Euthymics Bioscience 10Q 2007 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the quarterly period ended: March 31, 2007

o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 000-49730

DOV PHARMACEUTICAL, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware

(State or Other Jurisdiction

of Incorporation or Organization)

22-3374365

(I.R.S. Employer

Identification No.)

150 Pierce Street

Somerset, New Jersey 08873

(Address of principal executive office)

(732) 907-3600

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definitions of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act.

Large Accelerated Filer o Accelerated Filer o Non-accelerated Filer x

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

On May 10, 2007, there were outstanding 26,743,657 shares of the registrant’s common stock, par value $0.0001 per share.

DOV PHARMACEUTICAL, INC.

Form 10-Q

For the Quarter Ended March 31, 2007

Table of Contents

		PAGE NUMBER

PART I -	FINANCIAL INFORMATION

ITEM 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006	4

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006	5

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	19

ITEM 4.	Controls and Procedures	20

PART II -	OTHER INFORMATION

ITEM 1.	Legal Proceedings	21

ITEM 1A.	Risk Factors	21

ITEM 6.	Exhibits	30

Signatures		31

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Special Note Regarding Forward-Looking Statements

This Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, each as amended, including statements regarding our expectations with respect to the progress of and level of expenses for our clinical trial programs. You can also identify forward-looking statements by the following words: may, will, should, expect, intend, plan, anticipate, believe, estimate, predict, potential, continue or the negative of these terms or other comparable terminology. We caution you that forward-looking statements are inherently uncertain and are simply point-in-time estimates based on a combination of facts and factors currently known by us about which we cannot be certain or even relatively confident. Actual results or events will surely differ and may differ materially from our forward-looking statements as a result of many factors, some of which we may not be able to predict or may not be within our control. Such factors may also materially adversely affect our ability to achieve our objectives and to successfully develop and commercialize our product candidates, including our ability to:

·	raise substantial additional capital in order to fund operations;

·	obtain and maintain all necessary patents, licenses and other intellectual property rights;

·	demonstrate the safety and efficacy of product candidates at each stage of development;

·	meet our development schedule for our product candidates, including with respect to clinical trial initiation, enrollment and completion;

·	meet applicable regulatory standards and receive required regulatory approvals on our anticipated time schedule or at all;

·	meet or require our partners to meet obligations and achieve milestones under our license and other agreements;

·	obtain and maintain collaborations as required with pharmaceutical partners; and

·	produce drug candidates in commercial quantities at reasonable costs and compete successfully against other products and companies.

You should refer to the “Part II—Other Information” section of this report under the subheading “Item IA. Risk Factors” for a detailed discussion of some of the factors that may cause our actual results to differ materially from our forward-looking statements. We qualify all our forward-looking statements by these cautionary statements. There may also be other material factors that may materially affect our forward-looking statements and our future results. As a result of the foregoing, readers should not place undue reliance on our forward-looking statements. We do not undertake any obligation and do not intend to update any forward-looking statement.

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PART I - FINANCIAL INFORMATION

ITEM I. Financial Statements

DOV PHARMACEUTICAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2007			December 31, 2006
	(Unaudited)
Assets
Cash and cash equivalents	$	6,263,525		$	35,088,467
Marketable securities—short-term		15,149,040			7,203,327
Prepaid expenses and other current assets		917,887			2,644,230
Total current assets		22,330,452			44,936,024
Restricted cash—long-term		4,211,109			4,211,109
Property and equipment, net		1,139,800			1,214,189
Total assets	$	27,681,361		$	50,361,322

Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	2,270,824		$	2,465,141
Accrued expenses		2,948,591			5,054,594
Deferred credit - current		257,313			257,313
Convertible subordinated debentures		—			16,021,600
Total current liabilities		5,476,728			23,798,648
Deferred credits - non-current		2,189,126			2,218,362
Convertible subordinated debentures		—			53,978,400
Issuable warrants		4,600,000			—
Series C convertible preferred stock, $1.00 par value, 560,000 shares authorized, 439,784 and 0 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively		32,903,380			—
Series D convertible preferred stock, $1.00 par value, 560,000 authorized shares, 100,000 and 0 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively		6,326,980			—
Commitments and contingencies
Stockholders’ deficit:
Preferred stock—undesignated preferred stock, $1.00 par value, 6,550,357 shares authorized, 0 shares issued and outstanding at March 31, 2007 and December 31, 2006		—			—
Common stock, $.0001 par value, 60,000,000 shares authorized, 26,743,657 issued and outstanding at March 31, 2007 and December 31, 2006, respectively		2,674			2,674
Treasury stock, at cost; 31,450 common shares at March 31, 2007 and December 31, 2006		(66,985	)		(66,985	)
Additional paid-in capital		167,986,078			162,088,677
Accumulated other comprehensive loss		(960	)		(5,170	)
Accumulated deficit		(191,735,660	)		(191,653,284	)
Total stockholders’ deficit		(23,814,853	)		(29,634,088	)
Total liabilities and stockholders’ deficit	$	27,681,361		$	50,361,322

The accompanying notes are an integral part of these consolidated financial statements.

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DOV PHARMACEUTICAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended March 31,
	2007			2006
	(Unaudited)

Revenue	$	7,967,714		$	1,377,953
Operating expenses:
Research and development expense		6,859,144			17,878,936
General and administrative expense		4,513,626			4,010,222
License expense		5,500,000			—
Loss from operations		(8,905,056	)		(20,511,205	)
Interest income		512,964			835,583
Interest expense		(90,924	)		(599,977	)
Gain on extinguishment of convertible debentures and other income, net		8,400,640			6,632
Net loss	$	(82,376	)	$	(20,268,967	)
Basic and diluted net loss per share		—		$	(0.87	)
Weighted average shares used in computing basic and diluted net loss per share		26,687,472			23,199,611

The accompanying notes are an integral part of these consolidated financial statements.

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DOV PHARMACEUTICAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,
	2007			2006
	(Unaudited)
Cash flows from operating activities
Net loss	$	(82,376	)	$	(20,268,967	)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on debt extinguishment		(8,390,182	)		—
Non-cash amortization of premium paid on marketable securities		(27,718	)		224,443
Depreciation		74,389			102,024
Amortization of deferred (credits)/charges		(29,236	)		99,977
Non-cash compensation charges		5,897,401			2,099,313
Warrants, options and common stock revalued for services		—			80,894
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		1,726,343			102,398
Accounts payable		(194,317	)		(493,402	)
Accrued expenses		(2,106,003	)		(493,227	)
Deferred revenue		—			(1,377,953	)
Net cash used in operating activities		(3,131,699	)		(19,924,500	)
Cash flows from investing activities
Purchases of marketable securities		(33,389,695	)		(24,007,300	)
Sales of marketable securities		25,475,910			47,590,000
Establishment of line of credit for property lease		—			(4,211,109	)
Purchases of property and equipment		—			(22,639	)
Net cash (used in)/provided by investing activities		(7,913,785	)		19,348,952
Cash flows from financing activities
Redemption of convertible debentures		(17,779,458	)		—
Proceeds from options exercised		—			593,302
Net cash (used in)/provided by financing activities		(17,779,458	)		593,302
Net (decrease)/increase in cash and cash equivalents		(28,824,942	)		17,754
Cash and cash equivalents, beginning of period		35,088,467			8,425,552
Cash and cash equivalents, end of period	$	6,263,525		$	8,443,306

NON-CASH FINANCING ACTIVITIES

On March 15, 2007, as a result of the consummation of the Exchange Offer, the Company exchanged $67.5 million in principal amount of its 2.5% convertible subordinated debentures for 439,784 shares of series C convertible preferred stock with an estimated value of $38.1 million, 100,000 shares of series D convertible preferred stock with an estimated value of $7.5 million and cash of $13.5 million. Pursuant to the Exchange Offer, the Company will also issue warrants to purchase up to 30,000,000 shares of common stock to its common stockholders with an estimated valued of $4.6 million.

The accompanying notes are an integral part of these consolidated financial statements.

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DOV PHARMACEUTICAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. The Company

Organization

DOV Pharmaceutical, Inc. (“DOV” or the “Company”) was incorporated in May 1995 in New Jersey and reincorporated in Delaware in November 2000.

DOV is a biopharmaceutical company focused on the discovery, in-licensing and development of novel drug candidates for central nervous system disorders. The Company has several product candidates in clinical development. These product candidates target depression, alcohol abuse, pain, insomnia and angina and hypertension. The Company has established strategic alliances with select partners to access their unique technologies and their commercialization capabilities. The Company operates principally in the United States but it also conducts clinical studies outside the United States.

2. Liquidity/Going Concern

In March 2007, the Company consummated an exchange offer pursuant to which $67.5 million in principal amount of DOV’s outstanding convertible subordinated debentures were exchanged for 439,784 shares of series C and 100,000 shares of series D convertible preferred stock and $14.3 million in cash (the “Exchange Offer”). Additionally, the $2.5 million in principal amount of debentures that remained outstanding after the consummation of the Exchange Offer was repaid for $2.6 million (an amount equal to par plus accrued interest). Although the Company estimates that it has sufficient remaining capital to fund operations through December 31, 2007, it will continue to have capital needs. The Company intends to raise additional capital in 2007 through public or private financing or collaborative agreements; however, if adequate funds are not available to DOV as it needs them, DOV will be required to curtail significantly or eliminate at least temporarily one or more product development programs. These matters raise substantial doubt over the Company’s ability to continue as a going concern.

3. Significant Accounting Policies

Basis of Presentation

The financial statements are presented on the basis of accounting principles that are generally accepted in the United States for interim financial information and in accordance with the instructions of the Securities and Exchange Commission (“SEC”) on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these financial statements include all adjustments (consisting of normal recurring adjustments), except for stock compensation and adjustments to reflect the redemption of the convertible debentures, necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented.

The results of operations for the interim periods shown in this report are not necessarily indicative of results expected for the full year. The financial statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2006, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2007.

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Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported assets, liabilities, revenues, earnings, financial position and various disclosures. Significant estimates have included stock-based compensation expense, value of convertible preferred stock issued in the Exchange Offer and warrants issuable to common stockholders in relation to the Exchange Offer as described below, the value of investments, the valuation allowance recorded for deferred tax assets and the development period for the Company’s products. Actual results could differ from those estimates and the differences could be material.

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Deferred Credit

Deferred credits include the tenant allowance received from DOV’s landlord and the straight-lining of future rent escalations under the operating lease agreement. Both of these items are amortized over the life of the lease.

Net Loss Per Share

Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. The Company has excluded the shares issuable on conversion of the series C and series D convertible preferred stock, convertible subordinated debentures, outstanding options and warrants to purchase common stock from the calculation of diluted net loss per share, as such securities are antidilutive as indicated in the table below.

	Three Months Ended March 31,
	2007			2006
	(Unaudited)
Net loss	$	(82,376	)	$	(20,268,967	)
Basic and diluted:
Weighted -average shares used in computing basic and diluted net loss per share		26,687,472			23,199,611
Basic and diluted net loss per share		—		$	(0.87	)

Antidilutive securities not included in basic and diluted net loss per share calculation:
Series C convertible preferred stock		84,027,426			—
Series D convertible preferred stock		19,102,612			—
Convertible subordinated debentures		—			3,516,484
Options		4,210,686			3,617,816
Warrants		375,296			819,631
		107,716,020			7,953,931

Comprehensive Loss

	Three Months Ended March 31,
	2007			2006
	(Unaudited)
Net loss	$	(82,376	)	$	(20,268,967	)
Net unrealized gains on marketable securities and investments		4,210			133,567
Comprehensive loss	$	(78,166	)	$	(20,135,400	)

Concentration of Credit Risk

Cash and cash equivalents are invested in deposits with financial institutions. The Company has not experienced any losses on its deposits of cash and cash equivalents. Management believes that the financial institutions are financially sound and, accordingly, minimal credit risk exists. Approximately $2.3 million of the Company's cash balance was uninsured at March 31, 2007.

Restricted Cash

Restricted cash within non-current assets consists primarily of cash collateral as required under the $4.2 million letter of credit for the lease on the Somerset facility. The Company does not expect this cash to be released within the next twelve months. The restricted cash is primarily invested in short-term money market accounts with financial institutions. The classification of restricted cash is determined based on the expected term of the collateral requirement and not necessarily the maturity date of the underlying securities.

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Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159 which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, which for the Company will be as of the beginning of fiscal 2008. The Company is currently evaluating the impact this statement will have on its consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which is effective for the Company beginning January 1, 2008 and provides a definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements for future transactions. The Company is currently evaluating the impact this statement will have on its consolidated financial position or results of operations.

Accounting Changes

In July 2006, the FASB issued FASB Interpretation No.48 “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in practices associated with certain aspects of recognition and measurement related to accounting for income taxes. The Company adopted the provisions of FIN 48 as of January 1, 2007, and has analyzed its filing positions in all open tax years in jurisdictions where it may be obligated to file returns. The Company has identified its Federal tax return and its state tax return in New Jersey as “major” tax jurisdictions, as defined. The Company believes that its income tax filing position and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48. The Company’s policy is to recognize interest and/or penalties related to income tax matter in income tax expense. The Company had no accrual for interest or penalties at March 31, 2007. As of January 1, 2007 the Company had no unrecognized tax benefit and there was no significant change during the three months ended March 31, 2007. In addition, future changes in unrecognized tax benefit will have no impact on the effective tax rate due to the existence of the valuation allowance.

Since its inception, the Company has generated net operating losses (“NOLs”) for tax purposes and to date has not utilized its NOLs to offset income tax liabilities. Hence all prior tax return years of the Company remain open for audit purposes.

Variable Interest Entities, or VIE

On February 28, 2006, the Company entered into a ten-year operating lease with a leasing entity for a 133,686 square-foot facility in Somerset, New Jersey which has served as the Company’s corporate headquarters and principal place of business since June 2006. The sole purpose of the leasing entity is to manage the Somerset facilities on behalf of its tenant(s) and is therefore considered a VIE as defined by FIN 46R. At March 31, 2007, the Company is the only tenant of the building and is therefore considered to hold a significant variable interest. With respect to the Company’s leasing arrangement, the Company has determined that it is not the primary beneficiary and accordingly is not required to consolidate the related assets and liabilities of the leasing entity. The Company’s maximum exposure to any potential losses, should they occur, associated with this VIE is limited to the Company’s standby letter of credit of $4.2 million.

Risks and Uncertainties

The Company is subject to risks common to companies in the biopharmaceutical industry, including but not limited to successful commercialization of product candidates, protection of proprietary technology and compliance with U.S. Food and Drug Administration, or FDA, regulations.

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4. Stock-Based Compensation

The Company's 2000 Stock Option and Grant Plan (the "2000 Plan") was adopted by the Company's board of directors on November 18, 2000 and amended on March 28, 2002, May 30, 2003, May 24, 2004, May 23, 2005, May 22, 2006 and May 30, 2006. The 2000 Plan provides for the granting of stock, stock options, restricted stock and stock appreciation rights. Under the 2000 Plan, the Company has granted options and restricted stock to certain employees, directors and non-employee advisors. The Company's board of directors administers the 2000 Plan. Options granted under the 2000 Plan have a maximum term of ten years. Options issued generally vest 25% on the first anniversary of grant andthe balance ratably over the next three years. The 2000 Plan also provides the Company's board of directors with the discretion to accelerate the exercisability of any award. The Exchange Offer completed on March 15, 2007 discussed in note 7 below constituted a change of control under the 2000 Plan and all outstanding options issued prior to January 2007 and restricted stock awards were immediately accelerated pursuant to the terms of the 2000 Plan. Thus the Company recognized the total unrecognized compensation expense of $5.9 million for the outstanding awards that accelerated due to this change in control in the first quarter of 2007. As of March 31, 2007, the Company had 607,710 shares available for future grants.

	Options		Weighted Average Options Exercise Price		Aggregate Intrinsic Value (millions)
Options Outstanding, December 31, 2006		4,098,441	$	8.41
Granted		572,000		0.39
Exercised		—		—
Forfeited		459,725		10.84
Options Outstanding, March 31, 2007		4,210,716	$	7.06		—
Options Exercisable, March 31, 2007		3,673,716	$	7.73		—

The total intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock for the options that were in-the-money as of March 31, 2007. The following is a summary of outstanding stock options at March 31, 2007:

	Options Outstanding as of March 31, 2007						Options Exercisable as of March 31, 2007
	Weighted Average Remaining Contractual Life		Number Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Number Exercisable		Weighted Average Exercise Price

Price range $0.00 - $0.39		9.8 years		537,000	$	0.39		—		—		—
Price range $0.40 - $10.80		6.3 years		2,210,841	$	2.97		6.3 years		2,210,841	$	2.97
Price range $10.81 - $21.20		7.4 years		1,462,875	$	15.69		7.4 years		1,462,875	$	15.69
				4,210,716						3,673,716

5. Research and Development Expense

Research and development costs are expensed when incurred and include allocations for payroll and related costs and other corporate overhead.

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The following represents a detail of amounts included in research and development expense:

	Three Months Ended March 31,
	2007		2006
	(Unaudited)

Payroll related and associated overhead	$	5,110,889	$	5,201,286
Clinical and preclinical development costs and manufacturing supplies		1,593,834		12,021,745
Professional fees		154,421		655,905
Total research and development expense	$	6,859,144	$	17,878,936

6. Marketable Securities and Investments

The Company considers all highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents. The Company has evaluated its investment policies in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and has determined that all its investment securities are to be classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in Stockholders’ Equity under the caption "Accumulated Other Comprehensive Income (Loss)." The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in other income and expense. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. At March 31, 2007 and December 31, 2006, short-term marketable securities included $15.1 million and $7.2 million of investments, respectively, primarily comprised of investment grade asset-backed, variable-rate debt obligations (auction rate securities) and commercial paper.

7. Convertible Subordinated Debentures and Equity Issuance

In December 2004 and January 2005, the Company completed a private placement of $80 million in aggregate principal amount of 2.5% convertible subordinated debentures due January 15, 2025, of which $70.0 million in aggregate principal amount remained outstanding as of December 31, 2006 and none remained outstanding as of March 31, 2007.

In March 2007, the Company consummated the Exchange Offer pursuant to which $67.5 million in principal amount of its convertible subordinated debentures were exchanged for 439,784 shares of series C and 100,000 shares of series D convertible preferred stock and $14.3 million in cash, which included accrued interest of $843,000. Additionally, the $2.5 million in principal amount of debentures that remained outstanding after the consummation of the Exchange Offer was repaid for $2.6 million (an amount equal to par plus accrued interest). In addition, on or about May 24, 2007, the Company will distribute to holders of record of its common stock at the close of business on May 10, 2007 warrants to purchase up to 30 million shares of its common stock. The exercise price will be $0.523 per share. The warrants will be exercisable on and after July 1, 2007, or later in certain circumstances, until December 31, 2009, unless sooner redeemed, and are classified as a liability on the Company’s financial statements. Once the Company registers the common stock underlying the warrants then the warrants will be reclassified to stockholders’ equity.

The exchange transaction falls under the guidance of SFAS No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructurings”. The difference between the amount of the face value of the debentures and the fair value of the assets given to the debenture holders in the Exchange Offer of $8.4 million is recorded as a gain on debt extinguishment in the first quarter of 2007. The fair value of the series C and the series D convertible preferred stock was estimated at $38.1 million and $7.5 million, respectively, with a significant amount of the value reflecting the value of the underlying common stock. The balance reflected is reduced by the Exchange Offer expenses of $1.8 million and the estimated value of the warrants to be issued to common shareholders of approximately $4.6 million. The Company estimated the fair value of the warrants using a Black-Scholes methodology. Significant assumptions included the Company’s closing stock price as of March 15, 2007 of $0.37 per share and a volatility factor of 87%. The fair value of the warrants will fluctuate due to many factors, including, but not limited to, the fair value of the Company’s common stock and the volatility in the underlying common stock. The liability will be revalued at each balance sheet date to reflect the current fair value of the warrants. The value is expected to fluctuate significantly from quarter to quarter as the majority of the value in the liability relates to the Company’s current stock price, the term of the warrants and the fact that the Company’s common stock is volatile.

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Terms of Series C Preferred Stock. The 439,784 shares of series C convertible preferred stock votes with the common stock on an as-converted basis and has certain class voting rights. The series C has an initial liquidation preference of $100 per share and is convertible into 191.02612143 shares of common stock per share. The series C convertible preferred stock is mandatorily convertible upon the earlier of (i) 30 days following the filing of an amendment increasing the Company’s authorized common stock and (ii) a qualified financing, provided that the foregoing amendment to the Company’s certificate of incorporation has been filed.

Terms of Series D Preferred Stock. The 100,000 shares of series D convertible preferred stock has no voting rights and no liquidation preference. The series D convertible preferred stock is not mandatorily convertible and may not convert into common if conversion would result in beneficial ownership in excess of 9.9% of the Company’s voting capital stock for the converting holder. The series D is convertible into 191.02612143 shares of common stock per share, or a total of 19,102,612 shares as of March 31, 2007.

Recent Event. On May 11, 2007, the Company filed an amendment to its certificate of incorporation increasing the number of shares of common stock authorized for issuance by the Company to 260,000,000. As such the 439,784 outstanding shares of series C convertible preferred stock will be converted into 84,027,426 common shares on or before June 11, 2007. This will result in an increase to the Company’s stockholders’ equity by the book value of the preferred stock, or $32.9 million.

Original Terms of the Debentures. The holders of the debentures may have required the Company to purchase all or a portion of their debentures on January 15, 2012, January 15, 2015 and January 15, 2020 (the investor repurchase dates) or upon the occurrence of a fundamental change, in each case at a price equal to the principal amount of the debentures to be purchased, plus accrued and unpaid interest, including liquidated damages, if any, to the purchase date. The debentures were unsecured and subordinated in right of payment to all existing and future senior debt, as defined in the indenture governing the debentures. The Company paid interest semi-annually of $1 million on January 15 and July 15 of each year, commencing July 15, 2005. The Company had reserved 3,516,484 shares of common stock for issuance upon conversion of the debentures. The Company incurred issuance costs related to this private placement of approximately $2.8 million, which were recorded as other assets and were amortized to interest expense through the first investor repurchase date of the debentures. However, due to the reclassification of the Company’s debentures to current liabilities the balance of these deferred charges of $1.9 million was charged to interest expense as of September 30, 2006.

On July 26, 2006, the Company exchanged an aggregate of 3,445,000 shares of its common stock for an aggregate of $10 million in original principal amount of these debentures. The debentures and the shares of common stock originally issuable upon conversion thereof were registered for resale under the Securities Act. The Company canceled the debentures received in the exchange transactions which reduced the aggregate bonds outstanding from $80 million in original principal amount to $70 million in original principal amount.

8. Significant Agreements

Merck Agreement

On August 5, 2004, the Company entered into a license agreement with a subsidiary of Merck & Co. Inc., or Merck, for the worldwide development and commercialization of DOV 21,947 for all therapeutic indications and of DOV 216,303 for the treatment of depression, anxiety and addiction. The agreement became effective in September 2004. Additionally, Merck obtained rights of first offer and refusal regarding a licensing agreement for DOV 102,677 under certain circumstances and for additional consideration. The parties agreed to work together to clinically develop licensed product and DOV reserved the right to co-promote the sales of product in the United States to psychiatrists and other specialists who treat depression.

Under the agreement, DOV received a $35.0 million up-front licensing payment. In addition, the Company was entitled to receive milestone payments of up to $420.0 million, as well as royalties on worldwide net sales, if any. In accordance with the Emerging Issues Task Force (EITF) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” the Company evaluated the arrangement to determine if the deliverables were separable into units of accounting and then applied applicable revenue recognition criteria. The Company determined that the license and the collaboration were a single element for accounting purposes. As the Company had a continuing obligation with respect to collaboration on development of product candidates, until an NDA is filed, the up-front payment was deferred and amortized into revenue over the estimated research and development period of 72 months. In December 2006, Merck and DOV terminated its license agreement and as such the remaining deferred revenue of $22.2 million was taken into revenue in the fourth quarter of 2006.

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XTL Agreement

On January 15, 2007, the Company entered into an agreement with XTL relating to bicifadine. Under the agreement the Company granted XTL the exclusive right to develop products incorporating bicifadine for the treatment of human diseases, disorders and conditions, except for treatment of symptoms in certain areas of women’s health. The Company was entitled to receive an up-front payment of $6.5 million, of which $1.5 million was paid directly to DOV and $5.0 million was paid directly to Wyeth as a result of the acceleration of a milestone payable pursuant to the Company’s agreement with Wyeth. In addition, the Company paid to Elan Corporation plc (“Elan”) $500,000 pursuant to the Company’s agreement with Elan. Additionally, XTL was required to make a $1.0 million payment within 30 days if the Company successfully transferred to XTL an existing investigational new drug (“IND”) application and certain program documentation relating to bicifadine. Such transfers were completed and XTL made such payment to the Company in February 2007. Total up-front and milestone payments by XTL under the agreement could exceed $130.0 million if all milestones are achieved, with escalating low double-digit royalties on annual net sales of bicifadine. At its election, XTL may make certain non-royalty payments, including milestone payments, to the Company in shares of freely tradeable stock of XTL’s parent company, XTL Biopharmaceuticals Ltd. XTL will fund future research, development, manufacturing and commercialization costs of bicifadine.

The Company’s agreement with XTL resulted in the evaluation of three separate elements for revenue recognition purposes. Two elements, the license and the R&D services, were delivered during the first quarter. The remaining element represented certain administrative services, which are being completed throughout the first and second quarters, resulting in additional, but insignificant, revenue related to this arrangement being applicable to the second quarter.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our results of operations and financial condition together with our unaudited financial statements and related notes contained elsewhere in this report.

Liquidity/Going Concern

In March 2007, we consummated an Exchange Offer pursuant to which $67.5 million in principal amount of DOV’s outstanding convertible subordinated debentures were exchanged for 439,784 shares of series C and 100,000 shares of series D convertible preferred stock and $14.3 million in cash, which included $843,000 of accrued interest. Additionally, the $2.5 million in principal amount of debentures that remained outstanding after the consummation of the Exchange Offer was repaid for $2.6 million (an amount equal to par plus accrued interest). Please refer to note 7 to our financial statements included under Part I. Item I of this Form 10-Q. Although we estimate that we have remaining capital to fund operations through December 31, 2007, we will continue to have capital needs. We intend to raise additional capital in 2007 through public or private financing or collaborative agreements; however, if adequate funds are not available to us as we need them, we will be required to curtail significantly or eliminate at least temporarily one or more product development programs. These matters raise substantial doubt over our ability to continue as a going concern.

Executive Overview

We are a biopharmaceutical company focused on the discovery, in-licensing and development of novel drug candidates for central nervous system, or CNS, disorders. Since our inception, we have incurred significant operating losses and we expect to do so for the foreseeable future. As of March 31, 2007, we had an accumulated deficit of $191.7 million. We have depended upon equity and debt financings and license fee and milestone payments from our collaborative partners and licensees to fund our research and product development programs and expect to do so for the foreseeable future.

We anticipate that our quarterly results of operations will fluctuate for several reasons, including the timing and extent of research and development efforts, the timing of milestone, license fee and royalty payments and the timing and outcome of regulatory approvals.

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In pursuing our strategy, we enter into collaboration and/or license agreements with strategic partners from time to time. We currently have relationships with Neurocrine Biosciences, Inc. (“Neurocrine”), XTL and Wyeth. In 1998, we sublicensed the worldwide development and commercialization of indiplon to Neurocrine in exchange for the right to receive payments upon the achievement of certain clinical development milestones and royalties based on product sales, if any. Neurocrine filed two NDAs for indiplon for the treatment of insomnia in April and May 2005. The FDA issued an approvable letter for a 5 mg and 10 mg IR formulation and a non-approvable letter for a 15 mg MR formulation in May 2006. Neurocrine plans to resubmit its NDA for indiplon capsules by the end of the second quarter of 2007. All descriptions of Neurocrine’s clinical development and clinical trial results for indiplon are based solely on Neurocrine’s public disclosures through May 4, 2007.

On January 15, 2007, we entered into an agreement with XTL relating to bicifadine. Under the agreement we granted XTL the exclusive right to develop products incorporating bicifadine for the treatment of human diseases, disorders and conditions, except for treatment of symptoms in certain areas of women’s health. We received an up-front payment of $6.5 million, of which $5.0 million was paid to Wyeth as a result of the acceleration of a milestone payable pursuant to our agreement with Wyeth. In addition, we paid to Elan $500,000 pursuant to our agreement with them. Additionally, XTL was required to make a $1.0 million payment to DOV within 30 days if we successfully transferred to XTL an existing IND and certain program documentation relating to bicifadine. Such transfers were completed and XTL made such payment to us in February 2007. Total up-front and milestone payments by XTL under the agreement could exceed $130.0 million if all milestones are achieved, with escalating low double-digit royalties on annual net sales of bicifadine. XTL will fund future research, development, manufacturing and commercialization costs of bicifadine. As the up-front payment was not associated with continuing obligations from us, the payment was recorded as revenue in the first quarter of 2007.

Our revenue has consisted primarily of license fees and milestone payments from our collaborative partners and licensees. We record revenue on an accrual basis when amounts are considered collectible. In accordance with EITF 00-21, we evaluate all new agreements to determine if they are a single unit of accounting or separable. Revenue received in advance of performance obligations, or in cases where we have a continuing obligation to perform services, is deferred and amortized over the performance period. Revenue from milestone payments that represent the culmination of a separate earnings process is recorded when the milestone is achieved. Contract revenues are recorded as the services are performed. License and milestone revenue are typically not consistent or recurring in nature. Our revenue has fluctuated from year-to-year and quarter-to-quarter and this will likely continue. In 2007, our revenue is expected to reflect the up-front payment received from XTL on the licensing of bicifadine and the reimbursement for certain work and expenditures that we are incurring on their behalf.

Our operating expenses consist primarily of license expense, costs associated with research and development and general and administrative costs associated with our operations. Research and development expense consists primarily of compensation and other related costs of our personnel dedicated to research and development activities, clinical and preclinical trial expenses, including toxicology studies, costs of manufacturing clinical and preclinical trial materials, and professional fees related to clinical trials and patent strategy and prosecution. General and administrative expense consists primarily of the costs of our senior management, finance and administrative staff, business insurance, professional fees, including fees associated with investment bankers and lawyers engaged to advise us in relation to our debentures, and costs associated with being a public reporting entity. The recently consummated Exchange Offer effected a technical change of control and pursuant to the 2000 Plan, all outstanding options issued prior to January 2007 and restricted stock awards were immediately accelerated. Thus the Company recognized a non-cash compensation charge in the first quarter of 2007 of approximately $5.9 million.

In 2007 our research and development expenses are expected to be reduced from 2006 and will be funded with our existing cash. However, we will need additional funding to continue our program development and operations. For DOV 21,947, we initiated a Phase I clinical trial in April 2007 and intend to initiate a Phase II clinical trial in August 2007. We intend to select an uptake inhibitor development candidate from our preclinical pipeline in the second quarter of 2007, file an IND for the selected compound with the FDA in early 2008 and undertake the necessary expenditures to enable initiation of a Phase I clinical study in the first half of 2008.

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Stock-based Compensation

Beginning on January 1, 2006, we began accounting for stock options under the provisions of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123(R), which requires the recognition of the fair value of stock-based compensation. Under the fair value recognition provisions for SFAS 123(R), stock-based compensation cost is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisite service period of the award. We have used the Black-Scholes valuation model, or BSM, to estimate fair value of our stock-based awards, which requires various judgmental assumptions including estimating stock price volatility, forfeiture rates, and expected life. Our computation of expected volatility is based on our historical volatility. In addition, we consider many factors when estimating expected forfeitures and expected life, including types of awards, employee class and historical experience. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

Results of Operations

Three Months Ended March 31, 2007 and 2006

Revenue. Our revenue for the three months ended March 31, 2007 was comprised of the $7.5 million received from XTL pursuant to the licensing of bicifadine on January 15, 2007 and from reimbursement of certain costs incurred by us for services provided during the transition period following the consummation of the licensing transaction. Our revenue for the three months ended March 31, 2006 was comprised of $1.4 million of amortization of the $35.0 million up-front fee we received on the signing of the license, research and development agreement for our collaboration with Merck. The up-front payment was deferred and amortized to revenue over the estimated research and development period of 72 months. In December 2006, the license agreement was terminated. Thus the remaining deferred revenue was recognized during the fourth quarter of 2006 upon such termination and thus no revenue was recorded in the first quarter of 2007.

Research and Development Expense. Research and development expense decreased $11.0 million to $6.9 million for the first quarter of 2007 from $17.9 million for the comparable period in 2006. Approximately $10.4 million of the decrease was associated with decreased clinical development costs of $10.1 million for bicifadine, $278,000 for DOV 273,547 and $64,000 for DOV 102,677. The remaining decrease in research and development expense related to decreased travel expenses of $357,000 and professional fees of $501,000 offset by an increase in payroll and associated overhead expense of $424,000. The increase in payroll and associated overhead is primarily the result of an increase in non-cash stock compensation of $2.3 million related to the acceleration of certain stock options as a result of the change of control effected by the consummation of the Exchange Offer, offset by a net decrease in payroll related expenses for a decrease in headcount of approximately 54 employees from the comparable period in 2006. The net decrease in professional fees primarily related to consulting fees, recruitment fees and legal fees related to patents.

General and Administrative Expense. General and administrative expense increased $503,000 to $4.5 million for the first quarter of 2007 from $4.0 million for the comparable period in 2006. The increase was primarily attributable to an increase of $822,000 in payroll and related benefits, $271,000 in rent, offset by decreased office and related expenses of $297,000 and $211,000 in professional fees. The increase in payroll and associated overhead is primarily the result of an increase in non-cash stock compensation of $1.5 million related to the acceleration of certain stock options as a result of the change of control effected by the consummation of the Exchange Offer, offset by a net decrease in payroll related expenses for a decrease in headcount of approximately 11 employees from the comparable period in 2006. Of the $297,000 decrease in office and related expenses, $161,000 is related to decreased marketing research expenses.

License Expense. License expense for the first quarter of 2007 is comprised of the $5.0 million paid to Wyeth and $500,000 paid to Elan in connection with the licensing of certain rights to bicifadine to XTL in January 2007. As these milestone payments are prior to FDA approval, the entire amount was expensed in the first quarter of 2007.

Interest Income. Interest income decreased $323,000 to $513,000 in the first quarter of 2007 from $836,000 in the comparable period in 2006 primarily due to lower average cash balances, offset by higher effective interest rate yield.

Interest Expense. Interest expense decreased $509,000 to $91,000 from $600,000 in the comparable period in 2006 primarily due to the completion of the Exchange Offer and the exchange transactions in the third quarter of 2006 which reduced the aggregate bonds outstanding from $80 million in original principal amount to $70 million in original principal amount. Please refer to note 7 of our financial statements included under Part I, Item 1of this Form 10-Q.

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Gain on Extinguishment of Convertible Debentures and Other Income,Net. In March 2007, we consummated the Exchange Offer pursuant to which $67.5 million in principal amount of our outstanding convertible subordinated debentures were exchanged for 439,784 shares of series C and 100,000 shares of series D convertible preferred stock and $14.3 million in cash, which included interest of $843,000. The exchange transaction falls under the guidance of SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings. The difference between the amount of the face value of the debentures and the fair value of the assets given up in the exchange of $8.4 million is recorded as a gain on debt extinguishment in the first quarter of 2007. Please refer to note 7 to our financial statements included under Part I, Item 1 of this Form 10-Q.

Liquidity and Capital Resources

At March 31, 2007, our cash and cash equivalents and marketable securities totaled $21.4 million as compared with $42.3 million at December 31, 2006. The decrease in cash balances at March 31, 2007 resulted primarily from approximately $17.8 million of cash used in consummating the Exchange Offer and redeeming the remaining debentures. At March 31, 2007, we had working capital of $16.9 million compared with $21.1 million at December 31, 2006. Although we estimate that we have remaining capital to fund operations through December 31, 2007, we will continue to have capital needs. We intend to raise additional capital in 2007 through public or private financing or collaborative agreements; however, if adequate funds are not available to us as we need them, we will be required to curtail significantly or eliminate at least temporarily one or more product development programs. These matters raise substantial doubt over our ability to continue as a going concern.

Net cash used in operations during the quarter ended March 31, 2007 amounted to $3.1 million as compared to $19.9 million in the same period of 2006. The decrease in cash used in operations resulted primarily from the decrease in clinical development activities and the reduction of personnel. Net non-cash expense related to stock-based compensation and depreciation and amortization expenses was $5.9 million in the three months ended March 31, 2007 and $2.6 million in the comparable period in 2006.

Net cash used in investing activities during the quarter ended March 31, 2007, was $7.9 million as compared to $19.3 million provided by investing activities during the same period in 2006. This fluctuation resulted primarily from the timing differences in investment purchases, sales and maturities and the fluctuations in our portfolio mix between cash equivalents and short-term investment holdings. We expect similar fluctuations to continue in future periods. In February 2006, we committed to a ten-year operating lease for a 133,686 square foot facility in Somerset, New Jersey which has served as our corporate headquarters and principal place of business since June 2006. In connection with this lease, we entered into a stand-by letter of credit facility for $4.2 million to serve as collateral for our performance under the lease and as such this cash is not available to us through March 2016.

Net cash used in financing activities during the quarter ended March 31, 2007 was $17.8 million as compared to $593,000 provided by financing activities in the comparable period in 2006. In March 2007, we consummated the Exchange Offer pursuant to which $67.5 million in principal amount of our convertible subordinated debentures were exchanged for 439,784 shares of series C and 100,000 shares of series D convertible preferred stock and $14.3 million in cash, which included $843,000 of accrued interest which is not classified as a financing activity. Additionally, the $2.5 million in principal amount of Debentures that remained outstanding after the consummation of the Exchange Offer was repaid for $2.6 million (an amount equal to par plus accrued interest). The Company incurred approximately $1.8 million for costs related to the Exchange Offer.

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Factors That May Affect Future Financial Condition and Liquidity

We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated operating expenses, debt obligations and capital requirements until at least December 31, 2007. Our future capital uses and requirements depend on numerous factors, including:

· our progress with research and development;

· our ability to maintain and establish, and the scope of, collaborations that finance research and development of our clinical candidates;

· the progress and success of clinical trials and preclinical studies of our product candidates;

· the costs and timing of obtaining, enforcing and defending our patent and intellectual rights; and

· the costs and timing of regulatory approvals.

In addition to the foregoing, our future capital uses and requirements are also dependent in part on the ability of our licensees and collaborative partners to meet their obligations to us, including the fulfillment of their development and commercialization responsibilities in respect of our product candidates. Our sublicensee and collaborative partners, Neurocrine and XTL, may encounter conflicts of interest, changes in business or clinical strategy, or they may acquire or develop rights to competing products, all of which could adversely affect their ability or willingness to fulfill their obligations to us and, consequently, require us to satisfy, through the commitment of additional funds or personnel or both, any shortfalls in their performance.

To meet future capital requirements, we may attempt to raise additional funds through equity or debt financings, collaborative agreements with corporate partners or from other sources. If adequate funds are not available, or available on an acceptable basis, we may be required to curtail or delay significantly one or more of our product development programs. In addition, future milestone payments under some of our collaborative or license agreements are contingent upon our meeting particular research or development goals. The amount and timing of future milestone payments are contingent upon the terms of each collaborative or license agreement. Milestone performance criteria are specific to each agreement and based upon future performance. Therefore, we are subject to significant variation in the timing and amount of our revenues, milestone expenses and results of operations from period to period.

Contractual Obligations

Future minimum payments for all contractual obligations for years subsequent to March 31, 2007, are as follows:

	Payments Due by Period
	Less than 1 Year		1- 3 Years		3- 5 Years		More Than 5 Years		Total
Operating leases	$	2,862,338	$	5,703,216	$	6,001,833	$	12,257,558	$	26,824,945
Other contractual liabilities(1)		607,441		95,263		—		—		702,704
Total	$	3,469,779	$	5,798,479	$	6,001,833	$	12,257,558	$	27,527,649

(1)

We have entered into contracts with an investment banker and a real estate broker. The contracts will require substantial fees upon the successful closing of certain transactions in relation to either an acquisition of our assets or equity or the sublease of all or part of our existing facility. These amounts have been excluded from the table as the costs are not quantifiable or certain at this time.

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The table above excludes future milestones and royalties (as summarized in the table below) that may be owed to Wyeth, Elan and Biovail Laboratories, Inc., under terms of existing agreements as payments are contingent upon future events. We do not expect to pay any royalties under these agreements in 2007.

	Milestone Payments						Royalty/Payments on Net Sales, if Any
	NDA Filing		NDA Approval or Marketing Authorization		Upon License or Introduction to Market		Royalty/Payments on Net Sales, if Any
Bicifadine		—	$	4,500,000	$	500,000		5.5	%
DOV 21,947(1)		—	$	2,250,000		—		—
DOV 102,677(1)		—	$	2,250,000		—		—
DOV 216,303(1)		—	$	4,500,000		—		3.5	%
DOV Diltazem		—	$	3,000,000		—		Up to $7.5 million
Ocinaplon	$	2,500,000	$	4,500,000	$	2,000,000		3.5	%

(1) We are obligated to pay milestones upon NDA (or equivalent) approval in the United States, Europe or Japan, but only if such milestone becomes payable prior to payment of the $4.5 million milestone payable on an NDA (or equivalent) approval for DOV 216,303. Any milestone payments made with respect to DOV 21,947 or DOV 102,677 reduce, dollar-for-dollar, our $4.5 million milestone obligation for DOV 216,303.

The table also excludes any severance or termination payments that would be due to certain of our employees under their employment contracts should they be terminated without cause or terminate following a change of control, as defined in their agreements, prior to the expiration of their contract term as the amounts are not determinable at this time. If on March 31, 2007 the relevant employees were terminated without cause the amounts due pursuant to these contracts would have been $860,000. We file our employment agreements with our current and former executive officers with the SEC and these agreements are available at www.sec.gov.

Accounting Changes

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement is effective in the first fiscal quarter of 2008 and we will adopt the statement at that time. We are currently evaluating the impact this statement will have on our consolidated financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159 which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, which for us will be as of the beginning of fiscal 2008. We are currently evaluating the impact this statement will have on our consolidated financial position or results of operations.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risks

To date, we have invested our cash balances with substantial financial institutions. In the future, the primary objective of our investment activities will be to maximize the income we receive from our investments consistent with preservation of principal and minimum risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and corporate obligations. Due to the short holding period of these types of investments, we have concluded that we do not have a material financial market risk exposure.

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ITEM 4. Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out by management as of March 31, 2007, under the supervision and with the participation of our chief executive officer. Based upon that evaluation, our chief executive officer concluded that our disclosure controls and procedures are effective.

There was no significant change in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

We are not a party to any material legal proceedings.

ITEM 1A. Risk Factors

If any of the events covered by the following risks occur, our business, results of operations and financial condition could be harmed. In that case, the trading price of our common stock could decline. Moreover, our actual results may differ materially from our forward-looking statements as a result of the following factors.

Risks Related to our Business

If we cannot raise additional funding, we may be unable to complete development of our product candidates.

At March 31, 2007, we had cash and cash equivalents and marketable securities of $21.4 million. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our anticipated operating expenses and capital requirements until December 31, 2007. We will require additional funding to continue our research and development programs, including preclinical testing and clinical trials of our product candidates, for operating expenses and to pursue regulatory approvals for our product candidates. We intend to raise additional capital in 2007 through public or private financing or collaborative agreements; however, if adequate funds are not available to us as we need them, we will be required to curtail significantly or eliminate at least temporarily one or more product development programs. These matters raise substantial doubt over our ability to continue as a going concern.

Mandatory conversion of our series C convertible preferred stock will result in dilution to our common stockholders and may cause our common stock’s price to decline.

The shares of series C convertible preferred stock issued in connection with the Company’s recently consummated Exchange Offer will convert into approximately 84.0 million shares of common stock on or before June 11, 2007. In addition, the shares of our series D convertible preferred stock are convertible into approximately 19.1 million shares of common stock at any time unless such conversion would result in beneficial ownership in excess of 9.9% of the Company’s voting capital stock by the converting holder. Sales of these additional shares of common stock, which generally will have no restriction on trading, may cause our common stock’s price to decline. In addition, future growth and increases in the value of the Company as a whole will be shared by a significantly larger number of shares of common stock.

Our common stock is currently quoted on the Pink Sheets, which will result in more limited trading opportunities for holders of our common stock, increased volatility and additional difficulty in raising capital in the future if needed.

Our common stock is no longer traded on The NASDAQ Global Market. Instead, it is currently quoted on the Pink Sheets. Although this trading venue offers holders of our common stock the opportunity to trade, our stock price may be highly volatile. Moreover, it is unlikely that any significant long-term institutional holdings will develop through these trading venues. Trading on the Pink Sheets will also likely present additional difficulties in the event we need to raise additional capital in the future as most institutions prefer to invest in a common stock that is traded on a national securities exchange.

Our stock price may be volatile and the market price of our common stock may decline.

Our stock price has been particularly volatile in the past. Following the release of results from our completed Phase III clinical trial of bicifadine in patients with chronic low back pain, or CLBP, our stock price experienced a substantial decline from the previous day’s close price of $14.69 to $7.92. Further, following our partner Neurocrine’s announcement regarding the FDA review and approval process for indiplon, our stock price experienced another decline from the previous day’s close price of $7.05 to $3.02 and further declined upon the July 31, 2006 announcement of our notice of NASDAQ listing requirement deficiencies and the October 26, 2006 announcement that we would no longer be listed for trading on a national securities exchange.

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Some of the factors that may cause the market price of our common stock to continue to fluctuate include:

future issuances of our common stock or other forms of financings which would result in substantial dilution to our existing equity holders;

results of clinical trials conducted by us or on our behalf, or by our competitors;

delays in initiating clinical trials or changes in previously planned or initiated clinical trials;

regulatory developments or enforcement in the United States and foreign countries, such as the result of the May 2006 FDA issuance of an approvable letter (for the 5mg and 10mg IR doses) and a non-approvable letter (for the 15mg MR dose) for the indiplon NDA filings;

business or legal developments concerning our collaborators, licensors or licensees, including XTL, Neurocrine and Wyeth;

developments or disputes concerning patents or other proprietary rights;

changes in estimates or recommendations by securities analysts;

public concern over our drugs that treat CNS disorders, including any drugs that we may develop in the future;

litigation;

general market conditions;

changes in the structure of health care payment systems;

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

economic and other external factors or other disasters or crises;

period-to-period fluctuations in our financial results and financial position; and

changes in senior management.

If any of the foregoing risks occur, our stock price could fall and in some cases expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management. In this regard, following a decline in the aftermarket trading price of our common stock in connection with our initial public offering, beginning on April 30, 2002, a number of class action lawsuits were filed naming us as defendants, in addition to certain of our officers and directors and certain of our underwriters. On December 20, 2002, we entered into a settlement agreement, which was approved by the court on April 16, 2003, to settle these lawsuits. Pursuant to the settlement agreement, we have paid the class members (inclusive of their attorneys' fees and costs) $250,000 in cash and issued them six-year warrants to purchase 500,000 shares of our common stock with an exercise price of $10.00 per share. Upon issuance, we determined the value of the warrants to be $2.2 million.

We have incurred losses since our inception and expect to incur significant losses for the foreseeable future, and we may never reach profitability.

Since our inception in April 1995 through March 31, 2007, we have incurred significant operating losses and, as of March 31, 2007, we had an accumulated deficit of $191.7 million. We have not yet completed the development, including obtaining regulatory approvals, of any product candidate and, consequently, have not generated any revenues from the sale of products. Even if we succeed in developing and commercializing one or more of our product candidates, we may never achieve significant sales revenue and we expect to incur operating losses for the foreseeable future. We also expect to continue to incur significant operating expenses and capital expenditures and anticipate that our expenses may increase in the foreseeable future as we:

conduct clinical trials;

conduct research and development on existing and new product candidates;

make milestone payments;

seek regulatory approvals for our product candidates;

commercialize our product candidates, if approved; and

identify additional compounds and acquire rights from third parties to those compounds through a license to us.

We must generate significant revenue to achieve and maintain profitability. We may not be able to generate sufficient revenue and we may never be able to achieve or maintain profitability.

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We are dependent on the successful outcome of clinical trials for our lead product candidates.

None of our product candidates are currently approved for sale by the FDA, or by any other regulatory agency in the world, and our product candidates may never be approved for sale or become commercially viable. Before obtaining regulatory approval for the sale of our product candidates, they must be subjected to extensive preclinical and clinical testing to demonstrate their safety and efficacy for humans. Our success will depend on the success of clinical trials that have not yet begun. There are a number of difficulties and risks associated with clinical trials including, but not limited to, the possibilities that:

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

we may discover that a product candidate, even if safe when taken alone, may interfere with the actions of other drugs taken at the same time such that its marketability is materially reduced;

we may discover that a product candidate does not exhibit the expected therapeutic results in humans;

a product candidate may lend itself to user abuse, in which case labeling may adversely affect its marketability;

results may not be statistically significant or predictive of results to be obtained from large-scale, advanced clinical trials;

we or the FDA may suspend or delay initiation of further clinical trials of our product candidates for any of a number of reasons;

we may be delayed in the FDA protocol review process;

patient recruitment may be slower than expected;

patient compliance may fall short of trial requirements; and

patients may drop out of our clinical trials.

In April and May 2006, we announced the results of our Phase III clinical trial of bicifadine for the treatment of chronic lower back pain, CLBP, study 020. Bicifadine did not achieve a statistically significant effect relative to placebo on the primary endpoint of the study at any of the three doses tested. In October 2006, we announced the interim results of our second Phase III clinical trial of bicifadine for CLBP, study 021. Bicifadine did not achieve a statistically significant effect relative to placebo on the primary endpoint of the study and we therefore stopped the dosing in this study. We also recently stopped the dosing in the long-term safety trial, study 022, and following the execution of our sublicense agreement with XTL for bicifadine, we have transitioned the bicifadine program to XTL for further development.

Given the uncertainty surrounding the outcome of the regulatory and clinical trial process, we may not be able to successfully advance the development of effective and safe, commercially viable products. If we are unable to successfully develop and commercialize any one or more of our product candidates, this could severely harm our business, impair our ability to generate revenues and adversely impact our stock price.

We may determine to continue to reduce staffing further as a result of stopping certain clinical trials and other development activities for bicifadine, in which case we could face lawsuits.

On May 18, 2006, we reduced our workforce to 74 employees from 111 employees in order to lower our cost structure as part of a reorganization of operations and to appropriately align our operations with its current stage of drug development and research. This reduction in force was made as a result of the postponement by us of certain clinical trials and other development activities for bicifadine. In October 2006, we announced the interim results of our second Phase III clinical trial of bicifadine for CLBP, study 021. Bicifadine did not achieve a statistically significant effect relative to placebo on the primary endpoint of the study and we therefore stopped the dosing in this study. We also recently stopped the dosing in the long-term safety trial, study 022. In addition, our sublicense of bicifadine to XTL in January 2007 resulted in the further reduction of the time and resources necessary for the development of bicifadine. We are continuing to perform certain activities related to bicifadine on behalf of XTL and once these are complete, we may determine to further reduce our workforce. Any reduction in workforce is accompanied by risk of litigation, which if initiated or successful, could harm our business and financial position.

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We have experienced a substantial decline in our workforce and we may continue to experience such declines given the uncertainty of our current business situation.

From May 19, 2006 through May 4, 2007, our workforce has declined to 41 employees from 74 employees. With the uncertainty of our business situation, we expect to have further declines. With the employee base that we currently have, we believe we will complete the transition activities agreed to with XTL for bicifadine in the second quarter of 2007. Further reductions in workforce will not only result in delays in initiating clinical studies but could also result in increased costs associated with hiring outside consultants.

We may not receive regulatory approvals for our product candidates, approvals may be delayed or the approvals we receive may not be sufficient to fulfill our current goals for our product candidates.

Regulation by government authorities in the United States and foreign countries is a significant factor in the development, manufacture and commercialization of our product candidates and in our ongoing research and development activities. Our partner Neurocrine filed two NDAs for indiplon for the treatment of insomnia in April and May 2005. The FDA issued an approvable letter for the 5 mg and 10 mg IR formulation and a non-approvable letter for the 15 mg MR formulation in May 2006. Neurocrine announced in January 2007 that it plans to resubmit its NDA for indiplon capsules by the end of the second quarter of 2007. All our other product candidates are in various stages of research and development and we have not yet requested or received regulatory approval to commercialize any product candidate from the FDA or any other regulatory body.

In particular, human therapeutic products are subject to rigorous preclinical testing, clinical trials and other approval procedures of the FDA and similar regulatory authorities in foreign countries. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record keeping, labeling, storage, approval, advertising, promotion, sale and distribution of biopharmaceutical products. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. The approval process may take many years to complete and the approvals we receive may not allow us to pursue all the desired indications or uses for each of our product candidates. Additionally, even after receipt of FDA approval, the FDA may request additional clinical trials to evaluate any adverse reactions or long-term effects. The scope and expense of such post-approval trials could be extensive and costly to us. Any FDA or other regulatory approval of our product candidates, once obtained, may be withdrawn. If our product candidates are marketed abroad, they will also be subject to extensive regulation by foreign governments.

Any failure to receive regulatory approvals necessary to commercialize our product candidates would have a material adverse effect on our business. The process of obtaining these approvals and the subsequent compliance with appropriate federal and state statutes and regulations require spending substantial time and financial resources. If we, or our collaborators or licensees, fail to obtain or maintain or encounter delays in obtaining or maintaining regulatory approvals, it could adversely affect the marketing of any product candidates we develop, our ability to receive product or royalty revenues and our liquidity and capital resources.

Our operating results are subject to fluctuations that may cause our stock price to decline.

Our revenue is unpredictable and has fluctuated significantly from year-to-year and quarter-to-quarter and will likely continue to be highly volatile. We believe that period-to-period comparisons of our past operating results are not good indicators of our future performance and should not be relied on to predict our future results. In the future, our operating results in a particular period may not meet the expectations of any securities analysts whose attention we may attract, or those of our investors, which may result in a decline in the market price of our common stock.

Our success in developing our product candidates depends upon the performance of our licensees and collaborative partners.

Our efforts to develop, obtain regulatory approval for and commercialize our existing and any future product candidates depend in part upon the performance of our licensees and collaborative partners. Currently, we have license and collaborative agreements with XTL, Neurocrine and Wyeth. If DOV at any time becomes insolvent or commits actions for bankruptcy, the license for our compounds with Wyeth may be terminated and thus we may not have any remaining economic interest in the compounds. In addition, if at any time we become insolvent or commit actions for bankruptcy, the licenses for certain technology that we have with certain of our partners may be terminated. In connection with certain of these agreements, we have granted certain rights, including development and marketing rights and rights to defend and enforce our intellectual property. We do not have day-to-day control over the activities of our licensees or collaborative partners and cannot assure you that they will fulfill their obligations to us, including their development and commercialization responsibilities in respect of our product candidates.

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We also cannot assure you that our licensees or collaborators will properly maintain or defend our intellectual property rights or that they will not utilize our proprietary information in such a way as to invite litigation that could jeopardize or potentially invalidate our proprietary information or expose us to potential liability. Further, we cannot assure you that our licensees or collaborators will not encounter conflicts of interest, or changes in business strategy, or that they will not acquire or develop rights to competing products, all of which could adversely affect their willingness or ability to fulfill their obligations to us.

From January 1999 until October 2003, Elan and we were engaged in developing controlled release formulations of bicifadine and ocinaplon pursuant to our joint venture. In October 2003, we acquired from Elan 100% ownership of Nascime, the joint venture's operating subsidiary, and the product candidates bicifadine and ocinaplon. This acquisition ended our involvement with Elan in the nearly five-year joint venture. In March 2003, we and Biovail terminated our collaboration for DOV diltiazem and in December 2006, we and Merck terminated our collaboration for DOV 21,947 and DOV 216,303.

Any failure on the part of our licensees or collaborators to perform or satisfy their obligations to us could lead to delays in the development or commercialization of our product candidates and affect our ability to realize product revenues. Disagreements with our licensees or collaborators could require or result in litigation or arbitration, which could be time-consuming and expensive. If we or our licensees or collaborators fail to maintain our existing agreements or establish new agreements as necessary, we could be required to undertake development, manufacturing and commercialization activities solely at our own expense. This would significantly increase our capital requirements and may also delay the commercialization of our product candidates.

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

We depend on independent clinical investigators and contract research organizations, or CROs, to assist in the conduct of our clinical trials under their agreements with us. The investigators are not our employees, and we cannot control the amount or timing of resources that they devote to our programs. If independent investigators fail to devote sufficient time and resources to our drug development programs, or if their performance is substandard, it will delay the approval of our FDA applications and our introduction of new drugs. The CROs we contract with to assist with the execution of our clinical trials play a significant role in the conduct of the trials and the subsequent collection and analysis of data. Failure of the CROs to meet their obligations could adversely affect clinical development of our products. Moreover, these independent investigators and CROs may also have relationships with other commercial entities, some of which may compete with us, which could harm our competitive position.

Our existing collaborative and licensing agreements contain, and any such agreements that we may enter into in the future may contain, covenants that restrict our product development and commercialization activities.

Our existing license and collaborative agreements contain covenants that restrict our product development and our ability to compete in collaborative agreements. In addition, certain of our agreements no longer effective have involved, among other things, restrictions on the issuance of debt and equity securities and limitations on our ability to license our product candidates to third parties. Because of existing restrictive covenants, if our licensees or collaborators fail to fulfill their obligations to us or we are otherwise not able to maintain these relationships, we cannot assure you that we will be able to enter into alternative arrangements or assume the development of these product candidates ourselves. This would significantly affect our ability to commercialize our product candidates. Further, we cannot assure you, even if alternative arrangements are available to us, that they will be any less restrictive on our business activities.

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If we are unable to create sales, marketing and distribution capabilities, or enter into agreements with third parties to perform these functions, we will not be able to commercialize our product candidates.

We do not have any sales, marketing or distribution capabilities. In order to commercialize our product candidates, if any are approved, we must either acquire or internally develop sales, marketing and distribution capabilities or make arrangements with third parties to perform these services for us. If we obtain FDA approval for our existing product candidates, we intend to rely on relationships with one or more pharmaceutical companies or other third parties with established distribution systems and direct sales forces to market our product candidates. If we decide to market any of our product candidates directly, we must either acquire or internally develop a marketing and sales force with technical expertise and supporting distribution capabilities. The acquisition or development of a sales and distribution infrastructure would require substantial resources, which may divert the attention of our management and key personnel, and negatively impact our product development efforts. Moreover, we may not be able to establish in-house sales and distribution capabilities or relationships with third parties. To the extent we enter into co-promotion or other licensing agreements, our product revenues are likely to be lower than if we directly marketed and sold our product candidates, and any revenue we receive will depend upon the efforts of third parties, which may not be successful.

The success of our business depends upon the members of our senior management team, our scientific staff and our ability to continue to attract and retain qualified scientific, technical and business personnel.

We are dependent on the principal members of our management team and scientific staff for our business success. The loss of any of these people could impede the achievement of our development and business objectives. We do not carry key man life insurance on the lives of any of our key personnel. There is intense competition for human resources, including management, in the scientific fields in which we operate and there can be no assurance that we will be able to attract and retain qualified personnel necessary for the successful development of our product candidates, and any expansion into areas and activities requiring additional expertise. In addition, there can be no assurance that such personnel or resources will be available when needed. In addition, we rely on a significant number of consultants to assist us in formulating our research and development strategy and other business activities. All our consultants may have commitments to, or advisory or consulting agreements with, other entities that may limit their availability to us.

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

As is commonplace in the biotechnology industry, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

Because some of our product candidates are protected by patents that have expired or will expire in the near term, we may be required to rely solely on the Hatch-Waxman Act for market exclusivity.

A number of patents that we licensed from Wyeth have expired, including certain composition of matter patents that provide protection for the use of DOV 216,303 for the treatment of depression and the use of bicifadine for the treatment of pain. Patents protecting intermediates useful in the manufacture of ocinaplon are due to expire in 2007. The numerous patent applications pending and others in preparation covering our compounds, even if filed and approved, may not afford us adequate protection against generic versions of our product candidates or other competitive products. In the event we achieve regulatory approval to market any of our product candidates and we are unable to obtain adequate patent protection for the ultimate marketed product, we will be required to rely to a greater extent on the Hatch-Waxman Act, and applicable foreign legislation, to achieve market exclusivity. The Hatch-Waxman Act generally provides for marketing exclusivity to the first applicant to gain approval for a particular drug by prohibiting filing of an abbreviated NDA, or ANDA, by a generic competitor for up to five years after the drug is first approved. The Hatch-Waxman Act, however, also accelerates the approval process for generic competitors using the same active ingredients once the period of statutory exclusivity has expired. It may also in practice encourage more aggressive legal challenges to the patents protecting approved drugs. In addition, because some of our patents have expired, third parties may develop competing product candidates using our product compounds and if they obtain regulatory approval for those products prior to us, we would be barred from seeking an ANDA for those products under the Hatch-Waxman Act for the applicable statutory exclusivity period.

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Our business activities require compliance with environmental laws, which if violated could result in significant fines and work stoppage.

Our research and development programs, and the manufacturing operations and disposal procedures of our contractors and collaborators, are affected by federal, state, local and foreign environmental laws. Although we intend to use reasonable efforts to comply with applicable environmental laws, our contractors and collaborators may not comply with these laws. Failure to comply with environmental laws could result in significant fines and work stoppage, and may harm our business.

We have not been able to fully utilize our new corporate headquarters, and as a result, our overhead expenses have increased.

In February 2006, we committed to a ten-year operating lease for a 133,686 square foot facility in Somerset, New Jersey. This facility has served as our corporate headquarters and principal place of business since June 2006. This new facility has office and laboratory space and results in a higher level of fixed overhead. As a result of the failure of the Phase III bicifadine clinical studies 020 and 021, the stoppage of 022 and the sublicensing of bicifadine to XTL, for the foreseeable future we will not utilize the full capacity of the facility and there can be no assurance that we will ever operate the facility efficiently. The annual lease payments on this facility are $2.8 million.

Our bylaws require us to indemnify our officers and directors to the fullest extent permitted by law, which may obligate us to make substantial payments and in some instances payments in advance of judicial resolution of entitlement.

Our bylaws require that we indemnify our directors, officers and scientific advisory board members, and permit us to indemnify our other employees and agents, to the fullest extent permitted by the Delaware corporate law. This could require us, with some legally prescribed exceptions, to indemnify our directors, officers and scientific advisory board members against any and all expenses, judgments, penalties, fines and amounts reasonably paid in defense or settlement in connection with an action, suit or proceeding relating to their association with us. For directors, our bylaws require us to pay in advance of final disposition all expenses including attorneys’ fees incurred by them in connection with any action, suit or proceeding relating to their status or actions as directors. Advance payment of legal expenses is discretionary for officers, scientific advisory board members and other employees or agents. We may make these advance payments provided that they are preceded or accompanied by an undertaking on behalf of the indemnified party to repay all advances if it is ultimately determined that he or she is not entitled to be indemnified by us. Accordingly, we may incur expenses to meet these indemnification obligations, including expenses that in hindsight are not qualified for reimbursement and possibly not subject to recovery as a practical matter.

Provisions of Delaware law, our charter and by-laws and our stockholders rights plan may make a takeover more difficult.

Provisions of our certificate of incorporation and by-laws and in the Delaware corporate law may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and board of directors. Moreover, our stockholders rights plan, adopted in October 2002, commonly called a poison pill, empowers our board of directors to delay or negotiate, and thereby possibly to thwart, any tender or takeover attempt the board of directors opposes. Public stockholders who might desire to participate in such a transaction may not have an opportunity to do so. We also have a staggered board of directors that makes it difficult for stockholders to change the composition of our board of directors in any one year. These anti-takeover provisions could substantially impede the ability of public stockholders to change our management and board of directors.

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Risks Related to our Industry

We face intense competition and if we are unable to compete effectively, the demand for our products, if any, may be reduced.

The pharmaceutical industry is highly competitive and marked by a number of established, large pharmaceutical companies, as well as smaller emerging companies, whose activities are directly focused on our target markets and areas of expertise. We face and will continue to face competition in the discovery, in-licensing, development and commercialization of our product candidates, which could severely impact our ability to generate revenue or achieve significant market acceptance of our product candidates. Furthermore, new developments, including the development of other drug technologies and methods of preventing the incidence of disease, occur in the pharmaceutical industry at a rapid pace. These developments may render our product candidates or technologies obsolete or noncompetitive.

We are focused on developing product candidates for the treatment of central nervous system disorders. We have a number of competitors. If one or more of their products or programs are successful, the market for our product candidates may be reduced or eliminated. Compared to us, many of our competitors and potential competitors have substantially greater:

capital resources and access to capital;

research and development resources, including personnel and technology;

regulatory experience;

preclinical study and clinical testing experience; and

manufacturing, distribution and marketing experience.

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

If we are unable to protect our intellectual property, our competitors could develop and market products based on our discoveries, which may reduce demand for our product candidates.

To a substantial degree, our success will depend on the following intellectual property achievements:

our ability to obtain patent protection for our proprietary technologies and product candidates, as well as our ability to preserve our trade secrets;

the ability of our collaborators and licensees to obtain patent protection for their proprietary technologies and product candidates covered by our agreements, as well as their ability to preserve related trade secrets; and

our ability to prevent third parties from infringing upon our proprietary rights, as well as the ability of our collaborators and licensees to accomplish the same.

Because of the substantial length of time and expense associated with bringing new products through the development and regulatory approval processes in order to reach the marketplace, the pharmaceutical industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Accordingly, we, either alone or together with our collaborators or licensees, intend to seek and enhance patent protection for our proprietary technologies and product candidates. The risk exists, however, that these patents may be unobtainable and that the breadth of the claims in a patent, if obtained, may not provide adequate protection of our, or our collaborators’ or licensees’ proprietary technologies or product candidates.

We also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our collaborators, licensees, employees and consultants. We also have invention or patent assignment agreements with our employees and some of, but not all, our collaborators and consultants. If our employees, collaborators or consultants breach these agreements or common law principles, we may not have adequate remedies for any such breach, and our trade secrets may otherwise become known to or independently discovered by our competitors.

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In addition, although we own or otherwise have certain rights to a number of patents and patent applications, the issuance of a patent is not conclusive as to its validity or enforceability, and third parties may challenge the validity or enforceability of our patents or the patents of our collaborators or licensees. We cannot assure you how much protection, if any, will be given to our patents if we attempt to enforce them or if they are challenged in court or in other proceedings. It is possible that a competitor may successfully challenge our patents, or the patents of our collaborators or licensees, or that challenges will result in elimination of patent claims and therefore limitations of coverage. Moreover, competitors may infringe our patents, the patents of our collaborators or licensees, or successfully avoid them through design innovation. To prevent infringement or unauthorized use, we may need to file infringement claims, which are expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the ground that our patents do not cover its technology. In addition, interference proceedings brought by the U.S. Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patent applications or those of our collaborators or licensees. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and be a distraction to management. We cannot assure you that we, or our collaborators or licensees, will be able to prevent misappropriation of our respective proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.

The intellectual property of our competitors or other third parties may prevent us from developing or commercializing our product candidates.

Our product candidates and the technologies we use in our research may inadvertently infringe the patents or violate the proprietary rights of third parties. In addition, other parties conduct their research and development efforts in segments where we, or our collaborators or licensees, focus research and development activities. We cannot assure you that third parties will not assert patent or other intellectual property infringement claims against us, or our collaborators or licensees, with respect to technologies used in potential product candidates. Any claims that might be brought against us relating to infringement of patents may cause us to incur significant expenses and, if 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 could divert the attention of our management and key personnel from our business operations. In addition, any patent claims brought against our collaborators or licensees could affect their ability to carry out their obligations to us. Furthermore, if a patent infringement suit is brought against us, or our collaborators or licensees, the development, manufacture or potential sale of product candidates claimed to infringe a third party’s intellectual property may have to stop or be delayed, unless that party is willing to grant certain 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 product candidates. We may not, however, be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if we, or our collaborators or licensees were able to obtain rights to a third party’s intellectual property, these rights may be non-exclusive, thereby giving our competitors potential 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.

Our ability to receive royalties and profits from product sales depends in part upon the availability of approved reimbursement for the use of our products from third-party payors, for which we may or may not qualify.

Our royalties or profits will be heavily dependent upon the availability of reimbursement for the use of our products from third-party health care payors, both in the United States and in foreign markets. The health care industry and these third-party payors are experiencing a trend toward containing or reducing the costs of health care through various means, including lowering reimbursement rates and negotiating reduced payment schedules with service providers for drug products. These cost-containment efforts could adversely affect the market acceptance of our product candidates and may also harm our business. There can be no assurance that we will be able to offset any of the payment reductions that may occur.

Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:

safe, effective and medically necessary;

appropriate for the specific patient;

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cost-effective; and

neither experimental nor investigational.

Reimbursement approval is required from each third-party payor individually, and seeking this approval is a time-consuming and costly process. Third-party payors may require cost-benefit analysis data from us in order to demonstrate the cost-effectiveness of any product we might bring to market. We cannot assure you that we will be able to provide data sufficient to gain acceptance with respect to reimbursement. There also exists substantial uncertainty concerning third-party reimbursement for the use of any drug product incorporating new technology. We cannot assure you that third-party reimbursement will be available for our product candidates utilizing new technology, or that any reimbursement authorization, if obtained, will be adequate. If such reimbursement approval is denied or delayed, the marketability of our product candidates could be materially impaired.

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

The use of our product candidates in clinical trials and the sale of any approved products may expose us to a substantial risk of product liability claims and the adverse publicity resulting from such claims. These claims might be brought against us by study participants or, once a drug has received regulatory approval and is marketed, by consumers, health care providers, pharmaceutical companies or others selling our products. If we cannot successfully defend ourselves against these claims, we may incur substantial losses or expenses, or be required to limit the commercialization of our product candidates. We have obtained limited product liability insurance coverage for our clinical trials in the amount of $10 million per occurrence and $10 million in the aggregate. Our insurance coverage, however, may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us would decrease our cash and could cause our stock price to fall.

ITEM 6. Exhibits

(a)

Exhibits.

The following is a complete list of exhibits filed or incorporated by reference as part of this report.

Exhibit No.

31.1

Certification of Chief Executive Officer and Principal Financial Officer of DOV Pharmaceutical, Inc., pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of Chief Executive Officer and Principal Financial Officer of DOV Pharmaceutical, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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


	DOV Pharmaceutical, Inc.

Date: May 15, 2007	By:	/s/ BARBARA DUNCAN
		Name: Barbara Duncan
		Title: Chief Executive Officer and Principal Financial Officer


	DOV Pharmaceutical, Inc.

Date: May 15, 2007	By:	/s/ WILLIAM C. KALTNECKER
		Name: William C. Kaltnecker
		Title: Chief Accounting Officer and Controller

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Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Euthymics Bioscience (DOVP) Inactive 10-Q2007 Q1 Quarterly report

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