DOV PHARMACEUTICAL INC - 10-Q Quarterly Report

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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 June 30, 2002

OR

/ / 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 000-49730

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DOV PHARMACEUTICAL, INC.
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 22-3374365
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)

CONTINENTAL PLAZA
433 HACKENSACK AVENUE
HACKENSACK, NEW JERSEY 07601

(Address of principal executive office)

(201) 968-0980
(Registrant's telephone number, including area code)

-------------------

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:

Yes /X/ No / /

On August 13, 2002, there were outstanding 14,414,038 shares of our common
stock, par value $0.0001 per share, and 354,643 shares of series B nonvoting
preferred stock, par value $1.00 per share, which shares are convertible at any
time upon the vote of the holders of 75% or more of such shares outstanding into
574,521 shares of our common stock.

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DOV PHARMACEUTICAL, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2002

TABLE OF CONTENTS

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

- meet obligations and required milestones under our license and other
agreements;

- obtain substantial additional funds;

- obtain and maintain all necessary patents or licenses; and

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

You should refer to the "Part II--Other Information" section of this report
under the subheading "Item 5. Other Information - Risk Factors and Factors
Affecting Forward-Looking Statements" for a detailed discussion of some of the
factors that may cause our actual results to differ materially from our
forward-looking statements. You should also refer to the risks discussed in our
other filings with the Securities and Exchange Commission, including those
contained in our final prospectus dated April 24, 2002. We qualify all our
forward-looking statements by these cautionary statements. There may also be
other material factors that may materially affect our forward-looking statements
and our future results. As a result of the foregoing, readers should not place
undue reliance on our forward-looking statements. We do not undertake any
obligation and do not intend to update any forward-looking statement in the
future.

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PART I - FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

DOV PHARMACEUTICAL, INC.
BALANCE SHEETS

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

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DOV PHARMACEUTICAL, INC.
STATEMENTS OF OPERATIONS

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

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DOV PHARMACEUTICAL, INC.
STATEMENTS OF CASH FLOWS

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

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DOV PHARMACEUTICAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS

1. THE COMPANY

ORGANIZATION

DOV Pharmaceutical, Inc. (the "Company") was incorporated in May 1995 under
the laws of the State of New Jersey and reincorporated in Delaware in November
2000.

The Company is a biopharmaceutical company focused on the discovery,
in-licensing, development and commercialization of novel drug candidates for
central nervous system, cardiovascular and urological disorders. The Company has
five product candidates in clinical trials targeting insomnia, anxiety
disorders, pain, depression and angina and hypertension. The Company has
established strategic alliances with select partners to access their unique
technologies and their commercialization capabilities. The Company operates
principally in the United States.

2. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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

The results of operations for the interim periods shown in this report are
not necessarily indicative of results expected for the full year. The financial
statements should be read in conjunction with the audited financial statements
and notes for the year ended December 31, 2001, included in our Registration
Statement on Form S-1 filed with the SEC, as amended through its effective date
of April 24, 2002.

The Company and Elan Corporation, plc ("Elan") entered into a transaction
to form DOV (Bermuda), Ltd. f/k/a DOV Newco, Ltd. a Bermuda exempted limited
company ("DOV Bermuda"). While the Company owns 80.1% of the outstanding capital
stock of DOV Bermuda and Elan owns 19.9%, Elan has retained significant minority
rights that are considered "participating rights" as defined in the Emerging
Issues Task Force Consensus No. 96-16 "Investor's Accounting for an Investee
When the Investor Has a Majority of the Voting Interest but the Minority
Shareholder or Shareholders Have Certain Approval or Veto Rights." Accordingly,
the Company does not consolidate the financial statements of DOV Bermuda, but
instead accounts for its investment in DOV Bermuda under the equity method of
accounting.

The Company records its 80.1% interest in the loss in DOV Bermuda as
research and development expense for the portion of the research and development
expense incurred by the Company on behalf of DOV Bermuda and as Loss in
Investment in DOV Bermuda for the Company's 80.1% interest in the remaining loss
of DOV Bermuda.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported assets, liabilities, revenues, earnings,
financial position and various disclosures. Actual results could differ from
those estimates.

DEFERRED CHARGES

Deferred charges are issuance costs for the convertible exchangeable
promissory note and the convertible promissory note and are being amortized over
the six-year term of the instruments.

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NET LOSS PER SHARE

Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period.
The Company has excluded the shares issuable on conversion of the convertible
exchangeable promissory note, the convertible promissory note, convertible
preferred stock, outstanding options and warrants to purchase common stock from
the calculation of diluted net loss per share, as such securities are
antidilutive for all periods presented.

CONCENTRATION OF CREDIT RISK

Cash and cash equivalents are invested in deposits with significant
financial institutions. The Company has not experienced any losses on its
deposits of cash and cash equivalents. Management believes that the financial
institutions are financially sound and, accordingly, minimal credit risk exists.
Approximately $15.5 million of the Company's cash balance was uncollateralized
at June 30, 2002.

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121.
SFAS No. 144 further refines the requirements of SFAS No. 121 that requires
companies to recognize an impairment loss if the carrying amount of a long-lived
asset is not recoverable based on its undiscounted future cash flows and measure
an impairment loss as the difference between the carrying amount and fair value
of the asset. In addition, SFAS No. 144 provides guidance on accounting and
disclosure issues surrounding long-lived assets to be disposed of by sale. The
Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144
did not have any impact on the Company's financial statements.

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3. RESEARCH AND DEVELOPMENT EXPENSE

Research and development costs are expensed when incurred and include
allocations for payroll and related costs and other corporate overhead. Certain
research and development expenses incurred on behalf of DOV Bermuda are billed
to DOV Bermuda under a joint development and operating agreement. Payments
received from DOV Bermuda that reflect Elan's 19.9% interest in the work
performed by the Company for DOV Bermuda are recorded as a reduction in research
and development expense. Certain expenses from prior periods have been
reclassified to conform to the current period presentation.

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

4. DOV BERMUDA

The unaudited summarized results of operations of DOV Bermuda for the
second quarter and the six months ended June 30, 2002, and the respective
periods in 2001, are as follows:

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The following represents a reconciliation of the total loss of DOV Bermuda
included in the Company's statements of operations:

5. STOCK SPLIT

On March 8, 2002, the Company's board of directors declared a 1.62 for 1
stock split of the Company's common stock paid in the form of a dividend. In
order to effect the split with regard to the series B preferred stock, the
Company's board of directors approved an amendment to the Company's certificate
of incorporation to provide for an adjustment in the conversion ratio of the
series B preferred stock to reflect the split. The amendment was approved by the
stockholders of the Company, including the holders of the series B preferred
stock voting as a separate class. The split was effective on April 5, 2002. All
share data give effect to such split as if the split had occurred on January 1,
2001.

6. INITIAL PUBLIC OFFERING

On April 30, 2002, the Company completed an initial public offering of
5,000,000 shares of common stock at $13.00 per share, raising estimated net
proceeds for the Company of $59.0 million, net of underwriting discounts and
offering expenses. Upon completion of the initial public offering, all
outstanding shares of the Company's series C and series D redeemable convertible
preferred stock automatically converted on a 1.62 for 1 basis into an aggregate
of 4,519,800 shares of common stock.

7. SUBSEQUENT EVENTS

The investment balance at June 30, 2002 is the value of warrants the
Company holds on Neurocrine common stock. As the warrants represent a derivative
financial instrument under SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities," both the asset and the liability to Wyeth-Ayerst are
reflected in the Company's financial statements at fair value and the Company
arecords an adjustment to those fair values at the end of each reporting period,
with the corresponding gain or loss reflected in other income or other expense.
As of July 31, 2002, the fair market value of these warrants was $1.7 million,
an increase of $577,000 from June 30, 2002, due primarily to an increase in the
market value of Neurocrine's common stock. This is partially offset by a
corresponding increase in the liability to Wyeth-Ayerst of $202,000.

8. RECENT LITIGATION DEVELOPMENTS

During the period from April 29, 2002 through July 25, 2002, a number
of class action lawsuits were filed naming as defendants the Company, certain of
the Company's officers and directors and certain of the underwriters in the
Company's April 25, 2002 initial public offering of 5,000,000 shares of its
common stock. The lawsuits were filed in the United States District Court for
the Southern District of New York and the Untied States District Court for the
District of New Jersey. The complaints that have been served allege violations
of Sections 11, 12 and 15 of the Securities Act of 1933 as well as Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder by the Securities and

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Exchange Commission, based upon the Company's alleged failure to disclose the
filing of a revised registration statement and prospectus for the Company's
initial public offering reflecting changes to the 1999 financial statements of
the Company's joint venture with Elan Corporation, plc, DOV (Bermuda), Ltd.
These class actions were brought on behalf of purchasers of the Company's common
stock in or traceable to the Company's initial public offering and seek money
damages or rescission. On July 29, 2002, Judge Robert W. Sweet consolidated
before him the lawsuits filed in the Southern District of New York and appointed
lead plaintiffs and approved the selection of counsel for the lead plaintiffs.
In addition, the parties have jointly moved to have the lawsuits filed in the
District of New Jersey transferred and consolidated with the New York
litigation. Defendants' time to respond has been extended pending determination
of the transfer motion and the filing of a consolidated complaint. The Company
believes that it has meritorious defenses to the claims alleged in the class
actions and the Company intends to vigorously defend against the claims.
However, litigation is inherently uncertain and the Company cannot give
assurances as to the ultimate outcome or effect of these actions. If the
plaintiffs in these actions were to prevail, such an outcome would have a
material adverse effect on the Company's financial condition, results of
operations and liquidity.

In connection with the securities class action lawsuits described above,
the Company's providers of primary and excess liability insurance for directors
and officers, D&O, have asserted that the policy binders they issued in
connection with the Company's initial public offering are not effective. The
Company's primary carrier has stated it will rescind the D&O policy unless the
Company agrees to a $5.0 million deductible in respect of the initial public
offering class action lawsuits under a separate, revised binder. The excess
carrier, citing the Company's alleged failure to satisfy certain conditions
precedent, has asserted that the Company's coverage never existed. Thus, both
carriers assert they are not obligated to provide coverage under the original
binders for the securities class action lawsuits. The Company strongly disagrees
with their positions and has advised the carriers that the Company intends to
hold them to their original binder terms as the Company vigorously pursues
resolution of these matters. The Company cannot provide any assurance that a
satisfactory resolution of these matters will be achieved or that litigation
will not ensue. Pending resolution, the Company will incur expenses, including
attorneys' fees, in defending the securities class actions and in attempting to
resolve the coverage disputes. These expenses may be significant and, as a
result, may materially and adversely affect the Company's results of operations.
In addition, the Company's inability to obtain coverage as provided in the
Company's original binders could adversely affect the Company's financial
condition, results of operations and liquidity, since expenses incurred in
defending the class actions may not be reimbursable by the insurers and any
losses in respect of the class action lawsuits may be borne solely by the
Company. In the absence of D&O coverage, the Company will also be responsible,
without insurance support, for losses, if any, normally covered by such
insurance for officer and director reimbursement under its standard agreements.
Moreover, if the Company and its officers and directors are not covered by D&O
insurance, the Company's ability to recruit and retain officers and directors
may be adversely affected. The Company cannot assure you that replacement D&O
coverage will be available or, if it is, will be available on financial terms
comparable to those offered by the original carriers that have denied coverage.
Further, if replacement coverage is secured, it will not cover
previously-initiated class or related class actions arising out of the Company's
initial public offering and may contain other exceptions not found in the
original policy binders.

9. CONTINGENCIES

BIOVAIL MATTERS

Until recently, Andrx Pharmaceuticals, Inc., Andrx, and Biovail Corporation
were involved in litigation relating to the DOV diltiazem patent in the United
Stated District Court for the Southern District of Florida. This litigation was
instituted following the license of the DOV diltiazem patent to Biovail and
Biovail's subsequent listing of that patent in the FDA's "Orange Book" as
claiming its branded drug Tiazac under approved new drug application, or NDA,
20-401. This listing had the effect of preventing FDA approval of Andrx's
abbreviated new drug application, or ANDA, for a generic version of Tiazac for
up to 30 months. Among other things, Biovail claimed that Andrx's generic
version of Tiazac infringed the DOV diltiazem patent. Andrx, among other things,
claimed that its generic version of Tiazac did not infringe the DOV diltiazem
patent, that the DOV diltiazem patent is invalid and that the Company's license
agreement with Biovail is invalid as an unreasonable restraint of trade in
violation of antitrust laws. The Company was not a party to that litigation, and
made no attempt to join in the litigation.

In April 2002, Biovail withdrew its Orange Book listing described above.
Also in April 2002, Biovail dismissed with prejudice its claim that Andrx's
generic version of Tiazac would infringe the DOV diltiazem patent, thereby
barring Biovail from reasserting the same claim in the future. The federal court
in Florida also ordered that Andrx's claims of non-infringement and invalidity
were moot. Subsequently, as part of an overall settlement with Biovail, Andrx
dropped its claims that the patent

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and license agreement with Biovail are invalid. As reported, pursuant to the
Biovail-Andrx settlement, Biovail and Andrx agreed (a) to file a stipulation of
dismissal with prejudice of all pending claims, (b) to enter into mutual
releases of any unasserted claims relating to Biovail's Cardizem CD and Tiazac
and Andrx's generic versions of those products and (c) that Biovail will permit
Andrx to manufacture and market, Taztia, Andrx's generic version of Tiazac, free
of any patent infringement claims Biovail may have or acquire.

The Company's license agreement with Biovail gives Biovail the exclusive
right to enforce the DOV diltiazem patent against others, including the
exclusive right to sue others for past, present and future infringements of
the DOV diltiazem patent. The Company is contractually obligated under
certain circumstances to reimburse Biovail for legal fees and disbursements
incurred in connection with such patent enforcement, up to a maximum of $1.5
million. On July 10, 2002, Biovail, citing this contractual provision,
asserted that the Company is responsible for the reimbursement of legal
expenses of approximately $1.3 million that Biovail allegedly incurred to
enforce the DOV diltiazem patent against Andrx. The Company believes that it
is not obligated to reimburse Biovail for these expenses. Among other
reasons, the Company believes that Biovail's actions in listing the DOV
diltiazem patent in the Orange Book were taken in major part to secure a stay
of FDA approval of Andrx's generic drug, rather than to enforce the DOV
diltiazem patent. Further, Biovail's litigation with Andrx involved many
issues, including violation of antitrust laws, unrelated to the DOV diltiazem
patent or its validity. As noted above, Biovail withdrew its Orange Book
listing, Andrx and Biovail filed a stipulation of dismissal of the patent
infringement action against Andrx with respect to the DOV diltiazem patent
and, as noted below, the FTC announced a complaint against Biovail founded on
the alleged illegality of the Orange Book filing. The Company responded to
Biovail's July claim, rejecting it on both procedural and substantive
grounds. The Company also responded to Biovail's subsequent assertion that
failure to pay its legal fees will constitute a material breach of the
license agreement entitling Biovail to legal remedies including rescission.
The Company believes that any such dispute is subject to mandatory
arbitration and that the sole remedy for any award of legal fees is an offset
against royalties, if any. The Company has also submitted its own contractual
claim for legal fees and disbursements of $422,677 against Biovail resulting
from license agreement misrepresentations and the Orange Book filing.
Nonetheless, the Company may be responsible for a portion of Biovail's legal
expenses with regard to litigating Biovail's claim that Andrx's generic drug
infringes the DOV diltiazem patent and may fail to recover the Company's
legal expenses. As of June 30, 2002, no provision for the reimbursement of
these costs is included in the Company's financial statements.

FEDERAL TRADE COMMISSION INVESTIGATION

Related to the Andrx/Biovail litigation, in March 2001, following a request
for investigation by Andrx, the Federal Trade Commission, or FTC, notified the
Company that it was conducting a nonpublic investigation to determine whether
Biovail or any other person was engaged in unfair methods of competition in
violation of the Federal Trade Commission Act, and that the primary focus was
the legality of Biovail's January 2001 Orange Book listing of the DOV diltiazem
patent. The FTC letter sought information related to the Biovail license
agreement. The Company has cooperated with the FTC in its requests.

On April 23, 2002, the FTC announced a complaint against Biovail and a
proposed consent order with Biovail to settle the antitrust investigation. The
proposed consent order requires Biovail to return to the Company the exclusive
license to manufacture and sell any extended release formulation of diltiazem
using the DOV diltiazem patent in the Tiazac field, defined as a drug product
approved by the FDA for sale pursuant to NDA 20-401, or that is described in any
ANDA for which approval is sought by referencing NDA 20-401. On July 18, 2002,
the license agreement was amended to return to the Company, without payment, all
license rights, exclusive and non-exclusive, to practice the diltiazem patent in
the Tiazac field. The amendment has the effect of precluding Biovail from using
the DOV diltiazem patent in the Tiazac field, while, at the same time,
maintaining the agreement between the Company and Biovail to develop,
manufacture and market a new drug approved for sale under an NDA other than
Biovail's existing NDA 20-401. The Company believes this amendment fully
reflects the intention of the parties to the license agreement. The effect of
this change in the license agreement means that the Company is entitled, but not
required, to grant an exclusive or a non-exclusive license to other persons for
the manufacture and sale of an extended release formulation of diltiazem that is
described in any ANDA for which approval is sought by referencing Biovail's NDA
20-401. The Company continues to have the right to receive royalties from any
licensee who manufactures and sells an extended release formulation of diltiazem
using the DOV diltiazem patent. The FTC must approve the license agreement
amendment, which, to the Company's knowledge, it has not done. In addition, to
the Company's knowledge the proposed consent order between the FTC and Biovail
has not been declared final. Until the order is final, the FTC may amend either
the complaint or the proposed consent order and seek other remedies against
Biovail or the Company, including court ordered reformation of the agreement,
which could have a material adverse affect on the Company's business, including
the substantial costs and distraction to management of any litigation that may
ensue.

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ELAN MATTER

Under the terms of the Company's joint venture agreements with Elan, Elan's
consent is required with respect to certain transactions entered into by the
Company. In the event that the Company does not obtain Elan's consent when it is
required, Elan has the right to terminate the license agreement with Nascime
Limited, a 100% owned subsidiary of DOV Bermuda. In January 2001, the Company
entered into a license, research and development agreement with Biovail, which
is a named technological competitor of Elan under Elan's license agreement with
Nascime. The Company does not believe that Elan's consent to the Biovail
agreement was required and the Company does not believe that Elan is entitled to
terminate its license agreement with Nascime as a result of the Company entering
into the Biovail license agreement without Elan's consent. Nonetheless, the
Company sought consent from Elan, which Elan refused to grant. While Elan has
neither asserted that its consent was required, nor objected to the Company
entering into the Biovail license agreement or threatened to terminate its
license agreement with Nascime, it has stated that it reserves its rights with
respect to this issue. It is not feasible to predict what the outcome would be
if Elan were to seek to terminate its agreement based on the Company's failure
to obtain its consent. The Elan license with Nascime is material to the Company
and if the license were to be terminated, it could have a material adverse
impact on the Company's financial position and results of operations.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION TOGETHER WITH OUR UNAUDITED FINANCIAL STATEMENTS AND RELATED
NOTES CONTAINED ELSEWHERE IN THIS REPORT. REFERENCES TO "WE," "US," AND "OUR"
REFER TO DOV PHARMACEUTICAL, INC.

OVERVIEW

We are focused on the discovery, in-licensing, development and
commercialization of novel drug candidates for the treatment of central nervous
system, cardiovascular and urological disorders. In 1998, we licensed four of
our product candidates from Wyeth-Ayerst: NBI-34060, for the treatment of
insomnia, bicifadine, for the treatment of pain, ocinaplon, for the treatment of
anxiety, and DOV 216,303, for the treatment of depression. We sublicensed
NBI-34060 to Neurocrine in 1998 in exchange for the right to receive payments
upon the achievement of certain clinical development milestones and royalties
based on product sales, if any. We are developing bicifadine and ocinaplon
through DOV (Bermuda), Ltd., or DOV Bermuda, our joint venture with Elan. DOV
diltiazem is being developed through our collaboration with Biovail, which we
entered into in January 2001.

Since our inception, we have incurred significant operating losses and we
expect to do so for the foreseeable future. As of June 30, 2002, we had an
accumulated deficit of $31.5 million. We have depended upon equity and debt
financings and license fee and milestone payments from our collaborative
partners and licensees to fund our research and product development programs and
expect to do so for the foreseeable future.

We have a limited history of operations and anticipate that our quarterly
results of operations will fluctuate for several reasons, including the timing
and extent of our research and development efforts, the timing and extent of our
adding new employees and infrastructure, the timing of milestone, license fee
and royalty payments and the timing and outcome of regulatory approvals.

Our revenue has consisted primarily of license fees and milestone payments
from our collaborative partners and licensees. We record revenue on an accrual
basis when amounts are considered collectible. Revenues received in advance of
performance obligations, or in cases where we have a continuing obligation to
perform services, are deferred and amortized over the performance period.
Revenues from milestone payments that represent the culmination of a separate
earnings process are recorded when the milestone is achieved. Contract revenues
are recorded as the services are performed. License and milestone revenue are
typically not consistent or recurring in nature. Our revenue has fluctuated from
year-to-year and quarter-to-quarter and will likely continue to be highly
volatile.

Our operating expenses consist primarily of royalty expense, costs
associated with research and development and general and administrative costs
associated with our operations. Royalty expense consists of royalty and
milestone payments accrued under our license agreement with Wyeth-Ayerst.
Research and development expense consists primarily of compensation and other
related costs of our personnel dedicated to research and development activities,
as well as

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outside professional fees related to clinical trials and preclinical studies.
Research and development expense also includes our expenses related to
development activities of DOV Bermuda. General and administrative expense
consists primarily of the costs of our senior management, finance and
administrative staff, business insurance and professional fees. Expansion of our
operations and costs associated with being a public reporting entity will
increase our general and administrative expense.

We expect our research and development expenses to increase substantially
in the foreseeable future. We expect that a large percentage of our research and
development expenses will be incurred in support of our clinical trial programs
for bicifadine, ocinaplon and DOV 216,303, as well as our product candidates in
our preclinical program if they progress into clinical trials.

In January 1999, we entered into a joint venture with Elan. As part of the
transaction, we formed DOV Bermuda to develop controlled release formulations of
ocinaplon and bicifadine. While we own 80.1% of the outstanding common stock of
DOV Bermuda, Elan has retained significant minority investor rights that are
treated as "participating rights" as defined in Emerging Issues Task Force
Consensus, or EITF, No. 96-16 "Investor's Accounting for an Investee When the
Investor Has a Majority of the Voting Interest but the Minority Shareholder or
Shareholders Have Certain Approval or Veto Rights." Therefore, we do not
consolidate the financial statements of DOV Bermuda, but instead account for our
investment in DOV Bermuda under the equity method of accounting. We record our
80.1% interest in the loss in DOV Bermuda as research and development expense
for the portion of the research and development expense incurred by us on behalf
of DOV Bermuda and as Loss in Investment in DOV Bermuda for our 80.1% interest
in the remaining loss of DOV Bermuda.

On July 31, 2002, Elan Corporation, plc, the Company's partner in the DOV
Bermuda joint venture, announced a recovery plan that includes the divestiture
of businesses, assets and products that are no longer core to Elan. If Elan
should determine that it no longer wishes to fund the joint venture, we intend
to assess our options, including self-funding of Elan's portion of the joint
venture or entering into substitute collaborative arrangements. Whatever the
outcome of the foregoing, we are committed to pursuing the development of these
product candidates on the present schedule.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2002 AND 2001

REVENUE. Our revenue was $635,000 for the second quarter 2002, as compared
to $625,000 for the comparable period last year. In each of the second quarter
of 2002 and 2001, our revenue was comprised virtually exclusively of $625,000 in
amortization of the $7.5 million fee we received on signing of the license,
research and development agreement for our collaboration with Biovail in January
2001.

RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased $1.1 million to $2.4 million for the second quarter 2002 from $1.3
million for the comparable period in 2001. Approximately $1.1 million of the
increase in research and development expense was attributable to increased costs
associated with the Phase II clinical trials for ocinaplon and bicifadine,
offset by a net reduction in other research and development expenses of
approximately $46,000. The net reduction was primarily attributable to a
reduction for the revaluation of options issued to consultants in prior periods
of $129,000, offset by net increased costs related to clinical trials for our
other products and additional personnel of $83,000.

GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $548,000 to $1.2 million in the second quarter 2002 from $619,000 for
the comparable period in 2001. The increase was primarily attributable to
increased payroll costs of $481,000 and increased office and related expenses of
$130,000 offset by decreased professional fees of $63,000. The increase in
payroll costs was primarily attributable to bonuses to our executive officers of
$275,000, increased non-cash compensation expense of $104,000, and increased
salaries of $71,000 as we expanded our operations. The increase in office and
related expenses was primarily related to an increase in directors and officers'
liability insurance premiums of $92,000.

LOSS IN INVESTMENT IN DOV BERMUDA. Loss in investment in DOV Bermuda
decreased $84,000 to $261,000 in the second quarter 2002 from $345,000 in the
comparable period in 2001. The decrease resulted primarily from decreased costs
associated with the formulation development work for ocinaplon and bicifadine
performed by Elan.

14

INTEREST INCOME. Interest income increased $137,000 to $220,000 in the
second quarter 2002 from $83,000 in the comparable period in 2001. The increase
was due to higher balances of cash and cash equivalents in the second quarter
2002 resulting from the $59.0 million of net proceeds received from our initial
public offering, offset by lower average interest rate yields in the second
quarter of 2002.

INTEREST EXPENSE. Interest expense increased $228,000 to $474,000 in the
second quarter 2002 from $247,000 in the comparable period in 2001. We recorded
interest expense of $474,000 on our convertible exchangeable promissory note and
convertible line of credit with Elan in the second quarter of 2002, and $246,000
in the comparable period in 2001. This increase was due to higher outstanding
balances on the convertible exchangeable promissory note and the convertible
line of credit and an increase in the additional interest discussed below. Both
the Elan convertible exchangeable promissory note and convertible line of credit
contain interest that will, at Elan's option, be paid either in cash or our
common stock. In accordance with EITF 00-27, we evaluate this conversion feature
each time interest is accrued on the notes. This feature resulted in interest
expense of $228,000 for the second quarter of 2002, an increase of $214,000 from
the second quarter of 2001, due primarily to the increase in the fair value of
our common stock. To the extent the value of our common stock is at or above
$3.98 per share with respect to the convertible exchangeable promissory note or
$3.41 per share with respect to the convertible line of credit, we will continue
to incur additional interest expense each time interest is accrued on the notes.

OTHER EXPENSE, NET. We had $387,000 of other expense, net in the second
quarter of 2002. We did not record any other expense, net in the comparable
period in 2001. In the second quarter 2002, other expense, net consisted
primarily of a decrease of $577,000 in value of the warrants to acquire
Neurocrine common stock, which we earned in 2001 upon the achievement of a
certain milestone, offset by the decrease in our liability to Wyeth-Ayerst of
$202,000 associated with the warrants. This resulted in an overall net expense
of $375,000 associated with these warrants.

SIX MONTHS ENDED JUNE 30, 2002 AND 2001

REVENUE. Revenue increased $302,000 to $1.3 million for the six months
ended June 30, 2002 from $1.0 million for the comparable period in 2001. The
increase was primarily attributable to an additional month of amortization of
the $7.5 million fee we received upon signing the license, research and
development agreement for our collaboration with Biovail in January 2001 of
$208,000 and an increase in revenue from contract research services performed
under our collaboration with Biovail of $93,000.

RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased $2.2 million to $4.6 million for the six months ended June 30, 2002
from $2.4 million for the comparable period in 2001. Approximately $1.9 million
of the increase in research and development expense was attributable to
increased costs associated with the Phase II clinical trials for ocinaplon and
bicifadine. The remaining increase of $375,000 was primarily attributable to net
increased costs related to clinical trials for our other products and additional
personnel of $395,000, offset by a net decrease in professional fees of $25,000.

GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $710,000 to $2.0 million in the six months ended June 30, 2002 from
$1.3 million for the comparable period in 2001. The increase was primarily
attributable to increased payroll costs associated with our personnel of
$615,000 and increased office and related expenses of $159,000 offset by
decreased professional fees of $64,000. The increase in payroll costs was
primarily attributable to bonuses to our employees of $207,000, increased
non-cash compensation expense of $203,000, and increased salaries of $149,000 as
we expanded our operations. The increase in office and related expenses was
primarily related to an increase in directors and officers' insurance of
$103,000.

LOSS IN INVESTMENT IN DOV BERMUDA. Loss in investment in DOV Bermuda
decreased $215,000 to $509,000 in the six months ended June 30, 2002 from
$724,000 in the comparable period in 2001. The decrease resulted primarily from
decreased costs associated with the formulation development work for ocinaplon
and bicifadine performed by Elan.

INTEREST INCOME. Interest income increased $87,000 to $281,000 in the six
months ended June 30, 2002 from $194,000 in the comparable period in 2001. The
increase was due to higher balances of cash and cash equivalents in the six
months ended June 30, 2002 resulting from the $59.0 million of net proceeds
received from our initial public offering, offset by lower average interest rate
yields in the six months ended June 30, 2002.

15

INTEREST EXPENSE. Interest expense increased $896,000 to $1.4 million in
the six months ended June 30, 2002 from $489,000 in the comparable period in
2001. We recorded interest expense of $1.4 million on our convertible
exchangeable promissory note and convertible line of credit with Elan in the six
months ended June 30, 2002, and $487,000 in the comparable period in 2001. This
increase was primarily due to higher outstanding balances on the convertible
exchangeable promissory note and the convertible line of credit and an increase
in the additional interest discussed below. Both the Elan convertible
exchangeable promissory note and convertible line of credit contain interest
that will be paid, at Elan's option, either in cash or our common stock. In
accordance with EITF 00-27, we evaluate this conversion feature each time
interest is accrued on the notes. This feature resulted in interest expense of
$892,000 for the six months ended June 30, 2002, an increase of $865,000 from
the comparable period of 2001, due primarily to the increase in the fair value
of our common stock. To the extent the value of our common stock is at or above
$3.98 per share with respect to the convertible exchangeable promissory note or
$3.41 per share with respect to the convertible line of credit, we will continue
to incur additional interest expense each time interest is accrued on the notes.

OTHER EXPENSE, NET. We had $810,000 of other expense, net in the six months
ended June 30, 2002. We did not record any other expense, net in the comparable
period in 2001. In the six months ended 2002, other expense, net consisted
primarily of a decrease of $1.2 million in value of the warrants to acquire
Neurocrine common stock, which we earned in 2001 upon the achievement of a
certain milestone, offset by the decrease in our liability to Wyeth-Ayerst of
$427,000 associated with the warrants. This resulted in an overall net expense
of $794,000 associated with these warrants.

16

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2002, our cash and cash equivalents totaled $66.0 million
compared with $13.6 million at December 31, 2001. The increase in cash balances
at June 30, 2002 resulted primarily from the completion of our initial public
offering of 5,000,000 shares of common stock at $13.00 per share, raising net
proceeds for the Company of $59.0 million, net of underwriting discounts and
estimated offering expenses, offset by funding of our operations during the six
months ended June 30, 2002. At June 30, 2002, we had working capital of $63.8
million.

Net cash used in operations during the six months ended June 30, 2002
amounted to $5.8 million, as compared with cash provided by operations of $4.6
million in the comparable period in 2001. The increase in cash used in
operations resulted primarily from the increase in clinical development
activities and the addition of personnel. Cash used in operations during the six
months ended June 30, 2001 was offset by the receipt of the $7.5 million license
fee from Biovail, net of amortization. Non-cash expense related to stock-based
compensation, interest expense and depreciation and amortization expenses were
$1.8 million in the six months ended June 30, 2002 and $757,000 in the
comparable period in 2001. Non-cash depreciation in the value of investments was
$794,000 in the six months ended June 30, 2002.

We believe that our existing cash and cash equivalents will be sufficient
to fund our anticipated operating expenses, debt obligations and capital
requirements until at least the end of 2003. Our future capital uses and
requirements depend on numerous factors, including:

- our progress with research and development;

- our ability to establish and the scope of any new collaborations;

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

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

- the costs and timing of regulatory approvals; and

- expenses associated with currently pending and potential litigation.

In addition to the foregoing, our future capital uses and requirements are also
dependent in part on the ability of our licensees and collaborative partners to
meet their obligations to us, including the fulfillment of their development and
commercialization responsibilities in respect of our product candidates. Our
licensees and collaborative partners, Elan, Biovail, Neurocrine and
Wyeth-Ayerst, may encounter conflicts of interest, changes in business strategy
or other business issues, or they my acquire or develop rights to competing
products, all of which could adversely affect their ability or willingness to
fulfill their obligations to us and, consequently, require us to satisfy,
through the commitment of additional funds or personnel or both, any shortfalls
in their performance. On July 31, 2002, Elan Corporation, plc, our partner in
the DOV Bermuda joint venture, announced a recovery plan that includes the
divestiture of businesses, assets and products that are no longer core to Elan.
If Elan should determine that it no longer wishes to fund the joint venture, we
intend to assess our options, including self-funding of Elan's portion of the
joint venture or entering into substitute collaborative arrangements. Whatever
the outcome of the foregoing, we are committed to pursuing the development of
these product candidates on the present schedule.

Our capital requirements may increase. As a result, we may require
additional funds and may attempt to raise additional funds through equity or
debt financings, collaborative agreements with corporate partners or from other
sources. In addition, future milestone payments under some of our collaborative
or license agreements are contingent upon our meeting particular research or
development goals. The amount and timing of future milestone payments are
contingent upon the terms of each collaborative or license agreement. Milestone
performance criteria are specific to each agreement and based upon future
performance. Therefore, we are subject to significant variation in the timing
and amount of our revenues, milestone expenses and results of operations from
period to period.

In connection with the securities class action lawsuits described under
Part II, Item 1 of this report, our providers of primary and excess liability
insurance for directors and officers, D&O, have asserted that the policy binders
they issued in connection with our initial public offering are not effective.
Our primary carrier has stated it will rescind the D&O policy unless we agree to
a $5.0 million deductible in respect of the initial public offering class action
lawsuits under a separate, revised binder. The excess carrier, citing our
alleged failure to satisfy certain conditions precedent, has asserted that its
coverage never existed. Thus, both carriers assert they are not obligated to
provide coverage under the original binders for

17

the securities class action lawsuits. We strongly disagree with their positions
and have advised the carriers that we intend to hold them to their original
binder terms as we vigorously pursue resolution of these matters. We cannot
provide any assurance that a satisfactory resolution of these matters will be
achieved or that litigation will not ensue. Pending resolution, we will incur
expenses, including attorneys' fees, in defending the securities class actions
and in attempting to resolve the coverage disputes. These expenses may be
significant and, as a result, may materially and adversely affect our results of
operations. In addition, our inability to obtain coverage as provided in our
original binders could adversely affect our financial condition, results of
operations and liquidity, since expenses incurred in defending the class actions
may not be reimbursable by the insurers and any losses in respect of the class
action lawsuits may be borne solely by us. In the absence of D&O coverage, we
will also be responsible, without insurance support, for losses, if any,
normally covered by such insurance for officer and director reimbursement under
our standard agreements. Moreover, if we are and our officers and directors are
not covered by D&O insurance, our ability to recruit and retain officers and
directors may be adversely affected. We cannot assure you that replacement D&O
coverage will be available or, if it is, will be available on financial terms
comparable to those offered by the original carriers that have denied coverage.
Further, if replacement coverage is secured, it will not cover
previously-initiated class or related class actions arising out of our initial
public offering and may contain other exceptions not found in our original
policy binders.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

To date, we have invested our cash balances with significant financial
institutions. In the future, the primary objective of our investment activities
will be to maximize the income we receive from our investments consistent with
preservation of principal and minimum risk. Some of the securities that we
invest in may have market risk. This means that a change in prevailing interest
rates may cause the principal amount of the investment to fluctuate. To minimize
this risk in the future, we intend to maintain our portfolio of cash equivalents
and investments in a variety of securities, including commercial paper, money
market funds, government and non-government debt securities and corporate
obligations.

The investment balance of $1.2 million at June 30, 2002 represents the
warrants we received from Neurocrine under our sublicense agreement. We have a
corresponding accrued royalty of $406,000 included in accrued expenses related
to the portion of the Neurocrine warrants we must remit to Wyeth-Ayerst under
our license agreement. As the warrants represent a derivative financial
instrument under SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities," both the asset and the liability to Wyeth-Ayerst are reflected in
our financial statements at fair value and we record an adjustment to those fair
values at the end of each reporting period with the corresponding gain or loss
reflected in other income or other expense. Included in other expense, net for
six months ended June 30, 2002, was $794,000 for the net result of the decrease
in the value of the warrants offset by the decrease in the liability. We
calculated these values using a Black-Scholes methodology. The fair value of the
warrants will fluctuate based on many factors including but not limited to
overall stock market conditions, the fair value of Neurocrine's common stock,
the volatility in Neurocrine's common stock and length of time left on our
warrants, currently four and one-half years. The majority of the value in the
asset at June 30, 2002, relates to the term of the warrants and the fact that
Neurocrine's common stock is volatile. As long as we continue to own these
warrants, we expect these factors and the corresponding value of the asset and
liability to continue to fluctuate perhaps significantly from quarter-to-quarter
and from year-to-year. As of July 31, 2002, the fair market value of these
warrants was $1.7 million, an increase of $577,000 from June 30, 2002, due
primarily to an increase in the market value of Neurocrine's common stock. This
is partially offset by a corresponding increase in the liability to Wyeth-Ayerst
of $202,000.

18

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

BIOVAIL/ANDRX LITIGATION

Until recently, Andrx Pharmaceuticals, Inc., Andrx, and Biovail Corporation
were involved in litigation relating to our DOV diltiazem patent in the United
Stated District Court for the Southern District of Florida. This litigation was
instituted following the license of our DOV diltiazem patent to Biovail and
Biovail's subsequent listing of that patent in the FDA's "Orange Book" as
claiming its branded drug Tiazac under approved new drug application, or NDA,
20-401. This listing had the effect of preventing FDA approval of Andrx's
abbreviated new drug application, or ANDA, for a generic version of Tiazac for
up to 30 months. Among other things, Biovail claimed that Andrx's generic
version of Tiazac infringed our DOV diltiazem patent. Andrx, among other things,
claimed that its generic version of Tiazac did not infringe our DOV diltiazem
patent, that our DOV diltiazem patent is invalid and that our license agreement
with Biovail is invalid because it is an unreasonable restraint of trade in
violation of antitrust laws. We were not a party to that litigation, and made no
attempt to join in the litigation.

In April 2002, Biovail withdrew its Orange Book listing described above.
Also in April 2002, Biovail dismissed its claim that Andrx's generic version of
Tiazac would infringe our DOV diltiazem patent, with prejudice, thereby barring
Biovail from reasserting the same claim in the future. The federal court in
Florida also ordered that Andrx's claims of non-infringement and invalidity were
moot. Subsequently, as part of an overall settlement with Biovail, Andrx dropped
its claims that our patent and license agreement with Biovail are invalid. As
reported, pursuant to the Biovail-Andrx settlement, Biovail and Andrx agreed (a)
to file a stipulation of dismissal with prejudice of all pending claims, (b) to
enter into mutual releases of any unasserted claims relating to Biovail's
Cardizem CD and Tiazac and Andrx's generic versions of those products and (c)
that Biovail will permit Andrx to manufacture and market, Taztia, Andrx's
generic version of Tiazac, free of any patent infringement claims Biovail may
have or acquire.

Our license agreement with Biovail gives Biovail the exclusive right to
enforce the DOV diltiazem patent against others, including the exclusive
right to sue others for past, present and future infringements of the DOV
diltiazem patent. We are contractually obligated under certain circumstances
to reimburse Biovail for legal fees and disbursements incurred in connection
with such patent enforcement, up to a maximum of $1.5 million. On July 10,
2002, Biovail, citing this contractual provision asserted that DOV is
responsible for the reimbursement of legal expenses of approximately $1.3
million that Biovail allegedly incurred to enforce the DOV diltiazem patent
against Andrx. We believe that we are not obligated to reimburse Biovail for
these expenses. Among other reasons, we believe that Biovail's actions in
listing the DOV diltiazem patent in the Orange Book were taken in major part
to secure a stay of FDA approval of Andrx's generic drug, rather than to
enforce the DOV diltiazem patent. Further, Biovail's litigation with Andrx
involved many issues, including violation of antitrust laws, unrelated to the
DOV diltiazem patent or its validity. As noted above, Biovail withdrew its
Orange Book listing, Andrx and Biovail filed a stipulation of dismissal of
the patent infringement action against Andrx with respect to the DOV
diltiazem patent and as noted below, the FTC announced a complaint against
Biovail founded on the alleged illegality of the Orange Book filing. We have
responded to Biovail's July claim, rejecting it on both procedural and
substantive grounds. We have also responded to Biovail's subsequent assertion
that failure to pay its legal fees will constitute a material breach of the
license agreement entitling Biovail to legal remedies including rescission.
We believe that any such dispute is subject to mandatory arbitration and that
the sole remedy for any award of legal fees is an offset against royalties,
if any. We have also submitted our own contractual claim for legal fees
and disbursements of $422,677 against Biovail resulting from license
agreement misrepresentations and the Orange Book filing. Nonetheless, we may
be responsible for a portion of Biovail's legal expenses with regard to
litigating Biovail's claim that Andrx's generic drug infringes the DOV
diltiazem patent and may fail to recover our legal expenses.

FEDERAL TRADE COMMISSION INVESTIGATION

Related to the Andrx/Biovail litigation, in March 2001, following a request
for investigation by Andrx, the Federal Trade Commission, or FTC, notified us
that it was conducting a nonpublic investigation to determine whether Biovail or
any other person was engaged in unfair methods of competition in violation of
the Federal Trade Commission Act, and that the primary focus was the legality of
Biovail's January 2001 Orange Book listing of the DOV diltiazem patent. The FTC
letter sought information related to the Biovail license agreement. We have
cooperated with the FTC in its requests.

19

On April 23, 2002, the FTC announced a complaint against Biovail and a
proposed consent order with Biovail to settle the antitrust investigation. The
proposed consent order requires Biovail to return to us the exclusive license to
manufacture and sell any extended release formulation of diltiazem using the DOV
diltiazem patent in the Tiazac field, defined as a drug product approved by the
FDA for sale pursuant to NDA 20-401, or that is described in any ANDA for which
approval is sought by referencing NDA 20-401. On July 18, 2002, the license
agreement was amended to return to us, without payment, all license rights,
exclusive and non-exclusive, to practice our diltiazem patent in the Tiazac
field. The amendment has the effect of precluding Biovail from using the DOV
diltiazem patent in the Tiazac field, while, at the same time, maintaining the
agreement between us and Biovail to develop, manufacture and market a new drug
approved for sale under an NDA other than Biovail's existing NDA 20-401. We
believe this amendment fully reflects the intention of the parties to the
license agreement. The effect of this change in the license agreement means that
we are entitled, but not required, to grant an exclusive or a non-exclusive
license to other persons for the manufacture and sale of an extended release
formulation of diltiazem that is described in any ANDA for which approval is
sought by referencing Biovail's NDA 20-401. We continue to have the right to
receive royalties from any licensee who manufactures and sells an extended
release formulation of diltiazem using the DOV diltiazem patent. The FTC must
approve the license agreement amendment, which, to our knowledge, it has not
done. In addition, to our knowledge the proposed consent order between the FTC
and Biovail has not been declared final. Until the order is final, the FTC may
amend either the complaint or the proposed consent order and seek other remedies
against Biovail or us, including court ordered reformation of the agreement,
which could have a material adverse affect on our business, including the
substantial costs and distraction to management of any litigation that may
ensue.

SECURITIES CLASS ACTION LAWSUITS

During the period from April 29, 2002 through July 25, 2002, a number of
class action lawsuits were filed naming us as defendants, certain of our
officers and directors and certain of the underwriters in our April 25, 2002
initial public offering of 5,000,000 shares of our common stock. The lawsuits
were filed in the United States District Court for the Southern District of New
York and the Untied States District Court for the District of New Jersey. The
complaints that have been served allege violations of Sections 11, 12 and 15 of
the Securities Act of 1933 as well as Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the Securities and
Exchange Commission, based upon our alleged failure to disclose the filing of a
revised registration statement and prospectus for our initial public offering
reflecting changes to the 1999 financial statements of our joint venture with
Elan Corporation, plc, DOV (Bermuda), Ltd. These class actions were brought on
behalf of purchasers of our common stock in or traceable to our initial public
offering and seek money damages or rescission. On July 29, 2002, Judge Robert W.
Sweet consolidated before him the lawsuits filed in the Southern District of New
York and appointed lead plaintiffs and approved the selection of counsel for the
lead plaintiffs. In addition, the parties have jointly moved to have the
lawsuits filed in the District of New Jersey transferred and consolidated with
the New York litigation. Defendants' time to respond has been extended pending
determination of the transfer motion and the filing of a consolidated complaint.
We believe that we have meritorious defenses to the claims alleged in the class
actions and we intend to vigorously defend against the claims. However,
litigation is inherently uncertain and we cannot give assurances as to the
ultimate outcome or effect of these actions. If the plaintiffs in these actions
were to prevail, such an outcome would have a material adverse effect on our
financial condition, results of operations and liquidity.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

USE OF PROCEEDS FROM REGISTERED SECURITIES

1) The effective date of the Securities Act registration statement for
which the use of proceeds information is being disclosed was April,
24, 2002, and the Commission file number assigned to the registration
statement is 333-81484.

4) (v) From April 24, 2002 to the date hereof, a reasonable
estimate of the amount of expenses incurred by us in
connection with the issuance and distribution of the
securities in the offering totaled $6,000,000, which
consisted of direct payments of (i) $1,300,000 in legal,
accounting and printing fees (reasonable estimate); (ii)
$4,550,000 in underwriters discount, fees and commissions;
and (iii) $150,000 in miscellaneous expenses (reasonable
estimate). No payments for such expenses were made to (i)
any of our directors, officers, general partners or their
associates, (ii) any person(s) owning 10% or more of any
class of our equity securities, except for $14,500 in
reimbursement of initial public offering related legal
expenses of shareholder Biotechnology Value Fund, L.P.,
which together with affiliates, owns 14.22% of our
outstanding equity securities or (iii) any of our
affiliates.

(vi) Our net offering proceeds after deducting our total
estimated expenses were $59,000,000.

20

(vii) As of August 13, 2002, we have invested the net offering
proceeds primarily in cash and cash equivalents and
short-term money market accounts. No payments out of the net
proceeds were made to (i) any of our directors, officers,
general partners or their associates, (ii) any person(s)
owning 10% or more of any class of our equity securities or
(iii) any of our affiliates.

ITEM 5. OTHER INFORMATION

RISK FACTORS AND FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

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

OUR STOCK PRICE IS LIKELY TO BE VOLATILE AND THE MARKET PRICE OF OUR COMMON
STOCK MAY DECLINE.

Prior to our April 25, 2002 initial public offering of 5,000,000 shares of
our common stock, there had been no public market for our common stock and an
active public market for our common stock may not develop or continue following
our initial public offering. Market prices for securities of biopharmaceutical
companies have been particularly volatile. In particular, our stock price has
experienced a substantial decline since our initial public offering. Some of the
factors that may cause the market price of our common stock to fluctuate
include:

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

- business or legal developments concerning our collaborators or
licensees, including Elan Corporation, plc, or Elan, and Biovail
Laboratories Incorporated, or Biovail;

- regulatory developments in the United States and foreign countries;

- developments or disputes concerning patents or other proprietary
rights;

- changes in estimates or recommendations by securities analysts;

- public concern over our drugs;

- litigation;

- future sales of our common stock;

- general market conditions;

- changes in the structure of health care payment systems;

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

- economic and other external factors or other disasters or crises; and

- period-to-period fluctuations in our financial results.

If any of the risks relating to our initial public offering occurred or if
any of the foregoing risks occur in the future, it could cause our stock price
to fall and may expose us to class action lawsuits that, even if unsuccessful,
could be costly to defend and a distraction to management. In this regard,
following a decline in the aftermarket trading price of our common stock in
connection with our initial public offering, beginning on April 30, 2002 through
the date hereof, a number of class action lawsuits have been filed naming us as
defendants, in addition to certain of our officers and directors and certain of
our underwriters. For a complete description of these class action lawsuits and
the risks they present, please refer to the "Part II--Other Information" section
of this report under the subheading "Item 1. Legal Proceedings--Securities Class
Action Lawsuits."

21

WE HAVE INCURRED LOSSES SINCE OUR INCEPTION AND EXPECT TO INCUR SIGNIFICANT
LOSSES FOR THE FORESEEABLE FUTURE, AND WE MAY NEVER REACH PROFITABILITY.

Since our inception in April 1995 through June 30, 2002, we have incurred
significant operating losses and, as of June 30, 2002, we had an accumulated
deficit of $31.5 million. We have not yet completed the development, including
obtaining regulatory approvals, of any product candidate and, consequently, have
not generated any revenues from the sale of products. Even if we succeed in
developing and commercializing one or more of our product candidates, we may
never achieve significant sales revenue and we expect to incur operating losses
for the foreseeable future. We also expect to continue to incur significant
operating expenses and capital expenditures and anticipate that our expenses
will increase substantially in the foreseeable future as we:

- conduct clinical trials;

- fund the operations of DOV (Bermuda), Ltd., or DOV Bermuda, our joint
venture with Elan;

- conduct research and development on existing and new product
candidates; o make milestone and royalty payments;

- seek regulatory approvals for our product candidates;

- commercialize our product candidates, if approved;

- hire additional clinical, scientific and management personnel;

- add operational, financial and management information systems and
personnel; and

- identify additional compounds or product candidates and acquire rights
from third parties to those compounds or product candidates through a
grant of a license to us, referred to as in-licensing.

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

WE ARE DEPENDENT ON THE SUCCESSFUL OUTCOME OF CLINICAL TRIALS FOR OUR FIVE LEAD
PRODUCT CANDIDATES.

None of our product candidates is currently approved for sale by the United
States Food and Drug Administration, or FDA, or by any other regulatory agency
in the world, and our product candidates may never be approved for sale or
become commercially viable. Before obtaining regulatory approval for the sale of
our product candidates, they must be subjected to extensive preclinical and
clinical testing to demonstrate their safety and efficacy for humans. Our
success will depend on the success of our currently ongoing clinical trials and
subsequent clinical trials that have not yet begun.

There are a number of difficulties and risks associated with clinical
trials. The possibility exists that:

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

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

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

- we or the FDA may suspend the clinical trials of our product
candidates;

- patient recruitment may be slower than expected; and

- patients may drop out of our clinical trials.

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

WE MAY NOT RECEIVE REGULATORY APPROVALS FOR OUR PRODUCT CANDIDATES OR APPROVALS
MAY BE DELAYED.

Regulation by government authorities in the United States and foreign
countries is a significant factor in the development, manufacture and
commercialization of our product candidates and in our ongoing research and
development activities. All our product candidates are in various stages of
research and development and we have not yet requested or

22

received regulatory approval to commercialize any product candidate from the FDA
or any other regulatory body.

In particular, human therapeutic products are subject to rigorous
preclinical testing, clinical trials and other approval procedures of the FDA
and similar regulatory authorities in foreign countries. The FDA regulates,
among other things, the development, testing, manufacture, safety, efficacy,
record keeping, labeling, storage, approval, advertising, promotion, sale and
distribution of biopharmaceutical products. Securing FDA approval requires the
submission of extensive preclinical and clinical data and supporting information
to the FDA for each therapeutic indication to establish the product candidate's
safety and efficacy. The approval process may take many years to complete and
may involve ongoing requirements for post-marketing studies. Additionally, even
after receipt of FDA approval, the FDA may request additional trials to evaluate
any adverse reactions or long-term effects. The scope and expense of such
post-approval trials could be extensive and costly to us. Any FDA or other
regulatory approval of our product candidates, once obtained, may be withdrawn.
If our product candidates are marketed abroad, they will also be subject to
extensive regulation by foreign governments.

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

OUR OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS THAT MAY CAUSE OUR STOCK PRICE
TO DECLINE.

Our revenue is unpredictable and has fluctuated significantly from
year-to-year and quarter-to-quarter and will likely continue to be highly
volatile. We believe that period-to-period comparisons of our past operating
results are not good indicators of our future performance and should not be
relied on to predict our future results. For example, in 2000 we recorded no
revenue while in 2001 we had $5.7 million in revenue, primarily as a result of
license fees from Biovail and a milestone payment from Neurocrine Biosciences,
Inc, or Neurocrine. In the future, our operating results in a particular period
may not meet the expectations of any securities analysts whose attention we may
attract, or those of our investors, which may result in a decline in the market
price of our common stock.

WE RELY ENTIRELY ON THE EFFORTS OF NEUROCRINE FOR THE DEVELOPMENT, DESIGN AND
IMPLEMENTATION OF CLINICAL TRIALS, REGULATORY APPROVAL AND COMMERCIALIZATION OF
OUR INSOMNIA COMPOUND, NBI-34060.

In 1998, we sublicensed NBI-34060 to Neurocrine without retaining any
material rights other than the right to receive milestone payments and royalties
on product sales, if any. The clinical development, design and implementation of
clinical trials, the preparation of filings for FDA approval and, if approved,
the subsequent commercialization of NBI-34060, and all other matters relating to
NBI-34060, are entirely within the control of Neurocrine. We will have no
control over this process and, as a result, our ability to receive any revenue
from NBI-34060 is entirely dependent on the success of Neurocrine's efforts.
Neurocrine may fail or otherwise decide not to devote the resources necessary to
successfully develop and commercialize NBI-34060, which would impair our ability
to receive milestone or royalty payments, if any, in respect of NBI-34060.

OUR SUCCESS IN DEVELOPING OUR PRODUCT CANDIDATES DEPENDS UPON THE PERFORMANCE OF
OUR LICENSEES AND COLLABORATIVE PARTNERS.

Our efforts to develop, obtain regulatory approval for and commercialize
our existing and any future product candidates depend in part upon the
performance of our licensees and collaborative partners. Currently, we have
license and collaborative agreements with Elan, Biovail, Neurocrine and
Wyeth-Ayerst, formerly American Cyanamid Company. In connection with these
agreements, we have granted certain rights, including development and marketing
rights and rights to defend and enforce our intellectual property. We do not
have day-to-day control over the activities of our licensees or collaborative
partners and cannot assure you that they will fulfill their obligations to us,
including their development and commercialization responsibilities in respect of
our product candidates. We also cannot assure you that our licensees or
collaborators will properly maintain or defend our intellectual property rights
or that they will not utilize our proprietary information in such a way as to
invite litigation that could jeopardize or potentially invalidate our
proprietary information or expose us to potential liability. Further, we cannot
assure you that our licensees or collaborators will not encounter conflicts

23

of interest, changes in business strategy or other business issues, or that they
will not acquire or develop rights to competing products, all of which could
adversely affect their willingness or ability to fulfill their obligations to
us. On July 31, 2002, Elan Corporation, plc, our partner in the DOV Bermuda
joint venture, announced a recovery plan that includes the divestiture of
businesses, assets and products that are no longer core to Elan. If Elan should
determine that it no longer wishes to fund the joint venture, we intend to
assess our options, including self-funding of Elan's portion of the joint
venture or entering into substitute collaborative arrangements. Whatever the
outcome of the foregoing, we are committed to pursuing the development of these
product candidates on the present schedule.

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

OUR EXISTING COLLABORATIVE AND LICENSING AGREEMENTS CONTAIN, AND ANY SUCH
AGREEMENTS THAT WE MAY ENTER INTO IN THE FUTURE MAY CONTAIN, COVENANTS THAT
RESTRICT OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION ACTIVITIES.

Our existing license and collaborative agreements contain covenants that
restrict our product development or future business efforts and have involved,
among other things, the issuance of debt and equity securities, limitations on
our ability to license our product candidates to third parties and restrictions
on our ability to compete. Because of these restrictive covenants, if our
licensees or collaborators fail to fulfill their obligations to us or we are
otherwise not able to maintain these relationships, we cannot assure you that we
will be able to enter into alternative arrangements or assume the development of
these product candidates ourselves. This would significantly affect our ability
to commercialize our product candidates. Further, we cannot assure you, even if
alternative arrangements are available to us, that they will be any less
restrictive on our business activities.

BIOVAIL AND THE FEDERAL TRADE COMMISSION HAVE AGREED TO A SETTLEMENT THAT MAY
LEAD TO A REFORMATION OF OUR LICENSE AGREEMENT WITH BIOVAIL.

Related to the Andrx/Biovail litigation, the Federal Trade Commission, or
FTC, commenced an investigation to determine whether Biovail or any other person
is engaging in unfair methods of competition. The FTC purported to focus
primarily on the legality of Biovail's listing of the DOV diltiazem patent with
the FDA. In connection with this investigation, the FTC requested that we
provide information regarding our license with Biovail. On April 23, 2002, the
FTC announced a complaint against Biovail and a proposed consent order with
Biovail to settle the antitrust investigation. The proposed consent order
requires Biovail to return to us the exclusive license to manufacture and sell
any extended release formulation of diltiazem in the Tiazac field, defined as a
drug product that has been approved by the FDA for sale pursuant to NDA 20-401
or that is described in any ANDA for which approval is sought by referencing NDA
20-401. We are not a party to the proposed consent order. On July 18, 2002, the
license agreement with Biovail was amended to return to us, without payment, all
license rights, exclusive and non-exclusive, to practice the diltiazem patent in
the Tiazac field. The effect of this change in the license agreement means that
we are entitled, but not required, to grant a non-exclusive license to other
persons for the manufacture and sale of an extended release formulation of
diltiazem that is described in any ANDA for which approval is sought by
referencing Biovail's NDA 20-401. We continue to have the right to receive
royalties from any licensee who manufactures and sells an extended release
formulation of diltiazem using the DOV diltiazem patent. For a complete
description of these issues and the risks they present, please refer to the
"Part I--Other Information" section of this report under the subheading "Item 1.
Legal Proceedings--Federal Trade Commission Investigation."

OUR 80.1% OWNERSHIP IN THE ELAN JOINT VENTURE MAY BE SIGNIFICANTLY REDUCED AND
ELAN'S INTEREST IN THE JOINT VENTURE COULD POTENTIALLY EXCEED OUR INTEREST.

In connection with our joint venture with Elan, we issued to Elan an $8.0
million convertible exchangeable promissory note. The outstanding principal
balance, including accrued unpaid interest, is convertible into shares of our
common stock. In the alternative, Elan may elect to exchange the outstanding
principal balance of the note for equity in the joint venture sufficient to
increase its overall ownership interest equal to ours. If Elan elects to
exchange its note, our

24

interest in any profits the joint venture may receive from ocinaplon and
bicifadine will be significantly reduced. Elan's ownership could increase
further if we fail to meet our future joint venture funding requirements.

IF CERTAIN TECHNOLOGICAL COMPETITORS OF ELAN ACQUIRE AT LEAST TEN PERCENT OF OUR
VOTING STOCK OR TRIGGER OTHER CHANGE OF CONTROL CLAUSES, ELAN MAY, AT ITS
OPTION, TERMINATE ITS LICENSE AGREEMENT WITH THE JOINT VENTURE, WHICH COULD LEAD
TO A TERMINATION OF THE JOINT VENTURE ITSELF.

Under the Elan joint venture agreements, Elan has certain change of control
rights that, if triggered, would permit it to terminate the license agreement
under which Elan granted the right to use its proprietary release technologies
to the joint venture. This could also lead to a termination of our license
agreement with the joint venture and a termination of the joint venture. Some of
Elan's change of control termination protections are triggered if a named
technological competitor of Elan:

- directly or indirectly acquires ten percent or more of our or the
joint venture's voting stock, or otherwise controls or influences our
or the joint venture's management or business; or

- enters into any joint venture, collaborative, license or other
agreement with us or the joint venture to the extent that the
competitor is materially engaged in our or the joint venture's
business or development.

In January 2001, we entered into our license, research and development
agreement with Biovail, a named technological competitor of Elan. We do not
believe that Elan's consent to that agreement was required since Biovail is not
materially engaged in our business or development. Biovail neither holds nor has
any options to purchase our voting securities. The patent licensed to Biovail is
only one of various patents we hold and DOV diltiazem is one of eight product
candidates we are developing. Further, we have retained control of the
development of DOV diltiazem, and we retain significant voting rights regarding
the patent licensed to Biovail through our participation on the joint oversight
committee organized to establish and manage the research and development
process. We do not, therefore, believe that Elan is entitled to terminate its
license agreement with the joint venture as a result of our entering into the
Biovail license agreement without Elan's consent. Nonetheless, we sought consent
from Elan, which Elan refused to grant. While Elan has not asserted that its
consent was required, objected to our entering into the Biovail license
agreement or threatened to terminate its license agreement with the joint
venture, it has stated that it reserves its rights with respect to this issue.
If Elan seeks to terminate its agreement based on our failure to obtain its
consent, we cannot assure you that a court would not ultimately permit such
termination. Upon such an event, our ability to successfully develop ocinaplon
and bicifadine may be impaired.

IF WE ARE UNABLE TO CREATE SALES, MARKETING AND DISTRIBUTION CAPABILITIES, OR
ENTER INTO AGREEMENTS WITH THIRD PARTIES TO PERFORM THESE FUNCTIONS, WE WILL NOT
BE ABLE TO COMMERCIALIZE OUR PRODUCT CANDIDATES.

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

IF WE CANNOT RAISE ADDITIONAL FUNDING, WE MAY BE UNABLE TO COMPLETE DEVELOPMENT
OF OUR PRODUCT CANDIDATES.

At June 30, 2002, we had cash and cash equivalents of $66.0 million. We
currently have no commitments or arrangements for any financing. We believe that
our existing cash and cash equivalents will be sufficient to fund our
anticipated operating expenses, debt obligations and capital requirements until
at least the end of 2003. We believe that we may require additional funding
after that time to continue our research and development programs, including
preclinical testing and clinical trials of our product candidates, for operating
expenses, and to pursue regulatory approvals for our product candidates. Lack of
funding could adversely affect our ability to pursue our business. We cannot
assure you that

25

financing will be available when needed on terms acceptable to us, if at all. We
may continue to seek additional capital through public or private financing or
collaborative agreements. If adequate funds are not available, we may be
required to curtail significantly or eliminate one or more of our product
development programs.

THE SUCCESS OF OUR BUSINESS DEPENDS UPON THE MEMBERS OF OUR SENIOR MANAGEMENT
TEAM, OUR SCIENTIFIC STAFF AND OUR ABILITY TO CONTINUE TO ATTRACT AND RETAIN
QUALIFIED SCIENTIFIC, TECHNICAL AND BUSINESS PERSONNEL.

We are dependent on the members of our senior management team, in
particular, our Chief Executive Officer, Dr. Arnold Lippa, our President, Dr.
Bernard Beer, and our Senior Vice President and Chief Scientific Officer, Dr.
Phil Skolnick, for our business success. Moreover, because of the specialized
scientific and technical nature of our business, we are also highly dependent
upon our scientific staff, the members of our scientific advisory board and our
continued ability to attract and retain qualified scientific, technical and
business development personnel. Drs. Lippa and Beer each hold a substantial
amount of vested common stock not subject to repurchase in the event of
termination. We do not carry key man life insurance on the lives of any of our
key personnel. There is intense competition for human resources, including
management in the scientific fields in which we operate and there can be no
assurance that we will be able to attract and retain qualified personnel
necessary for the successful development of our product candidates, and any
expansion into areas and activities requiring additional expertise. In addition,
there can be no assurance that such personnel or resources will be available
when needed. The loss of the services of Drs. Lippa, Beer, or Skolnick, or other
key personnel, could severely harm our business.

BECAUSE SOME OF OUR PATENTS WITH RESPECT TO SOME OF OUR PRODUCT CANDIDATES HAVE
EXPIRED OR WILL EXPIRE IN THE NEAR TERM, WE MAY BE REQUIRED TO RELY SOLELY ON
THE HATCH-WAXMAN ACT FOR MARKET EXCLUSIVITY.

A number of patents that we licensed from Wyeth-Ayerst have expired,
including the patent that provides protection for the use of DOV 216,303 for the
treatment of depression and the use of bicifadine for the treatment of pain. In
addition, our patent covering ocinaplon and NBI-34060 is due to expire in June
2003. We currently have patents protecting intermediates useful in the
manufacture of ocinaplon that are not due to expire until 2007, and we have
applied for additional patents relating to ocinaplon. In addition, Neurocrine
has stated that it has filed nine U.S. and foreign patent applications on
NBI-34060. Regardless of these efforts, these patents and patent applications,
if approved, may not afford us adequate protection against generic versions of
our product candidates or other competitive products. In the event we achieve
regulatory approval to market any of our product candidates, including
bicifadine, DOV 216,303 or ocinaplon, and we are unable to obtain adequate
patent protection for the ultimate marketed product, we will be required to rely
to a greater extent on the United States Drug Price Competition and Patent Term
Restoration Act of 1984, or the Hatch-Waxman Act, and applicable foreign
legislation, to achieve market exclusivity. The Hatch-Waxman Act generally
provides for marketing exclusivity to the first applicant to gain approval for a
particular drug by prohibiting filing of an abbreviated new drug application, or
ANDA, by a generic competitor for up to five years after the drug is first
approved. The Hatch-Waxman Act, however, also accelerates the approval process
for generic competitors using the same active ingredients once the period of
statutory exclusivity has expired. It may also in practice encourage more
aggressive legal challenges to the patents protecting approved drugs. In
addition, because some of our patents have expired, third parties may develop
competing product candidates using our product compounds and if they obtain
regulatory approval for those products prior to us, we would be barred from
seeking an ANDA for those products under the Hatch-Waxman Act for the applicable
statutory exclusivity period.

WE FACE INTENSE COMPETITION AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY, THE
DEMAND FOR OUR PRODUCTS, IF ANY, MAY BE REDUCED.

The pharmaceutical industry is highly competitive and marked by a number of
established, large pharmaceutical companies, as well as smaller emerging
companies, whose activities are directly focused on our target markets and areas
of expertise. We face and will continue to face competition in the discovery,
in-licensing, development and commercialization of our product candidates, which
could severely impact our ability to generate revenue or achieve significant
market acceptance of our product candidates. Furthermore, new developments,
including the development of other drug technologies and methods of preventing
the incidence of disease, occur in the pharmaceutical industry at a rapid pace.
These developments may render our product candidates or technologies obsolete or
noncompetitive. We are focused on developing product candidates for the
treatment of central nervous system, cardiovascular and urological disorders,
and we have a number of competitors. If one or more of their products or
programs are successful, the market for our product candidates may be reduced or
eliminated. Compared to us, many of our competitors and potential competitors
have

26

substantially greater:

- capital resources;

- research and development resources, including personnel and
technology;

- regulatory experience;

- preclinical study and clinical testing experience; and

- manufacturing, distribution and marketing experience.

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

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

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

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

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

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

Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval processes
in order to reach the marketplace, the pharmaceutical industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Accordingly, we, either alone or together
with our collaborators or licensees, intend to seek patent protection for our
proprietary technologies and product candidates. The risk exists, however, that
these patents may be unobtainable and that the breadth of the claims in a
patent, if obtained, may not provide adequate protection of our, or our
collaborators' or licensees', proprietary technologies or product candidates. We
also rely upon unpatented trade secrets and improvements, unpatented know-how
and continuing technological innovation to develop and maintain our competitive
position, which we seek to protect, in part, by confidentiality agreements with
our collaborators, licensees, employees and consultants. We also have
confidentiality and invention or patent assignment agreements with our employees
and some of, but not all, our collaborators and consultants. If our employees,
collaborators or consultants breach these agreements, we may not have adequate
remedies for any such breach, and our trade secrets may otherwise become known
to or independently discovered by our competitors. In addition, although we own
or otherwise have certain rights to a number of patents, the issuance of a
patent is not conclusive as to its validity or enforceability, and third parties
may challenge the validity or enforceability of our patents or the patents of
our collaborators or licensees. We cannot assure you how much protection, if
any, will be given to our patents if we attempt to enforce them or if they are
challenged in court or in other proceedings. It is possible that a competitor
may successfully challenge our patents, or the patents of our collaborators or
licensees, or that challenges will result in elimination of patent claims and
therefore limitations of coverage. Moreover, competitors may infringe our
patents, the patents of our collaborators or licensees, or successfully avoid
them through design innovation. To prevent infringement or unauthorized use, we
may need to file infringement claims, which are expensive and time-consuming. In
addition, in an infringement proceeding, a court may decide that a patent of
ours is not valid or is unenforceable, or may refuse to stop the other party
from using the technology at issue on the ground that our patents do not cover
its technology. In addition, interference proceedings brought by the United
States Patent and Trademark Office, or USPTO, may be necessary to determine the
priority of inventions with respect to our patent applications or those of our
collaborators or licensees. Litigation or interference proceedings may fail and,
even if successful, may result in substantial costs and be a distraction to
management. We cannot assure you that we, or our collaborators or licensees,
will be able to prevent misappropriation of our respective proprietary rights,
particularly in countries where the laws may not protect such rights as

27

fully as in the United States.

THE INTELLECTUAL PROPERTY OF OUR COMPETITORS OR OTHER THIRD PARTIES MAY PREVENT
US FROM DEVELOPING OR COMMERCIALIZING OUR PRODUCT CANDIDATES.

Our product candidates and the technologies we use in our research may
inadvertently infringe the patents or violate the proprietary rights of third
parties. In addition, other parties conduct their research and development
efforts in segments where we, or our collaborators or licensees, focus research
and development activities. We cannot assure you that third parties will not
assert patent or other intellectual property infringement claims against us, or
our collaborators or licensees, with respect to technologies used in potential
product candidates. Any claims that might be brought against us relating to
infringement of patents may cause us to incur significant expenses and, if
successfully asserted against us, may cause us to pay substantial damages. Even
if we were to prevail, any litigation could be costly and time-consuming and
could divert the attention of our management and key personnel from our business
operations. In addition, any patent claims brought against our collaborators or
licensees could affect their ability to carry out their obligations to us.
Furthermore, as a result of a patent infringement suit brought against us, or
our collaborators or licensees, the development, manufacture or potential sale
of product candidates claimed to infringe a third party's intellectual property
may have to stop or be delayed, unless that party is willing to grant certain
rights to use its intellectual property. In such cases, we may be required to
obtain licenses to patents or proprietary rights of others in order to continue
to commercialize our product candidates. We may not, however, be able to obtain
any licenses required under any patents or proprietary rights of third parties
on acceptable terms, or at all. Even if we, or our collaborators or licensees,
were able to obtain rights to a third party's intellectual property, these
rights may be non-exclusive, thereby giving our competitors potential access to
the same intellectual property. Ultimately, we may be unable to commercialize
some of our potential products or may have to cease some of our business
operations as a result of patent infringement claims, which could severely harm
our business.

OUR ABILITY TO RECEIVE ROYALTIES AND PROFITS FROM PRODUCT SALES DEPENDS IN PART
UPON THE AVAILABILITY OF REIMBURSEMENT FOR THE USE OF OUR PRODUCTS FROM
THIRD-PARTY PAYORS, FOR WHICH WE MAY OR MAY NOT QUALIFY.

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

- safe, effective and medically necessary;

- appropriate for the specific patient;

- cost-effective; and

- neither experimental nor investigational.

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

WE FACE POTENTIAL PRODUCT LIABILITY EXPOSURE, AND IF SUCCESSFUL CLAIMS ARE
BROUGHT AGAINST US, WE MAY INCUR SUBSTANTIAL LIABILITY FOR A PRODUCT AND MAY
HAVE TO LIMIT ITS COMMERCIALIZATION.

The use of our product candidates in clinical trials and the sale of any
approved products may expose us to a substantial risk of product liability
claims and the adverse publicity resulting from such claims. These claims might
be brought against us by consumers, health care providers, pharmaceutical
companies or others selling our products. If we

28

cannot successfully defend ourselves against these claims, we may incur
substantial losses or expenses, or be required to limit the commercialization of
our product candidates. We have obtained limited product liability insurance
coverage for our clinical trials in the amount of $3.0 million per occurrence
and $3.0 million in the aggregate. Our insurance coverage, however, may not
reimburse us or may not be sufficient to reimburse us for any expenses or losses
we may suffer. Moreover, insurance coverage is becoming increasingly expensive,
and we may not be able to maintain insurance coverage at a reasonable cost or in
sufficient amounts to protect us against losses due to liability. We intend to
expand our insurance coverage to include the sale of commercial products if we
obtain marketing approval for our product candidates in development, but we may
be unable to obtain commercially reasonable product liability insurance for any
products approved for marketing. On occasion, large judgments have been awarded
in class action lawsuits based on drugs that had unanticipated side effects. A
successful product liability claim or series of claims brought against us would
decrease our cash and could cause our stock price to fall.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

None.

(b) Reports on Form 8-K.

We filed current reports on Form 8-K on May 3, 2002 and August 12, 2002,
reporting information under Item 5. Other Events.

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SIGNATURES

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

DOV Pharmaceutical, Inc.
Date: August 14, 2002
By:
/s/ ARNOLD S. LIPPA
-------------------------------------
Name: Arnold S. Lippa
Title: Chief Executive Officer
and Secretary

DOV Pharmaceutical, Inc.

By:
/s/ BARBARA G. DUNCAN
-------------------------------------
Name: Barbara G. Duncan
Title: Vice President of Finance and
Chief Financial Officer

CERTIFICATIONS

The undersigned officer of DOV Pharmaceutical, Inc. (the "Company") hereby
certifies that the Company's quarterly report on Form 10-Q for the quarterly
period ended June 30, 2002, as filed with the Securities and Exchange Commission
on the date hereof (the "Report"), fully complies with the requirements of
Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934,
as amended, and that the information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company. This certification is provided solely pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Date: August 14, 2002 By: /s/ ARNOLD S. LIPPA
-------------------------------------
Arnold S. Lippa
Chief Executive Officer and Secretary

The undersigned officer of DOV Pharmaceutical, Inc. (the "Company") hereby
certifies that the Company's quarterly report on Form 10-Q for the quarterly
period ended June 30, 2002, as filed with the Securities and Exchange Commission
on the date hereof (the "Report"), fully complies with the requirements of
Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934,
as amended, and that the information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company. This certification is provided solely pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Date: August 14, 2002 By: /s/ BARBARA G. DUNCAN
-------------------------------------
Barbara G. Duncan
Vice President of Finance and Chief
Financial Officer

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