Icagen 10-Q 2011 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, 2011

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

For the transition period from              to             

Commission file number: 001-34217

Icagen, Inc.

(Exact name of registrant as specified in its charter)

Delaware	56-1785001
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4222 Emperor Boulevard, Suite 350

Durham, North Carolina 27703

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (919) 941-5206

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer	¨	Accelerated Filer	¨
Non-Accelerated Filer	¨  (Do not check if a smaller reporting company)	Smaller Reporting Company	x

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

As of April 30, 2011, there were outstanding 7,499,008 shares of the registrant’s common stock, $0.001 par value per share.

ICAGEN, INC.

INDEX

		Page
PART I FINANCIAL INFORMATION			3
Item 1	Financial Statements – Unaudited		3
	Condensed Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010		3
	Condensed Statements of Operations for the Three Months Ended March 31, 2011 and March 31, 2010 (unaudited)		4
	Condensed Statements of Cash Flows for the Three Months Ended March 31, 2011 and March 31, 2010 (unaudited)		5
	Notes to Condensed Financial Statements (unaudited)		6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3	Quantitative and Qualitative Disclosures About Market Risk		14
Item 4	Controls and Procedures		14
PART II OTHER INFORMATION			14
Item 1A.	Risk Factors		14
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		27
Item 6	Exhibits		27
Signatures			28
Exhibit Index			29

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and the documents incorporated by reference in this Quarterly Report on Form 10-Q contain forward-looking statements that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will,” and “would,” or similar words. You should read statements that contain these words carefully because they discuss future expectations, contain projections of future results of operations or of financial position or state other “forward-looking” information. The important factors listed below, as well as any cautionary language elsewhere in this Quarterly Report on Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in these forward-looking statements. You should be aware that the occurrence of the events described in the risk factors appearing in Item 1A of Part II below and elsewhere in this Quarterly Report on Form 10-Q could have an adverse effect on our business, results of operations and financial position.

Any forward-looking statements in this Quarterly Report on Form 10-Q are not guarantees of future performance, and actual results, developments and business decisions may differ from those envisaged by such forward-looking statements, possibly materially. We disclaim any duty to update any forward-looking statements.

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PART I FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS – UNAUDITED

Icagen, Inc.

Condensed Balance Sheets

(in thousands, except share and per share data)

	March 31, 2011			December 31, 2010
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	11,014		$	12,034
Accounts receivable		36			647
Prepaid expenses and other		1,030			243
Total current assets		12,080			12,924
Non-current assets:
Property and equipment, net		1,122			1,286
Technology licenses and related costs, net of accumulated amortization of $412 and $405 as of March 31, 2011 and December 31, 2010, respectively		217			224
Deposits and other		105			105
Total assets	$	13,524		$	14,539
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,150		$	726
Accrued expenses		143			383
Current portion of deferred revenue		—			1,015
Current portion of equipment debt financing		267			328
Total current liabilities		1,560			2,452
Equipment debt financing, less current portion		71			128
Other non-current liabilities		279			294
Total liabilities		1,910			2,874
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; 18,750,000 shares authorized at March 31, 2011 and December 31, 2010; 7,376,716 and 6,326,441 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		7			6
Additional paid-in capital		159,382			157,226
Accumulated deficit		(147,775	)		(145,567	)
Total stockholders’ equity		11,614			11,665
Total liabilities and stockholders’ equity	$	13,524		$	14,539

See accompanying notes.

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Icagen, Inc.

Condensed Statements of Operations

(in thousands, except share and per share data)

(unaudited)

	Three Months Ended March 31,
	2011			2010
Collaborative research and development revenues:
Research and development fees	$	1,015		$	1,301
Reimbursed research and development costs		30			160
Total collaborative research and development revenues		1,045			1,461
Operating expenses:
Research and development		2,218			3,673
General and administrative		1,029			995
Total operating expenses		3,247			4,668
Loss from operations		(2,202	)		(3,207	)
Other (expense) income:
Interest income		10			8
Interest expense		(16	)		(33	)
Total other (expense), net		(6	)		(25	)
Loss before income taxes		(2,208	)		(3,232	)
Income taxes		—			—
Net loss	$	(2,208	)	$	(3,232	)
Net loss per share – basic and diluted	$	(0.31	)	$	(0.54	)
Weighted average common shares outstanding – basic and diluted		7,187,114			5,953,208

See accompanying notes.

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Icagen, Inc.

Condensed Statements of Cash Flows

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2011			2010
Operating activities
Net loss	$	(2,208	)	$	(3,232	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment		174			198
Amortization of technology licenses and related costs		7			9
Loss on the disposal of equipment		—			1
Stock-based compensation		326			256
Changes in operating assets and liabilities:
Accounts receivable		611			(120	)
Prepaid expenses and other current and non-current assets		(787	)		(624	)
Accounts payable and accrued expenses		184			176
Other liabilities		(15	)		(12	)
Deferred revenue		(1,015	)		(124	)
Net cash used in operating activities		(2,723	)		(3,472	)
Investing activity
Acquisition of property and equipment		(10	)		(143	)
Net cash used in investing activity		(10	)		(143	)
Financing activities
Payments on equipment debt financing		(118	)		(150	)
Proceeds from sale of common stock, net of stock issuance costs		1,852			—
Payment of payroll taxes upon vesting of restricted stock		(21	)		(111	)
Proceeds from exercise of stock options		—			7
Net cash provided by (used in) financing activities		1,713			(254	)
Decrease in cash and cash equivalents		(1,020	)		(3,869	)
Cash and cash equivalents at beginning of period		12,034			18,149
Cash and cash equivalents at end of period	$	11,014		$	14,280
Supplemental disclosure of cash flow information
Cash paid for interest	$	16		$	37

See accompanying notes.

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Icagen, Inc.

Notes to Condensed Financial Statements

March 31, 2011

(unaudited)

1. Company Description and Significant Accounting Policies

Company Description

Icagen, Inc. (“Icagen” or the “Company”) was incorporated in Delaware in November 1992. Icagen is a biopharmaceutical company focused on the discovery, development and commercialization of novel orally-administered small molecule drugs that modulate ion channel targets. The Company has identified multiple drug candidates that modulate ion channels. These drug candidates were developed internally or through collaborative research programs. The Company is conducting research and development activities in a number of disease areas, including epilepsy, pain and inflammation.

Basis of Presentation

The accompanying unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2010.

On September 21, 2010, Icagen amended its certificate of incorporation in order to effect a previously announced one-for-eight reverse split of its outstanding common stock and to fix on a post-split basis the number of authorized shares of its common stock at 18,750,000. As a result of the reverse stock split, each share of the Company’s common stock outstanding as of 5:00 p.m. on September 21, 2010 was automatically changed into one-eighth of a share of common stock. No fractional shares were issued as a result of the reverse split. Holders of common stock who would have otherwise received fractional shares of Icagen common stock pursuant to the reverse split received cash in lieu of the fractional share. The reverse split reduced the total number of shares of the Company’s common stock outstanding from approximately 47.7 million shares to approximately 5.9 million shares. In addition, the number of shares of common stock subject to outstanding options, restricted stock units and warrants issued by the Company and the number of shares reserved for future issuance under the Company’s stock plans were reduced by a factor of eight to reflect the reverse split. The reverse split was accounted for retroactively and reflected in the Company’s common stock, warrant, stock options and restricted stock unit activity as of and during the year ended December 31, 2010 and the periods ended March 31, 2011 and 2010. All numbers and amounts included herein have been adjusted retroactively to reflect the September 21, 2010 one-for-eight reverse stock split.

In the opinion of the Company’s management, the accompanying unaudited financial statements have been prepared on the same basis as the audited financial statements, and reflect all adjustments of a normal recurring nature considered necessary to present fairly results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.

Liquidity and Management’s Plans

As of March 31, 2011, the Company had cash and cash equivalents of $11.0 million. In order to conserve capital, over the past two years the Company has reduced its workforce by approximately 45% and has implemented a number of other cost reduction measures. The Company believes that based on its current operating plan, not including the cost of a planned Phase II clinical trial of ICA-105665 in epilepsy, its existing cash and cash equivalents will be sufficient to enable it to fund its operations; lease, debt and other obligations; and capital expenditure requirements for at least the next twelve months. The Company will need additional funds to meet its obligations and fund operations beyond that time. The Company has renewed its research collaboration with Pfizer through December 2011. Except for collaboration revenue it expects to receive from Pfizer as funding for research and development activities, the Company does not currently have any commitments for future external funding. Additional equity or debt financing, or corporate collaboration and licensing arrangements, may not be available on acceptable terms, if at all, particularly in the current economic environment. If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate one or more of its research and development programs.

The Phase II trial of ICA-105665 that is currently in the planning stages is estimated to cost approximately $4.0 to $5.0 million. We plan to secure additional capital prior to the initiation of this trial. During the first quarter of 2011, we filed to raise up to $4.6 million through an At-The-Market Offering, and have initiated sales under this facility. Additional potential sources of capital include other equity or debt financings, potential milestone payments that may be received in connection with the Company’s collaboration with Pfizer, additional research and development funding if the current research term of the collaboration with Pfizer were to be extended, and the formation of a new collaboration or licensing arrangement.

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If sufficient funding is available and the scope of the clinical trials that the Company is conducting expands, the Company expects to incur losses from operations for at least the next several years. Until such time, if ever, as the Company can generate substantial product revenues, the Company will be required to finance its cash needs through public or private equity offerings, debt financings and corporate collaboration and licensing arrangements. If the Company raises additional funds by issuing equity securities, its stockholders may experience dilution. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity that the Company may raise may contain terms, such as liquidation and other preferences, that are not favorable to the Company or its stockholders. If the Company raises additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to the Company’s technologies, research programs or product candidates or grant licenses on terms that may not be favorable to the Company.

Revenue Recognition

The Company’s collaboration agreements contain multiple elements, including non-refundable upfront license fees, payments for reimbursement of research and development costs, payments for ongoing research and development, payments associated with achieving development, regulatory and commercialization milestones and royalties based on specified percentages of net product sales, if any. The Company applies the revenue recognition criteria outlined in Staff Accounting Bulletin (“SAB”) No. 104,Revenue Recognition (“SAB 104”) and Accounting Standards Codification (“ASC”) 605 (formerly Emerging Issues Task Force (“EITF”) Issue No. 00-21),Revenue Arrangements with Multiple Deliverables (“ASC 605”). In applying these revenue recognition criteria, the Company considers a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.

Cash received in advance of revenue recognition is recorded as deferred revenue and recognized as revenue as services are performed over the applicable term of the agreement. When the period of deferral cannot be specifically identified from the agreement, the deferral period is estimated based upon other factors contained within the agreement. The Company continually reviews these estimates, which could result in a change in the deferral period and which might impact the timing and the amount of revenue recognized.

When a payment is specifically tied to a separate earnings process, revenues are recognized when the specific performance obligation associated with the payment is completed. Performance obligations typically consist of significant milestones in the development life cycle of the related program, such as the initiation or completion of clinical trials, filing for approval with regulatory agencies, receipt of approvals by regulatory agencies and the achievement of commercial milestones. Revenues from milestone payments may be considered separable from funding for research and development services because of the uncertainty surrounding the achievement of milestones for products in early stages of development. Accordingly, these payments could be recognized as revenue if and when the performance milestone is achieved if they represent a separate earnings process as described in ASC 605.

In connection with the Company’s research and development collaboration with Pfizer, a non-refundable upfront license fee was received. Revenues from non-refundable upfront license fees, which the Company does not believe to be specifically tied to a separate earnings process, are recognized ratably over the term of the agreement. With respect to the Company’s collaboration with Pfizer, this period is the initial term of the research phase of the collaboration. Research and development services provided under the Company’s collaboration agreement with Pfizer are on a fixed fee basis. Revenues associated with long-term, fixed fee contracts are recognized based on the performance requirements of the agreements and as services are performed. The Company’s collaboration agreement with Pfizer allows for research term extensions upon mutually agreeable terms. Revenues from contract extensions are recognized as the extended services are performed.

Revenues derived from reimbursement of direct out-of-pocket expenses for research and development costs associated with the Company’s collaboration with Pfizer are recorded in compliance with ASC 605 (formerly EITF Issue No. 99-19),Reporting Revenue Gross as a Principal Versus Net as an Agent and ASC 605 (formerly EITF Issue No. 01-14),Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred. According to the criteria established by these EITF issues, in transactions where the Company acts as a principal, with discretion to choose suppliers, bears credit risk and performs part of the services required in the transaction, the Company records revenue for the gross amount of the reimbursement. The costs associated with these reimbursements are reflected as a component of research and development expense in the statements of operations.

None of the payments that the Company has received from collaborators to date, whether deferred or recognized as revenue, is refundable even if the related program is not successful.

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Use of Estimates

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

Research and Development Costs

The Company expenses research and development costs as incurred. Research and development expense includes, among other items, clinical trial costs. The Company accounts for its clinical trial costs by estimating the total cost to treat a patient in each clinical trial and recognizing this cost, based on a variety of factors, beginning with the preparation for the clinical trial. This estimated cost includes payments to contract research organizations for trial site and patient-related costs, including laboratory costs related to the conduct of the trial, and other costs. The cost per patient varies based on the type of clinical trial, the site of the clinical trial and the length of the treatment period for each patient.

Income Taxes

The Company accounts for income taxes using the liability method in accordance with the provisions of ASC 740 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 109),Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of the Company’s assets and liabilities and are estimated using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when the Company determines that it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Net Loss Per Share

The Company computes net loss per share in accordance with ASC 260 (formerly SFAS No. 128),Earnings Per Share (“ASC 260”). Under the provisions of ASC 260, basic net loss per share (“Basic EPS”) is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net loss per share (“Diluted EPS”) is computed by dividing net loss by the weighted average number of common shares and dilutive common share equivalents then outstanding. Common share equivalents consist of the incremental common shares issuable upon the conversion of preferred stock, shares issuable upon the exercise of stock options, shares issuable upon the vesting of restricted stock units and shares issuable upon the exercise of warrants. For the periods presented, Diluted EPS is identical to Basic EPS because common share equivalents, including all of the Company’s outstanding stock options, outstanding restricted stock units and outstanding warrants, are excluded from the calculation, as their effect is antidilutive. Had the Company been in a net income position, these securities may have been included in the calculation. These potentially dilutive securities consist of the following on a weighted average basis:

	Three Months Ended March 31,
	2011		2010
Outstanding common stock options		576,670		698,917
Restricted stock units		305,239		201,207
Outstanding warrants		652,365		652,365
Total		1,534,274		1,552,489

Recent Accounting Pronouncements

In April 2010, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) No. 2010-17, Revenue Recognition (Topic 605) -Milestone Method of Revenue Recognition: a consensus of the FASB EITF (“ASU 2010-17”). ASU 2010-17 amends ASC 605-28 and establishes a revenue recognition method for contingent consideration that is payable upon the achievement of an uncertain future event, referred to as a milestone. The scope of the milestone method is limited to research and development agreements and is applicable to milestones in multiple-deliverable arrangements involving research and development transactions. The guidance does not preclude the application of any other applicable revenue guidance. The guidance was effective for financial statements issued for fiscal years beginning after June 15, 2010. The adoption of the requirements of ASU 2010-17 did not have a material impact on the Company’s financial statements.

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605) –Multiple-Deliverable Revenue Arrangements: a consensus of the FASB EITF (“ASU 2009-13”). ASU 2009-13 establishes a selling-price hierarchy for determining the selling price of each element within a multiple-deliverable arrangement. Specifically, the selling price assigned to each deliverable is to be based on vendor-specific objective evidence (“VSOE”), if available, third-party evidence, if VSOE is unavailable, and estimated selling price if neither VSOE nor third-party evidence is available. In addition, ASU 2009-13 eliminates the residual method of allocating arrangement consideration and instead requires allocation using the relative selling price method. ASU 2009-13 was effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The adoption of the requirements of ASU 2009-13 did not have a material impact on the Company’s financial statements.

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2. Stock-Based Compensation

On January 7, 2011, the Company entered into Option Cancellation Agreements (the “Cancellation Agreements”) with the Company’s executive officers and certain other senior level employees, pursuant to which such individuals (the “Optionees”) agreed to the surrender and cancellation of certain previously granted stock options (the “Cancelled Options”) to purchase shares of the Company’s common stock in order to make available additional shares for future grants under the Company’s 2004 Stock Incentive Plan, as amended. Under the terms of the Cancellation Agreements, each Optionee and the Company acknowledged and agreed that the surrender and cancellation of the Cancelled Options was without any expectation on the part of the Optionee to receive, and without any obligation on the Company to pay or grant, any cash, equity awards or other consideration presently or in the future with respect to the Cancelled Options. A total of 85,659 options were cancelled and each of the Cancelled Options had an exercise price greater than $8.00 per share. The Company recognized a charge of approximately $112,000 associated with the cancellation of these options, which represented the remaining unamortized compensation expense.

The Company recognized $325,000 and $256,000 in stock-based compensation expense in operating expenses during the first quarter of 2011 and 2010, respectively.

During the first quarter of 2011, the Company granted 401,883 restricted stock units. The Company will recognize total compensation expense of $1.3 million, based on the market price of the common stock on the date of grant, over the restricted stock units’ vesting periods.

The Company’s 2004 Stock Incentive Plan (the “2004 Plan”) contains a provision that allows for an automatic annual increase in the number of shares authorized under the 2004 Plan, beginning in 2006 and ending in 2014, subject to certain limitations specified in the 2004 Plan. On January 1, 2011, in accordance with the provisions of the 2004 Plan, there was an automatic increase of 125,000 shares authorized under the 2004 Plan.

3. Restructuring

During 2010 and 2009, the Company implemented a number of cost savings measures, including workforce reductions, in order to conserve cash. The Company recorded restructuring charges of approximately $305,000 and $469,000 during 2010 and 2009, respectively, related to termination benefits. The restructuring costs are being accounted for pursuant to ASC 420 (formerly “SFAS No. 146”),Accounting for Costs Associated with Exit or Disposal Activities. The following table summarizes the activity in the restructuring accrual for the three months ended March 31, 2011 and 2010:

	Balance at December  31, 2010		Charges		Payments			Balance at March 31, 2011
Severance Costs	$	178	$	—	$	(147	)	$	31
Total	$	178	$	—	$	(147	)	$	31

	Balance at December  31, 2009		Charges		Payments			Balance at March  31, 2010
Severance Costs	$	223	$	—	$	(155	)	$	68
Total	$	223	$	—	$	(155	)	$	68

4. At Market Issuance Sales Agreement

On December 10, 2010, the Company entered into an At Market Issuance Sales Agreement (the “December 2010 Agreement”) with McNicoll, Lewis & Vlak LLC, pursuant to which the Company had the ability to issue and sell shares of its common stock, $0.001 par value per share, from time to time through MLV (the “December 2010 Offering”). Also on December 10, 2010, the Company filed a prospectus supplement with the Securities and Exchange Commission in connection with the December 2010 Offering of shares of common stock having an aggregate offering price of up to $2,600,000. The Company sold 334,000 shares of common stock under the December 2010 Agreement during December 2010, resulting in net proceeds of $529,000. During the period from January 1 through January 18, 2011, the Company sold an additional 951,000 shares of common stock under the December 2010 Agreement resulting in net proceeds of approximately $1.7 million. On January 20, 2011, the Company terminated the December 2010 Agreement in accordance with the provisions of the agreement. As of January 20, 2011, the Company had sold shares having a net offering price of $2.3 million in connection with the December 2010 Offering.

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On March 15, 2011, the Company entered into another At Market Issuance Sales Agreement (the “March 2011 Agreement”) with McNicoll, Lewis & Vlak LLC, pursuant to which the Company may issue and sell shares of its common stock, $0.001 par value per share, from time to time through MLV (the “March 2011 Offering”). Also on March 15, 2011, the Company filed a prospectus supplement with the Securities and Exchange Commission in connection with the March 2011 Offering of shares of common stock having an aggregate offering price of up to $4,600,000. The Company sold 63,385 shares of common stock under the March 2011 Agreement during March 2011, resulting in net proceeds of $161,000.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the section entitled “Risk Factors” of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel orally-administered small molecule drugs that modulate ion channel targets. Utilizing our proprietary know-how and integrated scientific and drug development capabilities, we have identified multiple drug candidates that modulate ion channels. We are conducting research and development activities in a number of disease areas, including epilepsy, pain and inflammation.

Since our incorporation in November 1992, we have devoted substantially all of our resources to the discovery and development of drug candidates with activity at ion channels. We currently have two clinical development programs, as well as other drug discovery programs addressing specific ion channel targets. We have not received approval to market any product and, to date, have received no product revenues.

Since our inception, we have incurred substantial losses and, as of March 31, 2011, we had an accumulated deficit of $147.8 million. These losses and accumulated deficit have resulted from the significant costs incurred in the research and development of our compounds and technologies and general and administrative costs.

A substantial portion of our revenue for at least the next several years will depend on our achieving development and regulatory milestones in our existing collaborative research and development program and entering into new collaborations. Our revenue may vary substantially from quarter to quarter and year to year. Our operating expenses may also vary substantially from quarter to quarter and year to year based on the timing of clinical trial patient enrollment and our research activities. We believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied on as indicative of our future performance.

The successful development of our product candidates is highly uncertain. ICA-105665, a small molecule compound that targets specific KCNQ ion channels, is in Phase II development for the treatment of epilepsy. The conduct of this program will be dependent upon the availability of additional capital, the receipt of additional milestones from our existing collaboration or the formation of one or more new collaborations. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research and development programs.

Recent Developments

On February 2, 2011, we announced that, following a review of data from recently completed clinical studies as well as our proposed protocol for a Phase II clinical trial in patients with treatment resistant epilepsy, the FDA had notified us that the clinical hold on our IND for ICA-105665, a novel orally available small molecule KCNQ potassium channel agonist, had been removed.

On March 15, 2011, we entered into an At Market Issuance Sales Agreement with McNicoll, Lewis & Vlak LLC, or MLV, pursuant to which we may issue and sell shares of our common stock, $0.001 par value per share, from time to time through MLV. Also on March 15, 2011, we filed a prospectus supplement with the Securities and Exchange Commission, or SEC, in connection with the offering of shares of common stock having an aggregate offering price of up to $4,600,000.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these

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financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results may differ materially from these estimates. Critical accounting policies are those policies that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. Our most critical accounting policies involve: revenue recognition, accrued expenses, research and development, stock-based compensation and accounting for income taxes. For a more detailed explanation of our critical accounting policies, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as filed with the SEC on March 9, 2011.

Results of Operations

Comparison of Three Months Ended March 31, 2011 and 2010

Collaborative Research and Development Revenues

Collaborative research and development revenues decreased by $416,000 or 28% to $1.0 million for the three months ended March 31, 2011 from $1.5 million for the three months ended March 31, 2010. The decrease was due to a $286,000 decrease in research and development fees and a $130,000 decrease in reimbursed research and development costs.

Research and Development Expense

Research and development expense decreased by $1.5 million, or 40%, to $2.2 million for the three months ended March 31, 2011 from $3.7 million for the three months ended March 31, 2010. The decrease was due primarily to a decrease of $589,000 in expenses associated with our epilepsy and pain program due to the timing of the conduct of the studies in this program; the implementation of a variety of cost reduction measures, including a decrease of $501,000 in salary and benefits expense, a decrease of $76,000 in laboratory supplies expense, a decrease of $66,000 in pharmacology study expenses, and a decrease of $57,000 in software license expense; and a decrease of $118,000 in patent expenses.

ICA-105665 and our other lead compounds for epilepsy and pain and senicapoc, which we had previously studied as a potential treatment for both sickle cell disease and asthma, represent a substantial majority of the total research and development payments by us to third parties. The following table shows, for the periods presented, the total out-of-pocket payments made by us to third parties for preclinical study support, clinical supplies and clinical trials associated with these programs:

Development Program	Three months ended March 31,				Cumulative from Inception
	2011		2010
	(in thousands)				(in thousands)
ICA-105665 and other lead compounds for epilepsy and pain	$	5	$	594	$	21,625
Senicapoc		—		16		52,152
Total	$	5	$	610	$	73,777

General and Administrative Expense

General and administrative expense increased by $34,000, or 3%, to $1.0 million for the three months ended March 31, 2011 from $995,000 for the three months ended March 31, 2010. The increase was due primarily to an increase of $83,000 in equity compensation expense, partially offset by a decrease in the aggregate of $36,000 in salary and benefits expense and legal expense.

Interest Income and Interest Expense

Interest income increased by $2,000, or 25%, to $10,000 for the three months ended March 31, 2011, from $8,000 for the three months ended March 31, 2010. The increase in interest income was attributable to increased interest rates during the period.

Interest expense decreased by $17,000, or 52%, to $16,000 for the three months ended March 31, 2011 from $33,000 for the three months ended March 31, 2010. The decrease in interest expense was attributable to decreased weighted average borrowings outstanding under our equipment debt financing.

Liquidity and Capital Resources

We have financed our operations since inception through the issuance of equity securities, payments received under our collaboration agreements, proceeds from equipment debt financing and capital leases and interest income. At March 31, 2011, our cash and cash equivalents were $11.0 million as compared to $12.0 million at December 31, 2010. Our cash and cash equivalents are highly liquid investments with a maturity of 90 days or less at date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions and United States government obligations.

In order to conserve capital, over the past two years we have reduced our workforce by approximately 45% and have implemented a number of other cost reduction measures. We believe that based on our current operating plan, not including the cost

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of a planned Phase II clinical trial of ICA-105665 in epilepsy, our existing cash and cash equivalents will be sufficient to enable us to fund our operations; lease, debt and other obligations; and capital expenditure requirements for at least the next twelve months. We will need additional funds to meet our obligations and fund operations beyond that time. We have renewed our research collaboration with Pfizer through December 2011. Except for collaboration revenue we expect to receive from Pfizer as funding for research and development activities, we do not currently have any commitments for future external funding. Additional equity or debt financing, or corporate collaboration and licensing arrangements, may not be available on acceptable terms, if at all, particularly in the current economic environment. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research and development programs.

The Phase II trial of ICA-105665 that is currently in the planning stages is estimated to cost approximately $4.0 to $5.0 million. We plan to secure additional capital prior to the initiation of this trial. During the first quarter of 2011, we filed to raise up to $4.6 million through an At-The-Market Offering, or ATM, and have initiated sales under this facility. Additional potential sources of capital include other equity or debt financings, potential milestone payments that may be received in connection with our collaboration with Pfizer, additional research and development funding if the current research term of the collaboration with Pfizer were to be extended, and the formation of a new collaboration or licensing arrangement.

Additional equity or debt financing, or corporate collaboration and licensing arrangements, may not be available on acceptable terms, if at all, particularly in the current economic environment. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research and development programs. If sufficient funding is available and the scope of our clinical trials that we are conducting expands, we expect to incur losses from operations for at least the next several years.

Cash Flows

Net cash used in operating activities was $2.7 million for the three months ended March 31, 2011. This reflects a net loss of approximately $2.2 million, a decrease of $1.0 million in deferred revenue, and an increase of $787,000 in prepaid expenses and other current and non-current assets. These amounts were partially offset by a decrease of $611,000 in accounts receivable, $326,000 of non-cash expenses related to stock-based compensation, $174,000 of non-cash expenses related to depreciation and amortization of property and equipment, and an increase of $184,000 in accounts payable and accrued expenses.

Net cash used in investing activities in the three months ended March 31, 2011 was $10,000 related to the purchase of property and equipment.

Net cash provided by financing activities during the three months ended March 31, 2011 was $1.7 million and consisted primarily of $1.9 million of net proceeds from the sale of common stock, partially offset by $118,000 of principal repayments related to our equipment debt financing.

Net cash used in operating activities was $3.5 million for the three months ended March 31, 2010. This reflects a net loss of approximately $3.2 million, an increase of $624,000 in prepaid expenses and other current and non-current assets, an increase of $120,000 in accounts receivable, and a decrease of $124,000 in deferred revenue. These amounts were partially offset by $256,000 of non-cash expenses related to stock-based compensation, $198,000 of non-cash expenses related to depreciation and amortization of property and equipment, and an increase of $176,000 in accounts payable and accrued expenses.

Net cash used in investing activities in the three months ended March 31, 2010 was $143,000 related to the purchase of property and equipment.

Net cash used in financing activities during the three months ended March 31, 2010 was $254,000 and consisted primarily of principal repayments related to our equipment debt financing and withholding taxes due upon the vesting of restricted stock.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

Our contractual obligations as of December 31, 2010 are described in our Annual Report on Form 10-K.

Funding Requirements

We believe that based on our current operating plan, not including the cost of a planned Phase II clinical trial of ICA-105665 in epilepsy, our existing cash and cash equivalents will be sufficient to enable us to fund our operations; lease, debt and other obligations; and capital expenditure requirements for at least the next twelve months. We will need additional funds to meet our obligations and fund operations beyond this time. We have renewed our research collaboration with Pfizer through December 2011. Except for collaboration revenue we expect to receive from Pfizer as funding for research and development activities, we do not currently have any commitments for future external funding. Additional equity or debt financing, or corporate collaboration and

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licensing arrangements, may not be available on acceptable terms, if at all, particularly in the current economic environment. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research and development programs.

The Phase II trial of ICA-105665 that is currently in the planning stages is estimated to cost approximately $4.0 to $5.0 million. We plan to secure additional capital prior to the initiation of this trial. During the first quarter of 2011, we filed to raise up to $4.6 million through an ATM, and have initiated sales under this facility. Additional potential sources of capital include other equity or debt financings, potential milestone payments that may be received in connection with our collaboration with Pfizer, additional research and development funding if the current research term of the collaboration with Pfizer were to be extended, and the formation of a new collaboration or licensing arrangement.

Until such time, if ever, as we can generate substantial product revenues, we will need to finance our cash requirements through public or private equity offerings, debt financings and corporate collaboration and licensing arrangements. Additional equity or debt financing, or corporate collaboration and licensing arrangements, may not be available on acceptable terms, if at all, particularly in the current economic environment. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity that we raise may contain terms, such as liquidation and other preferences, that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are not able to secure additional funding, we may be required to delay, reduce the scope of or eliminate one or more of our research and development programs.

If sufficient funding is available and the scope of the clinical trials that we are conducting expands, we expect to incur losses from operations for at least the next several years. Our future capital requirements will depend on many factors, including:

• the scope and results of our research, preclinical and clinical development activities;

• the timing of, and the costs involved in, obtaining regulatory approvals;

• the cost of commercialization activities, including product marketing, sales and distribution;

• the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including litigation costs and the results of such litigation;

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

• the success of our collaboration with Pfizer; and

• our ability to establish and maintain additional collaborations.

Recent Accounting Pronouncements

In April 2010, the Financial Accounting Standards Board, or FASB, issued accounting standards update, or ASU, No. 2010-17, Revenue Recognition (Topic 605) –Milestone Method of Revenue Recognition: a consensus of the FASB Emerging Issues Task Force, or ASU 2010-17. ASU 2010-17 amends ASC 605-28 and establishes a revenue recognition method for contingent consideration that is payable upon the achievement of an uncertain future event, referred to as a milestone. The scope of the milestone method is limited to research and development agreements and is applicable to milestones in multiple-deliverable arrangements involving research and development transactions. The guidance does not preclude the application of any other applicable revenue guidance. The guidance was effective for financial statements issued for fiscal years beginning after June 15, 2010. The adoption of the requirements of ASU 2010-17 did not have a material impact on our financial statements.

In October 2009, the FASB issued accounting standards update ASU No. 2009-13, Revenue Recognition (Topic 605) –Multiple-Deliverable Revenue Arrangements: a consensus of the FASB Emerging Issues Task Force, or ASU 2009-13. ASU 2009-13 establishes a selling-price hierarchy for determining the selling price of each element within a multiple-deliverable arrangement. Specifically, the selling price assigned to each deliverable is to be based on vendor-specific objective evidence, or VSOE, if available, third-party evidence, if VSOE is unavailable, and estimated selling price if neither VSOE nor third-party evidence is available. In addition, ASU 2009-13 eliminates the residual method of allocating arrangement consideration and instead requires allocation using the relative selling price method. ASU 2009-13 was effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The adoption of the requirements of ASU 2009-13 did not have a material impact on our financial statements.

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is currently confined to our cash and cash equivalents that have maturities of less than 90 days. We currently do not hedge interest rate exposure. We have not used derivative financial instruments for speculation or trading purposes. Because of the short-term maturities of our cash and cash equivalents, we do not believe that an increase in market rates would have any significant impact on the realized value of our investments.

We have operated primarily in the United States and have received payments from our collaborators in United States dollars. Accordingly, we do not have any material exposure to foreign currency exchange rate fluctuations.

ITEM 4 – CONTROLS AND PROCEDURES

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2011, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1A – RISK FACTORS

The following discussion includes two revised risk factors (“The number of shares of our common stock outstanding has increased substantially as a result of the “at-the-market” equity issuance facilities that we entered into on December 10, 2010 and March 15, 2011 and may continue to increase if we enter into similar equity issuance facilities in the future” and “We will need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts”) that reflect material developments subsequent to the discussion of risk factors included in our most recent Annual Report on Form 10-K.

Risks Related to Our Financial Results and Need for Additional Financing

We have incurred losses since inception and anticipate that we will continue to incur substantial losses for the foreseeable future. We might never achieve or maintain profitability.

We have a limited operating history and have not yet commercialized any products or generated any product revenues. As of March 31, 2011, we had an accumulated deficit of $147.8 million. We have incurred losses in each year since our inception in 1992. Our net losses were $2.2 million for the three months ended March 31, 2011, $6.4 million in 2010, $12.8 million in 2009 and $14.8 million in 2008. These losses resulted principally from costs incurred in our research and development programs and from our general and administrative expenses. Provided that sufficient funding is available, we expect to continue to incur significant operating losses for at least the next several years as we continue our research activities, conduct development of, and seek regulatory approvals for, our initial drug candidates, and commercialize any approved drugs. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity, total assets and working capital.

We have financed our operations and internal growth principally through the issuance of equity securities and funding under collaborations with leading pharmaceutical companies. We have devoted substantially all of our efforts to research and development, including clinical trials, and we have not completed development of any drugs. Because of the numerous risks and uncertainties associated with developing drugs targeting ion channels, we are unable to predict the extent of any future losses, whether or when any of our product candidates will become commercially available, or when we will become profitable, if at all. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

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If we are unable to achieve and then maintain profitability, the market value of our common stock will decline.

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

As of March 31, 2011, we had cash and cash equivalents of $11.0 million. In order to conserve capital, we have implemented a reduction of our workforce and other cost reduction measures. We believe that based on our current operating plan, not including the cost of a planned Phase II clinical trial of ICA-105665 in epilepsy, our existing cash and cash equivalents will be sufficient to enable us to fund our operations; our lease, debt and other obligations; and our capital expenditure requirements for at least the next twelve months. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” above. We will need additional funds to meet our obligations and fund operations beyond that time. Except for collaboration revenue we expect to receive from Pfizer for research and development activities through 2011, we do not currently have any commitments for future external funding.

Additional equity or debt financing, or corporate collaboration and licensing arrangements, may not be available on acceptable terms, if at all, particularly in the current economic environment. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research and development programs.

Until such time, if ever, as we can generate substantial product revenues, we will be required to finance our cash needs through public or private equity offerings, debt financings and corporate collaboration and licensing arrangements. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity that we may raise may contain terms, such as liquidation and other preferences, that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, research programs or product candidates or grant licenses on terms that may not be favorable to us.

If sufficient funding is available and the scope of the clinical trials that we are conducting expands, we expect our research and development expenses to continue and to increase in connection with our ongoing activities. In addition, subject to regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. Our future capital requirements will depend on many factors, including:

• the scope and results of our research, preclinical and clinical development activities;

• the timing of, and the costs involved in, obtaining regulatory approvals;

• the cost of commercialization activities, including product marketing, sales and distribution;

• the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including litigation costs and the results of such litigation;

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

• the success of our collaboration with Pfizer; and

• our ability to establish and maintain additional collaborations.

Our business and results of operations may be negatively impacted by general economic and financial market conditions and such conditions may exacerbate the other risks that affect our business.

Over the past few years, the global economy experienced a significant prolonged downturn and prospects for continued economic recovery remain uncertain. These economic conditions have had, and we expect will continue to have, an adverse impact on the pharmaceutical and biotechnology industries. Our business depends on our ability to raise substantial additional capital and to maintain and enter into new collaborative research, development and commercialization agreements with leading pharmaceutical and biotechnology companies. Current market conditions could impair our ability to raise additional capital when needed for our research and development programs, or on attractive terms. Our arrangements with existing or future collaborators typically require our existing or future collaborators to make a significant commitment of capital and other resources. Recent economic conditions may reduce the amount of discretionary investment that our current collaborator and prospective collaborators may have available to invest in our business. This may result in prospective collaborators electing to defer entering into collaborative agreements with us, or our existing collaborator choosing not to extend our existing collaboration beyond the fifteen month renewal research term, which expires in December 2011. A reduction in research and development funding, even if economic conditions continue to improve, would significantly adversely impact our business, operating results and financial condition.

We are unable to predict the likely duration and severity of the current economic weakness in the U.S. and abroad, but the longer the duration the greater risks we face in operating our business. There can be no assurance, therefore, that current economic conditions or worsening economic conditions or a prolonged or recurring recession will not have a significant adverse impact on our operating results.

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If we fail to continue to meet all applicable Nasdaq Global Market requirements and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock, impair the value of your investment and harm our business.

Our common stock is listed on the Nasdaq Global Market. In order to maintain that listing, we must satisfy minimum financial and other requirements. On November 12, 2009, we received notice from the Nasdaq Listing Qualifications Department that our common stock had not met the $1.00 per share minimum bid price requirement for 30 consecutive business days and that, if we were unable to demonstrate compliance with this requirement during the applicable grace periods, our common stock would be delisted after that time. On May 12, 2010, we were notified by the Nasdaq Listing Qualifications Department that the bid price of our common stock continued to close at less than $1.00 per share and that our stock would be delisted from the Nasdaq Global Market unless we requested a hearing before the Nasdaq Listing Qualifications Panel. We requested a hearing to appeal the delisting determination and the hearing was held on June 24, 2010.

On July 30, 2010, we received notice that the Nasdaq panel had granted our request for an extension of time, as permitted under Nasdaq’s Listing Rules, to regain compliance with the $1.00 per share minimum bid price requirement for continued listing. In accordance with the panel’s decision, we were provided until November 8, 2010 to evidence a closing bid price of $1.00 or more for a minimum of ten consecutive trading days. This date represented the maximum length of time that a panel may grant under Nasdaq’s Listing Rules. On September 22, 2010 we implemented the one-for-eight reverse stock split approved by our stockholders in June 2010. On October 7, 2010 we received notification from the Nasdaq Listing Qualifications Department that we had regained compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5450(a)(1) after maintaining a closing bid price equal to or in excess of $1.00 for a minimum of ten consecutive trading days and that our non-compliance with the requirement announced on November 13, 2009, had been rectified.

The closing bid price of our common stock on the Nasdaq Global Market was $2.78 on April 29, 2011. The effected reverse stock split may not prevent the common stock from dropping back down towards the Nasdaq minimum per share price requirement or below the required level. It is also possible that we would otherwise fail to satisfy another Nasdaq requirement for continued listing of our common stock.

If we fail to continue to meet all applicable Nasdaq Global Market requirements in the future and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock, adversely affect our ability to obtain financing for the continuation of our operations and harm our business. Such a delisting could also impair the value of your investment.

If our stock price is volatile, purchasers of our common stock could incur substantial losses.

Our stock price is likely to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price at which they purchase it. The market price for our common stock may be influenced by many factors, including:

• results of clinical trials of our product candidates or those of our competitors;

• regulatory developments in the United States and foreign countries;

• variations in our financial results or those of companies that are perceived to be similar to us;

• changes in the structure of healthcare payment systems;

• market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations;

• general economic, industry and market conditions; and

• the other factors described in this “Risk Factors” section.

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Risks Related to Development of Product Candidates

We depend heavily on the success of our most advanced internal product candidate, ICA-105665 and our other lead compounds for epilepsy and pain, which are still under development. If we are unable to commercialize any of these product candidates, or experience significant delays in doing so, our business will be materially harmed.

We have invested a significant portion of our efforts and financial resources in the development of our most advanced internal product candidates, ICA-105665 and our other lead compounds for the treatment of epilepsy and pain. Our ability to generate product revenues, which we do not expect in any case will occur for at least the next several years, will depend heavily on the successful development and commercialization of these product candidates. The commercial success of these product candidates will depend on several factors, including the following:

• successful completion of clinical trials;

• receipt of marketing approvals from the FDA and similar foreign regulatory authorities;

• establishing commercial manufacturing arrangements with third-party manufacturers;

• launching commercial sales of the product, whether alone or in collaboration with others; and

• acceptance of the product in the medical community and with third-party payors.

Our efforts to commercialize ICA-105665 and the other lead compounds that we are developing for epilepsy and pain are at an early stage. We submitted an Investigational New Drug, or IND, and began Phase I clinical trials with respect to ICA-105665 during the third quarter of 2007. The results of these Phase I trials were reported during the second quarter of 2009. In March 2009, we received notification from the FDA that, based on a review of certain preclinical data, the IND for ICA-105665 had been placed on partial clinical hold. This partial clinical hold related to the development of ICA-105665 for epilepsy but did not pertain to studies of the compound for pain. We submitted to the FDA additional preclinical data along with a revised protocol for a study of ICA-105665 in patients with photosensitive epilepsy. In July 2009, the FDA lifted the partial clinical hold.

We subsequently initiated a study in patients with photosensitive epilepsy during the third quarter of 2009, for which we reported positive results during the first quarter of 2010. We also initiated a pain study of ICA-105665 in healthy volunteers during the third quarter of 2009, for which we reported negative results during the first quarter of 2010. During the second quarter of 2010, we received approval from the FDA to study up to two additional higher doses of ICA-105665 in the photosensitivity study and in a multiple ascending dose study. During the third quarter of 2010, we suspended further enrollment in the photosensitive epilepsy study and reported that the IND for ICA-105665 had been placed on clinical hold due to the occurrence of a serious adverse event. During the first quarter of 2011, following a review of data from recently completed clinical studies as well as the proposed protocol for a Phase II clinical trial in patients with treatment resistant epilepsy, the FDA notified us that the clinical hold on the IND for ICA-105665 had been removed. If we are not successful in commercializing ICA-105665 or one of our other lead compounds for epilepsy and pain, or are significantly delayed in doing so, our business will be materially harmed.

We will not be able to commercialize our product candidates if our preclinical studies do not produce successful results or our clinical trials do not demonstrate safety and efficacy in humans.

Before obtaining regulatory approval for the sale of our product candidates, we must conduct, at our own expense, extensive preclinical tests and clinical trials to demonstrate the safety and efficacy in humans of our product candidates. Preclinical and clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and interim results of a clinical trial do not necessarily predict final results. A failure of one or more of our clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including:

• regulators or institutional review boards may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective trial site;

• our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical testing or clinical trials or we may abandon projects that we expect to be promising. For example, our pivotal Phase III clinical trial of senicapoc for sickle cell disease and our more recent development program of senicapoc for asthma were not successful;

• enrollment in our clinical trials may be slower than we currently anticipate, resulting in significant delays. Additionally, participants may drop out of our clinical trials;

• we might have to suspend or terminate our clinical trials if the participating patients are being exposed to unacceptable health risks;

• regulators or institutional review boards may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements. For example, in March 2009, we received notification from the FDA that, based on a review of certain preclinical data, ICA-105665 had been placed on partial clinical hold. Also, in October 2010, we received notification from the FDA that, based on the occurrence of a serious adverse event in the photosensitive epilepsy trial, ICA-105665 had been placed on clinical hold;

• the cost of our clinical trials may be greater than we currently anticipate;

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• any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the product not commercially viable; and

• the effects of our product candidates may not be the desired effects or may include undesirable side effects or the product candidates may have other unexpected characteristics.

If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing or if the results of these trials or tests are not positive or are only modestly positive, we may:

• be delayed in obtaining marketing approval for our product candidates;

• not be able to obtain marketing approval; or

• obtain approval for indications that are not as broad as intended.

Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether planned clinical trials will begin as planned, will need to be restructured or will be completed on schedule, if at all. Significant clinical trial delays also could allow our competitors to bring products to market before we do and impair our ability to commercialize our products or product candidates.

Risks Related to Our Dependence on Third Parties for Manufacturing,

Research and Development and Marketing and Distribution Activities

We depend significantly on existing and future collaborations with third parties to discover, develop and commercialize some of our product candidates.

A key element of our business strategy is to collaborate with third parties, particularly leading pharmaceutical companies, to research, develop and commercialize some of our product candidates. We are currently a party to one such collaboration with Pfizer. In 2010, research funding from our collaboration with Pfizer accounted for 91% of our net revenues. Our research funding under our collaboration with Pfizer is scheduled to end in December 2011. Our collaboration with Pfizer or future collaborations we may enter into may not be scientifically or commercially successful. The termination of any of these arrangements might adversely affect the development of the related product candidates and our ability to derive revenue from them.

The success of our existing or future collaboration arrangements will depend heavily on the efforts and activities of our existing or future collaborators. Our existing or future collaborators have significant discretion in determining the efforts and resources that they will apply to such collaborations. The risks that we face in connection with our collaboration with Pfizer, and that we anticipate being subject to in future collaborations, include the following:

• collaboration agreements are for fixed terms and subject to termination by collaborators in the event of a material breach by us;

• collaborators in some cases have the first right to maintain or defend our intellectual property rights and, although we have the right to assume the maintenance and defense of our intellectual property rights if collaborators do not, our ability to do so may be compromised by existing or future collaborators’ acts or omissions; and

• collaborators may utilize our intellectual property rights in such a way as to invite litigation that could jeopardize or invalidate our intellectual property rights or expose us to potential liability.

Collaborations with pharmaceutical companies and other third parties often are terminated or allowed to expire by the other party. A termination or expiration of our current collaboration with Pfizer or any potential future collaborations would adversely affect us financially and could harm our business reputation.

If one of our existing or future collaborators were to change its strategy or the focus of its development and commercialization efforts with respect to our relationship, the success of our product candidates and our operations could be adversely affected.

There are a number of factors external to us that may change our existing or future collaborators’ strategy or focus with respect to our relationship with them. For example:

• our existing or future collaborators may develop and commercialize, either alone or with others, products and services that are similar to or competitive with the products that are the subject of the collaboration with us;

• our existing or future collaborators may change the focus of their development and commercialization efforts. Pharmaceutical and biotechnology companies historically have re-evaluated their priorities from time to time, including following mergers and consolidations, which have been common in recent years in these industries. For example, in October 2009, Pfizer acquired Wyeth and in January 2011 announced a restructuring; and

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• the ability of our product candidates and products to reach their potential could be limited if our existing or future collaborators decrease or fail to increase spending relating to such products.

If any of the above factors were to occur, our collaborator might terminate the collaboration or not commit sufficient resources to the development, manufacture or marketing and distribution of our product or product candidate that is the subject of the collaboration. In such event, we might be required to devote additional resources to the product or product candidate, seek a new collaborator or abandon the product or product candidate, any of which could have an adverse effect on our business.

We may not be successful in establishing additional collaborations, which could adversely affect our ability to discover, develop and commercialize products.

If we are unable to reach new agreements with suitable collaborators, we may fail to meet our business objectives for the affected product or program. We face significant competition in seeking appropriate collaborators. Moreover, these collaboration arrangements are complex and time-consuming to negotiate and document. We may not be successful in our efforts to establish additional collaborations or other alternative arrangements. The terms of any additional collaborations or other arrangements that we establish may not be favorable to us. Moreover, these collaborations or other arrangements may not be successful.

If third parties do not manufacture our product candidates in sufficient quantities and at an acceptable cost, clinical development and commercialization of our product candidates could be delayed, prevented or impaired.

We do not currently own or operate manufacturing facilities and have little experience in manufacturing pharmaceutical products. We rely and expect to continue to rely on third parties for the production of clinical and commercial quantities of our product candidates. There are a limited number of manufacturers that operate under the FDA’s cGMP regulations and that are both capable of manufacturing for us and willing to do so. We do not have any long-term manufacturing agreements with third parties, and manufacturers under our short-term supply agreements are not obligated to accept any purchase orders we may submit. Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to develop product candidates and commercialize any products that receive regulatory approval on a timely and competitive basis. In particular, if the third parties that are currently manufacturing the lead compounds, including ICA-105665, which we are developing for the treatment of epilepsy and pain, for our preclinical studies or clinical trials should cease to continue to do so for any reason, we expect that we would experience delays in advancing these trials while we identify and qualify replacement suppliers.

Use of third-party manufacturers may increase the risk that we will not have adequate supplies of our product candidates.

Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates or products ourselves, including:

• reliance on the third party for regulatory compliance and quality assurance;

• the possible breach of the manufacturing agreement by the third party; and

• the possible termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or inconvenient for us.

If we are not able to obtain adequate supplies of our product candidates and any approved products, it will be more difficult for us to develop our product candidates and compete effectively. Our product candidates and any products that we successfully develop may compete with product candidates and products of third parties for access to manufacturing facilities.

Our contract manufacturers are subject to ongoing, periodic, unannounced inspection by the FDA and corresponding state and foreign agencies or their designees to ensure strict compliance with cGMP regulations and other governmental regulations and corresponding foreign standards. We cannot be certain that our present or future manufacturers will be able to comply with cGMP regulations and other FDA regulatory requirements or similar regulatory requirements outside the United States. We do not control compliance by our contract manufacturers with these regulations and standards. Failure of our third-party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates and products.

If third parties on whom we rely for clinical trials do not perform as contractually required or as we expect or fail to comply with all applicable regulatory requirements, we may not be able to obtain regulatory approval for or commercialize our product candidates, and our business may suffer.

We do not have the ability to independently conduct the clinical trials required to obtain regulatory approval for our products. We depend on independent clinical investigators, contract research organizations and other third-party service providers to conduct the

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clinical trials of our product candidates and expect to continue to do so for at least the next several years. In the past, we have relied on Quintiles Transnational Corp. for the performance of some of our clinical trials. One of our directors, Dr. Dennis B. Gillings, is chairman and chief executive officer of Quintiles Transnational Corp., and PharmaBio Development Inc. d/b/a NovaQuest, the holder of approximately 3% of our outstanding capital stock, is a wholly owned subsidiary of Quintiles Transnational Corp.

We rely heavily on independent clinical investigators, contract research organizations and other third-party service providers for successful execution of our clinical trials, but do not control many aspects of their activities. We are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, for conducting and recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. The FDA closely monitors the progress of clinical trials that are conducted in the U.S., and the FDAAA significantly expands the federal government’s clinical trial registry to cover more trials and more information, including information on the results of completed trials. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Third parties may not complete activities on schedule, or may not conduct our clinical trials in accordance with regulatory requirements or our stated protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our product candidates.

Provided that our clinical development program is successful, we plan to expand our internal clinical development and regulatory capabilities. We will not be successful in doing so unless we are able to recruit appropriately trained personnel and add to our infrastructure.

Risks Related to Our Intellectual Property

If we are unable to obtain and maintain protection for the intellectual property relating to our technology and products, the value of our technology and products will be adversely affected.

Our success will depend in large part on our ability to obtain and maintain protection in the United States and other countries for the intellectual property covering or incorporated into our technology and products. The patent situation in the field of biotechnology and pharmaceuticals generally is highly uncertain and involves complex legal and scientific questions. We may not be able to obtain additional issued patents relating to our technology or products. Even if issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.

Our patents also may not afford us protection against competitors with similar technology. Because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications.

If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our business.

We are a party to a number of license agreements. We do not consider any one of these license agreements to be material to our business. We expect to enter into additional licenses in the future. Our existing licenses impose, and we expect future licenses will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license, in which event we might not be able to market any product that is covered by the licensed patents.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how. We seek to protect this information in part by confidentiality agreements with our employees, consultants and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. If we are unable to protect the confidentiality of our proprietary information and know-how, competitors may be able to use this information to develop products that compete with our products, which could adversely impact our business.

If we infringe or are alleged to infringe intellectual property rights of third parties, it will adversely affect our business.

Our research, development and commercialization activities, as well as any product candidates or products resulting from these activities, may infringe or be claimed to infringe patents or patent applications under which we do not hold licenses or other rights.

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Third parties may own or control these patents and patent applications in the United States and abroad. These third parties could bring claims against us or our existing or future collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us or our existing or future collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.

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

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared by the United States Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our products and technology. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

Risks Related to Regulatory Approval of Our Product Candidates

If we are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates, and our ability to generate revenue will be materially impaired.

Our product candidates and the activities associated with their development and commercialization, including their testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Failure to obtain regulatory approval for a product candidate will prevent us from commercializing the product candidate. We have not received regulatory approval to market any of our product candidates in any jurisdiction. We have only limited experience in filing and prosecuting the applications necessary to gain regulatory approvals and expect to rely on third-party contract research organizations to assist us in this process. Securing FDA approval requires, among other things, the submission of extensive preclinical and clinical data, information about product manufacturing processes and supporting information to the FDA for each therapeutic indication and inspection of facilities to establish the product candidate’s safety and efficacy. Our future products may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.

The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon the type, complexity and novelty of the product candidates involved. Changes in the regulatory approval policy during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may delay or prevent regulatory approval of an application. The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing or negative, inconsistent or inconclusive results obtained from preclinical or clinical trials could delay, limit or prevent regulatory approval of a product candidate.

Our products could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements, or if we experience unanticipated problems with our products, when and if any of them are approved.

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory bodies. These requirements include, among other things, submissions of safety and other post-marketing information and reports, registration requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, and requirements regarding the distribution of samples to physicians and recordkeeping. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in:

• restrictions on such products, manufacturers or manufacturing processes;

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• warning letters;

• withdrawal of the products from the market;

• refusal to approve pending applications or supplements to approved applications that we submit;

• required labeling changes;

• required post-marketing studies or clinical trials;

• distribution and use restrictions;

• voluntary recall;

• fines;

• suspension or withdrawal of regulatory approvals;

• refusal to permit the import or export of our products;

• product seizure; and

• injunctions or the imposition of civil or criminal penalties.

Failure to obtain regulatory approval in international jurisdictions would prevent us from marketing our products abroad.

We intend to market our products, if approved, outside the United States. In order to market our products in the European Union and other foreign jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. With respect to some of our product candidates, our collaborator has, or we expect that a future collaborator will have, responsibility to obtain regulatory approvals outside the United States, and we will depend on our existing or future collaborators to obtain these approvals. The approval procedure varies among countries and can involve additional testing and additional review periods. The time required to obtain approval may differ from and may be longer than that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval as well as additional risks. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. We and our existing or future collaborators may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.

Risks Related to Commercialization

The commercial success of any products that we may develop will depend upon the degree of market acceptance by physicians, patients, healthcare payors and others in the medical community.

Any products that we bring to the market may not gain market acceptance by physicians, patients, healthcare payors and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate material product revenues and we may not become profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

• the prevalence and severity of any side effects;

• the efficacy and potential advantages over alternative treatments;

• the ability to offer our product candidates for sale at competitive prices;

• relative convenience and ease of administration;

• the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

• the strength of marketing and distribution support; and

• sufficient third-party coverage or reimbursement.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable to generate product revenues.

We do not have a sales organization and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource

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these functions to third parties. Currently, we plan to build a focused specialty sales and marketing infrastructure to market or copromote some of our product candidates if and when they are approved. There are risks involved with establishing our own sales and marketing capabilities, as well as in entering into arrangements with third parties to perform these services. For example, developing a sales force is expensive and time-consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed as a result of FDA requirements or other reasons, we would incur related expenses too early relative to the product launch. This may be costly, and our investment would be lost if we cannot retain our sales and marketing personnel. In addition, marketing and promotion arrangements in the pharmaceutical industry are heavily regulated, and many marketing and promotional practices that are common in other industries are prohibited or restricted. These restrictions are often ambiguous and subject to conflicting interpretations, but carry severe administrative, civil, and criminal penalties for noncompliance. It may be costly to implement internal controls to facilitate compliance by our sales and marketing personnel.

If we are unable to obtain adequate reimbursement from third-party payors for any products that we may develop or acceptable prices for those products, our revenues and prospects for profitability will suffer.

Most patients will rely on Medicare and Medicaid, private health insurers and other third-party payors to pay for their medical needs, including any drugs we or our existing or future collaborators may market. If third-party payors do not provide adequate coverage or reimbursement for any products that we may develop, our revenues and prospects for profitability will suffer.

Regulatory approval to market a drug product does not assure that the product will be eligible for coverage by third-party payors or, assuming it is covered, that it will receive a profitable price. The process for obtaining third-party coverage and payment is costly and time-consuming. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost-effectiveness of our products. Our products may not be considered medically necessary or cost- effective. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

Coverage through the Medicare prescription drug benefit program may increase demand for our products, but participating suppliers are required to negotiate prices with drug procurement organizations on behalf of Medicare beneficiaries. These prices are likely to be lower than we might otherwise obtain. Future legislation might allow government agencies to negotiate prices directly with drug companies, which could lead to even lower prices. Drugs sold to state-operated Medicaid programs are subject to mandatory rebate agreements that require quarterly payments to states based on the drug’s average manufacturer price and best price. Private, non-governmental third-party payors frequently base their coverage policies and the prices they are willing to pay on the policies and payment rates under the Medicare and Medicaid programs.

A primary trend in the United States healthcare industry is toward cost containment. Third-party payors are challenging the prices charged for medical products and services, and many third-party payors limit reimbursement for newly-approved healthcare products. In particular, third-party payors may limit the indications for which they will reimburse patients who use any products that we may develop. Cost control initiatives could decrease the price we might establish for products that we may develop, which would result in lower product revenues to us. Moreover, the U.S. Congress recently enacted major legislation that will dramatically overhaul the health care system in the United States and that could significantly change the market for pharmaceuticals.

U.S. drug prices may be further constrained by possible Congressional action regarding drug reimportation into the United States. Legislation proposed in past Congressional sessions would allow the reimportation of approved drugs originally manufactured in the United States back into the United States from other countries where the drugs are sold at a lower price. Some governmental authorities in the U.S. are pursuing lawsuits to obtain expanded reimportation authority. Such legislation, regulations, or judicial decisions could reduce the prices we receive for any products that we may develop, if approved, negatively affecting our revenues and prospects for profitability. Alternatively, in response to legislation such as this, we might elect not to seek approval for or market our products in foreign jurisdictions in order to minimize the risk of reimportation, which could also reduce the revenue we generate from our product sales. Even without legislation authorizing reimportation, patients have been purchasing prescription drugs from Canadian and other non-United States sources, which has reduced the price received by pharmaceutical companies for their products.

In addition, in some foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidates or products to other available therapies. The conduct of such a clinical trial could be expensive and result in delays in commercialization of our products.

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If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of any products that we may develop.

We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

• decreased demand for any product candidates or products that we may develop;

• injury to our reputation;

• withdrawal of clinical trial participants;

• costs to defend the related litigation;

• substantial monetary awards to trial participants or patients;

• loss of revenue; and

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• the inability to commercialize any products that we may develop.

We have product liability insurance that covers our clinical trials up to a $5.0 million annual aggregate limit with a deductible of $25,000 per claim. The amount of insurance that we currently hold may not be adequate to cover all liabilities that may occur. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any products. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost and we may not be able to obtain insurance coverage that will be adequate to satisfy any liability that may arise.

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

The development and commercialization of new drugs is highly competitive. We face competition with respect to our current product candidates and any products we may seek to develop or commercialize in the future from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. Our competitors may develop products that are more effective, safer, more convenient or less costly than any that we are developing. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours. We believe that our most significant competitors in the area of drugs that work by modulating the activity of ion channels are large pharmaceutical companies which have internal ion channel drug discovery groups as well as smaller more focused companies engaged in ion channel drug discovery.

There are approved products on the market for all of the diseases and indications for which we are developing products. In many cases, these products have well known brand names, are distributed by large pharmaceutical companies with substantial resources and have achieved widespread acceptance among physicians and patients. In addition, we are aware of product candidates of third parties that are in development, which, if approved, would compete against product candidates for which we receive marketing approval.

Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to or necessary for our programs or advantageous to our business.

Our business activities involve the use of hazardous materials, which require compliance with environmental and occupational safety laws regulating the use of such materials. If we violate these laws, we could be subject to significant fines, liabilities or other adverse consequences.

Our research and development programs involve the controlled use of hazardous materials. Accordingly, we are subject to federal, state and local laws governing the use, handling and disposal of these materials. Although we believe that our safety procedures for handling and disposing of these materials comply in all material respects with the standards prescribed by state and federal regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In addition, our existing or future collaborators may not comply with these laws. In the event of an accident or failure to comply with environmental laws, we could be held liable for damages that result, and any such liability could exceed our assets and resources. We maintain liability insurance for some of these risks, but our policy excludes pollution and has a coverage limit of $5.0 million.

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Risks Related to Employees and Growth

If we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully develop or commercialize our product candidates.

Our success depends on our continued ability to attract, retain and motivate highly qualified managerial and key scientific personnel. We consider retaining Dr. P. Kay Wagoner, our president and chief executive officer, to be key to our efforts to develop and commercialize our product candidates. All of our employees, other than Dr. Wagoner and Dr. Richard D. Katz, are at-will employees and can terminate their employment at any time. Our employment agreements with Dr. Wagoner and Dr. Katz are terminable by them on short notice.

Our business requires us to maintain a significant number of qualified scientific and commercial personnel, including clinical development, regulatory, marketing and sales executives and field personnel, as well as administrative personnel. We have implemented a number of cost savings measures in an effort to conserve cash, including reductions in the workforce. There is competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we cannot continue to retain and attract, on acceptable terms, the qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow.

Risks Relating to Our Private Placements and At-the-Market Equity Issuance Facility

The number of shares of our common stock outstanding has increased substantially as a result of the equity investments by Pfizer that closed on August 20, 2007 and February 13, 2008; Pfizer beneficially owns a significant block of our common stock; and upon registration under the Securities Act of 1933, as amended, or the Securities Act, these shares will be generally available for resale in the public market.

Upon the closing of the equity investment by Pfizer on August 20, 2007, we issued 336,021 shares of our common stock to Pfizer. Upon the closing of the equity investment by Pfizer on February 13, 2008, we issued an additional 730,994 shares of our common stock to Pfizer as a result of the exercise of our put option to sell to Pfizer up to an additional $10.0 million of common stock at the fair market value of the common stock at the time of exercise. The issuance of the aggregate of 1,064,515 shares to Pfizer, which owns approximately 14% of our common stock as of April 30, 2011, resulted in substantial dilution to stockholders who held our common stock prior to the equity investments by Pfizer.

In accordance with the purchase agreement for the equity investment by Pfizer, we have agreed to file, at any time after August 20, 2008, upon the request of Pfizer, a registration statement with the SEC covering the resale of the aggregate number of shares issued pursuant to the purchase agreement. Upon such registration of the shares issued in the equity investment by Pfizer, these shares will become generally available for immediate resale in the public market. In addition, Pfizer may sell these shares prior to their registration in transactions exempt from registration under the Securities Act. The market price of our common stock could fall due to an increase in the number of shares available for sale in the public market or if Pfizer decides to sell our shares of common stock.

If we do not obtain and maintain effectiveness of the registration statement covering the resale of the shares issued in the equity investment by Pfizer, upon the request of Pfizer, we will be required to pay certain liquidated damages, which could be material in amount.

The terms of the purchase agreement that we entered into in connection with the equity investment by Pfizer require us to pay liquidated damages to Pfizer in the event that we do not file the registration statement with the SEC within 30 days after the request by Pfizer to file such registration statement, the registration statement does not become effective or its effectiveness is not maintained beginning 90 days after the registration request (if the registration statement is not reviewed by the SEC) or 120 days after the registration request (if it is so reviewed) or, after the registration statement is declared effective by the SEC, the registration statement is suspended by us or ceases to remain continuously effective as to all registrable securities for which it is required to be effective, with certain specified exceptions. We refer to each of these events as a registration default. Subject to the specified exceptions, for each 30-day period or portion thereof during which a registration default remains uncured, we are obligated to pay Pfizer an amount in cash equal to 1% of Pfizer’s aggregate purchase price, up to a maximum of 10% of the aggregate purchase price paid by Pfizer. These amounts could be material, and any liquidated damages we are required to pay could have a material adverse effect on our financial condition.

The number of shares of our common stock outstanding has increased substantially as a result of the “at-the-market” equity issuance facilities that we entered into on December 10, 2010 and March 15, 2011 and may continue to increase if we enter into similar equity issuance facilities in the future.

        On December 10, 2010, we entered into an at market issuance sales agreement, which we refer to as the December 2010 sales agreement, with McNicoll, Lewis & Vlak LLC, or MLV, pursuant to which we could issue and sell shares of our common stock having an aggregate offering price of up to $2.6 million from time to time through MLV. On January 20, 2011, we terminated the December 2010 sales agreement in accordance with the provisions of the agreement. During the term of the December 2010 sales agreement, we sold shares having an aggregate offering price of $2.4 million. On March 15, 2011, we entered into an at market issuance sales agreement, which we refer to as the March 2011 sales agreement, with MLV pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $4.6 million from time to time through MLV. As of April 30,

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2011, we sold shares having an aggregate offering price of $511,000 under the March 2011 sales agreement. The issuance of shares has resulted and may in the future result in dilution to stockholders who held our common stock prior to the offering. These shares are available for immediate resale in the public market. The market price of our common stock could fall due to an increase in the number of shares available for sale in the public market. In addition, we may enter into similar equity issuance facilities in the future, which would enable us to sell additional newly issued shares into the public market in order to raise additional capital.

General Company Related Risks

Our executive officers, directors and principal stockholders have substantial control over us and could limit your ability to influence the outcome of matters submitted to stockholders for approval.

As of April 30, 2011, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock beneficially owned, in the aggregate, shares representing approximately 34% of our capital stock. As a result, if these stockholders were to choose to act together, they could influence or control matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, could influence the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could lead to a delay in or prevent an acquisition of our company on terms that other stockholders may desire.

Our corporate charter documents, our stockholder rights plan, Delaware law and our purchase agreement for the equity investment by Pfizer contain provisions that may prevent or frustrate attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us.

Provisions of our corporate charter and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

• a classified board of directors;

• limitations on the removal of directors;

• advance notice requirements for stockholder proposals and nominations;

• the inability of stockholders to act by written consent or to call special meetings; and

• the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval.

The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our corporate charter. In addition, absent approval of our board of directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote.

On December 2, 2008, we adopted a stockholder rights plan pursuant to which we issued a dividend of one preferred share purchase right for each share of our common stock held by stockholders of record on December 15, 2008. Our stockholders approved the rights plan on June 2, 2009. Upon the effectiveness of our reverse stock split on September 21, 2010, the total number of preferred share purchase rights remained the same, but the number of rights associated with each share of common stock was increased by a factor of eight. Therefore, due to the reverse stock split, each share of common stock now trades with eight rights, each of which entitles the registered holder to purchase from us one one-thousandth of a share of our series A junior participating preferred stock, at a purchase price of $7.50 per share, subject to adjustment under certain circumstances. Unless we redeem or exchange the rights at an earlier date, they will expire upon the close of business on December 2, 2018.

The rights issued under our rights plan will automatically trade with the underlying common stock and will initially not be exercisable. If a person acquires or commences a tender offer for 15% (or in the case of Pfizer, which currently owns approximately 14% of our common stock, 20%) or more of our common stock in a transaction that was not approved by our board of directors, each right, other than those owned by the acquiring person, would instead entitle the holder to purchase $15.00 worth of our common stock for the $7.50 exercise price. If we are involved in a merger or other transaction with another company that is not approved by our board of directors, in which we are not the surviving corporation or which transfers more than 50% of our assets to another company, then each right, other than those owned by the acquiring person, would instead entitle the holder to purchase $15.00 worth of the acquiring company’s common stock for the $7.50 exercise price. The rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors. Although we believe that our stockholder rights plan will help enhance our ability to negotiate with a prospective acquirer in order to ensure that all company stockholders realize the long-term value of their investment, it could have the effect of discouraging, delaying or preventing a change of control of our company, including under circumstances that some stockholders may consider favorable.

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Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns or within the last three years has owned 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change of control of our company.

Pfizer has agreed to constitute and appoint our president and treasurer, and each of them, with full power of substitution, as the proxies of Pfizer with respect to matters on which Pfizer is entitled to vote as a holder of common stock, and authorize each of them to represent and to vote all of Pfizer’s shares with respect to matters other than a merger or acquisition of our company, the disposition of all or substantially all of our assets, or a change of control of our company. In addition, if on the record date for any vote of our common stock Pfizer holds greater than 10% of the outstanding shares of our common stock, with respect to any of Pfizer’s shares in excess of the number of shares equal to 10% of the outstanding shares of our common stock, Pfizer has agreed to constitute and appoint such persons as the proxies of Pfizer and authorize each of them to represent and to vote with respect to matters related to a merger or acquisition of our company, the disposition of all or substantially all of our assets, or a change of control of our company, in the same manner and in the same proportion as shares of common stock held by our other shareholders are voted on such matters. However, if both (1) we issue common stock that represents more than 10% of our then outstanding common stock to a third party strategic investor in connection with a collaboration agreement and (2) the voting rights granted to such third party contain fewer restrictions, then Pfizer’s voting rights shall be deemed to be automatically modified so as to make such rights no less favorable to Pfizer than those granted to the third party strategic investor. Pfizer will have significant influence over the outcome of a stockholder vote with respect to the approval of mergers or other business combination transactions. In addition, with respect to matters other than the approval of mergers or other business combination transactions, our management will control how Pfizer’s shares are voted and therefore may have significant influence over the outcome of a stockholder vote with respect to such matters.

A significant portion of our total outstanding shares may be sold into the market at any time. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of April 30, 2011, we had 7,499,008 shares of common stock outstanding. Substantially all of these shares, including those shares issued in the private placement and the “at the market” equity issuance facility, may be resold in the public market at any time. Moreover, Pfizer, which holds 1,064,515 shares of our common stock, has the right to require us to file a registration statement covering the resale of their shares, as discussed above. We also have registered all shares of common stock that we may issue under our equity compensation plans. As a result, they can be freely sold in the public market upon issuance. In addition, shares from certain restricted stock unit grants are automatically sold upon vesting to cover related employee tax obligations.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities

We did not sell any equity securities that were not registered under the Securities Act in the first quarter of 2011.

Issuer Purchases of Equity Securities

We did not make any purchases of our shares of common stock, nor did any affiliated purchaser or anyone acting on behalf of us or an affiliated purchaser, in the first quarter of 2011.

ITEM 6 – EXHIBITS

The exhibits filed herewith or incorporated by reference are set forth on the Exhibit Index attached hereto.

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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.

ICAGEN, INC.
By:	/s/ Richard D. Katz, M.D.
	Richard D. Katz, M.D.
	Executive Vice President, Finance and Corporate Development and Chief Financial Officer
	(Duly authorized officer and principal financial and accounting officer)

Date: May 10, 2011

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EXHIBIT INDEX

Exhibit Number	Description
10.1(1)	Sixth Amendment to Lease, dated as of April 8, 2011, by and between Crown Royal Associates, LLC and the Registrant.
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a).
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a).
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to the exhibits to the Registrant’s Current Report on Form 8-K filed with the SEC on April 25, 2011.

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