NEW RIVER PHARMACEUTICALS INC - 10-Q Quarterly Report

NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
Assets	April 3, 2005			January 2, 2005
Current assets:	(Unaudited)
Cash and cash equivalents	$	14,600,027		$	4,018,556
Short-term investments		52,479,724			21,174,747
Prepaid expenses		220,718			315,644
Total current assets		67,300,469			25,508,947
Property and equipment:
Leasehold improvements		94,609			76,860
Machinery and equipment		723,766			686,895
		818,375			763,755
Less accumulated depreciation and amortization		538,070			502,890
Property and equipment, net		280,305			260,865
Total assets	$	67,580,774		$	25,769,812
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	665,348		$	701,175
Unpaid and accrued research and development expenses		1,408,294			2,100,421
Accrued compensation		461,793			1,506,413
Due to affiliates		141,922			76,920
Total current liabilities		2,677,357			4,384,929

Accrued stock-based compensation		14,311			—
Deferred revenue		50,000,000			—
Total liabilities		52,691,668			4,384,929

Shareholders’ Equity:

Preferred stock, par value $0.001 per share. Authorized 25,000,000 shares; none issued and outstanding		—			—
Common stock, par value $0.001 per share. Authorized 150,000,000 shares; issued and outstanding 17,830,204 shares at April 3, 2005 and 17,774,554 shares at January 2, 2005		17,831			17,775
Additional paid-in capital		61,522,429			61,346,030
Accumulated deficit		(46,651,154	)		(39,978,922	)
Total shareholders’ equity		14,889,106			21,384,883
Commitments and contingencies
Total liabilities and shareholders’ equity	$	67,580,774		$	25,769,812

NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
	Three months ended
	April 3, 2005			March 28, 2004
	(Unaudited)
Sales, net	$	—		$	—
Operating costs and expenses:
Selling, general, and administrative		3,175,281			686,658
Research and development		3,784,215			1,108,258
Depreciation and amortization of property and equipment		35,180			30,543
Total operating expenses		6,994,676			1,825,459
Operating loss		(6,994,676	)		(1,825,459	)
Other income (expense):
Interest expense		—			(8,455	)
Interest income		322,444			541
Total other income (expense), net		322,444			(7,914	)
Net loss	$	(6,672,232	)	$	(1,833,373	)
Net loss per share:
Basic and diluted	$	(0.38	)	$	(0.15	)

NEW RIVER PHARMACEUTICALS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
	Three months ended
	April 3, 2005			March 28, 2004
	(Unaudited)
Cash flows from operating activities:
Net loss	$	(6,672,232	)	$	(1,833,373	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment		35,180			30,543
Stock-based compensation		19,081			—
Contribution of services by related party		—			182,077
Changes in operating assets and liabilities:
Prepaid expenses		94,926			(13,652	)
Due from affiliates		—			(2,221	)
Accounts payable		(35,827	)		34,912
Unpaid and accrued research and development expenses and other accrued expenses		(692,127	)		2,549
Accrued compensation		(1,044,620	)		(13,879	)
Due to affiliates		65,002			8,455
Deferred revenue		50,000,000			—
Net cash provided by (used in) operating activities		41,769,383			(1,604,589	)
Cash flows from investing activities:
Proceeds from sale of short-term investments		14,200,000			—
Purchases of short-term investments		(45,504,977	)		—
Proceeds from sale of property and equipment		—			7,545
Purchases of property and equipment		(54,620	)		(4,200	)
Net cash provided by (used in) investing activities		(31,359,597	)		3,345
Cash flows from financing activities:
Proceeds from notes payable to shareholder		—			1,400,000
Net proceeds from issuances of common stock		171,685			—
Net cash provided by financing activities		171,685			1,400,000
Net increase (decrease) in cash and cash equivalents		10,581,471			(201,244	)
Cash and cash equivalents at beginning of period		4,018,556			264,393
Cash and cash equivalents at end of period	$	14,600,027		$	63,149

New River Pharmaceuticals Inc. (the Company), a Virginia corporation, was formed in 1996. The Company has a wholly-owned subsidiary, Lotus Biochemical (Bermuda) Ltd. (Lotus Bermuda), which exists to hold pharmaceutical intellectual property. While Lotus Bermuda has held such forms of intellectual property in the past, at April 3, 2005, Lotus Bermuda no longer held any such assets; however, Lotus Bermuda may be used again for such purpose in the future. Alternatively, the Company may decide to dissolve Lotus Bermuda at some time in the future.

The Company is a specialty pharmaceutical company focused on developing safer and improved versions of widely-prescribed drugs in large and growing markets. Utilizing its proprietary Carrierwave^TM technology, the Company is developing versions of amphetamines and opioids that are designed to provide overdose protection, abuse resistance and less potential for addiction while providing efficacy comparable to the active pharmaceutical ingredients on which they are based.

The accompanying unaudited consolidated financial statements include the accounts of New River Pharmaceuticals Inc. and its wholly-owned subsidiary and have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) pertaining to Form 10-Q. Certain disclosures required for complete financial statements are not included herein. All significant intercompany accounts and transactions have been eliminated in consolidation. The information as of April 3, 2005 and for the three months ended April 3, 2005 and March 28, 2004 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to state fairly the financial information set forth herein. The interim results are not necessarily indicative of results to be expected for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto for the year ended January 2, 2005, included in the Company’s annual report on Form 10-K filed with the SEC.

The Company maintains its books using a 52/53-week fiscal year ending on the Sunday nearest the last day of December. Quarterly periods are closed every thirteen weeks except during years that include 53 weeks. In such years, the fourth quarter will include 14 weeks. Fiscal year 2004 includes 53 weeks and ended on January 2, 2005. Fiscal year 2005 includes 52 weeks and ends January 1, 2006.

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. At April 3, 2005, cash equivalents consisted of commercial paper and money market accounts of $12,348,243 and $2,348,982, respectively. At January 2, 2005 cash equivalents consisted of money market accounts of $22,759.

Short-term investments are classified in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. At April 3, 2005 and January 2, 2005, the Company’s short-term investments of $52,479,724 and $21,174,747, respectively, consisted of auction rate municipal bonds which are classified as available-for-sale. The Company records its investment in these securities at cost, which approximates fair market value due to their variable interest rates, which typically reset every 28 to 35 days, and the fact that, despite the long-term nature of their stated contractual maturities, the Company has the ability to liquidate readily these securities. As a result, the Company had no cumulative gross unrealized gains (losses) from its investments in these securities at April 3, 2005 and January 2, 2005. All income generated from these investments is recorded as interest income. Short-term investments include accrued interest of $79,724 and $24,747 at April 3, 2005 and January 2, 2005, respectively.

In accordance with SFAS No. 2, Accounting for Research and Development Costs, the costs of producing inventory in the reporting periods prior to the receipt of regulatory approval or clearance are recorded as research and development expense. Since the Company does not currently have any products on the market, nor any products currently approved by the Food and Drug Administration or other regulatory body for production, the Company does not have any inventory at April 3, 2005 or January 2, 2005.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Due to the Company’s history of losses, no income tax benefit has been recorded and the corresponding deferred tax assets have been fully reserved as the Company believes that it is more likely than not that the deferred tax assets will not be realized.

The Company’s strategy includes entering into collaborative agreements with strategic partners for the development and commercialization of its product candidates. Such collaboration agreements may have multiple deliverables. The Company evaluates multiple deliverable arrangements pursuant to EITF 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Pursuant to EITF 00-21, in arrangements with multiple deliverables where the Company has continuing performance obligations; contract, milestone and license fees are recognized together with any up-front payments over the term of the arrangement as performance obligations are completed, unless the deliverable has stand alone value and there is objective, reliable evidence of fair value of the undelivered element in the arrangement. In the case of an arrangement where it is determined there is a single unit of accounting, all cash flows from the arrangement are considered in the determination of all revenue to be recognized. Additionally, pursuant to the guidance of Securities and Exchange Commission Staff Accounting Bulletin 104 (“SAB 104”), unless evidence suggests otherwise, revenue from consideration received is recognized on a straight-line basis over the expected term of the arrangements. Cash received in advance of revenue recognition is recorded as deferred revenue (see note 3).

Research and development expenses consist of direct costs and indirect costs. Direct research and development costs include salaries and related costs of research and development personnel, and the costs of consultants, facilities, materials and supplies associated with research and development projects as well as various laboratory studies. Indirect research and development costs include depreciation and other indirect overhead expenses. The Company considers that regulatory and other uncertainties inherent in the research and development of new products preclude it from capitalizing such costs. This treatment includes up-front and milestone payments made to third parties in connection with research and development collaborations. At April 3, 2005, the Company had research and development commitments with third parties totaling approximately $16,944,000, of which approximately $9,662,000 had not yet been incurred. The commitments are cancelable by the Company at any time upon written notice.

The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, including Financial Accounting Standards Board (FASB) Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25, and FIN 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, to account for its fixed-plan stock options and stock appreciation rights (SARs), including stock options granted to non-employee members of the Board of Directors. Under this method, compensation expense is recorded for stock options on the date of grant only if the current market price of the underlying stock exceeded the exercise price. For SARs, compensation expense is recorded over the vesting period based on the difference between the market value of the Company’s common stock at the end of the current reporting period and the exercise price of the SARs. SARs to be settled in cash are recorded as a liability and SARs to be settled with common stock are recorded as additional paid in capital. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of SFAS No. 123.

In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” (SFAS No. 123(R)). SFAS No. 123(R) requires companies to expense the grant-date fair value of employee stock options over the vesting period. SFAS No. 123(R) is effective for the first fiscal year beginning after June 15, 2005; however, early adoption is encouraged. The Company has not yet adopted this standard and is currently evaluating the expected impact of adoption on its consolidated financial position, results of operations and cash flows, including the specific transition method to be utilized upon adoption. It is anticipated that the adoption of SFAS No. 123(R) will negatively impact the Company’s earnings.

	Three months ended
	April 3, 2005			March 28, 2004
Net loss:
As reported	$	(6,672,232	)	$	(1,833,373	)
Add stock-based employee compensation expense included in reported net loss, net of related tax effects		—			—
Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects		(1,923,583	)		(44,981	)
Pro forma	$	(8,595,815	)	$	(1,878,354	)
Net loss per share:
Basic and diluted:
As reported	$	(0.38	)	$	(0.15	)
Pro forma	$	(0.48	)	$	(0.15	)

Basic net loss per share excludes dilution and is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period. Diluted net loss per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net loss of the Company (see note 7).

On January 31, 2005, the Company entered into a collaboration agreement with Shire Pharmaceuticals Group plc (Shire) relating to the global commercialization of NRP104 for treatment of attention deficit hyperactivity disorder (ADHD) and other potential indications. On March 31, 2005, the Company and Shire split this agreement into two agreements by entering into a United States Collaboration Agreement and an ROW Territory License Agreement (the Shire Agreements) to replace the initial collaboration agreement. The collaboration includes product development, manufacturing, marketing and sales. Under the terms of the collaboration, Shire paid the Company an upfront fee of $50 million on February 11, 2005, which could be refundable to Shire in certain circumstances. The Company has recorded the $50 million upfront payment as deferred revenue in the consolidated balance sheet at April 3, 2005.

The Shire Agreements also provide for additional payments to the Company in the event that certain milestones are achieved. These potential payments include an additional $50 million on acceptance of the NDA filing by the FDA and an amount of up to $300 million depending on the characteristics of the FDA approved product labeling and $100 million upon achieving a significant sales target. The maximum amount of upfront and milestone payments under the terms of the collaboration is $505 million. In addition to the upfront and milestone payments, the Shire Agreements provide for profit sharing on U.S. product sales when and if the product is approved by the FDA. Shire will retain 75% of profits, as defined, for the first two years following the launch of the product and the parties will share the profits equally thereafter. For product sales in the rest of the world, Shire will pay the Company a royalty. The Shire Agreements provide for certain termination rights. Shire may for instance terminate the Shire Agreements at any time prior to receiving regulatory approval in the U.S., or within 30 days of receiving the first such regulatory approval. In the latter case, Shire may under some circumstances be entitled to a termination fee of $50 million. In addition, each party may terminate in the event of an uncured, defined material breach by the other party, entitling the non-breaching party the right to purchase the interests of the breaching party. Subject to certain conditions, either party is entitled to terminate in the event that governmental action restricts or prohibits the transactions contemplated by the Shire Agreements under the laws of the U.S. or European Union.

The Company’s future capital requirements will depend on the progress of its research on and development of product candidates; the timing and outcome of regulatory approvals; the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights; the status of competitive products; the availability of financing; and the Company’s and or its collaborative partner(s)’ success in developing markets for its product candidates (see note 3).

In February and March 2004, the Company received a total of $1,400,000 and in April 2004, the Company received $50,000 from Kirkfield, L.L.C., a related party, in exchange for a series of promissory demand notes. These notes, along with an additional promissory demand note issued in exchange for $350,000 received from Kirkfield, L.L.C. in February 2003, were due, along with accrued interest at the prime rate, upon demand of the holder or in the event of default (as defined) by the Company. On March 26, 2004, the Company entered into a Subscription Agreement with New River Management III, LP (the Fund), an affiliated private equity fund, pursuant to which the Company agreed to sell, and the Fund agreed to purchase 453,333 shares of the Company’s common stock on or before April 9, 2004, 156,667 shares on or before May 10, 2004, 150,000 shares on or before June 9, 2004, and 150,000 shares on or before July 12, 2004 at $5.00 per share. On April 16, 2004, the Company repaid the outstanding balances of the notes payable to Kirkfield, L.L.C., totaling $1,800,000 plus accrued interest, using a portion of the $2,266,665 proceeds received from the sale of common stock to the Fund, which was originally due on April 9, 2004 and which was received on April 14, 2004. The proceeds from the May 10, 2004, June 9, 2004 and July 12, 2004 stock issuances totaled $783,335, $750,000 and $750,000, respectively, and were received on May 14, 2004, June 10, 2004 and July 12, 2004, respectively. On May 3, 2004, the Company also issued 60,000 shares of common stock to a member of the Board of Directors of the Company and received proceeds of $300,000 from this sale. The Company also issued 5,000 stock options to the same member of the Board of Directors on May 3, 2004. The stock options vested immediately and had an exercise price of $5.00 per share.

In connection with the sales of 970,000 shares of common stock and the issuance of 5,000 stock options at $5.00 per share described in the previous paragraph, the Company recorded $1,386,000 of stock-based compensation expense during the fiscal year ended January 2, 2005. This expense represents the difference between the sales price of $5.00 per share and the estimated fair value of the common stock on the various dates of issuance, which was $5.72 for the shares and options issued on April 14, 2004, May 3, 2004 and May 14, 2004 and $8.00 for shares issued on June 10, 2004 and July 12, 2004.

On April 23, 2004, the Company entered into a credit agreement with Randal J. Kirk (2000) Limited Partnership (the Partnership), an entity controlled by the Company’s current Chairman, President and Chief Executive Officer, Randal J. Kirk. Under the terms of the credit agreement, the Partnership provided an irrevocable line of credit to the Company for up to the principal amount of $5,000,000. The proceeds from the credit line were to be used by the Company for general working capital and operating expenses. Amounts advanced to the Company under this credit agreement were to bear interest at 12% and payments made by the Company were to be applied first to any accrued interest. This credit agreement expired in accordance with its terms on August 10, 2004, which was the completion of the initial public offering of the Company’s common stock. The Company made no borrowings under this credit agreement during the time it was in effect.

In April 2004, the Board of Directors (the Board) authorized the Company to file a registration statement with the SEC covering the proposed sale by the Company of its common stock to the public. On June 25, 2004, the Board approved, subject to shareholder approval, the amendment and restatement of the Company’s Articles of Incorporation to provide for, among other things, an increase in the number of authorized shares of common stock and preferred stock to 150,000,000 shares and 25,000,000 shares, respectively, and a one-for-two reverse stock split of the Company’s common stock. All references in the consolidated financial statements to shares of common stock, common stock options, common stock prices and per share of common stock amounts have been adjusted retroactively for all periods presented to reflect this reverse stock split. On August 10, 2004, the Company completed the initial public offering of its common stock in which the Company sold 4,200,000 shares of common stock at $8.00 per share resulting in gross proceeds of $33.6 million. In connection with this offering, the Company paid approximately $2.4 million in underwriting discounts and commissions and incurred estimated other offering expenses of approximately $1.2 million. The net proceeds from the offering were approximately $30 million.

Effective June 30, 2004, the Company entered into an agreement (the Innovative Agreement) with Innovative Technologies, L.L.C. (Innovative Technologies) that effectively amended the Company’s obligation in its entirety under previous existing agreements with Innovative Technologies. The previous agreements were executed in connection with the Company’s acquisition of certain of its intellectual property from Innovative Technologies in prior years. The Innovative Agreement provided for an upfront fee of $200,000, which was paid on July 1, 2004, and a 1% royalty on net sales (as defined in the Innovative Agreement) for a period of 10 years for up to a total of $1 million, whichever comes first.

Through August 10, 2004, the date of the completion of the Company’s initial public offering, Third Security, LLC (Third Security), an entity controlled by the Company’s current Chairman, President and Chief Executive Officer, Randal J. Kirk, provided to the Company accounting, finance, information technology, human resources, legal and executive management services at no charge to the Company. For the three months ended March 28, 2004, the Company recorded the estimated cost of these services of $182,000 as selling, general and administrative expenses and as a contribution to additional paid-in capital. Management estimated the cost of these services based on the actual compensation of the individuals performing the work multiplied by an estimated percentage of the individual’s time allocated to services performed for the Company. Management believes that this method is a reasonable approximation of the cost of these services. Management also believes that it is not practicable to estimate the cost for these services that would have been incurred if the Company had operated as an unaffiliated entity for the three months ended March 28, 2004.

Effective upon the completion of the Company’s initial public offering on August 10, 2004, the Company executed an administrative services agreement with Third Security, pursuant to which Third Security has continued to provide certain services for a monthly fee. The monthly fee varies and is based on an hourly billing rate for each individual providing services multiplied by the number of hours of services performed by such individual. The initial term of the agreement is for 24 months and may be terminated with written notice at any time by the Company. The Company also hired certain executive and administrative staff to perform functions that were previously performed by Third Security.

Also upon completion of the initial public offering, the Company entered into a lease agreement with Third Security for certain executive and administrative office space for an initial period of 24 months. The current monthly rental is approximately $6,500. The Company recognized approximately $146,000 and $19,500 of expense under the administrative services agreement and lease agreement, respectively, for the three months ended April 3, 2005. The unpaid portions of these amounts are included in due to affiliates in the accompanying consolidated balance sheet at April 3, 2005.

	Net loss (numerator)			Shares (denominator)		Per share amount
Three-month period ended March 28, 2004:
Basic net loss per share	$	(1,833,373	)		12,592,888	$	(0.15	)
Effect of dilutive stock options		—			—
Diluted net loss per share	$	(1,833,373	)		12,592,888	$	(0.15	)
Three-month period ended April 3, 2005:
Basic net loss per share	$	(6,672,232	)		17,788,941	$	(0.38	)
Effect of dilutive stock options and stock appreciation rights		—			—
Diluted net loss per share	$	(6,672,232	)		17,788,941	$	(0.38	)

Effective June 25, 2004 the Board approved the 2004 Incentive Compensation Plan (the Plan). The Plan was effective upon the completion of the Company’s initial public offering on August 10, 2004. The Plan permits the award of options (both incentive stock options and nonqualified options), SARs, stock awards and incentive awards to eligible persons. Eligible persons include employees, employees of affiliates, any person who provides services to the Company or to an affiliate, members of the Board and members of the board of directors of an affiliate. The Plan amends and restates the Company’s prior Employee Stock Option Plan (the Prior Plan), which permitted the grant of options to employees, directors and consultants. The Plan also replaces the former Stock Appreciation Rights Plan, which permitted the grant of SARs, which are awards with a value based on appreciation in the common stock of the Company. Options granted under the Prior Plan remain subject to the terms of that plan. The terms of the Prior Plan are substantially similar to the terms of the Plan, except that, under the Plan, SARs, stock awards and incentive awards (payable in cash or shares) may be granted in addition to options. The maximum aggregate number of shares of common stock that may be issued under the Plan, including shares issued upon the exercise of options granted under the Prior Plan, is 1,620,000 shares, but no more than 810,000 shares of common stock may be issued as stock awards. The term of each stock option issued under the Plan is fixed, but no option shall be exercisable more than 10 years after the date the option is granted. Certain options granted under the Plan are exercisable at the date of grant. All other options vest in accordance with the vesting schedule established by the Compensation Committee of the Board at the time such options are granted.

Effective March 23, 2005, the Compensation Committee approved the grant of 25,000 stock options to each of the Company’s four non-employee directors under the Plan. These 100,000 stock options have a per share exercise price of $23.20, which was the closing price of the Company’s common stock on the date of grant, were vested upon the date of grant and expire 10 years from the date of grant.

Effective March 29, 2005, the Compensation Committee of the Board of Directors granted a total of 639,000 SARs to the Company’s three executive officers under the Plan. These SARs, of which 479,250 are payable in cash and 159,750 are payable in restricted stock, have an exercise price of $24.00, which was the closing price of the Company’s common stock on the date of grant, and vest on the third anniversary of the date of grant, which is the measurement date for determining their value. Upon vesting, the SARs will not be exercisable for two additional years. In the event that the Board of Directors believes that payment of the SARs will have an adverse impact to the Company, it has the right to defer payment of the awards until such time that it believes that payment will not have an adverse impact. The Company recognized $19,081 of stock-based compensation expense related to these SARs during the three months ended April 3, 2005.

In May 2002, the Company filed suit against DSM Pharmaceuticals, Inc. (DSM), alleging breach of contract and misrepresentations by DSM and failure of consideration by DSM. The parties reached an agreement for the settlement of all claims and counterclaims associated with the litigation, mutual releases between the parties and their affiliates, and the payment of $1.3 million to the Company by DSM. An Agreed Order of Dismissal with Prejudice evidencing the dismissal of all claims associated with the litigation was signed by counsel for both parties and submitted to the court for entry upon the Company’s receipt of the settlement amount of $1.3 million from DSM on May 4, 2004. As a result of this settlement, the Company recognized a gain of $1,764,043 in April 2004, including reversing outstanding invoices payable of $464,043.

In the normal course of business, the Company may enter into agreements which incorporate indemnification provisions. While the maximum amount to which the Company may be exposed under such agreements cannot be reasonably estimated, the Company maintains insurance coverage which management believes will effectively mitigate the Company’s obligations under these indemnification provisions. No amounts have been recorded in the consolidated financial statements with respect to the Company’s obligations under such agreements.

The following discussion contains forward-looking statements. All statements, other than statements of historical facts, included in the following discussion regarding our strategy, future operations, future financial position, future revenues, future costs, prospects, plans and objectives of management are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors Related to Our Business” in the annual report on Form 10-K for the fiscal year ended January 2, 2005 filed on April 1, 2005, with the SEC. The forward-looking statements made in this Form 10-Q are made only as of the date hereof and the Company does not intend to update any of these factors or to announce publicly the results of any revisions to any of its forward-looking statements, other than as required under the federal securities laws.

We are a specialty pharmaceutical company focused on developing novel pharmaceuticals that are safer and improved versions of widely-prescribed drugs in large and growing markets. Utilizing our proprietary Carrierwave technology, we are currently developing versions of amphetamines and opioids that are designed to provide overdose protection, abuse resistance and less potential for addiction while providing efficacy comparable to the active pharmaceutical ingredients on which they are based. We believe some of our drugs may prove highly resistant to overdose. We believe that we are the first company with a viable product in the pipeline attempting to address the potential overdose risk associated with currently-marketed amphetamines and opioids.

We are currently devoting our efforts to the development of our three lead product candidates. NRP104, our most advanced product candidate, is a conditionally bioreversible derivative (CBD) of amphetamine and is currently in Phase 3 trials. We anticipate filing a new drug application (NDA) on NRP104 by the end of 2005. NRP290, our second product candidate, is a CBD of hydrocodone, an opioid widely used to treat acute pain. We are currently conducting preclinical animal studies on NRP290. We anticipate filing an investigational new drug application (IND) for NRP290 by the end of the second quarter of 2005. NRP369 is our third pipeline program. This program is focused on developing a CBD of oxycodone, an opioid widely used to treat chronic pain. We are currently evaluating several CBDs of oxycodone and anticipate filing an IND on NRP369 by the fourth quarter of 2005.

On January 31, 2005, we entered into a collaboration agreement with Shire Pharmaceuticals Group plc (Shire) relating to the global commercialization of NRP104 for treatment of attention deficit hyperactivity disorder (ADHD) and other potential indications. On March 31, 2005, we and Shire split this agreement into two agreements by entering into a United States Collaboration Agreement and an ROW Territory License Agreement to replace the initial collaboration agreement. The collaboration includes product development, manufacturing, marketing and sales. Under the terms of the collaboration, Shire paid us an upfront fee of $50 million on February 11, 2005, which could be refundable to Shire in certain circumstances. We have recorded the $50 million upfront payment as deferred revenue in the consolidated balance sheet at April 3, 2005.

The collaboration also provides for additional payments to us in the event that certain milestones are achieved. These potential payments include an additional $50 million on acceptance of the NDA filing by the FDA and an amount of up to $300 million depending on the characteristics of the FDA approved product labeling and $100 million upon achieving a significant sales target. The maximum amount of upfront and milestone payments under the terms of the collaboration is $505 million. In addition to the upfront and milestone payments, the collaboration provides for profit sharing on U.S. product sales when and if the product is approved by the FDA. Shire will retain 75% of profits, as defined, for the first two years following the launch of the product and the parties will share the profits equally thereafter. For product sales in the rest of the world, Shire will pay us a royalty.

Our agreements with Shire provide for certain termination rights. Shire may for instance terminate the agreements at any time prior to receiving regulatory approval in the U.S., or within 30 days of receiving the first such regulatory approval. In the latter case, Shire may under some circumstances be entitled to a termination fee of $50 million. In addition, each party may terminate in the event of an uncured, defined material breach by the other party, entitling the non-breaching party the right to purchase the interests of the breaching party. Subject to certain conditions, either party is entitled to terminate in the event that governmental action restricts or prohibits the transactions contemplated by the agreements under the laws of the U.S. or European Union.

The collaboration will be managed by committees that will have equal representation of Shire and us, although ultimate responsibility for approval is allocated to one party or the other in certain areas. We, at our own expense, will bear primary responsibility for development and regulatory approval of the product in the U.S. for ADHD, and Shire will bear primary responsibility for development and regulatory approval in other countries, and in certain cases will share those expenses with us. Shire will have primary responsibility for commercialization in all countries, and we will have certain co-promotion rights in the U.S.

Revenues. If our development efforts result in clinical success, regulatory approval and successful commercialization of our products, we could generate revenues from sales of our products. We do not expect to submit an application for regulatory approval for any of our product candidates before the end of 2005, and it could be later. If, as an alternative to commercializing a particular product, we enter into license agreements or other collaboration arrangements with corporate partners, such as our collaboration with Shire, we could recognize revenue from license fees, milestone payments or royalties from product sales.

Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of legal costs associated with patent filings and litigation that was settled in May 2004, board of director fees, insurance expense, personnel and benefits costs, stock-based compensation costs, costs associated with completing the collaboration agreements with Shire, and fees charged to us by an affiliate, Third Security, LLC (Third Security), for services provided to us under an administrative services agreement. Administrative services that Third Security is providing under the administrative services agreement include support for taxation, legal and market research functions as well as other miscellaneous services that we may need from time to time.

Research and Development Expenses. Our current research and development efforts are focused on developing our three lead product candidates. Our research and development expenses consist of direct and indirect costs. Our direct costs include salaries and related expenses for personnel, including stock-based compensation, costs of materials used in research and development, costs of facilities and external development costs that consist of fees paid to professional service providers for conducting various studies and trials. Indirect costs include various overhead costs. We believe that significant investment in product development is a competitive necessity, and we plan to continue these investments in order to be in a position to realize the potential of our product candidates and proprietary technologies.

We use our research and development employee and infrastructure resources across several projects, and many of our costs are not attributable to an individually-named project but are directed to broadly-applicable research efforts. Accordingly, we do not account for internal research and development costs on a project-by-project basis, and we cannot state precisely the total costs incurred for each of our clinical and preclinical projects on a project-by-project basis.

The following table summarizes, from inception and for the three months ended April 3, 2005, the total external development costs associated with (i) our Carrierwave technology and our earlier related iodothyronine technology, all of which costs are included in the Carrierwave line item in the table below as historically we made no efforts to separate such costs, and (ii) each of our current lead product candidates.

We expect that a larger percentage of our research and development expenses in the future will be incurred in support of our current and future preclinical and clinical development programs rather than technology development. These expenditures are subject to numerous uncertainties relating to timing and cost to completion. We test compounds in numerous preclinical studies for safety, toxicology and efficacy. We expect then to conduct early-stage clinical trials for each drug candidate. We anticipate funding these trials ourselves. As we obtain results from trials, we may elect to discontinue or delay clinical trials for certain products in order to focus our resources on more promising products. Completion of clinical trials may take several years or more, and the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product candidate.

The commencement and completion of clinical trials for our products may be delayed by many factors, including lack of efficacy during clinical trials, unforeseen safety issues, slower than expected patient recruitment, or government delays. In addition, we may encounter regulatory delays or rejections as a result of many factors, including results that do not support the intended safety or efficacy of our product candidates, perceived defects in the design of clinical trials and changes in regulatory policy during the period of product development. As a result of these risks and uncertainties, we are unable to estimate accurately the specific timing and costs of our clinical development programs or the timing of material cash inflows, if any, from our product candidates. Our business, financial condition and results of operations may be materially adversely affected by any delays in, or termination of, our clinical trials or a determination by the FDA that the results of our trials are inadequate to justify regulatory approval, insofar as cash in-flows from the relevant drug or program would be delayed or would not occur.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $2,488,000, or 362%, to $3,175,000 for the three months ended April 3, 2005 from $687,000 for the three months ended March 28, 2004. This increase is primarily attributed to a $1,500,000 fee paid to an investment banking firm for managing the process through which we were able to evaluate various partnering alternatives prior to the successful completion of our collaboration agreements with Shire, an increase of approximately $626,000 of payroll and benefit costs, including estimated bonus accruals, associated with hiring executive management and accounting personnel and a general increase in general and administrative expenses associated with being a public company.

Research and Development Expenses. Research and development expenses increased $2,676,000, or 242%, to $3,784,000 for the three months ended April 3, 2005 from $1,108,000 for the three months ended March 28, 2004. An increase in external development costs of $2,194,000 accounted for most of this increase. This increase in external development costs was primarily related to Phase 3 clinical studies for our NRP104 compound and continued progress in our research and development of our NRP290 compound.

	Three months ended
Research and development expenses	April 3, 2005		March 28, 2004
	(in thousands)
Direct project costs:
Personnel, benefits and related costs	$	471	$	282
Consultants, supplies, materials and other direct costs		255		98
External development costs		2,910		716
Total direct costs		3,636		1,096
Indirect costs		148		12
Total	$	3,784	$	1,108

Our operations from 2001 through April 3, 2005, have been funded primarily from proceeds of approximately $17.3 million raised from various private placements of our common stock, $33.6 million of gross proceeds from the initial public offering of our common stock on August 10, 2004, and $50 million received on February 11, 2005 in accordance with the terms of our collaboration agreements with Shire, as follows:

Fiscal year	Number of shares ⁽¹⁾			Price per share		Gross Proceeds
2001		150,000		$	6.66	$	1,000,000
2002		1,122,500			2.50		2,806,250
2002		2,038,860	⁽²⁾		2.50		5,097,151
2003		1,411,600			2.50		3,529,000
2004		970,000			5.00		4,850,000
2004 - Initial public offering		4,200,000			8.00		33,600,000
2005 - Shire collaboration		—					50,000,000
		9,892,960				$	100,882,401

________________

On August 10, 2004 we completed the initial public offering of our common stock whereby we sold 4,200,000 shares at a price of $8.00 per share, resulting in gross proceeds of $33.6 million. In connection with this offering, we paid approximately $2.4 million in underwriting discounts and commissions and incurred estimated other offering expenses of approximately $1.2 million. After deducting the underwriting discounts and commissions and offering expenses, we received net proceeds from the offering of approximately $30 million.

At April 3, 2005, we had cash and cash equivalents of $14,600,000 compared to $4,019,000 at January 2, 2005. Our cash and cash equivalents are highly liquid investments in money market funds and commercial paper. We maintain cash balances with financial institutions in excess of insured limits. We also maintain short-term investments in auction rate municipal bonds. We record these short-term investments at cost, which approximates fair market value due to their variable interest rates, which typically reset every 28 to 35 days, and the fact that, despite the long-term nature of their stated contractual maturities, we have the ability to liquidate readily these securities. We do not anticipate any losses with respect to such cash and cash equivalents and short-term investment balances.

Cash provided by operations was $41,769,000 for the three months ended April 3, 2005 compared to cash used in operations of $1,605,000 for the three months ended March 28, 2004. The upfront payment of $50,000,000 received in February 2005 under the terms of our collaboration agreements with Shire, offset by increased operating expenses primarily accounted for this change. Cash used in investing activities was $31,360,000 for the three months ended April 3, 2005 and was the result of investing the proceeds from the $50,000,000 upfront payment received from Shire. Cash provided by financing activities was $172,000 for the three months ended April 3, 2005, which was from proceeds received from exercises of stock options and $1,400,000 for the three months ended March 28, 2004, which was from proceeds from demand loans from Kirkfield. These notes were repaid during the second quarter of 2004.

The contractual commitments reflected in this table exclude royalty payments that we may be obligated to pay to Innovative Technologies in the future. Such future royalty payments are contingent on product sales and are based on 1% of net sales (as defined in the agreement with Innovative Technologies dated June 30, 2004) for a period of 10 years or up to a total of $1 million, whichever occurs first.

As of April 3, 2005, we do not have any short-term debt or long-term contractual or debt obligations. Our operating leases are for our research and development facilities and our administrative offices. We renewed the research and development facility lease, including additional space of 2,358 square feet, in August 2004 for one year at a monthly rental of approximately $11,000. We may renew this lease for successive one-year periods thereafter. Upon completion of the initial public offering of our common stock on August 10, 2004, we entered into an operating lease agreement with Third Security for offices occupied by certain of our executive and administrative staff. The lease is for 24 months with a current monthly rental of approximately $6,500. We may renew this lease for three successive one-year periods thereafter. We also have in-progress research and development contracts performed by third parties. As of April 3, 2005, we had commitments, which consist primarily of external development work, with third parties totaling approximately $16,944,000, of which approximately $9,662,000 had not yet been incurred. The commitments are cancelable by us at any time upon written notice.

We expect to incur losses from operations for fiscal year 2005. We expect to incur increasing research and development expenses, including expenses related to additional clinical trials and personnel. We expect that our general and administrative expenses will continue to increase in the future as we continue to expand our business development, legal and accounting staff, add infrastructure and incur additional costs related to being a public company, including directors’ and officers’ insurance, investor relations programs and increased professional fees.

Our future capital requirements will depend on a number of factors, including the progress of our research and development of product candidates, the timing and outcome of regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights, the status of competitive products, the availability of financing and our success in developing markets for our product candidates. We believe our existing cash and cash equivalents and short-term investments will be sufficient to fund our operating expenses and capital equipment requirements for at least the next 24 months.

To the extent our capital resources are insufficient to meet future capital requirements, we will need to raise additional capital or incur indebtedness to fund our operations. We cannot assure that additional debt or equity financing will be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our commercialization efforts or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently. Any future funding may dilute the ownership of our equity investors.

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued expenses, fair valuation of stock related to stock-based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Revenue Recognition. Although we currently have no products available for sale, we do anticipate having products in the future. We anticipate that some of our sales will be to wholesalers who have the right to return purchased product. In accordance with SFAS No. 48, “Revenue Recognition When the Right of Return Exists,” until we have sufficient sales history to estimate product returns, we will have to defer recognition of revenue on such sales until the products are dispensed through patient prescriptions. Once we have obtained sufficient sales history to estimate product returns, under SFAS 48, we will be able to recognize revenue on product shipments, net of a reasonable allowance for estimated returns relating to these shipments.

Our strategy includes entering into collaborative agreements with strategic partners for the development and commercialization of its product candidates. Such collaboration agreements may have multiple deliverables. We evaluate multiple deliverable arrangements pursuant to EITF 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Pursuant to EITF 00-21, in arrangements with multiple deliverables where the we have continuing performance obligations, contract, milestone and license fees are recognized together with any up-front payments over the term of the arrangement as performance obligations are completed, unless the deliverable has stand alone value and there is objective, reliable evidence of fair value of the undelivered element in the arrangement. In the case of an arrangement where it is determined there is a single unit of accounting, all cash flows from the arrangement are considered in the determination of all revenue to be recognized. Additionally, pursuant to the guidance of Securities and Exchange Commission Staff Accounting Bulletin 104 (“SAB 104”), unless evidence suggests otherwise, revenue from consideration received is recognized on a straight-line basis over the expected term of the arrangements. Cash received in advance of revenue recognition is recorded as deferred revenue.

Accrued Expenses. As part of the process of preparing consolidated financial statements, we are required to estimate accrued expenses. This process involves identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date in our consolidated financial statements. Examples of estimated accrued expenses include professional service fees, such as fees of lawyers and contract service fees. In connection with such service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual levels of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs that have begun to be incurred or we under- or over-estimated the level of services performed or the costs of such services, our reported expenses for such period would be too low or too high. The date on which certain services commence, the level of services performed on or before a given date and the cost of such services are often subject to management’s judgment. We make these judgments based upon the facts and circumstances known to us in accordance with U.S. generally accepted accounting principles.

Stock-Based Compensation. We have elected to follow APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for our stock-based compensation plans, rather than the alternative fair value accounting method provided for under SFAS No. 123, “Accounting for Stock-Based Compensation”. In the notes to our financial statements, we provide pro forma disclosures in accordance with SFAS No. 123 and related pronouncements. The two factors which are most likely to affect charges or credits to operations related to stock-based compensation are the fair value of the common stock underlying stock options for which stock-based compensation is recorded and the volatility of such fair value. If our estimates of the fair value of these equity instruments are too high or too low, our expenses will be overstated or understated. Because shares of our common stock had not been publicly traded before our initial public offering in August 2004, we valued our stock and stock option grants by considering comparative values of stock of public companies discounted for the risk and limited liquidity of our common stock, events that have occurred since the date of grants, economic trends and transactions involving the sale of our common stock to independent third parties.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” (SFAS No. 123(R)). SFAS No. 123(R) requires companies to expense the grant-date fair value of employee stock options. SFAS No. 123(R) is effective for the first fiscal year beginning after June 15, 2005; however, early adoption is encouraged. We have not yet adopted this standard and are currently evaluating the expected impact of adoption on our consolidated financial position, results of operations and cash flows, including the specific transition method to be utilized upon adoption. We anticipate that the adoption of SFAS No. 123(R) will negatively impact our earnings.

Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

We have not recorded any tax provision or benefit for the three months ended April 3, 2005 and March 28, 2004. We have provided a valuation allowance for the full amount of our net deferred tax assets since realization of any future benefit from deductible temporary differences and net operating loss carry forwards cannot be sufficiently assured. At January 2, 2005, we had federal net operating loss carry forwards of approximately $33.5 million available to reduce future taxable income, which will begin to expire in 2019.

Our exposure to market risk is currently confined to our cash and cash equivalents that have original maturities of less than three months and our short-term investments in auction rate municipal bonds. We record our investment in auction rate municipal bonds at cost, which approximates fair market value due to their variable interest rates, which typically reset every 28 to 35 days, and the fact that, despite the long-term nature of their stated contractual maturities, we have the ability to liquidate readily these securities. We currently do not hedge interest rate exposure. We have not used derivative financial instruments. Because of the short-term maturities of our cash and cash equivalents and the reset terms of our investments in auction rate municipal bonds, we do not believe that an increase in market rates would have any significant impact on their realized value.

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the Exchange Act), we carried out an evaluation, with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act), as of April 3, 2005. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is accumulated and communicated to our management and is recorded, processed, summarized, and reported as specified in Securities and Exchange Commission rules and forms. There has been no significant change in our internal control over financial reporting during the quarter ended April 3, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Effective March 23, 2005, in consideration for their service on our Board of Directors, we granted each of our four non-employee directors options to purchase 25,000 shares of our common stock. These options were granted at an exercise price of $23.20 per share pursuant to our Incentive Compensation Plan. No underwriters were involved in these option issuances. These option issuances were exempt from registration under the Securities Act of 1933, as amended, either pursuant to Rule 701 under the Securities Act, as transactions pursuant to a compensatory benefit plan, or pursuant to Section 4(2) under the Securities Act, as a transaction by an issuer not involving a public offering.

We intend to use the remaining proceeds of the offering in accordance with the disclosure set forth in the prospectus related to our initial public offering, except that based upon further discussions with the FDA we have agreed to conduct additional studies in support of the NDA filing for NRP104, the cost of which we estimate to be approximately $5.5 million. As a result of these discussions, we may also be required to do additional studies with respect to further development of NRP290 and NRP369, which would result in additional cost. Pending application of the remaining proceeds, we have invested the proceeds in short-term, investment-grade, interest-bearing securities.

	Virginia		54-1816479
	(State or other jurisdiction of incorporation or organization)		(IRS employer identification no.)

	1881 Grove Avenue Radford, Virginia		24141
	(Address of principal executive offices)		(Zip code)

		Page

PART I FINANCIAL INFORMATION		1

	Item 1. Consolidated Financial Statements.	1

	Consolidated Balance Sheets April 3, 2005 (unaudited) and January 2, 2005

	Consolidated Statements of Operations Three months ended April 3, 2005 and March 28, 2004 (unaudited)

	Consolidated Statements of Cash Flows Three months ended April 3, 2005 and March 28, 2004 (unaudited)

	Notes to Consolidated Financial Statements (unaudited)

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

	Item 3. Quantitative and Qualitative Disclosures About Market Risk.	24

	Item 4. Controls and Procedures.	24

PART II OTHER INFORMATION		25

	Item 1. Legal Proceedings.	25

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	25

	Item 3. Defaults Upon Senior Securities.	25

	Item 4. Submission of Matters to a Vote of Securities Holders.	25

	Item 5. Other Information.	26

	Item 6. Exhibits and Reports on Form 8-K.	26

SIGNATURES		28

	Three months ended April 3, 2005
	Three months ended April 3, 2005
Expected dividend yield	0%
Risk-free interest rate	4.61%
Expected life of awards	10 years
Expected volatility	70%

	Number of shares			Weighted average exercise price
Balance at January 2, 2005		860,897		$	4.30
Granted		100,000			23.20
Exercised		(55,650	)		(3.09	)
Balance at April 3, 2005		905,247		$	6.46
Exercisable at April 3, 2005		636,747		$	6.59

Funding for further development of NRP104	$	7,126,000
Funding for further research and development of NRP290		619,000
Working capital and general corporate purposes		7,776,000
Total	$	15,521,000

	(540) 633-7978
	(Registrant’s telephone number,
	including area code)

	Three months ended April 3, 2005		Inception to April 3, 2005
	(in thousands)
NRP104	$	2,217	$	9,950
NRP290		655		1,449
NRP369		38		191
Carrierwave/thyroid		—		5,488
Total	$	2,910	$	17,078

	Total		2005		Thereafter
	(in thousands)
Operating lease obligations	$	161	$	115		46
Research and development contracts		9,662		9,662		—
Total contractual cash obligations	$	9,823	$	9,777		46

	NEW RIVER PHARMACEUTICALS INC.
	(Registrant)



Date: May 11, 2005	/s/ Randal J. Kirk
	Randal J. Kirk
	Chairman, President and Chief Executive Officer
	(Principal executive officer)



Date: May 11, 2005	/s/ Krish S. Krishnan
	Krish S. Krishnan
	Chief Operating Officer, Chief Financial Officer and Secretary
	(Principal financial and accounting officer)