and timing of regulatory approvals;

	•	the costs of establishing manufacturing, sales or distribution capabilities;

	•	the success of the commercialization of our products; and

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

We believe that our existing cash and investments, excluding the proceeds from this offering, will be sufficient to meet our projected operating requirements through at least the next twelve months.

Until we can generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources generated from the proceeds of offerings of our equity securities. In addition, we may finance future cash needs through the sale of other equity securities, strategic collaboration agreements and debt financing. However, we may not be successful in obtaining collaboration agreements, or in receiving milestone or royalty payments under those agreements. In addition, we cannot be sure that our existing cash and investment resources will be adequate or that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale back or eliminate some or all of our development programs, relinquish some or

even all rights to product candidates at an earlier stage of development or renegotiate less favorable terms than we would otherwise choose. Failure to obtain adequate financing also may adversely affect our ability to operate as a going concern. 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 rations that may restrict our ability to operate our business.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, or SFAS, No. 123(R), Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and superseding APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R) requires all companies to measure compensation cost for share-based payments, including grants of employee stock options, at fair value and recognize the cost over the vesting period of the award. Amounts previously disclosed in the footnotes will be recorded in our statement of operations under SFAS No. 123(R). SFAS No. 123(R) is effective the first annual period beginning after June 15, 2005. We will adopt SFAS No. 123(R) in the first quarter of fiscal 2006 and we are currently evaluating the effect its adoption will have on our financial position and results of operations.

Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve our capital for the purpose of funding operations, while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper and money market funds. Our cash and investments at September 30, 2005 consisted primarily of commercial paper.

BUSINESS

Overview

Our current portfolio consists of the following three product candidates:


	•	**SILENOR™ for Insomnia.** According to the American Psychiatric Association, approximately one-third of adult Americans (approximately 73 million people) are affected by insomnia. One study has found that fewer than 15% of those who suffer from insomnia are treated with prescription medications. We are developing SILENOR^tm for the treatment of insomnia and believe that SILENOR^tm will offer significant benefits over currently available therapies in the insomnia market. We in-licensed the patents and the development and commercial rights to SILENOR^tm and intend to develop the product for the U.S. market. SILENOR^tm is an oral formulation of doxepin at strengths of 1 mg to 6 mg. Doxepin has been marketed and used for over 35 years at dosages from 75 mg to 300 mg per day for the treatment of depression and anxiety. Doxepin has a well-established safety profile and we expect that our targeted dosages will be well tolerated and provide a wide margin of safety. SILENOR^tm is a potent blocker of a set of brain receptors known as H₁ receptors, which are believed to play an important role in the regulation of sleep. The leading approved insomnia medications, Ambien, Sonata and Lunesta, work by binding and activating a different set of brain receptors known as GABA receptors. Many of the GABA receptor-activating drugs are deemed to have the potential for abuse and are therefore designated by the DEA as Schedule IV controlled substances, which require additional registration and administrative controls. We have completed two placebo-controlled Phase II clinical trials, one in adults and one in elderly patients with chronic primary sleep maintenance insomnia, and we are currently enrolling patients in Phase III clinical trials. Based on our analysis of the results of our prior clinical trials, we believe that SILENOR^tm will induce and maintain sleep throughout the night, without next-day residual effects, in both adult and elderly patients. We expect initial data from our Phase III clinical trials to be available in mid-2006.

	•	*Nalmefene for Impulse Control and Substance Abuse Disorders.* We are developing nalmefene for the treatment of pathological gambling, an impulse control disorder. We are also evaluating nalmefene for smoking cessation. Nalmefene, an opioid antagonist, is approved and has been used for over 10 years in the United States in an intravenous form for the reversal of opioid drug effects. We in-licensed the North American development and commercial rights to an oral form of nalmefene and patents for its use in the treatment of impulse control disorders, nicotine dependence and other conditions. The impulse control disorder category includes a number of serious conditions, including pathological gambling, kleptomania, pyromania, intermittent explosive disorder and compulsive buying. There are no approved therapies for any of these disorders. The University of Chicago’s 1999 Gambling Impact and Behavior Study estimates that in the United States alone, there are approximately 2.5 million pathological gamblers, 3 million problem gamblers and an additional 15 million people who are at-risk gamblers. In a multi-center Phase II clinical trial conducted by our licensor, nalmefene was shown to be statistically superior to placebo in limiting gambling behavior and reducing the frequency and intensity of gambling thoughts/urges. Based on these results, we have initiated a confirmatory Phase II/III clinical trial for pathological gambling. We have also initiated a

pilot Phase II clinical trial investigating nalmefene for smoking cessation. We expect results from both trials to be available in late 2006.

• Acamprosate for Movement Disorders. We are developing acamprosate for the treatment of tardive dyskinesia, a movement disorder which limits a person’s ability to perform activities of daily living and impairs quality of life. In many cases, this disorder is induced by the long-term use of certain drugs prescribed to treat schizophrenia or Parkinson’s disease. There are currently no approved therapies to treat this disorder. We in-licensed worldwide development and commercial rights for the use of acamprosate in the treatment of movement disorders and other conditions. Our acamprosate program is currently focused on the development of a new patent-protected formulation of the drug, designed to reduce daily dosing requirements and improve tolerability. If we are successful in reformulating the product, we plan to conduct Phase I clinical trials prior to initiating a dose-finding Phase II clinical trial in patients in 2006.

Our Strategy

Our goal is to be a leading specialty pharmaceutical company focused on the in-licensing and development of proprietary product candidates in the fields of psychiatry and neurology. Our near-term strategy is to focus on the regulatory approval our existing product candidates, and our long-term strategy is to build a portfolio of product candidates that are currently commercialized outside the United States, approved in the United States but with significant commercial potential for proprietary new uses, new dosages or alternative delivery systems, or in late stages of development. Specifically, we intend to:


	•	Maximize the value of our lead product candidate, SILENOR^tm. We are applying the expertise of our clinical development team to conduct and successfully complete four Phase III clinical trials for SILENOR^tm. We have designed our Phase III clinical program to facilitate regulatory approval and optimize marketing claims for this product candidate. We believe that SILENOR^tm will benefit from a strategic alliance to gain competitive access to the primary care market. We intend to establish a strategic partnership for the commercialization of SILENOR^tm after our Phase III data are available.

	•	Build a focused sales and marketing organization to target relevant specialists. We intend to build a commercial operation tightly focused on promoting our products to psychiatrists and neurologists. Importantly, in these markets a relatively small number of specialists account for a substantial portion of the prescription activity in each category. We will actively pursue strategic collaborations to draw on the development, regulatory and commercial expertise of larger pharmaceutical companies in those instances where we believe our products would benefit from such expertise.

	•	Pursue the clinical development of our other product candidates. In August 2005, we initiated a Phase II/III multi-center, placebo-controlled clinical trial evaluating the safety and efficacy of oral nalmefene in pathological gamblers. In addition, in September 2005, we initiated a Phase II clinical trial for smoking cessation. We estimate that data from these trials will be available in the second half of 2006. We are planning to conduct a Phase I clinical trial to evaluate a number of formulations of acamprosate in early 2006.

	•	Acquire or in-license late-stage development products with substantial human clinical experience. We will seek additional opportunities to acquire or in-license products to more fully exploit our clinical, regulatory, sales and marketing capabilities. We believe the psychiatry and neurology markets are an excellent focal point for a specialty pharmaceutical company, as drugs in these classes represent significant market opportunities. To reduce the risks, costs and time-to-market of clinical development, we will focus on products that are currently commercialized outside the United States, approved in the United States but with significant commercial potential for proprietary new uses, including patent-protected, marketable indications, new dosage forms or alternative delivery systems, or in late states of development.

Our Product Development Programs

Our current product development programs are focused on candidates in the fields of psychiatry and neurology. Our portfolio consists of the following three product candidates:


		Patent	Marketing
Product	Indication	Rights	Rights	Phase of Development
SILENOR^tm	Insomnia	United States	Worldwide	Phase III • Adult 35 day trial (enrolling)
				• Elderly 3 month trial (enrolling)
				• Elderly 1 month outpatient trial (early 2006 initiation)
				• Transient insomnia trial (early 2006 initiation)

Nalmefene	Pathological gambling and other impulse control disorders	United States	North America	Phase II/III (enrolling)
	Smoking cessation/ nicotine dependence	United States	Worldwide	Phase II (enrolling)

Acamprosate	Movement disorders and other conditions	Worldwide	Worldwide	Formulation development

Additionally, all of our product candidates require additional Phase I clinical evaluation prior to submission of an NDA. For example, with regard to SILENOR^tm we are undertaking several Phase I clinical trials which will evaluate the effect of food on absorption of the product candidate and the effect of SILENOR^tm when co-administered with other drugs. With regard to nalmefene, we plan to initiate a clinical trial evaluating the product candidate’s effect on the electrocardiogram. With regard to acamprosate, various preclinical and Phase I clinical trials are planned to facilitate the selection and evaluation of a formulation for the product candidate to be tested in subsequent trials.

SILENOR^tm (doxepin hydrochloride) for Insomnia


	*Disease Background and Market Opportunity*

Sleep is essential for human performance, general health and well-being. Insomnia, the most common sleep complaint across all stages of adulthood, is a condition characterized by difficulty falling asleep, waking frequently during the night or too early, or waking up feeling unrefreshed. According to the American Psychiatric Association, approximately one-third of adult Americans (approximately 73 million people) are affected by insomnia. One study has found that fewer than 15% of those who suffer from insomnia are treated with prescription medications. Chronic insomnia, insomnia lasting more than four weeks, is often associated with a wide range of adverse conditions, including mood disturbances, difficulties with concentration and memory, and certain cardiovascular, pulmonary and gastrointestinal disorders. Even in otherwise healthy young people, sleep deprivation has been associated with early signs of aging, carbohydrate intolerance and insulin resistance. It is estimated that health care services and medications used for the treatment of insomnia cost almost $14 billion in 1999, a number that is likely to increase with the aging of the U.S. population.

The U.S. market for prescription products to treat insomnia exceeded $2.6 billion in 2004, according to NDC Health, and grew by 18% from June 2004 to June 2005. Ambien is the current market leader in the insomnia segment. According to NDC Health, Ambien accounted for approximately $2 billion in retail sales in 2004. Another sedative hypnotic, Sonata, several hypnotic benzodiazepines such as temazapam (Restoril) and flurazepam (Dalmane), and sedative antidepressants such as trazodone (Desyrel), which are usually available in generic forms, account for the remaining prescriptions.

We believe that sedative antidepressants account for a large percentage of the total prescriptions written for insomnia because they are not Schedule IV controlled substances. The National Disease and Therapeutic

Index estimates that more than 66% of trazodone prescriptions may be prescribed off-label for insomnia, even though trazodone is not indicated for that use. Even though there are very limited data to support the safety and efficacy of trazodone for insomnia, trazodone is often prescribed off-label because it is a non-scheduled agent, unlike the benzodiazepines and GABA-receptor agonists.

Increased awareness and diagnosis of insomnia as well as the limitations of current treatments have led to the development of several new drugs to treat the condition. Lunesta was launched in April 2005, and Rozerem and Ambien CR were launched in September 2005.

Other compounds are currently in development or undergoing regulatory review.

We believe that the increased awareness at both the patient and physician level, the limitations of current therapy and the commercialization and promotion of new products will substantially increase the size of the insomnia market.


	*Limitations of Current Therapies*

While there are a number of products currently available for the treatment of insomnia, we believe that the market is still underserved due to the limitations of current therapies. The primary limitations of current therapies relate to the abuse potential of Schedule IV controlled substances, tolerability or undesirable side effects, and the limited ability to address all three major components of insomnia: sleep onset, maintenance and duration.

Nearly all drugs approved for the treatment of insomnia are Schedule IV controlled substances that act via the GABA receptors. All of these benzodiazepines and GABA-receptor agonists are deemed by the FDA and the DEA to have a potential for addiction and abuse and are classified by the DEA as Schedule IV controlled substances. As a result, many physicians are reluctant to prescribe, and patients are reluctant to take, scheduled drugs for chronic use in treating insomnia. The prescribing of a Schedule IV controlled substance brings scrutiny from the DEA and other regulatory bodies, and requires unique and burdensome registration and administrative controls. We believe that many physicians are uncomfortable prescribing controlled substances, especially when treating a patient with a history of addiction or when other effective non-scheduled treatment options are available.

Drugs currently prescribed for insomnia, including antidepressants, and benzodiazepines or other drugs that work via the GABA receptors, are associated with many unwanted side effects, such as dry mouth, unpleasant taste, blurred vision, residual next-day effects, memory loss, hormonal changes and gastrointestinal effects. We believe that drugs with improved tolerability would be well received by both physicians and patients.

According to the 2005 Sleep in America Poll, 54% of respondents reported experiencing insomnia symptoms a few nights a week. Twenty-one percent of respondents had difficulty falling asleep (sleep onset), 32% awoke often during the night (sleep maintenance) and 21% woke up too early and could not get back to sleep (sleep maintenance and duration). Historically, insomnia therapies have addressed sleep onset rather than sleep maintenance and duration. Only recently have therapies been approved with indications for sleep maintenance, although the ability of available drugs to maintain sleep throughout the night without unwanted next-day residual effects remains limited.


	SILENOR^TM and Its Advantages

Based on our analysis of the results of the SILENOR^tm Phase II clinical trials which demonstrated a statistically significant improvement in sleep onset and sleep maintenance and duration in adults and elderly and the design of the Phase III clinical program for SILENOR^tm, we believe that there is an opportunity to obtain FDA approval of SILENOR^tm for the treatment of insomnia that will offer a number of significant competitive advantages over other insomnia therapies:


	•	Non-scheduled. Doxepin, at higher dosages, is not a scheduled drug. Additionally, the doxepin package insert states that doxepin has not been demonstrated to produce the physical tolerance or

psychological dependence associated with addictive compounds. Because doxepin is the sole active ingredient in SILENOR^tm, we believe that SILENOR^tm will likewise be a non-scheduled drug.

• Safety and tolerability. SILENOR^tm will benefit from doxepin’s well-established safety profile, having been prescribed for over 35 years at up to 50 times our proposed maximum insomnia dosage. Clinical results have demonstrated no significant unwanted side effects or next-day residual effects relative to placebo.

• Efficacy. We believe that SILENOR^tm may be the first non-scheduled drug to improve all three key sleep parameters: sleep onset, maintenance and duration.

• Population. We anticipate that SILENOR^tm will be suitable for the treatment of chronic and transient insomnia in adults and the elderly, demonstrating benefits to a broad segment of insomnia patients.

• Long-term use. SILENOR^tm may have the potential for long-term use. Doxepin is currently indicated and prescribed for long-term use in patients with depression and anxiety. Doxepin at dosages of 25 mg to 50 mg had also been evaluated by Hajak et al for the treatment of insomnia for up to four weeks in a randomized, controlled clinical study which demonstrated that the efficacy that was observed on night one was sustained at night twenty-eight. Additionally, in a 20-patient, 12-week, double-blind, placebo-controlled proof-of-principle trial, doxepin at a strength of 6 mg demonstrated improvements on numerous measures related to sleep maintenance and duration at several time points. The effects were sustained over the 12-week evaluation period.

SILENOR^tm is an oral formulation of doxepin at strengths of 1 mg to 6 mg. Doxepin belongs to a class of psychotherapeutic agents known as dibenzoxepin tricyclic compounds. Doxepin was first approved by the FDA in 1969 and was originally marketed by Pfizer Inc. under the brand name Sinequan. Doxepin is currently marketed in oral capsule and solution form for depression and anxiety. Therapeutic dosages of doxepin for its indicated uses range from 75 mg to 300 mg daily, and at these dosages, doxepin exhibits potent sedative properties. However, the available strengths of doxepin are seldom used in the treatment of insomnia as they leave many patients reporting next-day residual effects and other undesirable side effects. It has been hypothesized that doxepin’s sedative effects on sleep derive from strong H₁ histamine-blocking properties. It is believed that the drug does not work via any of the GABA receptors and, according to its current FDA-approved labeling, does not appear to have any potential for dependency, addiction or abuse.

We completed two Phase II randomized, multi-center, double-blind, placebo-controlled, dose-response clinical trials in a sleep laboratory setting in patients with primary sleep maintenance insomnia. One clinical trial evaluated SILENOR^tm in adults and the other in the elderly. The goal of these trials was to evaluate a range of sleep efficacy parameters, and to evaluate the safety and tolerability profile of various strengths of doxepin (1 mg, 3 mg and 6 mg). Each trial was conducted at 11 sites throughout the United States. All patients participated in four double-blind treatment periods (three dosages of low-dose doxepin as well as placebo) using a crossover design. Each patient received, in a random fashion, all trial doses including placebo in a sleep laboratory setting, and the trial included a five-or 12-day drug-free period between each dose designed to assure drug clearance.

The objective sleep efficacy parameters that we evaluated included Wake After Sleep Onset, or WASO, which is defined as the number of minutes a patient is awake from the time the patient initially falls asleep until the end of the evaluation period. WASO is the FDA’s preferred endpoint for the purpose of demonstrating sleep maintenance in sleep laboratory studies. We also evaluated Total Sleep Time, or TST, which is the total minutes of sleep recorded; Sleep Efficiency, or SE, which is the total minutes of sleep divided by the total minutes in bed (8 hours); and Latency to Persistent Sleep, or LPS, which is the number of minutes it takes to achieve persistent sleep. We also evaluated a number of patient-reported sleep outcomes including subjective TST, which is the patient’s estimate of the total minutes of sleep, and Latency to Sleep Onset, or LSO, which is the patient’s estimate of how long it took to fall asleep.

In each patient, the drug effects were measured against the placebo using a statistical methodology of p values. A p value is a measurement of statistical significance that represents the risk that the observed

difference is caused by chance alone. A p value of < 0.05 indicates that the probability of concluding that the two groups are different, when they are actually not different, is less than five percent, and is usually the threshold for which one can declare confidence that the observed difference is meaningful.

The objective sleep efficacy parameters are illustrated in the following diagram:

The above diagram assumes two awakenings: one of “X” minutes duration and one of “Y” minutes duration. The actual number and length of awakenings during the night will vary by patient.

Results of the clinical trials can be summarized as follows:


	*Adult Phase II Clinical Trial (67 patients)*

Wake After Sleep Onset. WASO at all tested dosages of SILENOR^tm (1 mg, 3 mg and 6 mg) showed statistically significant improvements as compared to placebo (1 mg, p = 0.009; 3 mg and 6 mg, p < 0.0001). The mean number of minutes of WASO for placebo was 61.1 minutes, improving to 46.7 minutes at 1 mg, 38.9 minutes at 3 mg and 38.1 minutes at 6 mg dosages of SILENOR^tm.

Total Sleep Time. TST improved significantly at all SILENOR^tm dosages (1 mg, p = 0.0005; 3 mg and 6 mg, p < 0.0001) as compared to placebo. The mean number of minutes of TST for placebo was 389.6 minutes, improving to 407.5 minutes at 1 mg, 415.4 minutes at 3 mg and 418.4 minutes at 6 mg dosages of SILENOR^tm.

Sleep Efficiency. SE was measured for the entire night, and analyzed for the initial, middle and final thirds of the night. This approach is useful in assessing the drug’s ability to maintain sleep throughout the night. All dosage levels of SILENOR^tm showed a significant improvement in SE for the entire night (1 mg, p = 0.0005; 3 mg and 6 mg, p < 0.0001). As measured in percentages, the mean SE for placebo was 81.2%, improving to 84.9% at 1 mg, 86.5% at 3 mg and 87.2% at 6 mg dosages of SILENOR^tm. SILENOR^tm showed a positive effect on SE in the first and middle thirds of the night. Even in the last third of the night, when many insomnia patients tend to wake up and are unable to fall back asleep, SILENOR^tm at all dosages significantly improved SE (p < 0.0001) as compared to placebo. In the final third of the night, the mean SE for placebo was 79.6%, improving to 86.8% at 1 mg, 88.2% at 3 mg and 89.3% at 6 mg dosages of SILENOR^tm. We believe that this observation demonstrates the persistent nature of the sleep maintenance effect.

Sleep Onset. The primary goal of the Phase II clinical trials was to demonstrate the effect of SILENOR^tm on sleep maintenance and, therefore, the trials were not specifically designed to study effects on sleep onset. Despite this, LPS improved numerically (up to 19%) over placebo, but did not reach statistical significance. Patients’ subjective assessment of LSO was superior to placebo at all dosages, reaching statistical

significance at 6 mg (p < 0.03). The mean number of minutes for LSO improved from 49.6 minutes at placebo to 46.5 minutes at 1 mg, 45.3 minutes at 3 mg and 43.0 minutes at 6 mg dosages of SILENOR^tm.

Other Parameters. Other objective and subjective parameters, such as Wake Time During Sleep, or WTDS, and subjective TST were generally consistent with the above-described results.

SILENOR^tm was well tolerated at all dosages evaluated. The number of patients reporting adverse events, as well as the incidence and nature of adverse events, was similar across all dosages of SILENOR^tm and placebo. There were no reports of memory impairment and no serious adverse events. There were no clinically relevant changes noted in laboratory parameters, electrocardiograms, or ECGs, vital signs, physical examinations or neurological assessments. Tests specifically administered to assess hangover/ residual effects exhibited no significant differences versus placebo.

Elderly Phase II Clinical Trial (76 patients)

Wake After Sleep Onset. WASO at all tested dosages of SILENOR^tm (1 mg, 3 mg and 6 mg) produced statistically significant improvements as compared to placebo (p < 0.0001). The mean number of minutes of WASO for placebo was 98.0 minutes, improving to 80.1 minutes at 1 mg, 70.8 minutes at 3 mg and 64.3 minutes at 6 mg dosages of SILENOR^tm.

Total Sleep Time. TST improved significantly at all SILENOR^tm dosages (p < 0.0001) as compared to placebo. The mean number of minutes of TST for placebo was 360.7 minutes, improving to 377.4 minutes at 1 mg, 390.6 minutes at 3 mg and 398.4 minutes at 6 mg dosages of SILENOR^tm.

Sleep Efficiency. SE for the entire night was significantly improved for all dosages (p < 0.0001) versus placebo. As measured in percentages, the mean SE for placebo was 75.1%, improving to 78.6% at 1 mg, 81.4% at 3 mg and 83.0% at 6 mg dosages of SILENOR^tm. SILENOR^tm showed a positive effect on SE in the first and middle thirds of the night. In the final third of the night, 3 mg and 6 mg dosages significantly improved SE versus placebo (p < 0.0001). In the final third of the night, the mean SE for placebo was 69.2%, improving to 73.0% at 1 mg, 78.9% at 3 mg and 80.8% at 6 mg dosages of SILENOR^tm. We believe that this observation demonstrates the persistent nature of the sleep maintenance effect.

Sleep Onset. As in the adult trial, the selection criteria for entry into the trial targeted patients with sleep maintenance, not sleep induction difficulties. Despite this approach, SILENOR^tm improved LPS numerically as compared to placebo. Subsets analyses of patients with greater difficulty falling asleep at baseline suggest a more pronounced effect of SILENOR^tm versus placebo. LSO demonstrated a statistically significant improvement (p < 0.02) at the 6 mg dosage as compared to placebo. The mean number of minutes for LSO improved from 45.5 minutes at placebo to 33.8 minutes at the 6 mg dosage of SILENOR^tm.

SILENOR^tm was well tolerated at all dosages. The number of patients reporting adverse events, as well as the incidence and nature of adverse events, was similar across all dosages of SILENOR^tm and placebo. There were no reports of memory impairment, and no drug-related serious adverse events. There were no clinically relevant changes noted in laboratory parameters, vital signs, physical examinations, neurological assessments or ECGs. Results of tests specifically administered to assess hangover/residual effects exhibited no significant differences versus placebo.


	*Clinical Development Plan*

After an End of Phase II meeting with the FDA, we initiated a Phase III clinical trial program for SILENOR^tm. As of September 2005, we have commenced two pivotal Phase III clinical trials and are enrolling patients. We expect to initiate a third Phase III clinical trial in 2005 and a fourth Phase III clinical trial in early 2006. These trials are designed to demonstrate the safety and efficacy of SILENOR^tm in adult and elderly patients with primary chronic insomnia characterized by sleep maintenance difficulties and in adults with induced transient insomnia. The four Phase III trials will collectively enroll approximately 1,200 patients.

Enrollment in the first Phase III clinical trial began in the second quarter of 2005. This trial is a randomized, placebo-controlled, double-blind, multi-center 35-day study that objectively measures sleep

endpoints in a sleep laboratory setting. The trial also assesses subjective patient-reported outcomes. The trial will assess the safety and efficacy of SILENOR^tm in approximately 240 adults with primary sleep maintenance insomnia. The primary endpoint of the trial is WASO, the sleep maintenance endpoint recommended by the FDA. We will evaluate several additional secondary endpoints, measured both objectively and as subjective patient-reported outcomes. Data from this trial are anticipated to be available in mid-2006.

We initiated a second Phase III clinical trial in September 2005. This trial is a three-month evaluation of SILENOR^tm in approximately 250 elderly patients diagnosed with primary sleep maintenance insomnia. The primary endpoint is WASO. Multiple secondary endpoints, measured both objectively and as patient-reported outcomes, will be evaluated. We intend to initiate two additional Phase III clinical trials with SILENOR^tm including a second evaluation of the product in approximately 240 elderly patients in an outpatient setting for four weeks. Subjective TST is the intended primary endpoint of this trial. We anticipate that this trial will commence in early 2006. A fourth Phase III clinical trial is also scheduled to commence in early 2006. This trial will evaluate the safety and efficacy of SILENOR^tm in approximately 450 adults with induced transient insomnia. The primary endpoint for this trial will be LPS.

Based upon discussions with the FDA, we anticipate that this clinical development program will support the submission of a new drug application, or NDA. The FDA has indicated that we may submit the NDA for SILENOR^tm using an application under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, an approach to seek regulatory approval for, among other things, new indications of drugs which have previously been approved by the FDA. The process allows a company to rely on published literature reports or the FDA’s findings of safety and efficacy for a previously-approved drug for which the company does not have a right of reference. This may mean that we would not be required to duplicate some previously conducted research, accordingly saving the company time and money. In addition, we may qualify for a period of three-year marketing exclusivity for a new condition of approval.

Nalmefene for Impulse Control and Substance Abuse Disorders


	*Disease Background and Market Opportunity*

Impulse control disorders affect millions of Americans and have been recognized by the Diagnostic and Statistical Manual of Mental Disorders as a clinical diagnosis since 1980. The Diagnostic and Statistical Manual of Mental Disorders— Fourth Edition, or DSM-IV, published by the American Psychiatric Association, is the standard reference manual used to classify and diagnose mental disorders. The impulse control disorder category includes pathological gambling, kleptomania, pyromania, intermittent explosive disorder and compulsive buying. The University of Chicago’s 1999 Gambling Impact and Behavior Study estimates that in the United States alone, there are approximately 2.5 million pathological gamblers, 3 million problem gamblers and an additional 15 million people who are at-risk for pathological gambling. There is also growing evidence of problematic adolescent gambling. The Gambling Impact and Behavior Study of 1999 found that approximately 3.5% of 16 to 17 year-olds could be considered at-risk, problem or pathological gamblers. In particular, the pervasiveness of internet gambling is a potential facilitating factor in youth gambling. Other disorders such as intermittent explosive disorder and compulsive buying are also significant problems. According to Datamonitor, potentially 6.4 million persons in the United States suffer from intermittent explosive disorder. Although estimates of the market for compulsive buying vary widely, based on a report in the 2004 Annals of Clinical Psychiatry, we believe the prevalence of this disorder ranges from 1.1% to 5.9% of American adults, or 2.4 to 13.0 million American adults.

We are evaluating nalmefene in a Phase II/ III clinical trial for the treatment of pathological gambling, which represents a significant unmet medical need. Currently, there is no approved drug therapy to treat pathological gambling. Pathological gambling is characterized by persistent and recurrent patterns of gambling behavior. Accordingly, pathological gambling often results in impaired functioning and reduced quality of life. Pathological gamblers may experience difficulties at work, become demoralized and depressed, abuse alcohol or drugs and develop other psychiatric co-morbidities. There is a high co-morbidity between pathological gambling and substance abuse disorders, particularly alcohol abuse and dependence. In 2005, Petry et al. reported in the Journal of Clinical Psychiatry that almost three-quarters of pathological gamblers had alcohol

use disorder and approximately 38% had drug use disorder. We believe that pathological gambling remains largely a neglected public health problem due to a low rate of diagnosis and lack of approved treatments.

Impulse control disorders share features with substance abuse disorders, including drug, alcohol and tobacco addiction, which potentially have similar neurobiological mechanisms. Substance abuse disorders, including nicotine dependence, are major public health problems in the United States. In 2005, the U.S. Centers for Disease Control and Prevention, or CDC, estimated that approximately 45 million, or 22%, of adults in the United States are smokers. The impact of nicotine dependence in terms of morbidity, mortality and economic costs to society is enormous. According to the Surgeon General, tobacco usage kills more than 440,000 people in the United States annually. Smoking is linked to an estimated $75 billion in medical expenditures in the United States per year. When indirect costs such as lost productivity due to smoking are considered, the costs increase significantly to approximately $158 billion per year.


	*Limitations of Current Therapies*

There are no approved drugs for the treatment of pathological gambling or other impulse control disorders. Another opioid antagonist, naltrexone, has been investigated in the treatment of pathological gambling. Various studies of naltrexone, including a double-blind, placebo-controlled trial, suggest that an opioid antagonist may be effective for the pharmacological treatment of this disorder. Despite the encouraging results, the rate limiting factor for the use of naltrexone is generally its side effect profile and tolerability. Efficacy appears to require dosing at levels significantly higher than approved in the product’s current label, increasing the risk of liver toxicities.

Currently, the standard of care for pathological gambling is behavioral and cognitive therapy. Most states have a gambling hot-line that refers patients to specialists or to Gamblers Anonymous. Although approximately 1,000 chapters exist in North America, there is little evidence to suggest the long-term efficacy of Gamblers Anonymous. Specific psychotherapies that focus on changing inappropriate thoughts and behaviors, such as cognitive and behavioral therapies, have shown promise. However, access to this form of treatment is often limited by insurance barriers, cost factors and an inadequate number of trained therapists.

Various pharmacological interventions have shown inconsistent results in efficacy studies of the treatment of pathological gambling. Selective serotonin reuptake inhibitors, or SSRIs, such as GlaxoSmithKline plc’s Paxil and Solvay Pharmaceuticals’ Luvox, which have been demonstrated to have anti-compulsive and anti-impulsive effects, were theorized to have a potential in treating impulse control disorders. To date, however, SSRIs have demonstrated mixed results in the treatment of pathological gambling and other impulse control disorders in controlled clinical trials.

There are a number of approved approaches to the treatment of nicotine dependence, including nicotine replacement therapy and the use of antidepressants, but they are not effective for a majority of patients. According to a 2001 National Institute on Drug Abuse Research Report, nearly 35 million smokers make a serious attempt to quit each year, but most relapse within a few days of attempting to quit and less than 7% achieve more than one year of abstinence. Behavioral therapies have also been used with some success. There remains an enormous need for improved therapies to treat this critical public health problem.


	*Nalmefene and its Advantages*

Nalmefene is a specific and selective opioid receptor antagonist characterized by its affinity to multiple opioid receptor sites. Nalmefene works similarly to other opioid receptor antagonists such as naltrexone and naloxone, but has an alternate metabolism pathway and has been shown in animal studies to be more potent and more bioavailable. BioTie Therapies, our licensor, has sponsored eight clinical trials (Phase I to Phase III) with oral nalmefene for alcohol use disorders. BioTie Therapies has also conducted one Phase II clinical trial in pathological gambling. In these nine trials, over 800 subjects were exposed to nalmefene at daily dosages of 5 mg to 100 mg for various periods, and at dosages up to 40 mg for a period of 52 weeks. The safety profile of nalmefene in clinical trials has been acceptable and liver toxicity has not been observed.

In a double-blind, multi-center Phase II clinical trial, nalmefene was effective and well-tolerated in the acute treatment of pathological gambling. The trial, conducted by BioTie Therapies, was a 16-week randomized, placebo-controlled, dose-response trial conducted at fifteen academic centers across the United States to compare the efficacy of nalmefene with placebo in the treatment of adults with pathological gambling. Two hundred seven subjects meeting the DSM-IV criteria for pathological gambling were randomized to one of three fixed daily dosages of nalmefene (25 mg, 50 mg or 100 mg) or placebo. The primary endpoint consisted of mean change from baseline on the Yale Brown Obsessive Compulsive Scale modified for Pathological Gambling, or PG-YBOCS, a clinician-administered questionnaire for assessing gambling thoughts/urges and behavior.

The primary endpoint was PG-YBOCS at week 16. All three dose groups demonstrated improvements, which were statistically significant compared to placebo for the 25 mg and 50 mg groups (p = 0.005 and p = 0.045, respectively), but the study data was compromised by the high discontinuation rates, with only 73 patients completing the study. Incidents of adverse events were higher with increasing dosages. The most common adverse events included nausea, dizziness, headache and insomnia. No serious adverse events related to the trial drug were reported.


	*Clinical Development Plan*

In October 2004, we met with the FDA for an End of Phase II meeting concerning nalmefene for the treatment of pathological gambling. In August 2005, we initiated a confirmatory Phase II/ III clinical trial evaluating the safety and efficacy of oral nalmefene in the treatment of patients with pathological gambling. This is a randomized, double-blind, placebo-controlled, outpatient, multi-center trial to assess the efficacy, safety and tolerability of nalmefene at daily dosages of 20 mg and 40 mg. This trial will be conducted in approximately 225 patients with a diagnosis of pathological gambling as defined by the DSM-IV criteria. The expected duration of trial participation for a patient is approximately 15 weeks. This trial has been designed to address historically high discontinuation rates and to enhance patient recruitment and retention with a focus on an improved dosing strategy, personalized patient support programs and integrated advertising and recruitment efforts. The primary efficacy endpoint will assess gambling thoughts/urges and behavior via the PG-YBOCS, while secondary endpoints include a number of additional physician and patient assessment measures. We anticipate that data from this trial will be available in late 2006.

We plan to conduct two Phase III clinical trials in the treatment of patients with a diagnosis of pathological gambling. Pending the results of our Phase II/ III clinical trial, the FDA has agreed to review our clinical protocols for future Phase III clinical trials under a Special Protocol Assessment, or SPA. Under an SPA, the FDA provides guidance on the design of a trial prior to its initiation. We submitted the protocol for an initial Phase III clinical trial in February 2005. We anticipate filing an SPA on a second trial design prior to initiation of this protocol. We also plan to conduct a number of additional preclinical studies and Phase I clinical trials to further assess the safety of nalmefene at the dosages targeted for pathological gambling and nicotine dependence. While nalmefene has been approved and marketed in an intravenous form under the brand name Revex for over ten years, the recommended intravenous dose results in blood levels that are below those observed at the anticipated oral dosages, necessitating further documentation and clinical research for regulatory approval.

Impulse control disorders share common characteristics with other addictions including substance abuse. In a Phase II clinical trial of nalmefene for the treatment of alcohol dependency, an investigator from the University of Miami observed that smokers who received 80 mg of nalmefene experienced a reduction in their cigarette consumption. As a result of these findings, we initiated a Phase II clinical trial of nalmefene for the treatment of nicotine dependency in September 2005. This is a single-center, randomized, placebo-controlled, double-blind, outpatient, pilot clinical trial to assess the efficacy and safety of nalmefene hydrochloride at daily dosages of 40 mg and 80 mg. This trial will be conducted in approximately 75 patients. Should nalmefene prove promising in the treatment of patients with nicotine dependence, we will evaluate further development options.

Acamprosate for Movement Disorders

Disease Background and Market Opportunity

Tardive dyskinesia is a debilitating movement disorder that limits a person’s ability to perform activities of daily living and impairs quality of life. Tardive dyskinesia is often caused by the long-term use of certain drugs used to treat some psychiatric or neurological conditions, such as schizophrenia or Parkinson’s disease. It is characterized by involuntary and repetitive movements of the face, trunk and limbs. According to Datamonitor, tardive dyskinesia affects approximately 600,000 people in the United States. We believe that fewer than 200,000 people in the United States exhibit moderate to severe symptoms.


	*Limitations of Current Therapies*

There are a variety of medications prescribed off-label to lessen the symptoms associated with tardive dyskinesia, including benzodiazepines, dopamine depleting agents, serotonergic agents and calcium channel blockers. These therapies are associated with significant side effects, including cognitive effects, sedation, depression, physical dependency and parkinsonianism.

Acamprosate and its Advantages

Acamprosate calcium is a synthetic compound which works through two mechanisms; it is a GABA-receptor agonist and a NMDA-glutamate receptor antagonist. We believe that these two neurotransmitters— GABA and glutamate— may play an important role in mediating the effects of certain movement disorders. Acamprosate increases GABA transmission and diminishes the response to glutamate, potentially reducing the recurrent involuntary movements associated with tardive dyskinesia.

Our licensor has administered acamprosate to a small number of patients with severe movement disorders. All patients showed a clinically meaningful response with positive effects.

The FDA recently approved acamprosate for the maintenance of alcohol abstinence. It is marketed by Forest Laboratories, Inc. as Campral. The recommended daily dosage is approximately 2 grams dosed as two 333 mg tablets, three times daily. It has been marketed in Europe for alcohol abstinence since 1989 and has an established safety profile. More than 1 million patients with alcohol dependence have been treated with acamprosate worldwide. Side effects have been limited, with mild to moderate diarrhea cited most frequently (10% to 17%).


	*Development Plan*

We in-licensed the patents associated with acamprosate’s use in movement disorders, obsessive compulsive disorder and post-traumatic stress disorder. We are developing a new formulation of acamprosate prior to conducting any clinical trials. Acamprosate is a compound characterized by poor bioavailability (11%). As a result, the approved form of acamprosate requires that patients take two tablets, three times a day for the current indication. In the first quarter of 2005 we entered into a product formulation and development agreement to develop an improved, patent-protected form of acamprosate. If a formulation is achieved that can significantly reduce the amount of drug required to demonstrate clinical effect, it may result in less frequent and/or lower dosages. Formulation development work is underway and, if we are successful in reformulating the product, we anticipate initiating required Phase I clinical trials prior to initiating a dose-finding Phase II clinical trial in patients in 2006. We have filed an application under the Orphan Drug Act seeking a designation of acamprosate as an orphan drug for the treatment of moderate to severe tardive dyskinesia. The FDA grants orphan drug designation to drugs intended to treat a rare disease or condition that affects fewer than 200,000 individuals in the United States or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available in the United States a drug for this type of disease or condition will be recovered from sales in the United States for that drug. We intend to rely on and reference certain available data for our regulatory submission as a basis for FDA approval.

Commercialization Strategy

We currently do not have significant internal sales, distribution and marketing capabilities. In order to commercialize any of our product candidates, we must either acquire or internally develop sales, marketing and distribution capabilities, or enter into collaborations with partners to perform these services for us, or both. In connection with the final regulatory approval, if any, of our first product candidate, we intend to build a U.S. commercial operation tightly focused on promoting our products to psychiatrists and neurologists. We believe that we can achieve our goals by deploying an experienced sales organization supported by an internal marketing infrastructure that targets the highest prescribers in the fields of psychiatry and neurology. We will consider opportunities to partner our products with larger pharmaceutical companies where marketing and expanded reach to primary care physicians could expand the market penetration for our product candidates. In particular, we believe that, assuming favorable Phase III results, SILENOR^tm will be an excellent candidate for partnering and we anticipate launching the product with a partner who has the resources to be competitive in the insomnia market.

Our targeting of psychiatrists and neurologists will allow our commercial operations to stay focused and to leverage our infrastructure across brands. Psychiatrists and neurologists account for approximately 15% of branded prescriptions for insomnia and we believe they will account for a majority of the prescriptions for oral nalmefene and a reformulated acamprosate. Based on data from IMS Health regarding physician prescribing patterns, we estimate that a sales force of approximately 150 people can effectively cover more than 40% of the prescriptions written by psychiatrists for insomnia. We believe that a small number of additional sales representatives can be effective in promoting oral nalmefene for pathological gambling to psychiatrists and can reach the most influential neurologists and movement disorder specialists for acamprosate. We believe this infrastructure will also allow us to acquire or in-license additional products or to co-promote products targeted at these specialties.

Technology In-Licenses


	ProCom One Agreement (SILENOR^TM)

In a license agreement entered into in August 2003, as amended in October 2003, we acquired the exclusive, worldwide license from ProCom One to certain patents to develop and commercialize low dosages of doxepin for the treatment of insomnia. Although our license to the low-dose doxepin patents is a worldwide license, we currently intend to develop and commercialize SILENOR^tm in the United States only, since patent protection for the current dosage form is limited to the United States. The term of the license extends until the last licensed patent expires, which is expected to occur in 2020. The license agreement is cancelable at any time by us with 30 days’ notice if we believe that the use of the product poses an unacceptable safety risk or if it fails to achieve a satisfactory level of efficacy. Either party may terminate the agreement with 30 days’ notice if the other party commits a material breach of its obligations and fails to remedy the breach within 90 days, or upon the filing of bankruptcy, reorganization, liquidation, or receivership proceedings.

As consideration for the license, we paid $100,000 as an option payment and $400,000 as the first milestone payment for a total of $500,000 for the period ended December 31, 2003. In December 2004, we accrued $500,000 for a milestone due upon the completion of the first Phase II clinical trial, which was paid in January 2005. We also issued 84,058 shares of common stock to ProCom One contemporaneous with our Series A preferred stock financing. Future payments of an aggregate of $1.5 million may be payable upon the achievement of various milestones related to the lapse of time or the occurrence of various clinical or regulatory events. We are also obligated to pay a royalty on worldwide net sales of the licensed products. We have the right to grant sublicenses to third parties.


	*BioTie Therapies Agreement (nalmefene for impulse control disorders)*

In July 2004, we entered into an option agreement with BioTie Therapies to license oral nalmefene hydrochloride for the treatment of impulse control disorders, alcohol dependence, obsessive compulsive disorders, eating disorders and nicotine dependence. We paid $200,000 to BioTie Therapies for this option. We exercised the option in November 2004 and entered into an exclusive license with BioTie Therapies to certain

patents to develop, manufacture, and market nalmefene in North America. We also agreed not to sell a competing product for a period of time after the first commercial sale of the product contemplated by the license agreement. As consideration for the license, we paid an upfront fee of $3.0 million to BioTie Therapies.

The term of the license extends through the expiration of each licensed patent or patent application, which is expected to occur in 2017. We may cancel the agreement with 30 days’ written notice if the product poses an unacceptable safety risk for patients or fails to achieve efficacy in clinical development. Either party may cancel the agreement with 60 days’ written notice upon material breach of the contract and failure to cure such breach, or if either party becomes insolvent or is adjudged bankrupt.

Future payments of an aggregate of $10.0 million may be payable upon achievement of various regulatory events, with potential additional payments associated with any subsequent indications. We are also obligated to pay BioTie Therapies a royalty on net sales of licensed products. No milestones are due prior to NDA acceptance by the FDA. We have the right to sublicense to third parties and we are required to pay BioTie Therapies part of any sublicense revenue we receive.


	*University of Miami Agreement (nalmefene for smoking cessation)*

In January 2005, we in-licensed exclusive worldwide rights from the University of Miami to a patent relating to the treatment of nicotine dependence. The patent expires in 2016. The term of the license extends generally through the expiration of the patent, and potentially longer under certain circumstances. The agreement is cancelable by us at any time with 60 days’ written notice. The University of Miami may terminate the agreement upon a material breach of the contract, provision of a false report, or our insolvency or certain bankruptcy proceedings.

As consideration for the license, we paid $35,000 upon entering the license and currently make immaterial license payments each year. Future payments of an aggregate of $395,000 may be payable upon achievement of various clinical, regulatory or commercial events. We are also obligated to pay the University of Miami a royalty on net sales of licensed products. We have the right to sublicense to third parties and we are required to pay the University of Miami part of any sublicense revenue we receive.


	*Synchroneuron Agreement (acamprosate for movement disorders)*

In September 2004, we in-licensed exclusive worldwide rights from Synchroneuron to certain patents to develop, manufacture and market acamprosate for movement disorders, obsessive compulsive disorder and post-traumatic stress disorder. The term of the license extends through the expiration of the last patent, which is expected to occur in 2018. The agreement is cancelable by us at any time with 30 days’ written notice. Synchroneuron may terminate the agreement upon 30 days’ written notice to us of a material breach of the contract, including our failure to pay a quarterly license payment, subject to certain cure periods, or immediately upon written notice as to our insolvency or certain bankruptcy proceedings.

As consideration for the license, we paid $100,000 upon entering the license and currently make additional quarterly license payments. Future obligations include increased quarterly payments and equity issuances after the achievement of certain product development milestones, up to a maximum of $250,000 per quarter and an aggregate of 83,333 shares of our common stock. In addition, we are obligated to pay a royalty on net sales of the licensed product. The royalty payment will be reduced by the initial license fee and quarterly license payments until all such license fees are applied against any royalties earned. We also have the right to sublicense to third parties and we are required to pay to Synchroneuron part of any sublicense revenue we receive.

Intellectual Property


	SILENOR^TM

We are the exclusive licensee of four U.S. patents from ProCom One claiming the use of low dosages of doxepin and other antidepressants. U.S. Patent No. 6,211,229, “Treatment of Transient and Short Term Insomnia,” covers dosages of doxepin from 0.5 mg to 20 mg for use in the treatment of transient insomnia and

expires in February 2020. U.S. Patent No. 5,502,047, “Treatment For Insomnia,” claims the treatment of chronic insomnia using doxepin in a daily dosage of 0.5 mg to 20 mg and expires in March 2013. Due to some recently identified prior art, we initiated a reexamination of this patent and have received an Office Action from the U.S. Patent and Trademark Office which will result in the narrowing of certain claims, so that the broadest dosage ranges claimed by us are 0.5 mg to 20 mg for otherwise healthy patients, 0.5 mg to 20 mg for patients with insomnia resulting from depression, and 0.5 mg to 4 mg for all chronic insomnia patients. Because we are seeking to develop SILENOR^tm for indications consistent with the subject matter of our patent claims, we believe that our licensed patents will restrict the ability of competitors to market doxepin with identical drug labeling. In addition, we are requesting reissue of this same patent to add intermediate dosage ranges below 10 mg and to consider some additional prior art that is relevant primarily to claims for treating insomnia in depressed patients. During reissue, the U.S. Patent and Trademark Office could require narrowing or cancellation of certain claims or could reject all of the claims of this patent.

Additionally, we have the exclusive license from ProCom One to a third patent in the series, U.S. Patent No. 5,643,897, which is a divisional of the ’047 patent and claims the treatment of chronic insomnia using amitriptyline, trimipramine, trazodone and mixtures thereof in a daily dosage of 0.5 mg to 20 mg. This patent expires in March 2013. A fourth patent to which we have an exclusive license from ProCom One, U.S. Patent No. 6,344,487, claims a method of treating insomnia with low dosage forms (0.5 mg to 10 mg) of nortriptyline. This patent expires in June 2020.


	*Nalmefene*

We are the exclusive licensee of U.S. Patent No. 5,780,479, “Use of opioid antagonists to treat impulse-control disorders,” from BioTie Therapies. This patent expires in April 2017. The patent claims the use of opioid antagonists, including nalmefene, for the treatment of impulse control disorders with the exception of trichotillomania. We have also exclusively in-licensed U.S. Patent No. 5,852,032, “Method of treating nicotine dependence,” from the University of Miami. This patent expires in November 2016. The patent claims the use of nalmefene to decrease nicotine dependence.


	*Acamprosate*

We have exclusively in-licensed four U.S. issued patents from Synchroneuron covering the use of acamprosate. U.S. Patent No. 5,952,389, “Methods of treating tardive dyskinesia and other movement disorders,” claims the use of agents which are GABA-receptor agonists and NMDA-glutamate receptor antagonists, including acamprosate, to treat hyperkinetic movement disorders. This patent expires in January 2018. We are seeking to amend a claim in the ’389 Patent to eliminate the reference to homotaurine, which was apparently included by mistake at the time of filing. U.S. Patent No. 6,294,583, “Methods of treating tardive dyskinesia and other movement disorders,” claims a composition for treating movement disorders comprising a compound that is both a GABA-receptor agonist and NMDA-glutamate receptor antagonist, and magnesium. This patent expires in January 2018. Additionally, U.S. Patents Nos. 6,391,922 and 6,689,816 claim the use of an agent that increases GABA neurotransmission and decreases NMDA-glutamate neurotransmission to treat anxiety disorders including post-traumatic stress disorder and obsessive compulsive disorder. These two patents also expire in January 2018. We have also in-licensed the rights to one pending U.S. application on acamprosate for movement disorders and the rights of two families of foreign applications corresponding to the patents filed in the United States.


	*Other Intellectual Property*

Although we have taken steps to protect our trade secrets and unpatented know-how, including entering into confidentiality agreements with third parties, and confidential information and inventions agreements with employees, consultants and advisors, third parties may still obtain this information or we may be unable to protect our rights. Enforcing a claim that a third party illegally obtained and is using our trade secrets or unpatented know-how is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secret information. Moreover, our competitors

may independently develop equivalent knowledge, methods and know-how, and we would not be able to prevent their use.


	*Third Party Intellectual Property*

Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing products. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our product candidates may infringe.

We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that our product candidates infringe their intellectual property rights. If one of these patents was found to cover our product candidates or their uses, we could be required to pay damages and could be restricted from commercializing our product candidates or use our proprietary technologies unless we or they obtained a license to the patent. A license may not be available to us on acceptable terms, if at all. In addition, during litigation, the patent holder could obtain a preliminary injunction or other equitable right, which could prohibit us from making, using or selling our product candidates.


	•	infringement and other intellectual property claims which, with or without merit, may be expensive and time-consuming to litigate and may divert our management’s attention from our core business;

	•	substantial damages for infringement, including treble damages and attorneys’ fees, which we may be required to pay if a court decides that the product candidate at issue infringes on or violates the third party’s rights;

	•	a court prohibiting us from selling or licensing the product candidate or using the proprietary technology unless the third party licenses its technology to us, which it is not required to do;

	•	if a license is available from the third party, we may have to pay substantial royalties, fees or grant cross-licenses to our technology; and

	•	redesigning our product candidates so they do not infringe, which may not be possible or may require substantial funds and time.

We have not conducted an extensive search of patents issued to third parties, and no assurance can be given that such patents do not exist, have not been filed, or could not be filed or issued, which contain claims covering our product candidates or methods. Because of the number of patents issued and patent applications filed in our technical areas or fields, we believe there is a significant risk that third parties may allege that they have patent rights encompassing our product candidates or methods.

Competition


	SILENOR^TM

In addition to the currently approved products for the treatment of insomnia, a number of new products are expected to enter the insomnia market over the next several years. While the new entrants bring additional competition to the insomnia market, they are also expected to substantially increase the awareness of insomnia and further expand the market. Additionally, market growth will also be driven by the aging of the population and the emerging links between sleep, health and overall well-being.

Ambien, which is marketed by Sanofi-Synthélabo Inc., is the market leader in the insomnia segment. The drug accounted for approximately $2.2 billion in retail sales from September 30, 2004 to September 30, 2005, according to NDC Health. Ambien is patent-protected until October 2006. Sonata, marketed by King Pharmaceuticals, accounted for approximately $136 million in retail sales from September 30, 2004 to

September 30, 2005, according to NDC Health. The remaining market was comprised of older generic benzodiazepines and sedative antidepressants.

Lunesta, marketed by Sepracor Inc., is a GABA-receptor agonist that was approved in December 2004 by the FDA and was launched in the second quarter of 2005. Lunesta accounted for approximately $168 million in retail sales from September 30, 2004 to September 30, 2005. Lunesta is indicated for the treatment of insomnia and has been shown to decrease sleep latency and increase sleep maintenance. It is the first product to have the short-term use restriction removed from its label. A new version of Ambien, Ambien CR, was launched in September 2005. This product is approved for the treatment of insomnia and has been shown to decrease sleep latency and increase sleep maintenance. Unlike Ambien, Ambien CR does not have a label restriction limiting the length of time of its use.

Rozerem was launched by Takeda Pharmaceuticals North America, Inc. in September 2005. Rozerem is indicated for the treatment of insomnia characterized by difficulty with sleep onset. It is the first drug approved for the treatment of insomnia that is not a Schedule IV controlled substance. With the exception of Rozerem, the approved medications for the treatment of insomnia all act on GABA receptors and are Schedule IV controlled substances.

New entrants are expected to include indiplon, to be marketed by Neurocrine Biosciences, Inc. and Pfizer Inc., and gaboxadol, to be marketed by H. Lundbeck A/ S and Merck & Co., Inc. These compounds act on GABA receptors, and, to date, all GABA-acting drugs have been designated Schedule IV controlled substances.

Several companies, including Eli Lilly and Company and Sepracor, are evaluating 5HT2 antagonists as potential hypnotics. Additionally, Hypnion Inc. is developing a scientific platform regarding the biology of sleep.


	*Nalmefene*

There are no approved drugs for the treatment of pathological gambling or other impulse control disorders. The opioid antagonist naltrexone has been investigated in the treatment of pathological gambling but is used in clinical practice on a very limited basis. Efficacy appears to require dosing at levels significantly higher than approved in the product’s label, significantly increasing the risk of liver toxicity. Currently, the standard of care of pathological gambling is behavioral and cognitive therapy. Various pharmacological interventions have shown inconsistent results in efficacy studies in the treatment of pathological gambling. SSRIs, such as Paxil from GlaxoSmithKline and Luvox from Solvay Pharmaceuticals, which have been demonstrated to have anti-compulsive and anti-impulsive effects, were theorized to have potential in treating impulse control disorders. The SSRIs have reportedly demonstrated mixed results in the treatment of pathological gambling and other impulse control disorders in controlled studies.

There are a number of approved products, including nicotine replacement therapy and the drug Zyban from GlaxoSmithKline, as an aid to smoking cessation treatment. TOPAMAX, marketed by Ortho-McNeil Neurologics, is also being studied for the treatment of pathological gambling.


	*Acamprosate*

There are no approved products for the treatment of tardive dyskinesia. A variety of medications are prescribed off-label to lessen the symptoms associated with tardive dyskinesia, including benzodiazepines, adrenergic antagonists, reserpine (an antihypertensive agent) and dopamine agonists. Requip, a dopamine agonist, has been shown to reduce the risk for developing dyskinesias in patients with Parkinson’s disease, while maintaining comparable control of motor symptoms in patients on levodopa therapy. Merck KGaA is investigating sarizotan hydrochloride, a serotonin 5HT1A agonist, in Phase III clinical trials for treatment-associated dyskinesias in patients with Parkinson’s disease. Additionally, Juvantia Pharma Ltd. is investigating fipamezole, an adrenergic antagonist, in Phase II clinical trials for treatment-associated dyskinesias in Parkinson’s disease and Acadia Pharmaceuticals Inc. is investigating ACP-103, a 5-HT_2A inverse agonist, in Phase I clinical trials for levodopa-induced dyskinesias in patients with Parkinson’s disease.

Manufacturing

The active pharmaceutical ingredient, or API, doxepin hydrochloride is currently available from multiple suppliers. We utilized a contract laboratory to incorporate doxepin API into a pharmaceutically acceptable capsule formulation, which we used in our Phase II clinical trials of SILENOR^tm. We have contracted with Patheon Inc. to manufacture, test and quality-control Phase III clinical trial supplies of SILENOR^tm and we are negotiating the terms of a contract with Patheon for commercial supply. Patheon has produced clinical supplies of both a capsule and tablet formulation of SILENOR^tm which we are using in our Phase III clinical program. We intend to commercialize the tablet form of the product to allow for improved branding and distinction from the higher strength, generic capsule forms currently available. BioTie Therapies has contracted with Patheon to manufacture clinical supplies of nalmefene. Under the terms of our agreement with BioTie Therapies, we purchase clinical supplies manufactured by Patheon from BioTie Therapies. We are currently negotiating with Patheon for the direct supply of commercial quantities of nalmefene. We are currently developing a new formulation of acamprosate calcium; however, we have not yet entered into a definitive agreement for the long-term supply of this product candidate.

Government Regulation

Governmental authorities in the United States and other countries extensively regulate the testing, manufacturing, labeling, storage, record-keeping, advertising, promotion, export, marketing and distribution, among other things, of pharmaceutical products. In the United States, the FDA, under the Federal Food, Drug, and Cosmetic Act and other federal statutes and regulations, subjects pharmaceutical products to rigorous review. If we do not comply with applicable requirements, we may be fined, the government may refuse to approve our marketing applications or allow us to manufacture or market our products, and we may be criminally prosecuted.

We and our manufacturers and clinical research organizations may also be subject to regulations under other federal, state, and local laws, including the Occupational Safety and Health Act, the Environmental Protection Act, the Clean Air Act and import, export and customs regulations as well as the laws and regulations of other countries.


	*FDA Approval Process*

To obtain approval of a new product from the FDA, we must, among other requirements, submit data supporting safety and efficacy as well as detailed information on the manufacture and composition of the product and proposed labeling. The testing and collection of data and the preparation of necessary applications are expensive and time-consuming. The FDA may not act quickly or favorably in reviewing these applications, and we may encounter significant difficulties or costs in our efforts to obtain FDA approvals that could delay or preclude us from marketing our products.

The process required by the FDA before a new drug may be marketed in the United States generally involves the following: completion of preclinical laboratory and animal testing in compliance with FDA regulations, submission of an investigational new drug application, or IND, which must become effective before human clinical trials may begin, performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use, and submission and approval of an NDA by the FDA. The sponsor typically conducts human clinical trials in three sequential phases, but the phases may overlap. In Phase I clinical trials, the product is tested in a small number of patients or healthy volunteers, primarily for safety at one or more dosages. In Phase II clinical trials, in addition to safety, the sponsor evaluates the efficacy of the product on targeted indications, and identifies possible adverse effects and safety risks in a patient population. Phase III clinical trials typically involve testing for safety and clinical efficacy in an expanded population at geographically-dispersed test sites.

Clinical trials must be conducted in accordance with the FDA’s good clinical practices requirements. The FDA may order the partial, temporary or permanent discontinuation of a clinical trial at any time or impose other sanctions if it believes that the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The institutional review board, or

IRB, generally must approve the clinical trial design and patient informed consent at each clinical site and may also require the clinical trial at that site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.

The applicant must submit to the FDA the results of the preclinical and clinical trials, together with, among other things, detailed information on the manufacture and composition of the product and proposed labeling, in the form of an NDA, including payment of a user fee. The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under the policies agreed to by the FDA under the Prescription Drug User Fee Act, or PDUFA, the FDA has 10 months in which to complete its initial review of a standard NDA and respond to the applicant. The review process and the PDUFA goal date may be extended by three months if the FDA requests or the NDA sponsor otherwise provides additional information or clarification regarding information already provided in the submission within the last three months of the PDUFA goal date. If the FDA’s evaluations of the NDA and the clinical and manufacturing procedures and facilities are favorable, the FDA may issue either an approval letter or an approvable letter, which contains the conditions that must be met in order to secure final approval of the NDA. If and when those conditions have been met to the FDA’s satisfaction, the FDA will issue an approval letter, authorizing commercial marketing of the drug for certain indications. According to the FDA, the median total approval time for NDAs approved during calendar year 2004 was approximately 13 months for standard applications. If the FDA’s evaluation of the NDA submission and the clinical and manufacturing procedures and facilities is not favorable, the FDA may refuse to approve the NDA and issue a not approvable letter.


	*Section 505(b)(2) New Drug Applications*

As an alternate path to FDA approval for new indications or improved formulations of previously-approved products, a company may file a Section 505(b)(2) NDA, instead of a “stand-alone” or “full” NDA. Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Amendments. Section 505(b)(2) permits the submission of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. For example, the Hatch-Waxman Amendments permit the applicant to rely upon the FDA’s findings of safety and effectiveness for an approved product. The FDA may also require companies to perform additional studies or measurements to support the change from the approved product. The FDA may then approve the new formulation for all or some of the label indications for which the referenced product has been approved, or the new indication sought by the Section 505(b)(2) applicant. We intend to submit Section 505(b)(2) applications for SILENOR^tm and nalmefene. These applications will rely, in part, on the FDA’s previous findings of safety and effectiveness for doxepin and nalmefene.

To the extent that the Section 505(b)(2) applicant is relying on the FDA’s findings for an already-approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book publication. Specifically, the applicant must certify that: (1) the required patent information has not been filed; (2) the listed patent has expired; (3) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patent is invalid or will not be infringed by the manufacture, use or sale of the new product. A certification that the new product will not infringe the already approved product’s Orange Book-listed patents or that such patents are invalid is called a paragraph IV certification. If the applicant does not challenge the listed patents, the Section 505(b)(2) application will not be approved until all the listed patents claiming the referenced product have expired. The Section 505(b)(2) application may also not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired.

If the applicant has provided a paragraph IV certification to the FDA, the applicant must also send notice of the paragraph IV certification to the NDA and patent holders once the NDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a legal challenge to the paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of their receipt of a paragraph IV certification

automatically prevents the FDA from approving the Section 505(b)(2) NDA until the earliest of 30 months, expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the Section 505(b)(2) applicant. For drugs with five-year exclusivity, if an action for patent infringement is initiated after year four of that exclusivity period, then the 30-month stay period is extended by such amount of time so that 7.5 years has elapsed since the approval of the NDA with five-year exclusivity. This period could be extended by six months if the NDA sponsor obtains pediatric exclusivity. Thus, the Section 505(b)(2) applicant may invest a significant amount of time and expense in the development of its products only to be subject to significant delay and patent litigation before its products may be commercialized. Alternatively, if the listed patent holder does not file a patent infringement lawsuit within the required 45-day period, the applicant’s NDA will not be subject to the 30-month stay. There are currently no patents listed in the Orange Book for doxepin, nalmefene or acamprosate. Therefore, at this time we do not anticipate submitting a paragraph IV certification.

Notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), over the last few years, certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If these companies successfully challenge the FDA’s interpretation of Section 505(b)(2), the FDA may be required to change its interpretation of Section 505(b)(2). This could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we submit.


	*The Hatch-Waxman Act*

Under the Hatch-Waxman Act, newly-approved drugs and indications benefit from a statutory period of non-patent marketing exclusivity. The Hatch-Waxman Act provides five-year marketing exclusivity to the first applicant to gain approval of an NDA for a new chemical entity, meaning that the FDA has not previously approved any other new drug containing the same active moiety. Hatch-Waxman prohibits the submission of an abbreviated new drug application, or ANDA, or a Section 505(b)(2) NDA for another version of such drug during the five-year exclusive period; however, as explained above, submission of an ANDA or Section 505(b)(2) NDA containing a paragraph IV certification is permitted after four years, which may trigger a 30-month stay of approval of the ANDA or Section 505(b)(2) NDA. Protection under Hatch-Waxman will not prevent the submission or approval of another full NDA; however, the applicant would be required to conduct its own preclinical and adequate and well-controlled clinical trials to demonstrate safety and effectiveness. The Hatch-Waxman Act also provides three years of marketing exclusivity for the approval of new and supplemental NDAs, including Section 505(b)(2) NDAs, for, among other things, new indications, dosages, or strengths of an existing drug, if new clinical investigations that were conducted or sponsored by the applicant are essential to the approval of the application. Acamprosate is currently protected by five years of new chemical entity exclusivity, which expires on July 29, 2009. This exclusivity would not prevent the FDA from approving our marketing application if it is submitted as a full Section 505(b)(1) NDA. We anticipate receiving three years of marketing exclusivity for SILENOR^TM, nalmefene and acamprosate if the FDA approves our marketing applications.


	*Orphan Drug Designation and Exclusivity*

Some jurisdictions, including Europe and the United States, may designate drugs for relatively small patient populations as orphan drugs. The FDA grants orphan drug designation to drugs intended to treat a rare disease or condition that affects fewer than 200,000 individuals in the United States or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available in the United States a drug for this type of disease or condition will be recovered from sales in the United States for that drug. In the United States, orphan drug designation must be requested before submitting an application for marketing approval. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. If a product which has an orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity. Also,

competitors may receive approval of different drugs or biologics for the indications for which the orphan product has exclusivity. We have submitted to the FDA an orphan drug designation request for acamprosate for the treatment of moderate to severe tardive dyskinesia. If the FDA designates the drug and approves our marketing application, we will be granted seven years of orphan drug exclusivity. This period of exclusivity will run concurrently with any three-year period of exclusivity applicable to our product candidate awarded upon FDA approval.

Under European Union medicines laws, criteria for designation as an “orphan medicine” are similar but somewhat different from those in the United States. A drug is designated as an orphan drug if the sponsor can establish that the drug is intended for a life-threatening or chronically debilitating condition affecting no more than five in 10,000 persons in the European Union or that is unlikely to be profitable, and if there is no approved satisfactory treatment or if the drug would be a significant benefit to those persons with the condition. Orphan medicines are entitled to ten years of market exclusivity, except under certain limited circumstances comparable to U.S. law. During this period of market exclusivity, no “similar” product, whether or not supported by full safety and efficacy data, will be approved unless a second applicant can establish that its product is safer, more effective or otherwise clinically superior. This period may be reduced to six years if the conditions that originally justified orphan designation change or the sponsor makes excessive profits.


	*Pediatric Exclusivity*

The Best Pharmaceuticals for Children Act, which was signed into law January 4, 2002, and which reauthorized Section 111 of the 1997 FDA Modernization Act, provides an additional six months of exclusivity and patent protection listed in the Orange Book for new or marketed drugs for specific pediatric studies conducted at the written request of the FDA. The Pediatric Research Equity Act of 2003, or PREA, authorizes the FDA to require pediatric studies for drugs to ensure the drugs’ safety and efficacy in children. PREA requires that certain new NDAs or supplements to NDAs contain data assessing the safety and effectiveness for the claimed indication in all relevant pediatric subpopulations. Dosing and administration must be supported for each pediatric subpopulation for which the drug is safe and effective. The FDA may also require this data for approved drugs that are used in pediatric patients for the labeled indication, or where there may be therapeutic benefits over existing products. The FDA may grant deferrals for submission of data, or full or partial waivers from PREA. Unless otherwise required by regulation, PREA does not apply to any drug for an indication with orphan designation. We plan to work with the FDA to determine the need for pediatric studies for our product candidates, and may consider attempting to obtain pediatric exclusivity for some of our product candidates.


	*Other Regulatory Requirements*

We may also be subject to a number of post-approval regulatory requirements. If we seek to make certain changes to an approved product, such as promoting or labeling a product for a new indication, making certain manufacturing changes or product enhancements or adding labeling claims, we will need FDA review and approval before the change can be implemented. While physicians may use products for indications that have not been approved by the FDA, we may not label or promote the product for an indication that has not been approved. Securing FDA approval for new indications or product enhancements and, in some cases, for manufacturing and labeling claims, is generally a time-consuming and expensive process that may require us to conduct clinical trials under the FDA’s IND regulations. Even if such studies are conducted, the FDA may not approve any change in a timely fashion, or at all. In addition, adverse experiences associated with use of the products must be reported to the FDA, and FDA rules govern how we can label, advertise or otherwise commercialize our products.

There are current post-marketing safety surveillance requirements that we will need to meet to continue to market an approved product. The FDA also may, in its discretion, require post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of these products.

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback statutes and false claims statutes. The federal health care program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under Medicare, Medicaid or other federally financed health care programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal health care programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. Recently, several pharmaceutical and other health care companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn are used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.

In addition, we and the manufacturers on which we rely for the manufacture of our products are subject to requirements that drugs be manufactured, packaged and labeled in conformity with current good manufacturing practice, or cGMP. To comply with cGMP requirements, manufacturers must continue to spend time, money and effort to meet requirements relating to personnel, facilities, equipment, production and process, labeling and packaging, quality control, record-keeping and other requirements. The FDA periodically inspects drug manufacturing facilities to evaluate compliance with cGMP requirements.

Also, as part of the sales and marketing process, pharmaceutical companies frequently provide samples of approved drugs to physicians. This practice is regulated by the FDA and other governmental authorities, including, in particular, requirements concerning record-keeping and control procedures.

Outside of the United States, our ability to market our products will also depend on receiving marketing authorizations from the appropriate regulatory authorities. The foreign regulatory approval process includes all of the risks associated with the FDA approval process described above. The requirements governing the conduct of clinical trials and marketing authorization vary widely from country to country.

Third-Party Reimbursement and Pricing Controls

In the United States and elsewhere, sales of pharmaceutical products depend in significant part on the availability of reimbursement to the consumer from third-party payors, such as government and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services. It will be time-consuming and expensive for us to go through the process of seeking reimbursement from Medicare and private payors. Our products may not be considered cost effective, and coverage and reimbursement may not be available or sufficient to allow us to sell our products on a competitive and profitable basis.

In many foreign markets, including the countries in the European Union, pricing of pharmaceutical products is subject to governmental control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental pricing control.

While we cannot predict whether such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and profitability.

Employees

As of September 30, 2005, we had 17 employees, consisting of regulatory affairs, manufacturing and program management, clinical development, business development, marketing and administration.

Facilities

We lease approximately 6,500 square feet of space in our headquarters in San Diego, California under a sublease and a lease that expire in 2006 and 2007, respectively. We have no laboratory, research or manufacturing facilities. We believe that our current facilities are adequate for our needs for the immediate future and that, should it be needed, suitable additional space will be available to accommodate expansion of our operations on commercially reasonable terms.

Legal Proceedings

We are not engaged in any legal proceedings.

MANAGEMENT

Executive Officers and Directors

The following table sets forth certain information about our executive officers and directors:


Name	Age		Position

Kenneth M. Cohen		50	President, Chief Executive Officer and Director
Susan E. Dubé		58	Senior Vice President, Corporate and Business Development
Jeffrey W. Raser		44	Senior Vice President, Sales and Marketing
Philip Jochelson, M.D.		44	Senior Vice President and Chief Medical Officer
Meg M. McGilley		46	Vice President, Chief Financial Officer, Treasurer and Secretary
David F. Hale⁽¹⁾		56	Chairman of the Board of Directors
Louis C. Bock⁽²⁾⁽³⁾		40	Director
Terrell A. Cobb		56	Director
Cam L. Garner⁽¹⁾		57	Director
Scott L. Glenn⁽²⁾		55	Director
Jesse I. Treu, Ph.D.⁽¹⁾⁽³⁾		58	Director
Daniel K. Turner III⁽²⁾⁽³⁾		44	Director
Kurt von Emster⁽³⁾		38	Director
Kurt C. Wheeler⁽¹⁾		52	Director


⁽¹⁾	Member of the Compensation Committee
⁽²⁾	Member of the Audit Committee
⁽³⁾	Member of the Nominating/ Corporate Governance Committee


	*Executive Officers*

Kenneth M. Cohen is one of our co-founders and has served as our President and Chief Executive Officer and as a member of our board of directors since our inception in August 2003. Previously, he was an independent advisor to various biotechnology and pharmaceutical companies, entrepreneurs and investors, including Synbiotics Corporation, Applied NeuroSolutions, Inc. and Highbridge Capital Management. From May 1996 to April 2001, he was President and Chief Executive Officer of Synbiotics Corporation, a diagnostics company. From March 1995 to February 1996, Mr. Cohen was Executive Vice President and Chief Operating Officer for Canji Incorporated, a human gene-therapy company, until its acquisition by Schering-Plough Corporation in February 1996. Prior to joining Canji, he was Vice President of Business Affairs at Argus Pharmaceuticals, Inc. and Vice President of Marketing and Business Development for LifeCell Corporation. Mr. Cohen began his career at Eli Lilly and Company in 1978, where, among many different responsibilities over ten years, he directed business planning for the Medical Instrument Systems Division (now known as Guidant Corporation) and managed the launch of Prozac. He received an A.B. in biology and chemistry from Dartmouth College and an M.B.A. from the Wharton School of The University of Pennsylvania.

Susan E. Dubé is one of our co-founders and has served as our Senior Vice President, Corporate Development since our inception in August 2003. Throughout 2002 and 2003, she served as a consultant to a number of specialty pharmaceutical companies and venture firms, including Cypress Bioscience, Inc., Women First HealthCare, Inc. and Windamere Venture Partners. From October 2000 to February 2002, she was the Senior Vice President of Corporate Development for Women First HealthCare, a specialty pharmaceutical company. She joined Women First as the Vice President, Strategic Planning & Acquisitions in June 1998 and became the Senior Vice President, Strategic Planning & Acquisitions in December 1999. Prior to Women First, Ms. Dubé served as the Senior Vice President, Strategy and Corporate Development at Imagyn Medical Technologies, Inc., a medical device company, from October 1997 to June 1998. She joined Imagyn Medical

Technologies upon its acquisition of Imagyn Medical, Inc. where she served as the Vice President of Marketing and Corporate Development from February 1996 until its acquisition. She has also served as the Chief Executive Officer of BioInterventions, Inc., Executive Vice President and Chief Operating Officer of Adeza Biomedical Corporation, Vice President, Ventures at the Brigham and Women’s Hospital, and as a consultant to a number of health care companies. Ms. Dubé hol


		psychological dependence associated with addictive compounds. Because doxepin is the sole active ingredient in SILENOR^tm, we believe that SILENOR^tm will likewise be a non-scheduled drug.

	•	Safety and tolerability. SILENOR^tm will benefit from doxepin’s well-established safety profile, having been prescribed for over 35 years at up to 50 times our proposed maximum insomnia dosage. Clinical results have demonstrated no significant unwanted side effects or next-day residual effects relative to placebo.

	•	Efficacy. We believe that SILENOR^tm may be the first non-scheduled drug to improve all three key sleep parameters: sleep onset, maintenance and duration.

	•	Population. We anticipate that SILENOR^tm will be suitable for the treatment of chronic and transient insomnia in adults and the elderly, demonstrating benefits to a broad segment of insomnia patients.

	•	Long-term use. SILENOR^tm may have the potential for long-term use. Doxepin is currently indicated and prescribed for long-term use in patients with depression and anxiety. Doxepin at dosages of 25 mg to 50 mg had also been evaluated by Hajak et al for the treatment of insomnia for up to four weeks in a randomized, controlled clinical study which demonstrated that the efficacy that was observed on night one was sustained at night twenty-eight. Additionally, in a 20-patient, 12-week, double-blind, placebo-controlled proof-of-principle trial, doxepin at a strength of 6 mg demonstrated improvements on numerous measures related to sleep maintenance and duration at several time points. The effects were sustained over the 12-week evaluation period.