Renovis, Inc (RNVS) - Description of business

Renovis is a science-driven, biopharmaceutical company that seeks to discover, develop, and commercialize therapeutics for major medical needs in the areas of neurological and inflammatory diseases. We apply our integrated capabilities in preclinical research and development, including molecular biology, medicinal chemistry, in vitro and in vivo pharmacology, drug metabolism and pharmacokinetics, toxicology and informatics, to identify and select small molecule drug candidates that meet stringent standards for development. This approach has yielded multiple lead candidates from diverse, proprietary chemical series in our late-stage preclinical programs for pain and inflammation. We are engaged in an exclusive, worldwide collaboration with Pfizer Inc. (Pfizer) to discover and develop product candidates targeting the vanilloid receptor, VR1, for the potential treatment of pain and other major medical needs. Our unpartnered preclinical programs are focused on identifying antagonists of the purinergic receptors, P2X7 and P2X3, as novel potential treatments for a broad spectrum of pain and inflammatory conditions.

Based on the progress demonstrated in the table above and our planned activities in 2007, we currently expect Pfizer to begin clinical development of a VR1 antagonist in 2007 and we currently expect to begin clinical development of product candidates from our P2X7 and P2X3 programs during 2008.

We were incorporated in Delaware on January 5, 2000. Our office is located at Two Corporate Drive, South San Francisco, California 94080, and our telephone number is (650) 266-1400. Our website address is www.renovis.com.

Our Drug Discovery Approach

The goal of our drug discovery organization is to discover and develop small molecule drugs to treat major medical needs in the areas of neurological and inflammatory diseases. We select molecular targets that have a biologically or chemically validated role in a neurological or inflammatory disease process affecting many patients for which we believe there is an opportunity for significant improvement in the safety, dosing, or effectiveness of existing treatment options. We believe such targets offer us opportunities to efficiently identify and develop best-in-class or first-in-class product candidates.

Renovis scientists integrate a broad range of drug discovery capabilities, including medicinal chemistry, cell biology and high throughput screening, in vivo pharmacology, toxicology and safety, as well as an extensive series of in vitro and in vivo metabolic and safety profiling assays, to conduct preclinical research and development and create human drug candidates. The integration of these efforts begins very early in the drug

discovery process at Renovis to guide the design of compounds with drug-like characteristics. Our approach focuses on identifying the optimal balance of properties required for a best-in-class human therapeutic, such as potency, selectivity, safety, exposure, dosing frequency and patient compliance much earlier in the discovery process than in a traditional high-throughput screening approach.

We believe this early integration of a broad spectrum of drug discovery capabilities is a critical element that distinguishes our drug discovery approach. With a less integrated approach, organizations frequently focus narrowly on optimizing molecules for a single desired trait such as potency or metabolism and subsequently encounter difficulty in adding other important chemical characteristics, such as oral bioavailability or an ability to penetrate into the central nervous system. We believe our fully integrated drug discovery approach may lead to better preclinical and clinical success rates with small molecule drug candidates that have the potential to become best-in-class human therapeutics.

Our scientists design and create proprietary focused screening libraries for the identification and generation of chemical leads in our drug discovery programs. The identification of drug-like lead molecules is a critical step in the drug discovery process and we invest significant time and effort in library design and synthesis to ensure that the compounds incorporate critical drug-like properties. These focused screening libraries are synthesized at Renovis (or by one or more of our preferred global vendors) for our internal drug discovery screens. Where appropriate, we focus our research on families of related molecular targets to improve our ability to leverage our proprietary screening libraries across multiple drug discovery programs. In our VR1, P2X7, and P2X3 programs we were successful in rapidly identifying multiple proprietary molecules from our focused chemical screening libraries that are potent and selective antagonists of the receptors and which offered promising opportunities for rapid development toward our goal of securing best or first-in-class status.

We believe the overall efficiency and effectiveness of our drug discovery approach depends upon our drug discovery philosophy, our disciplined adherence to our target selection criteria, the design and synthesis of proprietary chemical libraries, our focus on strongly enabled patent portfolios covering the composition of matter of our lead compounds and chemical series, and a commitment to best-in-class and first-in-class opportunities.

Drug Discovery Programs

Our drug discovery and development programs focus on new therapeutic approaches for neurological and inflammatory diseases.

Neurological Diseases

In the area of neurological diseases we are currently focused on identifying and developing new treatments for pain. In our programs that address various forms of pain, our strategy is to pursue novel mechanisms of analgesia, or pain relief, that are superior to those of existing pain treatments. Our goal in each program is to identify and develop orally bioavailable analgesics suitable for once-daily dosing that demonstrate superior efficacy in multiple chronic pain indications, such as osteoarthritic pain, or pain associated with osteoarthritis, and neuropathic pain, or nerve pain. We believe that small molecules that inhibit the vanilloid receptor 1 (VR1) or the purinergic receptors P2X3 and P2X7 have the potential to meet this goal.

Chronic Pain Market Opportunity

The world wide pain management market for 2008 is estimated to exceed $29.8 billion. Currently marketed treatment options for chronic pain include narcotics , non-steroidal anti-inflammatories and COX2 inhibitors for inflammatory pain and antidepressants and anticonvulsants (e.g. Neurontin ® and Lyrica ® ) for neuropathic pain. The existing treatment options for chronic inflammatory pain have limitations including physical dependence, gastrointestinal bleeding, increased risk of serious cardiovascular events (heart attack and stroke) and liver damage. The most prevalent treatments for neuropathic pain demonstrate central nervous system side effects such as sedation, dizziness and cognitive defects. In addition, many patients do not experience satisfactory pain

relief. We believe the shortcomings of existing therapies provide an opportunity for new classes of therapies for chronic pain. Accordingly, the goal for our drug discovery programs focused on pain is to identify and develop well-tolerated, orally bioavailable therapies, suitable for once daily dosing with efficacy equivalent to or greater than currently marketed treatment options in a broad range of chronic pain states.

VR1 Antagonist Program

Key mediators of pain signaling are ion channels, which regulate the flow of different ions, or charged atoms, between the inside and outside of neurons, or nerve cells. The transient receptor potential (TRP) ion channels constitute a large and diverse family, several of which are thought to mediate pain signaling and are attractive targets for drug discovery. The best known of these is the VR1 receptor. We believe drugs that block VR1, preventing it from activating nerve cell signaling, could be effective, non-narcotic analgesics for the treatment of chronic pain and could also be effective for treating non-neurological conditions such as urinary incontinence, irritable bowel syndrome and asthma.

Accumulated evidence indicates that VR1 plays an important role in the development and maintenance of various pain states, including inflammatory and neuropathic pain; furthermore, in our collaboration with Pfizer, we have demonstrated oral analgesic efficacy in preclinical models of these conditions. In addition to our preclinical results, VR1 research conducted by others has expanded significantly over the past several years and the analgesic potential of inhibiting VR1 has been demonstrated by various approaches, including gene knockouts, VR1 receptor antagonism and human clinical data. In VR1 knockout mice that were bred to omit the VR1 gene, researchers have observed reduced pain sensation. In studies with experimental VR1 antagonists, researchers have shown robust analgesic effects in multiple animal models of inflammatory, osteoarthritis, and neuropathic pain that suggest broad potential for VR1 antagonists in these various disease states. Results from early clinical trials provided the first clinical evidence that VR1 antagonists may alleviate the pain and hyperalgesia, or heightened sensitivity to pain, associated with inflammation and injury in humans. In a placebo-controlled study in healthy volunteers, a VR1 antagonist drug candidate reduced the areas of induced flares compared with placebo at a well-tolerated dose. Collectively, these preclinical and clinical findings strongly suggest that VR1 antagonists have the potential to treat a broad spectrum of pain conditions.

In addition to pain, VR1 may play a role in several other areas of major medical need. For example, the expression of VR1 in sensory neurons and a layer of the lining of the bladder known as the urothelium, may explain the success in Phase II trials of a potent VR1 agonist known as RTX in treating urinary incontinence. If this effect is attributable to desensitisation of the VR1 receptor, VR1 antagonism may achieve a similar positive effect on bladder function. Similarly, VR1 agonists have also been effective in clinical trials involving gastrointestinal disorders such as irritable bowel syndrome, gastro-esophageal reflux disease and fecal urgency which suggests that antagonism of VR1 may have value in these disease states. VR1 is also suspected in certain airway diseases, such as asthma, based on the presence of the receptor in sensory nerves throughout the airways and the detection of natural agonists of VR1 in the lungs of asthma patients. While there is strong preclinical evidence for the involvement of VR1 in numerous areas of major medical need, there are no approved therapies known to function as VR1 antagonists and limited clinical trial data to confirm the preclinical evidence. Thus, if successfully developed, VR1 antagonists would represent a novel class of treatments.

Our collaboration with Pfizer to identify, develop and commercialize VR1 antagonists is our most advanced preclinical program. We began our internal VR1 drug discovery program in 2003 and combined efforts with Pfizer following the execution of our collaborative research agreement in May 2005. In June 2006, Pfizer nominated a VR1 antagonist molecule from the collaboration for studies to enable a potential Investigational New Drug Application (IND). Based on the progress of the program to date and our planned activities in 2007, we expect that Pfizer will nominate at least one additional molecule for IND-enabling studies and initiate human clinical studies during 2007. We are eligible to receive milestone payments of more than $170.0 million and double-digit royalties on worldwide net sales of products successfully developed and commercialized under this collaboration.

P2X3, P2X2/3 Antagonist Program

The P2X3 and P2X2/3 receptors are members of a family of ligand-gated ion channels known as purinergic receptors. We believe that the P2X3 and P2X2/3 receptors are promising therapeutic targets for major medical needs in the areas of chronic pain and bladder dysfunction. These receptors are present in a restricted subset of primary sensory neurons, and preclinical studies examining their function suggest that they may have important roles in pain signaling and bladder function in humans. Studies conducted using small molecule antagonists of P2X3 and P2X2/3, as well as gene knockdown experiments, have demonstrated profound pain relief in multiple preclinical models of chronic inflammatory and neuropathic pain as well as urinary incontinence without apparent safety concerns.

We are conducting a drug discovery program to identify and develop product candidates that act as antagonists of the P2X3 and P2X2/3 receptors. To our knowledge, there are no marketed therapies or ongoing clinical trials of molecules that target this novel mechanism for the treatment of pain and urinary incontinence. We have successfully identified proprietary small molecule antagonists of P2X3 and are actively engaged in the optimization of these lead candidates to support the selection of a candidate for IND-enabling preclinical studies. Based on our progress to date and our planned activities in 2007, we expect to commence clinical development of a first-in-class P2X3 antagonist drug candidate during 2008.

Inflammatory Diseases

P2X7 Antagonist Program

Consistent with our focus on families of related molecular targets, we are pursuing a drug discovery program to identify and develop antagonists of the purinergic receptor, P2X7, which represents a promising molecular target for potential new therapies in the areas of rheumatoid arthritis (RA) and inflammatory bowel disease (IBD). Approximately 2.1 million Americans suffer from RA and approximately 1 million more are afflicted with the two most common forms of IBD, ulcerative colitis and Crohn’s disease. There is an urgent need for safe and effective small molecule therapies for these inflammatory conditions as current treatment options are often complex combination therapies including IV infusions or injections. In addition, many patients do not respond to available therapies or are unable to tolerate current treatments. Side effects of current RA and IBD treatments include increased risk of serious infections, sepsis, tuberculosis and rare cases of opportunistic infections that can be fatal.

The P2X7 receptor is a member of the purinergic family of ligand-gated ion-channels. In contrast to the P2X3 and P2X2/3 receptors which are present primarily in sensory neurons and represent targets for potential new therapies to treat chronic pain, the P2X7 receptor is found primarily in cells of the immune systems where it is thought to play a role in inflammatory processes important to human disease states. P2X7 has been shown to initiate processing and release of IL-1 family cytokines such as IL-1ß and IL-18, which are believed to play a critical role in the inflammation underlying diseases like RA and IBD. Published research with knockout mice indicates that the absence of P2X7 reduces inflammatory responses and the severity of induced arthritis. In addition to this preclinical evidence of the role of P2X7 in inflammatory diseases, a major pharmaceutical company has reported positive clinical results from a Phase II study of a small molecule P2X7 antagonist in RA patients.

Our goal for this program has been to design best-in-class P2X7 receptor antagonists that are distinguished by their potency, selectivity, pharmacokinetic properties and safety profiles. To date, we have identified and validated novel, orally bioavailable, potent, selective P2X7 antagonists from multiple proprietary chemical series. We have recently selected a lead molecule for IND enabling studies and we are continuing to optimize the characteristics of lead candidates as back-up candidates. Based on our progress to date and our planned activities in 2007, we expect to commence clinical development of a best-in-class P2X7 antagonist drug candidate during 2008.

Other Programs

Exploratory Programs

In addition to our VR1, P2X3, and P2X7 drug discovery programs, we conduct limited exploratory research on an ongoing basis to identify promising molecular targets to add to our preclinical pipeline in the future. For example, we have identified potent, small molecule antagonists of TRPV4, which is a member of the family of transient receptor potential ion channels that also includes the VR1 receptor. Preliminary research indicates that TRPV4 may be an attractive target for chronic pain. We have made similar progress in an exploratory program involving a key regulator of the endo-cannabinoid system, Fatty Acid Amide Hydrolase (FAAH). Research suggests that FAAH could be a novel mechanism for new therapies to treat a range of neurological conditions, including chronic pain, Parkinson’s disease, and anxiety.

NXY-059 and Cytoprotectants

In May 2003, our exclusive licensee, AstraZeneca, initiated two multi-national Phase III clinical trials (SAINT I and SAINT II) to test our neuroprotectant drug candidate, NXY-059, versus placebo in acute ischemic stroke patients. NXY-059 had been previously shown to reduce infarct size and preserve brain function in experimental models of acute ischemic stroke. In May 2005, we announced, in coordination with AstraZeneca, that the first of these two clinical trials, SAINT I, involving approximately 1,700 patients, achieved its primary endpoint by showing a statistically significant reduction versus placebo of disability in patients after an acute ischemic stroke (p=0.038). In October 2006, we reported that the second Phase III clinical trial with NXY-059, which involved more than 3,200 patients, did not demonstrate a statistically significant reduction on the primary endpoint of stroke-related disability in patients treated with NXY-059. After reviewing the data from this study, AstraZeneca announced its decision to discontinue development of NXY-059.

Based on the benefit of NXY-059 treatment observed in the SAINT I trial, we independently developed proprietary, orally available nitrone compounds similar to NXY-059 that acted as cytoprotectants that reduced damage to vital tissues in experimental models of ischemia, or restricted oxygen. However, following the results of the SAINT II trial, we have discontinued further development of these compounds.

Strategy

Our primary goal is to create a proprietary pipeline of potential first- and best-in-class product candidates for major medical needs in the areas of neurological and inflammatory diseases. The key elements of our strategy for achieving this goal are to:

Build a balanced portfolio of product candidates.     We believe that our scientific expertise is broadly applicable to a wide range of neurological and inflammatory diseases and that expanding our product portfolio will mitigate some of the risks associated with drug development. We intend to advance our preclinical product candidates into clinical development as rapidly as practicable. We believe our scientific expertise enables us to effectively identify and capitalize on external product candidates and we may acquire or in-license such opportunities in the future. We also intend to undertake new discovery projects to identify novel product opportunities for internal development or collaboration.

Focus research and development efforts in market opportunities with large unmet medical needs.     Our drug discovery efforts generally target diseases that represent attractive commercial opportunities and that are underserved by available therapeutic alternatives. Shortcomings of currently available treatments may include limited efficacy, side effects or method of delivery. In particular, we believe that orally available drugs that treat disease with a high degree of specificity without these shortcomings will have strong commercial potential.

Pursue best-in-class and first-in-class opportunities involving families of related disease targets.     We select molecular targets that have a biologically or chemically validated role in a neurological or inflammatory disease process for which we believe our proprietary chemical library may yield drug-like

lead compounds. The molecular targets we select are not proprietary and, therefore, we seek targets that we believe offer us an opportunity to efficiently identify and develop best-in-class or first-in-class product candidates that could have important competitive advantages in the marketplace.

Take an integrated approach to the early identification and design of lead compounds.     We integrate a broad range of drug discovery capabilities early in the discovery process with a focus on rapidly identifying the optimal balance of properties required for a best-in-class human therapeutic, such as potency, selectivity, safety, exposure, dosing frequency and patient compliance. These capabilities include medicinal chemistry, cell biology and high throughput screening, in vivo pharmacology, toxicology and safety, as well as an extensive series of in vitro and in vivo metabolic and safety profiling assays. We believe this early integration of a broad spectrum of drug discovery capabilities is a critical element that distinguishes our drug discovery approach.

Develop orally available, small molecule drugs.     Our drug discovery and development efforts generally focus on orally available small molecule drugs. The major commercial advantage of small molecule product candidates is the potential for oral administration. In addition, small molecule drugs can be manufactured by conventional methods, resulting in lower manufacturing costs and higher margins than for other types of drugs, such as protein therapeutics.

Establish selective corporate collaborations to assist in the development and commercialization of our products while retaining significant commercial rights.     We intend to selectively form corporate collaborations to leverage our internal resources to undertake projects that are beyond our resources while retaining significant economic rights to our products. Such projects include establishing a broad-based sales capability and completing large and costly clinical trials.

Strategic Alliances

We believe that strategic alliances with the right partners can improve our ability to build a sustainable pipeline of product candidates. Our existing agreements with Pfizer and Genentech allow us to leverage their expertise in the clinical development and commercialization of drugs to treat major medical needs of large patient populations.

Pfizer

In May 2005, we entered into a collaborative research agreement and a license and royalty agreement with Pfizer to research, develop and commercialize small molecule compounds that target VR1. The collaboration focuses on treatments for pain and other diseases and disorders. Under the agreements, we received an upfront license fee of $10.0 million in July 2005. In addition to the upfront license fee, the Pfizer collaboration also provides us with research funding in excess of $7.0 million during the first two years of the collaboration. Pfizer has the option to extend the research period for up to two additional years from June 2007 subject to additional funding requirements. Additionally, upon the successful achievement of research, development and commercialization milestones for each product resulting from the collaboration, we will be eligible to receive milestone payments greater than $170.0 million in aggregate. In addition to milestone payments, we will be entitled to receive double-digit royalties on net sales by Pfizer upon commercialization of a product generated by the collaboration.

Genentech

In December 2003, we entered into a collaborative research, development and license agreement with Genentech for the discovery and development of drugs that inhibit pathological or tumor angiogenesis and promote nerve re-growth following nervous system injury. Under the terms of the agreement, Genentech paid us an upfront license and technology access fee of approximately $5.3 million in January 2004 and made a $3.0 million equity purchase concurrent with our initial public offering. The funded research under this agreement ended in February 2006. We are also eligible to receive future milestones and royalty payments on therapeutic

products emerging from the collaboration that are developed and commercialized by Genentech. In exchange, Genentech obtained exclusive worldwide rights to research, develop, manufacture and commercialize protein-based therapeutics and other drug compositions for the treatment of cancer and other diseases in which mechanisms underlying new blood vessel growth play a significant role. Unless Genentech exercises certain rights and makes additional payments to us, we will have the right to develop and commercialize products arising from the collaboration that are specifically useful for the treatment of central and peripheral nervous system diseases and conditions. We would be required to make royalty payments and, in certain cases, milestone payments to Genentech on products that we develop and commercialize under the collaboration.

Intellectual Property

Patents, Trade Secrets and Licenses

The following factors are important to our success:

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receiving patent protection for our product candidates;   •  

not infringing on the intellectual property rights of others;   •  

preventing others from infringing our intellectual property rights; and   •  

maintaining our patent rights and trade secrets. We actively seek, when appropriate, protection for our products, technologies and proprietary information through U.S. and foreign patents. In addition, we rely upon trade secrets and contractual arrangements to protect our proprietary information.

As of December 31, 2006, we owned more than 35 U.S. patents, 45 U.S. patent applications, 30 foreign patents and 60 foreign patent applications related to our technologies, compounds and their applications in pharmaceutical development or their use as pharmaceuticals. As of December 31, 2006, we have licensed, from institutions such as the Oklahoma Medical Research Foundation (OMRF), the University of Kentucky Research Foundation (UKRF), the Regents of the University of California (the Regents) and others, the exclusive rights to more than 30 U.S. patents, 5 U.S. patent applications, 100 foreign patents and 15 foreign patent applications related to our technologies, compounds and their applications in pharmaceutical development or their use as pharmaceuticals. We face the risk that one or more of the above patent applications may be denied. We also face the risk that our issued patents may be challenged or circumvented or may otherwise not provide protection for any commercially viable products we develop. We also note that U.S. patents and patent applications may be subject to interference proceedings and U.S. patents may be subject to reexamination proceedings in the U.S. Patent and Trademark Office (and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent office), which proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such interference, reexamination and opposition proceedings may be costly. In the event that we seek to enforce any of our owned or exclusively licensed patents against an infringing party, it is likely that the party defending the claim will seek to invalidate the patents we assert, which, if successful, would result in the entire loss of our patent or the relevant portion of our patent and not just with respect to that particular infringer. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations.

In addition, our ability to assert our patents against a potential infringer depends on our ability to detect the infringement in the first instance. Many countries, including certain European countries, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties in some circumstances (for example, the patent owner has failed to “work” the invention in that country, or the third party has patented improvements). In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. Compulsory licensing of life-saving drugs is also becoming

increasingly popular in developing countries either through direct legislation or international initiatives. Such compulsory licenses could be extended to include some of our product candidates, which could limit our potential revenue opportunities. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patent and other intellectual property protection which makes it difficult to stop infringement.

Our success will also depend in part upon our not infringing patents issued to others. If our product candidates are found to infringe the patents of others, our development, manufacture and sale of such potential products could be severely restricted or prohibited. In this regard, we have received correspondence from a third party alleging that we infringe certain patents held by the third party. We do not believe there is a reasonable basis for this action claiming that we are infringing any valid and enforceable patents of such third party. To date, we have not been subject to any infringement actions. Although we do not believe that these patents seriously harm our ability to develop and commercialize our products, we cannot be certain of this. It is likely that in the future we will encounter other similar situations which will require us to determine whether we need to license a technology or face the risk of defending an infringement claim.

Patent litigation can involve complex factual and legal questions and its outcome is uncertain. Any claim relating to infringement of patents that is successfully asserted against us may require us to pay substantial damages. Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. Furthermore, as a result of a patent infringement suit brought against us or our strategic partners or licensees, we or our strategic partners or licensees may be forced to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a third party’s intellectual property unless that party grants us or our strategic partners or licensees rights to use its intellectual property. In such cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to commercialize our products. However, we may not be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if our strategic partners, licensees or we were able to obtain rights to the third party’s intellectual property, these rights may be non-exclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize some of our potential products or may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business.

Much of our technology and many of our processes depend upon the knowledge, experience and skills of our scientific and technical personnel. To protect rights to our proprietary know-how and technology, we generally require all employees, contractors, consultants, advisors, visiting scientists and collaborators as well as potential collaborators to enter into confidentiality agreements that prohibit the disclosure of confidential information. The agreements with employees and consultants also require disclosure and assignment to us of ideas, developments, discoveries and inventions. These agreements may not effectively prevent disclosure of our confidential information or provide meaningful protection for our confidential information.

Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel.

We also use as advisors and consultants individuals who are currently employed by universities. Most of these individuals are parties to agreements pursuant to which some of the work product created by these individuals belongs to their respective universities. While we and these individuals try to maintain records which make it clear that the work these individuals do for us is not subject to their agreements with universities, it is always possible that a university will assert an ownership claim to the work of one or more of these individuals.

OMRF and UKRF.     We hold the exclusive, worldwide license to specified intellectual property related to NXY-059, a novel free radical trapping neuroprotectant, owned by OMRF and UKRF pursuant to a license agreement entered into in July 1992. In consideration for this technology license, we are obligated to pay OMRF and UKRF low-single digit royalties on any future net sales of products relating to our license, subject to a minimum annual royalty payment of $25,000 through the year the FDA first approves an NDA and $100,000 annually thereafter. The license agreement terminates upon the later of the expiration of the last of any patent rights to licensed products that are developed under the agreement or 15 years from the effective date of the agreement. We may terminate the license agreement for any reason following six months written notice to OMRF and UKRF.

The Regents of the University of California.     We hold two exclusive, worldwide licenses to specified intellectual property related to targets and potential protein biotherapeutics relevant for inhibition of tumor angiogenesis and other pathological diseases and for nerve regeneration and repair owned by the Regents pursuant to license agreements entered into in June 2001 and November 2002, respectively, each as amended in December 2003. In consideration for these technology licenses, we paid license fees to the Regents. We are required to make additional annual payments on the November 2002 license. We are also obligated to pay the Regents royalties on any future net sales relating to our licenses subject to specified minimum annual royalty payments of $25,000 for products developed under the June 2001 license and $50,000 for products developed under the November 2002 license. In addition, we are obligated to make payments to the Regents based on meeting certain regulatory and clinical milestones. The June 2001 license automatically terminates upon the date of expiration of the last to expire patent under the license. The November 2002 license automatically terminates on or after December 31, 2018.

Government Regulation

The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our products.

The process required by the FDA before product candidates may be marketed in the United States generally involves the following:

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preclinical laboratory and animal tests;   •  

submission of an IND which must become effective before clinical trials may begin;   •  

adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug candidate for its intended use;   •  

pre-approval inspection of manufacturing facilities and selected clinical investigators; and   •  

FDA approval of a New Drug Application, or NDA, or NDA supplement, for an approval of a new indication if the product is already approved for another indication. The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any new approvals for our products will be granted on a timely basis, if at all.

Prior to commencing the first clinical trial with a product candidate, we must submit an IND to the FDA. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the clinical trial. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Our submission of an IND may not result in FDA authorization to commence a clinical trial. A separate submission to the existing IND

must be made for each successive clinical trial conducted during product development, and the FDA must grant permission for each clinical trial to start and continue. Further, an independent institutional review board for each medical center proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that center. Regulatory authorities or an institutional review board or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

For purposes of NDA approval, human clinical trials are typically conducted in three sequential phases that may overlap.

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Phase I: Studies are initially conducted in a limited patient population to test the product candidate for safety, dosage tolerance, absorption, metabolism, distribution and excretion in healthy humans or patients.   •  

Phase II: Studies are conducted in a limited patient population to identify possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. Multiple Phase II clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase III clinical trials. In some cases, a sponsor may decide to run what is referred to as a “Phase IIb” evaluation, which is a second, confirmatory Phase II trial that could, if positive, serve as a pivotal trial in the approval of a product candidate.   •  

Phase III: When Phase II evaluations demonstrate that a dosage range of the product is effective and has an acceptable safety profile, Phase III trials are undertaken in large patient populations to further evaluate dosage, to provide statistically significant evidence of clinical efficacy and to further test for safety in an expanded patient population at multiple clinical trial sites. The FDA may require, or companies may pursue, additional clinical trials after a product is approved. These so-called Phase IV studies may be made a condition to be satisfied after a drug receives approval. The results of Phase IV studies can confirm the effectiveness of a product candidate and can provide important safety information to augment the FDA’s voluntary adverse drug reaction reporting system.

The results of product development, preclinical studies and clinical trials are submitted to the FDA as part of an NDA, or as part of an NDA supplement. The FDA may deny approval of an NDA or NDA supplement if the applicable regulatory criteria are not satisfied, or it may require additional clinical data and/or an additional pivotal Phase III clinical trial. Even if such data are submitted, the FDA may ultimately decide that the NDA or NDA supplement does not satisfy the criteria for approval. Once issued, the FDA may withdraw product approval if ongoing regulatory standards are not met or if safety problems occur after the product reaches the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products which have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs.

Satisfaction of FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. Typically, if a drug product is intended to treat a chronic disease, as is the case with some of the product candidates we are developing, safety and efficacy data must be gathered over an extended period of time, which can range from six months to three years or more. Government regulation may delay or prevent marketing of product candidates or new diseases for a considerable period of time and impose costly procedures upon our activities. The FDA or any other regulatory agency may not grant approvals for new indications for our product candidates on a timely basis, if at all. Success in early stage clinical trials does not ensure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. Even if a product candidate receives regulatory approval, the approval may be significantly limited to specific disease states, patient populations and dosages. Further, even after regulatory approval is obtained, later discovery of

previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Delays in obtaining, or failures to obtain, additional regulatory approvals for NXY-059 would harm our business. In addition, we cannot predict what adverse governmental regulations may arise from future U.S. or foreign governmental action.

Any products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with good manufacturing practices, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. We cannot be certain that we or our present or future suppliers will be able to comply with the good manufacturing practices regulations and other FDA regulatory requirements. If our present or future suppliers are not able to comply with these requirements, the FDA may halt our clinical trials, require us to recall a drug from distribution, or withdraw approval of the NDA for that drug.

The FDA closely regulates the marketing and promotion of drugs. A company can make only those claims relating to safety and efficacy that are approved by the FDA. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe legally available drugs for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturers’ communications on the subject of off-label use.

The FDA’s policies may change and additional government regulations may be enacted which could prevent or delay regulatory approval of our product candidates or approval of new indications for our product candidates. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the United States or abroad.

Competition

We compete in the segments of the pharmaceutical market that treat neurological and inflammatory diseases, which are highly competitive. We face significant competition from most pharmaceutical companies as well as many biotechnology companies that are also researching and selling products designed to treat neurological and inflammatory diseases. Many of our competitors have significantly greater financial, manufacturing, marketing and product development resources than we do. Large pharmaceutical companies, in particular, have extensive experience in clinical testing and in obtaining regulatory approvals for drugs. These companies also have significantly greater research capabilities than we do. In addition, many universities and private and public research institutes are actively researching neurological and inflammatory diseases, some in direct competition with us. In addition, we also must compete with these organizations to recruit scientists and clinical development personnel.

We believe that our ability to successfully compete will depend on, among other things:

  •  

efficacy, safety and reliability of our product candidates;   •  

timing and scope of regulatory approval;   •  

the speed at which we develop product candidates;   •  

completion of clinical development and laboratory testing and obtaining regulatory approvals for product candidates;   •  

our ability to manufacture and sell commercial quantities of a product to the market;   •  

product acceptance by physicians and other health care providers;   •  

quality and breadth of our technology;   •  

skills of our employees and our ability to recruit and retain skilled employees;   •  

protection of our intellectual property; and   •  

availability of substantial capital resources to fund development and commercialization activities. Employees

As of December 31, 2006, we had approximately 111 full-time employees, including 34 Ph.D.s. Of the full-time employees, 83 were engaged in research and development and 28 were engaged in general and administrative activities. On January 23, 2007, we announced a restructuring that reduced the number of full-time positions in the company to approximately 70 full-time employees. We believe our relations with our employees are good.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) are available free of charge on our Internet website as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the Securities and Exchange Commission, or SEC. Our website address is www.renovis.com . We can furnish without charge to you, upon written or oral request, copies of our reports. You should direct any request to John C. Doyle, Senior Vice President, Corporate Development and Chief Financial Officer, Renovis, Inc., Two Corporate Drive, South San Francisco, California 94080.

Item 1A. Risk Factors

An investment in our common stock is very risky. You should carefully consider the risks described below, together with all of the other information in this report before making a decision to invest in our common stock. If any of the following risks actually occur, our business, financial condition, results of operations and growth prospects could be adversely affected. In this case, the trading price of our common stock could decline and you may lose all or part of your investment in our common stock. Additional risks and uncertainties, not presently known to us, or that we presently deem as immaterial, may also adversely affect our business. If any of these additional risks and uncertainties occur, the trading price of our common stock could decline, and you might lose all or part of your investment.

Risks Related to Our Company

We are an early stage biopharmaceutical company without commercial products, and we cannot assure you that we will successfully develop and commercialize potential products.

You must evaluate us in light of the uncertainties and complexities inherent in an early stage biopharmaceutical company. All of our product candidates are in early stages of development and the commercialization of those products will not occur, if at all, for at least the next several years. Our future success is dependent upon, among other factors, our ability to develop viable product candidates, successfully complete clinical trials and obtain regulatory approval for those product candidates. All of our early stage drug discovery programs are focused on unproven molecular disease targets and will require extensive additional research and development prior to the commercial introduction of any product candidates. There can be no assurance that any of our research and development and clinical trial efforts, or those of our strategic partners and licensees, will result in viable new products. For example, in October 2006, AstraZeneca, our exclusive licensee for our lead product candidate, NXY-059, indicated its intention to discontinue the development of NXY-059 following the announcement that NXY-059 did not meet the primary or secondary endpoints in a pivotal Phase III study. Also, in August 2005, based on results of our Phase II clinical trials with REN-1654 in patient volunteers with post-herpetic neuralgia and sciatica, we announced that we were discontinuing development of REN-1654 as an oral medication and, in June 2005, we announced our decision to discontinue efforts to develop REN-850 for the treatment of multiple sclerosis. Finally, in July 2004, we announced our decision to discontinue efforts to commercialize REN-213, an intravenous drug candidate we were developing for the treatment of acute post-operative pain.

We depend on the efforts of our strategic partners and licensees to develop and commercialize many of our product candidates.

We cannot control the time or resources that our strategic partners or licensees devote to our collaborations with those parties, nor can we control our strategic partners’ or licensees’ business decisions. In addition, our collaborators may not perform their obligations as expected. Changes in a collaborator's business strategy or business combinations involving a collaborator may adversely affect that party’s willingness or ability to successfully meet its obligations. Disagreements between us and our collaborators may lead to delays in or termination of the research, development or commercialization of product candidates or result in time-consuming and expensive negotiations, litigation or arbitration. The failure of our strategic partners or licensees to successfully complete their obligations in a timely manner or the termination or breach of agreements by these parties, could materially harm our business, financial condition and results of operations.

Clinical trials have in the past and may in the future fail to demonstrate the safety and efficacy of our product candidates, which could prevent or significantly delay their regulatory approval and may adversely affect our business and stock price.

Any failure or substantial delay in completing clinical trials for our product candidates may severely harm our business. Before obtaining regulatory approval for the sale of any of our potential products or the potential

products of our current and future strategic partners and licensees, we and our strategic partners or licensees must subject these product candidates to extensive preclinical and clinical testing to demonstrate their safety and efficacy in humans. The success of this preclinical and clinical testing is critical to achieving our product development goals. If our product development efforts are unsuccessful, we will not obtain regulatory approval for them, we will not generate sales from them, and our business and results of operations would be adversely affected.

Clinical trials are expensive, time-consuming and typically take years to complete. In connection with clinical trials, we face the risks that:

  •  

a product candidate may not prove to be efficacious;   •  

we may discover that a product candidate may cause harmful side effects;   •  

patients may die or suffer other adverse medical effects for reasons that may not be related to the product candidate being tested;   •  

the results may not confirm the positive results of earlier trials; and   •  

the results may not meet the level of statistical significance required by the FDA, or other regulatory agencies. The results in early phases of clinical testing are based upon limited numbers of patients and a limited follow-up period and success in early phase trials may not be indicative of results in a large number of patients or long-term efficacy. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late stage clinical trials even after achieving promising results in earlier development activities, including previous late-stage clinical trials. For example, the results from the Phase III SAINT I trial for our lead product candidate, NXY-059, were not predictive of results obtained in the second and larger Phase III clinical trial, SAINT II, and following the announcement of the results of the SAINT II clinical trial and the decision by AstraZeneca to discontinue the development of NXY-059, our stock price declined significantly. Failure to demonstrate the safety and effectiveness of our product candidates in larger patient populations could prevent or significantly delay their regulatory approval and may adversely affect our business and our stock price.

Failure to enroll patients for clinical trials may cause delays in developing our product candidates.

We may encounter delays or rejections if we or our strategic partners or licensees are unable to enroll enough patients to complete clinical trials. Patient enrollment depends on many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the eligibility criteria for the trial and the number and size of ongoing clinical trials sponsored by others that seek to enroll similar patients. When one product candidate is evaluated in multiple clinical trials simultaneously, patient enrollment in ongoing trials can be adversely affected by negative results from completed trials. Any delays in planned patient enrollment may result in increased costs and delays, which could harm our ability to develop products.

The contract research organizations and independent clinical investigators that we and our strategic partners or licensees rely upon to conduct preclinical studies and clinical trials may not be diligent, careful or timely, and may make mistakes in the conduct of these studies.

We depend on contract research organizations, or CROs, and independent clinical investigators to conduct certain preclinical studies and clinical trials under their agreements with us or our collaborators. Before AstraZeneca decided to discontinue development of NXY-059, we depended on CROs to conduct clinical trials of NXY-059 under their agreements with AstraZeneca. In our preclinical research programs, we depend on CROs to conduct certain medicinal chemistry and in vivo testing activities that we are not staffed to perform ourselves. The personnel at these CROs are not our employees and we cannot control the amount or timing of

resources that they devote to our programs. Our contracts with CROs may involve fixed fees. If the costs of performing the research activities or clinical trials exceed estimates, the CROs may fail to devote sufficient time and resources to our drug discovery and development programs, fail to enroll patients as rapidly as expected, or otherwise fail to perform in a satisfactory manner. Failure of the CROs to meet their obligations could adversely affect the development of our product candidates and delay the regulatory approval and commercial introduction of our product candidates. 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, it could harm our competitive position.

If we or our strategic partners or licensees fail to obtain U.S. regulatory approvals for product candidates under development, we will not be able to generate revenue in the U.S. market from the commercialization of product candidates.

We must receive FDA approval for each of our product candidates before we can commercialize or sell that product candidate in the United States. The FDA can limit or deny its approval for many reasons, including:

  •  

a product candidate may be found to be unsafe or ineffective;   •  

regulators may interpret data from preclinical testing and clinical trials differently and less favorably than the way we interpret it;   •  

regulators may not approve the manufacturing processes or facilities that we or our strategic partners or licensees use; and   •  

regulators may change their approval policies or adopt new regulations. Failure to obtain FDA approval or any delay or setback in obtaining such approval could:

  •  

adversely affect our ability to market any drugs we develop independently or with strategic partners or licensees;   •  

impose additional costs and diminish any competitive advantages that we may attain; and   •  

adversely affect our ability to generate royalties or product revenues. Any such failures or delays in the regulatory approval process for any of our product candidates would delay or diminish our receipt of product revenues, if any, and would materially adversely affect our business, financial condition and results of operations.

Even if we obtain FDA approval, our product candidate may not be approved for all indications that we request, which could limit the uses of our product and adversely impact our potential royalties and product sales. If FDA approval of a product is granted, 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. As to any product for which marketing approval is obtained, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping related to the product will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the product may result in restrictions on the product, including withdrawal of the product from the market. We may be slow to adapt, or we may never adapt, to changes in existing requirements or adoption of new requirements or policies.

If we fail to comply with applicable U.S. regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions, injunctions, civil penalties and criminal prosecution.

If we or our strategic partners or licensees fail to obtain regulatory approvals in other countries for product candidates under development, we will not be able to generate revenue in such countries from the commercialization of product candidates.

In order to market our products outside of the United States, we and our strategic partners and licensees must 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. 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 negatively impact the regulatory processes 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, including the risks that our product candidate may not be approved for all indications that we request, which could limit the uses of our product and adversely impact our 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 we fail to comply with applicable foreign regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

Even if our product candidates are approved and commercialized, competitive products may impede market acceptance of our products.

Hospitals, physicians or patients may conclude that our potential products are less safe or effective or otherwise less attractive than existing drugs. Even if approved and commercialized, any future product candidates may fail to achieve market acceptance with hospitals, physicians or patients. If our products do not receive market acceptance for any reason, our revenue potential could be diminished which would materially adversely affect our business, financial condition and results of operations. Further, our competitors may develop new products that could be more effective or less costly, or that may seem more cost-effective, than our products.

Most of our competitors have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. As a result, they may achieve product commercialization or patent protection earlier than we can, if at all. Hospitals, physicians, patients or the medical community in general may not accept and use any products that we may develop.

We have no experience selling, marketing or distributing products and no internal capability to do so.

If we receive regulatory approval to commence commercial sales of any of our product candidates for which we have retained marketing rights, we will have to establish a sales and marketing organization with appropriate technical expertise and supporting distribution capability. At present, we have no sales or marketing personnel. Factors that may inhibit our efforts to commercialize our products without strategic partners or licensees include:

  •  

our inability to recruit and retain adequate numbers of effective sales and marketing personnel;   •  

the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products;   •  

the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage against companies with broader product lines; and   •  

unforeseen costs associated with creating an independent sales and marketing organization. As an alternative to establishing our own sales and marketing organization, we may engage a pharmaceutical or other healthcare company with an existing distribution system and direct sales organization to assist us. We may not be able to successfully establish sales and distribution capabilities either on our own or in collaboration with third parties or gain market acceptance for our products. To the extent we enter co-promotion or other licensing arrangements, any revenues we receive will depend on the efforts of third parties, and we may not succeed.

If our partners, licensees or contract manufacturers of our products fail to devote sufficient time and resources to our concerns, or if their performance is substandard, our clinical trials and product introductions may be delayed and our costs may rise.

We have no manufacturing facilities, and we have no experience in the commercial manufacturing of drugs and no experience in designing drug manufacturing processes. We depend on our partners, licensees and contract manufacturers to produce our product candidates for clinical trials and to manufacture, supply, store and distribute any resulting products.

While we have not experienced problems with our partners, licensees or contract manufacturers to date, our reliance on these third parties exposes us to the following risks, any of which could delay or prevent the completion of our clinical trials, the approval of our product candidates by the FDA or other regulatory agencies, or the commercialization of our products, result in higher costs or deprive us of potential product revenues:

  •  

Drug manufacturers are obliged to operate in accordance with FDA-mandated current good manufacturing practices, or cGMPs. A failure of any of our partners, licensees or contract manufacturers to establish and follow cGMPs and to document their adherence to such practices may lead to significant delays in the availability of material for clinical trials and may delay or prevent filing or approval of marketing applications for our products.   •  

Changing contract manufacturers may be difficult and the number of potential manufacturers is limited. Changing manufacturers may require re-validation of the manufacturing processes and procedures in accordance with FDA-mandated cGMPs. Such re-validation may be costly and time-consuming. It may be difficult or impossible for us to find replacement manufacturers on acceptable terms quickly, or at all. Drug manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies to ensure strict compliance with cGMPs, other government regulations and corresponding foreign standards. We are not aware of any violations by our partners, licensees or contract manufacturers of any of these regulations or standards. While we are obligated to audit the performance of our contractor manufacturers, we do not have control over their compliance with these regulations and standards. Failure by our partners, licensees, contract manufacturers or us to comply with applicable regulations could result in sanctions that would have a material adverse effect on our business, including fines, injunctions, civil penalties, failure of the government to grant premarket approval of drugs, delays, suspension or withdrawal of approvals, seizures or recalls of product, operating restrictions and criminal prosecutions.

We or our strategic partners or licensees may not be able to manufacture our product candidates in commercial quantities, which would prevent us from commercializing our product candidates.

To date, our product candidates have been manufactured in small quantities for preclinical and clinical trials. If any of these product candidates are approved by the FDA or other regulatory agencies for commercial sale, they will need to be manufactured in larger quantities. We or our strategic partners or licensees, as applicable, may not be able to successfully increase the manufacturing capacity, whether in collaboration with contract manufacturers or independently, for any of our product candidates in a timely or economic manner, or at all. Significant scale-up of manufacturing may require additional validation studies, which the FDA must review and approve. If we or our strategic partners or licensees are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch of that product candidate may be

delayed or there may be a shortage in supply. Our product candidates require precise, high quality manufacturing. Failure to achieve and maintain these high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously hurt our business.

If we are unable to retain and recruit qualified scientists or if any of our key executives, key employees or key consultants discontinues his or her employment or consulting relationship with us, it may delay our development efforts or otherwise harm our business.

We are highly dependent on the key members of our management and scientific staff, especially our chief executive officer, Corey Goodman, Ph.D. and our Senior Vice President of Research and Development, Michael Kelly, Ph.D. The loss of any of our key employees or key consultants could impede the achievement of our research and development objectives. Furthermore, recruiting and retaining qualified scientific personnel to perform research and development work in the future is critical to our success. We may be unable to attract and retain personnel on acceptable terms given the competition among biotechnology, pharmaceutical and health care companies, universities and non-profit research institutions for experienced scientists. We maintain “key man” insurance on Dr. Goodman. We do not maintain “key man” insurance policies on any of our other officers or employees. All of our employees are employed “at will” and, therefore, each employee may leave our employment at any time.

Among other equity incentive compensation, we have granted deferred stock units and stock options as a method of attracting and retaining employees, motivating performance and aligning the interests of employees with those of our stockholders. Due to fluctuations in the trading price of our common stock, a substantial portion of the stock options held by our employees have exercise prices that are significantly higher than the current trading price of our common stock. If we are unable to implement and maintain equity compensation arrangements that provide sufficient incentives, we may be unable to retain our existing employees and attract additional qualified candidates.

In January 2007, we announced a restructuring plan, which included a reduction in headcount. The planning and implementation of our restructuring has placed, and may continue to place a strain on our managerial, operational and other resources. In addition, the restructuring may negatively affect our employee turnover, recruiting and retention, and may not enable us to reduce our costs to the extent anticipated. If we are unable to retain our existing employees, including qualified scientific personnel, and attract additional qualified candidates our business and results of operations could be adversely affected.

We have a history of losses and we may never achieve sustained profitability.

Since our inception, we have incurred significant net losses, including net losses of $28.4 million, $32.0 million, $39.9 million, $41.9 million and $25.1 million, respectively, for the years ended December 31, 2006, 2005, 2004, 2003 and 2002. As of December 31, 2006, our cumulative net loss was $182.3 million. None of our product candidates has completed development or received required regulatory approvals and, consequently, we have not generated revenues from the sale of products and do not expect to do so for at least the next several years. Even if one or more of our product candidates is commercialized, we expect to incur substantial losses for the foreseeable future. The development and sale of our products will require completion of clinical trials and significant additional research and development activities. We expect to continue to incur significant operating expenditures in the foreseeable future as we:

  •  

expand our research and development programs; and   •  

advance new product candidates into clinical development from our existing research programs. We also expect to experience negative cash flow for the foreseeable future as we fund our operating losses and capital expenditures. We will need to generate significant revenues to achieve profitability. Our ability to generate revenues and achieve profitability depends on successful completion of clinical trials, our additional

research and development efforts, our ability to successfully commercially introduce our products, market acceptance of our products, the competitive position of our products and the other risk factors set forth in this report. We may not be able to generate these revenues, and we may never achieve profitability. Our failure to achieve, sustain and/or increase profitability on a quarterly or annual basis could negatively impact the market price of our common stock.

If we cannot raise additional capital on acceptable terms, we may be unable to complete clinical trials, obtain regulatory approvals or commercialize our product candidates.

We believe that existing cash reserves will fund our planned activities for more than the next 12 months. However, we will require substantial future capital in order to continue to conduct the research and development, clinical and regulatory activities necessary to bring our product candidates to market and to establish commercial manufacturing, sales and marketing capabilities. During the year ended December 31, 2006, our net cash used in operating activities was $19.0 million and we had capital expenditures of $3.0 million. Our future capital requirements depend on many factors, including:

  •  

the progress of preclinical development and laboratory testing and clinical trials;   •  

the time and costs involved in obtaining regulatory approvals;   •  

delays that may be caused by evolving requirements of regulatory agencies;   •  

the number of product candidates we pursue;   •  

the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims;   •  

our plans to establish sales, marketing and/or manufacturing capabilities;   •  

our ability to establish, enforce and maintain selected strategic alliances and activities required for product commercialization;   •  

the acquisition of technologies, products or other companies and other business opportunities that require financial commitments; and   •  

our revenues, if any, from successful development and commercialization of our products. We intend to seek additional funding through strategic collaborations. We face intense competition from many other companies in the pharmaceutical and biotechnology industry for corporate collaborations, as well as for establishing relationships with academic and research institutions and for obtaining licenses to proprietary technology. If we are unable to attract and retain corporate partners to develop, introduce and market our products, our business may be materially and adversely affected. Our strategy and any reliance on corporate partners, if we are able to establish such collaborative relationships, are subject to additional risks. Our collaborators may not devote sufficient resources to the development, introduction and marketing of our products or may not pursue further development and commercialization of products resulting from collaborations with us. If a corporate partner elects to terminate its relationship with us, our ability to develop, introduce and market our products may be significantly impaired and we may be forced to discontinue the product altogether. We may not be able to negotiate alternative corporate partnership agreements on acceptable terms, if at all. The failure of any collaboration efforts could have a material adverse effect on our ability to develop, introduce and market our products and, consequently, could have a material adverse effect on our business, results of operations and financial condition.

In addition to strategic collaborations, we may seek funding through private or public sales of our securities, entering into credit arrangements or licensing all or a portion of our technology. This funding may significantly dilute existing stockholders or may limit our rights to our technology.

In October 2006, we filed a registration statement on Form S-3 with the SEC to be able to sell from time to time up to $150.0 million of any combination of debt securities, common stock, preferred stock and warrants.

The SEC has not declared this registration statement effective and securities may not be sold, nor may offers to buy the securities be accepted, prior to the time this registration statement becomes effective. The terms of any offering will be determined at the time of such offering. In addition, in 2005 we filed a registration statement on Form S-3 with the SEC to be able to sell from time to time up to $100.0 million of any combination of debt securities, common stock, preferred stock and warrants. The SEC declared this registration statement effective in May 2005. In September 2005, we sold 4,000,000 shares of common stock to the public under this registration statement at $13.50 per share for gross proceeds of $54.0 million. As of December 31, 2006, $46.0 million remains available under this registration statement.

We may not be able to obtain additional funding on reasonable terms, or at all. If we cannot obtain adequate funds, we may:

  •  

terminate or delay preclinical development or clinical trials for one or more of our product candidates;   •  

delay establishment, or fail to establish, sales, marketing and/or manufacturing capabilities;   •  

curtail significant product development programs that are designed to identify new product candidates;   •  

not be in a position to acquire technologies or pursue other business opportunities that require financial commitments; and/or   •  

relinquish rights to our technologies or product candidates. Risks Related to Our Industry

Claims that we infringe a third party’s intellectual property may give rise to burdensome litigation, result in potential liability for damages or stop our development and commercialization efforts.

Third parties may assert patent or other intellectual property infringement claims against us or our strategic partners or licensees with respect to technologies used in our potential products. While we have conducted patent searches to determine whether the technologies used in our products infringe patents held by third parties, we expect that numerous patent applications are currently pending and may be filed in the future for technologies generally related to our technologies, including many patent applications that remain confidential after filing. Due to these factors and the inherent uncertainty in conducting patent searches, we may violate third-party patent rights that we have not yet identified.

U.S. and foreign patents have been issued to third parties in the same fields as some of our product candidates. There may also be patent applications filed by these or other parties in the United States and various foreign jurisdictions that are in the same fields as some of our product candidates. These patent applications, if issued, could subject us to infringement actions. Although we have received communications from a third party alleging that we may infringe certain patents held by the third party, we do not believe there is a reasonable basis for an action claiming that we are infringing any valid and enforceable patents of such third party. To date we have not been subject to any infringement actions.

The owners or licensees of these and other patents may file one or more infringement actions against us. Patent litigation can involve complex factual and legal questions and its outcome is uncertain. Any claim relating to infringement of patents that is successfully asserted against us may cause us to pay substantial damages.

Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. Furthermore, as a result of a patent infringement suit brought against us or our strategic partners or licensees, we or our strategic partners or licensees may be forced to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a third party’s intellectual property unless that party grants us or our strategic partners or licensees rights to use its intellectual property. In such cases, we may be required to obtain licenses to patents or

proprietary rights of others in order to continue to commercialize our products. However, we may not be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if our strategic partners, licensees or we were able to obtain rights to the third party’s intellectual property, these rights may be non-exclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize some of our potential products or may have to discontinue development of a product candidate or cease some of our business operations as a result of patent infringement claims, which could severely harm our business.

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

Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain product candidates, which could severely harm our business.

If we are unable to protect our intellectual property rights, our competitors may develop and market products with similar features that may reduce demand for our potential products.

The following factors are important to our success:

  •  

receiving patent protection for our product candidates;   •  

not infringing on the intellectual property rights of others;   •  

preventing others from infringing our intellectual property rights; and   •  

maintaining our patent rights and trade secrets. We will be able to protect our intellectual property rights in patents and trade secrets from unauthorized use by third parties only to the extent that such intellectual property rights are covered by valid and enforceable patents or are effectively maintained as trade secrets.

We try to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Because the patent position of biotechnology and pharmaceutical companies involves complex legal and factual questions, the issuance, scope and enforceability of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. U.S. patents and patent applications may also be subject to interference proceedings and U.S. patents may be subject to reexamination proceedings in the U.S. Patent and Trademark Office (and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent office), which proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such interference, reexamination and opposition proceedings may be costly. Thus, any patents that we own or license from others may not provide any protection against competitors. Our pending patent applications, those we may file in the future or those we may license from third parties may not result in patents being issued. If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. We rely on third-party payment services for the payment of foreign patent annuities and other fees. Non-payment or delay in payment of such fees, whether intentional or unintentional, may result in loss of patents or patent rights important to our business.

Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties (for example, in cases in which the patent owner has failed to “work” the invention in that country, or the third party has patented improvements). In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. Compulsory licensing of life-saving drugs is also becoming increasingly popular in developing countries either through direct legislation or international initiatives. Such compulsory licenses could be extended to include some of our product candidates, which could limit our potential revenue opportunities. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patent and other intellectual property protection which makes it difficult to stop infringement.

In addition, our ability to enforce our patent rights depends on our ability to detect infringement. It is difficult to detect infringers who do not advertise the compounds that are used in their products. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations.

We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as our strategic partners, collaborators, employees and consultants. Any of these parties may breach these agreements and disclose our confidential information or our competitors might learn of the information in some other way. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business, financial condition and results of operations could be materially adversely affected.

Governmental and third-party payors may impose sales and pharmaceutical pricing restrictions or controls on our potential products that could limit our future product revenues and adversely affect profitability.

The commercial success of our potential products is substantially dependent on whether third-party reimbursement is available for the ordering of our products by the medical profession for use by their patients. Medicare, Medicaid, health maintenance organizations and other third-party payors may not cover or provide adequate payment for our potential products. They may not view our potential products as cost-effective and reimbursement may not be available to consumers or may not be sufficient to allow our potential products to be marketed on a competitive basis. Likewise, legislative or regulatory efforts to control or reduce health care costs or reform government health care programs could result in lower prices or rejection of our potential products. Changes in reimbursement policies or health care cost containment initiatives that limit or restrict reimbursement for our products may cause our future product revenues, if any, to decline.

Competition in the biotechnology and pharmaceutical industries is intense, and if we fail to compete effectively our financial results will suffer.

Our business is characterized by extensive research efforts, rapid developments and intense competition. Our competitors may have or may develop superior technologies or approaches to the development of competing products, which may provide them with competitive advantages. Our potential products may not compete successfully. We believe that successful competition in our industry depends on product efficacy, safety, reliability, availability, timing, scope of regulatory approval, acceptance and price, among other things. Important factors to our success also include speed in developing product candidates, completing clinical development and laboratory testing, obtaining regulatory approvals and manufacturing and selling commercial quantities of potential products to the market.

We expect competition to increase as technological advances are made and commercial applications broaden. In commercializing our initial product candidates and any additional product candidates, we will face substantial competition from pharmaceutical, biotechnology and other companies, universities and research institutions.

Many of our competitors have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. Many of our competitors may achieve product commercialization or patent protection earlier than we achieve commercialization or patent protection, if at all. Furthermore, we believe that some of our competitors have used, and may continue to use, litigation to gain a competitive advantage.

Rapid technological change could make our products obsolete.

Biopharmaceutical technologies have undergone rapid and significant change and we expect that they will continue to do so. Any compounds, products or processes that we or our strategic partners or licensees develop may become obsolete or uneconomical before achieving significant revenues. Rapid technological change could also make our products obsolete or uneconomical.

We face potential product liability exposure far in excess of our limited insurance coverage.

The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to product liability claims. These claims might be made directly by consumers, health care providers, pharmaceutical companies or others selling our products. We have obtained limited product liability insurance coverage for our clinical trials in the amount of $1 million per occurrence and $1 million in the aggregate. However, our insurance may not reimburse us or may not be sufficient to reimburse us for expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and 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. If we obtain marketing approval for any of our product candidates in development, we intend to expand our insurance coverage to include the sale of commercial products, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, juries have awarded large judgments in class action lawsuits based on drugs that had unanticipated side effects. In addition, the pharmaceutical and biotechnology industries, in general, have been subject to significant medical malpractice litigation. A successful product liability claim or series of claims brought against us would decrease our cash reserves and could cause our stock price to fall.

Our activities involve hazardous materials and we may be liable for any resulting contamination or injuries.

Our research activities involve the use of hazardous materials. We cannot eliminate the risk of accidental contamination or injury from these materials. If an accident occurs, we may be liable for any resulting damages, which may decrease our cash reserves and could cause our stock price to fall.

If we are unable to complete our assessment as to the adequacy of our internal control over financial reporting within the required time periods as required by Section 404 of the Sarbanes-Oxley Act of 2002, or in the course of such assessments identify and report material weaknesses in our controls, our investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their Annual Reports on Form 10-K. This report is required to contain an assessment by management of the effectiveness of the company’s internal controls over financial reporting. In addition, the independent registered public accounting firm auditing a public company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting. Although our management has determined, and our independent registered public accounting firm has attested, that our internal control over financial reporting was effective as of December 31, 2006, and we intend to continue to diligently and vigorously review our internal controls over financial reporting in order to ensure

compliance with the Section 404 requirements, if our independent registered public accounting firm is not satisfied in the future with our internal controls over financial reporting or the level at which these controls are documented, designed, operated or reviewed, or if said firm interprets the requirements, rules or regulations differently from us, then they may decline to attest to management’s assessment or may issue a report that is qualified or has a scope limitation. We anticipate to continue to expend resources in developing the necessary documentation and testing procedures required by Section 404; however, there is a risk that in the future we will not comply with all of the requirements imposed by Section 404. In addition, the very limited sized of our organization could lead to conditions that could be considered material weaknesses, such as those related to segregation of duties that is possible in larger organizations but significantly more difficult in smaller organizations. Also, controls related to our general information technology infrastructure may not be as comprehensive as in the case of a larger organization with more sophisticated capabilities and more extensive resources. It unclear how such circumstances could be interpreted in the future in the context of an assessment of internal controls over financial reporting. If we fail to implement required new or improved controls, we may be unable to comply with the requirements of Section 404 in the future. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline or could limit our ability to obtain additional financing.

Risks Related to Our Common Stock

Our stock price has fluctuated significantly and we expect that it may continue to do so.

An active public market for our common stock may not be sustained. The stock market, particularly in recent years, has experienced significant volatility particularly with respect to pharmaceutical and biotechnology stocks. The volatility of pharmaceutical and biotechnology stocks often does not relate to the operating performance of the companies represented by the stock. Other price fluctuations are directly attributable to performance. In October 2006, following the announcement of results from the pivotal Phase III study (SAINT II) of our lead product candidate, NXY-059, and the decision of our exclusive licensee, AstraZeneca, to discontinue development of NXY-059, our stock price declined significantly.

Factors that could cause volatility in the market price of our common stock include:

  •  

the results from our clinical trial programs and any future trials we may conduct;   •  

developments in the clinical trials of potentially similar competitive products;   •  

FDA or international regulatory actions;   •  

failure of any of our product candidates, if approved, to achieve commercial success;   •  

announcements of the introduction of new products by us or our competitors;   •  

market conditions in the pharmaceutical and biotechnology sectors;   •  

developments concerning intellectual property rights;   •  

litigation or public concern about the safety of our potential products;   •  

comments by securities analysts;   •  

actual and anticipated fluctuations in our quarterly operating results;   •  

deviations in our operating results from the estimates of securities analysts;   •  

rumors relating to us or our competitors;   •  

additions or departures of key personnel;   •  

third party reimbursement policies; and   •  

developments concerning current or future collaborations, strategic alliances or similar relationships. These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.

Future sales of common stock by our existing stockholders may cause our stock price to fall.

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

Our directors and management exercise significant control over our company.

If acting together, our directors and executive officers and their affiliates can influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock.

Provisions of Delaware law or our charter documents and stockholder rights plan could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for stockholders to change management.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. This is because these provisions may prevent or frustrate attempts by stockholders to replace or remove our current management.

These provisions include:

  •  

a classified board of directors;   •  

a prohibition on stockholder action through written consent;   •  

a requirement that special meetings of stockholders be called only by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors;   •  

advance notice requirements for stockholder proposals and nominations;  

•
 

a requirement of approval of not less than 66  2 / 3 % of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to amend certain provisions of our certificate of incorporation; and   •  

the authority of the Board of Directors to issue preferred stock with such terms as the Board of Directors may determine. As a result, these provisions and others available under Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock.

In addition, in March 2005, we adopted a stockholder rights plan. Although the rights plan will not prevent a takeover, it is intended to encourage anyone seeking to acquire our company to negotiate with our board prior to attempting a takeover by potentially significantly diluting an acquirer’s ownership interest in our outstanding capital stock. The existence of the rights plan may also discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.

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

We have paid no cash dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our businesses. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

Item 1B. Unresolved Staff Comments

None