RENOVIS INC - 10-Q Quarterly Report

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 ¨

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

As of May 12, 2005, 24,721,638 shares of our Common Stock, $.001 par value, were outstanding.

Renovis, Inc. (the Company or Renovis) was incorporated in the state of Delaware on January 5, 2000. Renovis is a biopharmaceutical company developing drugs to treat neurological diseases and disorders. Its facilities are located in South San Francisco, CA.

The Company has sustained operating losses since inception and expects such losses to continue over the next several years. Management plans to continue to finance the operations with a combination of equity issuances, debt arrangements, and revenues from corporate alliances with pharmaceutical companies. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs.

The Company has prepared the condensed financial statements following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles can be condensed or omitted. In the opinion of management, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. The information included in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2004.

The condensed balance sheet amounts at December 31, 2004, have been derived from audited financial statements.

Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

As of March 31, 2005 and December 31, 2004, prepaids and other current assets included restricted cash, current of $673,000 related to bank certificates of deposit to collateralize the rent deposit on the Company’s facility in South San Francisco, California.

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

Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, requires an enterprise to report segment information based on how management internally evaluates the operating performance of its business units (segments). Our operations are confined to one business segment: the development of drugs to treat neurological diseases and disorders.

Revenue under collaborative agreements is recognized based on the performance requirements of the agreement. Amounts received under such arrangements consist of upfront license fees and include periodic milestone payments upon the achievement of certain events. Upfront payments which are subject to future performance requirements are recorded as deferred revenue and are amortized over the performance period. The performance period is estimated at the inception of the arrangement and is periodically reevaluated. The reevaluation of the performance period may shorten or lengthen the period during which the deferred revenue is recognized which would result in an acceleration or delay of expected revenue recognition. Payments received related to substantive, at-risk milestones are recognized upon achievement of the scientific or regulatory event specified in the underlying agreement.

The Company accounts for employee stock options using the intrinsic-value method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion No. 25), Financial Accounting Standards Board Interpretation (“FIN”) No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB No. 25, and related interpretations and has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123).

The information regarding net loss as required by SFAS No. 123 has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The resulting effect on net loss pursuant to SFAS No. 123 is not likely to be representative of the effects on net loss pursuant to SFAS No. 123 in future years, since future years are likely to include additional grants and the irregular impact of future years’ vesting.

The following table illustrates the weighted average assumptions for the Black-Scholes model used in determining the fair value of options granted to employees:

During the period from January 1, 2003 through January 31, 2004, certain stock options were granted with exercise prices that were below the estimated fair value of the common stock at the date of grant. The deferred compensation balance at March 31, 2005 of $8,059,000 was recorded in accordance with APB Opinion No. 25, and is being amortized on a straight-line basis over the related performance periods of the options. The Company recorded amortization of employee stock-based compensation of $1,032,000 and $1,184,000 for the three months ended March 31, 2005 and 2004, respectively.

For purposes of disclosures pursuant to SFAS No. 123, as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (SFAS No. 148), the estimated fair value of options is amortized to expense over the options’ vesting period. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock based employee compensation (in thousands, except per share amounts):

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

The original effective date of SFAS No. 123R was the first reporting period beginning after June 15, 2005. However, on April 14, 2005, the Securities and Exchange Commission (SEC) announced the adoption of a new rule that amends the compliance date of SFAS No. 123R. The SEC’s new rule allows calendar year-end companies to implement SFAS No. 123R at the beginning of 2006, which makes SFAS No. 123R effective for Renovis in the first quarter of 2006. SFAS No. 123R permits public companies to adopt its requirements using one of two methods:

(1) A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date.

(2) A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB No. Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123R’s fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future and the valuation model we ultimately select. We are currently evaluating option valuation methodologies and assumptions in light of SFAS No. 123R related to employee stock options. However, had we adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net loss and net loss per share above.

Stock compensation arrangements to non-employees are accounted for in accordance with SFAS No. 123, as amended by SFAS No. 148, and Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services,

using a fair value approach. The compensation costs of these arrangements are subject to remeasurement over the vesting terms as earned. During the three months ended March 31, 2005 and 2004, the company granted stock options to purchase 30,611 and 24,176 shares of common stock to consultants. Compensation expense related to non-employee stock option grants was $245,000 and $358,000 for the three months ended March 31, 2005 and 2004, respectively and is included in research and development expense in the accompanying statements of operations. The Company also granted stock awards of 10,000 shares to certain consultants during the three months ended March 31, 2005; the associated compensation expense was $88,000 and is included in research and development expense in the accompanying statement of operations.

The following table illustrates the weighted average assumptions for the Black-Scholes model used in determining the fair value of options granted to non-employees:

SFAS No. 130, Reporting Comprehensive Income, requires components of other comprehensive income, including gains and losses on available-for-sale investments, to be included as part of total comprehensive income. The Company’s total comprehensive loss for the three months ended March 31, 2005 and 2004 was $9,973,000 and $8,676,000 respectively and included an unrealized gain on available-for-sale investments of $17,000 in the first quarter of 2005; there were no such gains or losses in the corresponding period in 2004.

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, preferred stock, options, and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

On December 31, 2003, the Company entered into a collaborative research, development and license agreement with Genentech (Genentech Agreement) under which the Company received an upfront payment of $5,250,000. Additionally, as part of the Genentech Agreement and concurrent with the Company’s initial public offering, Genentech purchased 250,000 shares of common stock for an additional $3,000,000, or $12.00 per share. The Genentech Agreement also provides for future milestones and royalties in connection with the development and commercialization of products that may arise from the collaboration. The Company deferred the $5,250,000 upfront payment and is recognizing it on a straight-line basis over the two-year estimated research period of the agreement. The Company recognized $656,000 in revenue related to this agreement in each of the three months ended March 31, 2005 and 2004.

During 2002 the Company borrowed approximately $0.2 million under credit facilities, payable in monthly installments over a period of 36 months, to finance the purchase of equipment and tenant improvements. Interest rates range from 10.96% to 11.97% on the advances, which are secured by the assets financed.

In April 2002 and July 2002, the Company entered into additional credit facilities that provide up to an aggregate of $2.0 million to finance the purchase of equipment and tenant improvements. Advances made under the credit facilities amounted to approximately $1.8 million at December 31, 2003 and $1.4 million at December 31, 2002, and are payable in monthly installments over a period of 36 months. Interest rates range from 9.12% to 9.75% on the advances, which are secured by the assets financed.

In connection with certain credit facilities, the Company issued warrants to purchase an aggregate of 57,222 shares of common stock.

In February 2004, the Company entered into a credit facility with a lender that provides up to an aggregate of $5 million to finance the purchase of laboratory and computer equipment and certain leasehold improvements. Under this agreement the Company borrowed approximately $3.4 million during the year ended December 31, 2004. Payments are due in monthly installments over a period ranging from 42 to 48 months at interest rates ranging from 8.80% to 9.64% and are secured by the assets financed.

In March 2005, the Company borrowed approximately $1.0 million under an existing credit facility to finance the purchase of primarily laboratory equipment and computer software. Payments are due in monthly installments over a period ranging from 42 to 48 months at an interest rate of 9.56% and are secured by the assets financed.

The Board of Directors approved the Amended and Restated Renovis, Inc. 2003 Stock Plan (Amended 2003 Plan), giving effect to certain amendments to the previously approved Renovis, Inc. 2003 Stock Plan (2003 Plan). The Amended 2003 Plan became effective on January 3, 2005. The Amended 2003 Plan also includes additional shares of common stock that have or will have become available for issuance under the Company’s predecessor stock option plans. Additionally, commencing in 2005 and on each January 15 thereafter during the term of the Amended Plan, the number of shares reserved for issuance under the Plan will be increased by the least of (i) 3.5% of the Company’s outstanding shares of common stock on that date, (ii) 1,055,555 shares, or (iii) such lesser number determined by our Board of Directors. On January 19, 2005, the Board authorized and reserved 863,984 shares of the Company’s common stock for “replenishment” stock option grants under the Amended 2003 Plan.

The Amended 2003 Plan permits the Company to grant incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, deferred stock, dividend equivalents, performance share awards, stock payments and other stock related benefits, or any combination thereof to employees or consultants of the Company. The amendments provide that the automatic option grants for independent directors to purchase 11,111 shares and the chairman of the Board of Directors to purchase 22,222 shares shall be granted annually on a date determined by the Board of Directors in its discretion, which date shall, to the extent practicable, be consistent with the date on which annual “replenishment” grants of options are made to employees generally (the “Annual Grant Date”). The Board of Directors in its discretion may change the Annual Grant Date from year to year. Each eligible member of the Board of Directors must continue to serve through the Annual Grant Date in order to receive an automatic option grant.

Stock options awarded to employees may be granted at an exercise price no less than the fair market value of the common stock on the date of grant. Options become exercisable as determined by the Board of Directors, generally at the rate of 25% at the end of the first year, with the remaining balance vesting ratably over the next three years, or 1/48^th per month such that the options will be fully vested after four years. Options granted under the Amended 2003 Plan expire no more than ten years after the date of grant.

The Board of Directors approved the Renovis, Inc. 2005 Employment Commencement Incentive Plan (the “2005 Plan”), effective January 3, 2005. The number of shares of common stock that may be issued pursuant to awards under the 2005 Plan is 250,000.

The 2005 Plan provides the Company with the ability to grant specified types of equity awards including non-qualified stock options, restricted stock, stock appreciation rights, performance shares, dividend equivalents, deferred stock and stock payment awards. Company employees that are otherwise eligible to receive grants under the 2005 Plan may receive all types of awards approved under the 2005 Plan. A majority of the independent members of the Company’s Board of Directors or the compensation committee of the Board of Directors will determine which employees will receive awards under the 2005 Plan and the terms and conditions of such

awards, within certain limitations set forth in the 2005 Plan. The awards granted pursuant to the 2005 Plan are intended to be inducement awards pursuant to NASDAQ Marketplace Rule 4350(i)(1)(A)(iv). The 2005 Plan is not subject to the approval of the Company’s stockholders.

Options granted under the 2005 Plan have a 10-year term, and are granted at exercise prices equal to the fair market value on the date of grant. These options generally become exercisable at the rate of 25% at the end of the first year, with the remaining balance vesting ratably over the next three years, or 1/48^th per month such that the options will be fully vested after four years. Only those employees who have not previously been employees or directors of the Company or a subsidiary, or following a bona fide period of non-employment by the Company or a subsidiary are eligible to participate in the 2005 Plan and only if he or she is granted an award in connection with his or her commencement of employment with the Company or a subsidiary and such grant is an inducement material to his or her entering into employment with the Company or a subsidiary.

On February 4, 2004, the Company’s Employee Stock Purchase Plan (Purchase Plan) became effective. A total of 611,111 shares of Company common stock were initially reserved for issuance under the Purchase Plan. The Purchase Plan provides for an annual increase to the shares of common stock reserved under the Purchase Plan on each January 1 equal to the least of 194,444 shares, 0.75% of our outstanding shares on such date, or a lesser amount determined by our Board of Directors. On January 1, 2005, an annual increase of 184,747 shares of the Company’s common stock was added to the Purchase Plan. Employees scheduled to work more than 20 hours per week for more than five calendar months per year are eligible to participate in the Purchase Plan.

The Purchase Plan will be implemented by a series of offerings of approximately 24-months in duration. The initial offering commenced on February 4, 2004. Within the offering, there will be a series of semi-annual “purchase periods.” The purchase price for shares of common stock purchased at the end of a purchase period in an offering will be the lesser of 85% of the market price of common stock on a participant’s entry date into the offering period, or 85% of the market price of common stock on the last business day of the purchase period.

Participants may contribute up to 20% of their cash earnings through payroll deductions per offering period and the accumulated deductions will be applied to the purchase of shares on each semi-annual purchase date.

On March 23, 2005, our Board of Directors adopted a Stockholder Rights Plan (the “Rights Plan”). On April 11, 2005, the Company filed with the Delaware Secretary of State a Certificate of Designations (the “Certificate of Designations”) setting forth the terms of the Company’s Series A Junior Participating Preferred Stock, par value $0.001 per share (the “Preferred Shares”) in connection with the adoption of the Rights Plan by the Board. The Company has agreed to initially reserve 100,000 Preferred Shares for issuance upon exercise of the rights under the Rights Plan from and after the Distribution Date.

The rights issued pursuant to the Rights Plan expire on April 12, 2015 and are exercisable upon the earlier of ten business days after a person or group either (i) announces the acquisition of 15% or more of the Company’s outstanding common stock or (ii) commences a tender offer, which would result in ownership by the person or group of 15% or more of the Company’s outstanding common stock. Upon exercise, all rights holders except the potential acquiror will be entitled to acquire the Company’s common stock at a discount. The Company is entitled to redeem the rights in whole at any time on or before the tenth day following acquisition by a person or group of 15% or more of the Company’s common stock.

The rights under the Rights Plan are not being distributed in response to any specific effort to acquire control of the Company. The rights under the Rights Plan are designed to assure that all our stockholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender offers, open market accumulations and other potentially abusive tactics to gain control of the Company, while not foreclosing a fair acquisition bid for the Company.

The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth above under the caption “Business – Risk Factors.” You should read the following discussion and analysis of our financial condition and results of operations together with our interim financial statements and the related notes appearing at the beginning of this report. The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2004 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2005.

We are a biopharmaceutical company developing drugs to treat neurological diseases and disorders. We currently focus our research and development programs in the areas of neuroprotection, pain and neuroinflammatory diseases. Our most advanced product candidate, Cerovive^{^®} (NXY-059), is a novel free radical trapping neuroprotectant in development for the treatment of acute ischemic stroke. In May 2003, our exclusive licensee, AstraZeneca, commenced two Phase III clinical trials (SAINT I and II) with Cerovive^{^®} (NXY-059) to determine its effect on disability and neurological recovery in acute ischemic stroke patients. In August 2004, AstraZeneca initiated a Phase II trial (CHANT) to assess safety and tolerability of Cerovive^{^®} (NXY-059) in patients with acute intracerebral hemorrhage. In December 2004, we announced that patient enrollment in the SAINT I trial, one of the two Phase III trials with Cerovive^{^®} (NXY-059), had been completed. In May 2005, we announced that a first analysis of data from the Phase III SAINT I trial involving more than 1,700 patients and conducted by our licensee, AstraZeneca, showed that Cerovive^{^®} (NXY-059) demonstrated a statistically significant reduction versus placebo on the primary outcome of disability in patients after an acute ischemic stroke. However, on the National Institute of Health Stroke Scale (NIHSS), there was not a statistically significant difference in measurement of change in neurological impairment between the treatment groups. The clinical significance of these findings needs to be assessed in light of the outcome of SAINT II and CHANT trials which will continue as planned. Enrollment of patients in the SAINT II and CHANT trials with Cerovive^{^®} (NXY-059) is proceeding consistent with AstraZeneca’s announced goal of seeking regulatory approval in 2006. AstraZeneca is responsible for funding and conducting all of the clinical trials with Cerovive^{^®} (NXY-059).

In addition to Cerovive^{^®} (NXY-059), we are independently conducting clinical trials with two other product candidates. REN-1654, an oral drug candidate for neuropathic pain, is currently in a Phase II clinical trial for sciatica that we began in 2004 and REN-850, an oral drug candidate for multiple sclerosis, is currently in a Phase Ia clinical trial that we commenced in February 2005. In March 2005, we announced our decision to discontinue development of REN-1654 in post-herpetic neuralgia (PHN). In addition to our clinical programs, we are conducting preclinical research and development activities in the areas of neuroprotection and pain to identify future product candidates for clinical development. Previously, we were also conducting research in the area of neuroinflammation which led to the advancement of REN-850 into clinical development. As of March 31, 2005, we had an accumulated deficit of $132.0 million.

We expect to incur substantial and increasing losses for the next several years as we:

In addition, we may acquire or in-license technology and products and may also acquire or invest in businesses that are complementary to our own.

We have a limited history of operations. Since our inception we have generated all of our revenues from agreements with corporate partners. During 2003, we recorded $4.5 million in contract revenue related to milestone payments that we received from AstraZeneca following their receipt of regulatory approval to commence Phase III trials for Cerovive^{^®} (NXY-059). Upon achievement of certain future milestones involving the filing and approval of marketing applications in the U.S. and E.U. or Japan, AstraZeneca is obligated to make additional payments to us totaling up to $7.5 million. Upon commercialization of Cerovive^{^®} (NXY-059), we are entitled to receive mid-teen percentage royalties on worldwide net sales from AstraZeneca.

On December 31, 2003 we entered into a collaborative research, development and license agreement with Genentech under which we received an upfront payment of $5.25 million. We have deferred the upfront payment and are recognizing it as contract revenue on a straight-line basis over the estimated research period of two years. Accordingly, we recognized $0.7 million related to this agreement in both the three months ended March 31, 2005 and 2004. We expect to recognize the remaining deferred revenue as contract revenue during 2005. The agreement with Genentech also provides for future milestones and royalties in connection with the development and commercialization of products that may arise from the collaboration. We have had no other income since inception other than interest income from short-term investments.

In contrast to Cerovive^{^®} (NXY-059) which is licensed to AstraZeneca, we hold worldwide rights to commercialize REN-1654 and REN-850. If either or both of these product candidates receives regulatory approval we may choose to market and sell the product candidate ourselves or with a partner in exchange for upfront fees, milestones and royalties on future sales, if any. We currently contract with outside firms to manufacture REN-1654 and REN-850 and have no plans to establish internal manufacturing capability.

As of March 31, 2005, we had approximately $76.7 million in cash, cash equivalents and short-term investments. We anticipate that our current cash, cash equivalents and short-term investments will enable us to maintain our currently planned operations for more than another 12 months. However, changes to our current operating plan may require us to consume our capital resources significantly sooner than we expect.

To date, all of our revenue has been earned under agreements with AstraZeneca and Genentech. We do not expect to generate revenue from product sales or royalties until at least 2007, if at all. We seek to generate revenue from a combination of product sales, upfront fees and milestone payments in connection with collaborative or strategic relationships, and royalties resulting from the license of our intellectual property. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of milestone payments we may receive from our collaborative or strategic relationships, as well as those we may receive upon the sale of our products, to the extent any are successfully commercialized. Revenue derived from collaborative and strategic relationships helps us fund our operations and may increase in the future if we are successful in achieving milestones in our existing collaborations, licensing our technology and establishing new collaborations or

strategic relationships. If we are unsuccessful in these goals, our revenues will decline and we may be required to limit our research and development, clinical trial, manufacturing and marketing efforts.

Our research and development (R&D) expenses consist primarily of costs associated with research, preclinical development and clinical trials involving product opportunities we are pursuing internally in the areas of neuroprotection, pain, and neuroinflammatory diseases. We do not incur research and development costs for Cerovive^® (NXY-059), which is licensed to AstraZeneca.

The expenses we incur in connection with our research, preclinical and clinical development consist primarily of:

R&D costs, including some upfront fees and milestones paid to collaborators, are expensed as incurred. The timing of upfront fees and milestone payments in the future may cause variability in our future R&D expenses.

Prior to our acquisition of pharmaceutical assets from Centaur in December 2002, we had incurred research and development expenses of approximately $20.8 million to assemble a team of neurobiologists and establish specialized capabilities in assay development, screening, lead optimization, target identification and target validation, which we used to pursue early stage research in the areas of pain and trauma. We are unable to estimate the portion of costs incurred that are allocable to the individual research activities we conducted during the periods prior to December 31, 2002 because we do not segregate costs among early-stage research programs for both management and external reporting. Moreover, given the early stage nature of these projects and the subsequent integration of intellectual property and product opportunities that we acquired from Centaur, we are unable to reasonably estimate the cost or timeline required to generate cash inflows from our research efforts.

During the three months ended March 31, 2005 and 2004, we incurred research and development expenses of $7.7 million and $6.4 million, respectively. The total R&D costs related to individual research activities are as follows (in millions):

The increase in research and development expenses reflects investments in our preclinical activities in the areas of neuroprotection, pain and neuroinflammatory diseases partially offset by lower clinical development expenses. The decrease in clinical development expenses during the first quarter of 2005 compared to the first quarter of 2004 resulted from our decision to end development of REN-213, which was ongoing throughout the first three quarters of 2004. Our clinical development efforts during the three months ended March 31, 2005 were focused primarily on conducting Phase II clinical trials with REN-1654 that we began in 2004 and a Phase Ia clinical trial with REN-850 that we commenced in February 2005. In March 2005, we announced our decision to discontinue development of REN-1654 in PHN while continuing a Phase II clinical trial in sciatica. The preclinical R&D amount of $5.7 million reflected the addition of key personnel in chemistry and pharmacology as well as studies needed to support the advancement of REN-850 which began clinical development during the first quarter of 2005. Our clinical development efforts during the first quarter of 2004 were focused exclusively on activities required to advance REN-1654 and REN-213 into clinical trials that commenced in the fourth quarter of 2003.

Development timelines and costs are difficult to estimate and may vary significantly for each product candidate and from quarter to quarter. The process of seeking regulatory approvals, and the subsequent compliance with applicable regulations, requires the expenditure of substantial resources.

General and administrative expenses consist primarily of compensation for employees in executive and operational functions, including finance and business development. Other significant costs include allocated facilities costs and professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents. We anticipate incurring increases in general and administrative expenses, such as increased costs for compliance with certain sections of the Sarbanes-Oxley Act of 2002, insurance and investor relations associated with operating as a publicly-traded company. These increases will also likely include the hiring of additional personnel.

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our financial statements included in this report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

Revenue under our collaborative agreements is recognized based on the performance requirements of the agreement. Amounts received under such arrangements consist of upfront license fees and include periodic milestone payments upon the achievement of certain events. Upfront payments which are subject to future performance requirements are recorded as deferred revenue and are amortized over the performance period. The performance period is estimated at the inception of the arrangement and is periodically reevaluated. The reevaluation of the performance period may shorten or lengthen the period during which the deferred revenue is recognized which would result in an acceleration or delay of expected revenue recognition. Payments received related to substantive, at-risk milestones are recognized upon achievement of the scientific or regulatory event specified in the underlying agreement.

We account for employee stock options using the intrinsic-value method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB No. 25, and related interpretations and have adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. The information regarding net loss as required by SFAS No. 123 has been determined as if we had accounted for our employee stock options under the fair value method of that statement. The resulting effect on net loss pursuant to SFAS No. 123 is not likely to be representative of the effects on net loss pursuant to SFAS No. 123 in future years, since future years are likely to include additional grants and the irregular impact of future years’ vesting.

The preparation of the financial statement footnotes requires us to estimate the fair value of stock options granted to employees. While fair value may be readily determinable for awards of stock, market quotes are not available for long-term, nontransferable stock options because these instruments are not traded. We currently use the Black-Scholes option-pricing model to estimate the fair value of employee stock options. Option valuation models require the input of highly subjective assumptions, including but not limited to stock price volatility. We are currently evaluating our option valuation methodologies and assumptions in light of SFAS No. 123R, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their values no later than the first reporting period beginning after June 15, 2005. However, on April 14, 2005, the SEC announced the adoption of a new rule that amends the compliance date of SFAS No. 123R. The SEC’s new rule allows calendar year-end companies to implement SFAS No. 123R at the beginning of 2006, which makes SFAS No. 123R effective for Renovis in the first quarter of 2006.

Acquired in-process research and development relates primarily to purchase in-licensed technology, intellectual property and know-how. We evaluate the stage of development of acquired projects, taking into account the level of effort, time and estimated cost associated with further developing the in-process technology and producing a commercial product. The nature of the remaining efforts for completion of acquired in-process research and development projects generally include completion of clinical trials, completion of manufacturing validation, interpretation of clinical and preclinical data and obtaining marketing approval from the FDA and other regulatory bodies, the cost, length and success of which are extremely difficult to determine. Numerous risks and uncertainties exist with timely completion of development projects, including clinical trial results, manufacturing process development results, and ongoing feedback from regulatory authorities, including obtaining marketing approval. In addition, acquired products under development may never be successfully commercialized due to the uncertainties associated with the pricing of new pharmaceuticals, the cost of sales to produce these products in a commercial setting, changes in the reimbursement environment, or the introduction of new competitive products. As a result of the uncertainties noted above, we expense such acquired in-process research and development projects when incurred.

Clinical Study Activities and Other Expenses from Third-Party Contract Research Organizations

Some of our research and development, including certain clinical study activity, is conducted by various third parties, including contract research organizations, which may also provide contractually defined administration and management services. We recognize expenses for these contracted activities based upon a variety of factors, including actual and estimated patient enrollment rates, clinical site initiation activities, labor hours and other activity based factors. On a regular basis, our estimates of these costs are reconciled to actual invoices from the service providers, and adjustments are made accordingly.

Revenue during each of the quarters ended March 31, 2005 and 2004 was $0.7 million. Revenue during both periods resulted from a collaborative agreement with Genentech, which was signed at the end of 2003. Under this agreement with Genentech we received an upfront payment of $5.25 million that we are recognizing as revenue on a straight-line basis over the two-year estimated research period of the agreement.

Total research and development expenses and dollar and percentage change as compared to the prior period are as follows (dollar amounts are in thousands):

The increase in R&D expense in the first quarter of 2005 over the comparable period in 2004 reflected investments in our preclinical activities in the areas of neuroprotection, pain and neuroinflammatory diseases offset by lower clinical development expenses. Specific increases included the following:

We estimate that typical Phase I clinical trials generally take 6 to 12 months to complete, Phase II clinical trials are expected to last approximately 12 to 24 months and Phase III clinical trials are expected to last approximately 24 to 48 months. However, the actual length of clinical trials is based upon factors such as the intended use of the clinical product and the ability to enroll appropriate patients. Additionally, clinical trials of our drug candidates may fail to demonstrate safety and clinically significant efficacy which would prevent or significantly delay regulatory approval.

We expect research and development expenses to increase in future periods as we continue to advance existing drug candidates into later stages of clinical trials and move pre-clinical products into clinical trials. However, we currently do not have estimates of total costs to reach regulatory approval for each drug candidate or in the aggregate as our drug candidates are subject to an uncertain and lengthy regulatory process which may not result in obtaining the necessary regulatory approval.

Total general and administrative (G&A) expenses and dollar and percentage change as compared to the prior period are as follows (dollar amounts are in thousands):

Overall general and administrative expenses increased by $0.3 million in the first quarter of 2005 from the comparable period in 2004. The increase in G&A expense in 2005 over 2004 is primarily due to investments in protecting intellectual property generated from our preclinical research programs and establishing administrative capabilities and infrastructure appropriate for a public company. Specific increases included the following:

Amortization of Employee Stock-Based Compensation. In connection with the grant of stock options to employees and directors, we recorded deferred stock compensation of $17.3 million representing the difference between the deemed fair value of the common stock and the option exercise price at the date of grant. We recorded this amount as a component of stockholders’ equity (net capital deficiency) and are amortizing the amount, on a straight-line basis, as a non-cash charge to operations over the vesting period of the options. We recorded amortization of employee stock-based compensation of $1.0 million and $1.2 million for the three months ended March 31, 2005 and 2004, respectively.

As of March 31, 2005, we had $8.1 million of deferred stock compensation and we anticipate recording the remaining amortization of deferred stock compensation through the year ended December 31, 2007.

Total interest income and dollar and percentage changes as compared to the prior period are as follows (dollar amounts are in thousands):

The $0.2 million increase in interest income from the three months ended March 31, 2005 as compared to the corresponding period in 2004 was primarily attributable to higher average cash and investment balances since our initial public offering in February 2004.

Total interest expense and dollar and percentage changes as compared to the prior period are as follows (dollar amounts are in thousands):

Interest expense for the three months ended March 31, 2005 was flat as compared to the 2004 period primarily due to the lower aggregate interest rates on our average debt balances (related to the purchase of equipment and leasehold improvements).

We expect our operating expenses to increase as we continue to advance existing drug candidates into later stages of clinical trials and move preclinical products into clinical trials.

To date, we have funded our operations primarily through the sale of equity securities as well as through equipment and leasehold improvement financing. As of March 31, 2005, we had received approximately $169.3 million from the sale of equity securities. In February 2004, we received approximately $71.4 million from our initial public offering of common stock and concurrent private placement with Genentech. In addition, as of March 31, 2005, we had financed through loans the purchase of equipment and leasehold improvements totaling approximately $11.1 million, of which $4.1 million was outstanding at that date. These obligations are secured by the purchased equipment and leasehold improvements, bear interest at rates ranging from approximately 8.8% to 11.66% and are due in monthly installments through February 2009.

At March 31, 2005, we had $76.7 million in cash, cash equivalents and short-term investments as compared to $87.0 million as of December 31, 2004, a decrease of $10.3 million. This decrease resulted from the ongoing use of the net proceeds of $71.4 million we received from our initial public offering of common stock and concurrent private placement with Genentech in February 2004 to fund our operations. Our cash and investments are invested in a diversified portfolio of financial instruments, including money market instruments, corporate notes and bonds, government or governmental agency securities and other debt securities issued by financial institutions and other issuers with strong credit ratings.

Net cash used in operating activities amounted to $10.4 million during the three months ended March 31, 2005, compared to $1.4 million during the same period last year and primarily reflected the net loss occurring for this period of $10.0 million, decreases in accounts payable and deferred revenue of $1.0 million and $0.7 million, respectively and an increase in prepaid and other current assets of $0.6 million, which were partially offset by noncash charges for amortization of deferred stock compensation of $1.0 million and noncash issuances of equity of $0.3 million. The increase in net cash used in operating activities in 2005 as compared to 2004 was primarily due to the increase in our operating expenses as we grew our research and development activities. Additionally, in the three months ended March 31, 2004 we received an upfront payment of $5.2 million from Genentech under our collaborative research, development and license agreement with them with no corresponding amount in 2005.

Net cash provided by investing activities was $10.3 million during the three months ended March 31, 2005 as compared to $67.5 million used in investing activities during the same period in the prior year. Net cash provided by investing activities in 2005 resulted primarily from sales and maturities which more than offset purchases of short term investments. Net cash used in investing activities in 2004 resulted primarily from purchases of short-term investments with the proceeds from our initial public offering, partially offset by sales and maturities of short-term investments.

Net cash provided by financing activities was $0.9 million for the three months ended March 31, 2005, compared to $72.2 million used in financing activities during the same period last year. Net cash provided by financing activities primarily reflected $1.0 million proceeds received from financing of equipment purchases through our existing credit facility. Net cash provided by financing activities in 2004 resulted primarily due to the net proceeds received from the completion of the company’s initial public offering and concurrent private placement with Genentech and proceeds from our credit facilities partially offset by principal payments on our credit facilities.

We have entered into a variety of license agreements relating to our research and development efforts, most of which relate to product candidates in the early stage of preclinical development. We have a cancelable license agreement relating to our product candidate in clinical trials, Cerovive^® (NXY-059). Under this agreement, we could be required to pay $25,000 annually in minimum royalty payments through NDA approval and $100,000 annually in minimum royalty payments after NDA approval. Additionally, low-single digit royalties are payable on net product sales.

Our future capital uses and requirements depend on numerous forward-looking factors. These factors include but are not limited to the following:

Based upon our current operating plan, we believe that our cash and cash equivalents and short term investments as of March 31, 2005, will be sufficient to meet our projected operating requirements for more than the next 12 months.

Until we can generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources. We may be required to seek additional sources of funding to complete development and commercialization of our products. If we need to raise funds in the future, we may be required to raise those funds through public or private financings, strategic relationships or other arrangements. We cannot assure you that the funding, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategy.

We did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.

We filed a registration statement on Form S-3 with the SEC in February 2005 and filed an amendment on May 6, 2005, to be able to sell from time to time up to $100,000,000 million of any combination of debt securities, common stock, preferred stock and warrants. The actual sale will be offered via prospectus in amounts, at prices and at terms determined at the time of an offering and may be sold directly by us to investors, through agents, or through underwriters or dealers.

The original effective date of SFAS No. 123R was the first reporting period beginning after June 15, 2005. However, on April 14, 2005, the SEC announced the adoption of a new rule that amends the compliance date of SFAS No. 123R. The SEC’s new rule allows calendar year-end companies to implement SFAS No. 123R at the beginning of 2006, which makes SFAS No. 123R effective for Renovis in the first quarter of 2006. SFAS No. 123R permits public companies to adopt its requirements using one of two methods:

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123R’s fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future and the valuation model we ultimately select. We are currently evaluating option valuation methodologies and assumptions in light of SFAS No. 123R related to employee stock options. However, had we adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net loss and net loss per share in Note 2 to our condensed financial statements.

This Form 10-Q, including the sections entitled “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements.

These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and other risks detailed in our reports filed with the SEC. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We do not intend to update any of the forward-looking statements after the date of this report or to conform these statements to actual results.

An investment in our common stock is very risky. You should carefully consider the risks described below, together with all of the other information in this report, and in our Annual Report on Form 10-K for the year ended December 31, 2004 before making a decision to invest in our common stock. If any of the following risks actually occur, our business, financial condition, results of operations and growth prospects could be adversely affected. In this case, the trading price of our common stock could decline and you may lose all or part of your investment in our common stock. Additional risks and uncertainties, not presently known to us, or that we presently deem as immaterial, may also adversely affect our business. If any of these additional risks and uncertainties occurs, the trading price of our common stock could decline, and you might lose all or part of your investment.

Clinical trials may fail to demonstrate the safety and efficacy of our product candidates, which could prevent or significantly delay their regulatory approval.

Our future success is dependent upon, among other factors, our ability to develop working products and our ability to successfully complete clinical trials. All of our potential products currently are in research, preclinical development or clinical testing, and commercialization of those products will not occur for at least the next several years, if at all. All of our products will require extensive additional research and development prior to any commercial introduction. There can be no assurance that any of our research and development and clinical trial efforts will result in viable new products. In July 2004, we announced our decision to discontinue efforts to commercialize REN-213, an intravenous drug candidate we were developing for the treatment of acute post-operative pain. In March 2005, we announced our decision to discontinue efforts to develop REN-1654 for the treatment of post-herpetic neuralgia (PHN). Any failure or substantial delay in completing clinical trials for our product candidates, including Cerovive^{^®} (NXY-059), REN-1654 and REN-850 may severely harm our business. Before obtaining regulatory approval for the sale of any of our potential products or potential products of our current and future strategic partners and licensees, we and our strategic partners or licensees must subject these product candidates to extensive preclinical and clinical testing to demonstrate their safety and efficacy in humans. The success of this preclinical and clinical testing is critical to achieving our product development goals. If our product development efforts are unsuccessful, we will not obtain regulatory approval for them, we will not generate sales from them, and our business and results of operations would be adversely affected.

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

The results in early phases of clinical testing are based upon limited numbers of patients and a limited follow-up period and our success may not be indicative of results in a large number of patients or long-term efficacy. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late stage clinical trials even after achieving promising results in early stage development. The results from the Phase III SAINT I trial for Cerovive^{^®} (NXY-059) may not be predictive of results obtained in the second Phase III clinical trial, SAINT II, and the results from the Phase I and IIa clinical trials for REN-1654 may not be predictive of results obtained in the current Phase II clinical trial. The results from the preclinical studies with REN-850 may not be predictive of results obtained in clinical trials with the drug candidate. If a larger population of patients does not experience positive results, or if these results do not have a lasting effect, our products may not receive approval from the FDA. Failure to demonstrate the safety and effectiveness of our products in larger patient populations could have a material adverse effect on our business that would cause our stock price to decline significantly.

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

We may encounter delays or rejections if we, our strategic partners or licensees are unable to enroll enough patients to complete clinical trials. Patient enrollment depends on many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the trial. Moreover, when one product candidate is evaluated in multiple clinical trials simultaneously, patient enrollment in ongoing trials can be adversely effected by negative results from completed trials. At various times, Cerovive^{^®} (NXY-059) and REN-1654 have each been involved in multiple clinical trials that were enrolling patients simultaneously. In March 2005 we announced our decision to discontinue development of REN-1654 for PHN because our Phase II trial in PHN patients did not reach statistical significance in its primary endpoint. This announcement could adversely effect enrollment of patients in our ongoing Phase II clinical trial with REN-1654 in sciatica patients. We have previously experienced delays in enrollment of the Phase II clinical trials with REN-1654. These delays have resulted in increased costs. Any such delays in planned patient enrollment in the future may result in further increased costs and delays, which could harm our ability to develop products.

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

We depend on independent clinical investigators and contract research organizations (CROs) to conduct our clinical trials under their agreements with us or, in the case of Cerovive^{^®} (NXY-059), with AstraZeneca. We are not employing these investigators, and we cannot control the amount or timing of resources that they devote to our programs. Our contracts with these investigators involve fixed fees. If the costs of performing the clinical trials exceed estimates, these investigators may fail to devote sufficient time and resources to our drug development programs, fail to enroll patients as rapidly as expected, or otherwise fail to perform in a satisfactory manner, regulatory approval and our introductions of new products will be delayed. We contract with CROs for execution of our clinical trials for our product candidates other than Cerovive^{^®} (NXY-059). Failure of the CROs to meet their obligations could adversely affect clinical development of our product candidates. Moreover, these independent investigators and CROs may also have relationships with other commercial entities, some of which may compete with us. If independent investigators and CROs assist our competitors, it could harm our competitive position.

We depend on our licensee, AstraZeneca, for the completion of the Cerovive^{^®} (NXY-059) clinical program and for the commercialization of Cerovive^{^®} (NXY-059).

Under our exclusive license agreement with AstraZeneca, AstraZeneca is responsible for all aspects of clinical development of Cerovive^{^®}. If Cerovive^{^®} (NXY-059) receives regulatory approval, AstraZeneca will be responsible for marketing and sales of the commercial product. Because AstraZeneca is responsible for these functions, we have no control over the development schedule or, if Cerovive^{^®} (NXY-059) receives regulatory approval, the marketing plan for Cerovive^{^®} (NXY-059). If the clinical trials for Cerovive^{^®} (NXY-059) are not successful, Cerovive^{^®} (NXY-059) will not be commercialized. Moreover, if AstraZeneca elects to terminate the clinical program for Cerovive^{^®} (NXY-059), the rights to develop and market Cerovive^{^®} (NXY-059) will revert to us. If these rights revert to us, we will have to fund the clinical programs for Cerovive^{^®} (NXY-059) on our own, seek a strategic partner or licensee for clinical development or abandon Cerovive^{^®} (NXY-059).

If any of these risks materialize, it could delay the development schedule for Cerovive^{^®} (NXY-059) and impair its commercialization.

If we or our strategic partners or licensees fail to obtain U.S. regulatory approvals for product candidates under development, including our lead product candidate, Cerovive^{^®} (NXY-059), we will not be able to generate revenue in the U.S. market from the commercialization of product candidates.

We must receive FDA approval for each of our product candidates before we can commercialize or sell that product candidate in the United States, and AstraZeneca, our licensee for Cerovive^{^®} (NXY-059), must receive regulatory approval for Cerovive^{^®} (NXY-059) and commercialize or sell Cerovive^{^®} (NXY-059) before we will receive royalties. The FDA can limit or deny their approval for many reasons, including:

Failure to obtain FDA approval or any delay or setback in obtaining such approval could:

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

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

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

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

In order to market our products outside of the United States, we and our strategic partners and licensees must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the United States. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding FDA approval in the United States, including the risk that our product candidate may not be approved for all indications that we request, which could limit the uses of our product and adversely impact our potential royalties and product sales and that such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies.

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

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

REN-1654 and REN-850 are intended to compete directly with existing drugs. Hospitals, physicians or patients may conclude that our potential products are less safe or effective or otherwise less attractive than these existing drugs. Even if approved and commercialized, Cerovive^{^®} (NXY-059) may fail to achieve market acceptance with hospitals, physicians or patients. Similarly, hospitals, physicians or patients may continue to use existing drugs in preference to REN-1654 and REN-850. If our products do not receive market acceptance for any reason, our revenue potential could be diminished which would materially adversely affect our business, financial condition and results of operations.

Further, our competitors may develop new products that could be more effective or less costly, or that may seem more cost-effective, than our products. For example, although we believe that Cerovive^{^®} (NXY-059) would not face direct competition from products currently available to stroke victims, a number of organizations are conducting clinical trials of neuroprotectant drug candidates which, if approved and commercialized, would compete with Cerovive^{^®} (NXY-059). Competitors developing such products include Yamanouchi Pharmaceutical Co. Ltd., Ono Pharmaceutical Co., Ltd., Merck & Company, IVAX Pharmaceuticals, Inc., Vertex Pharmaceuticals Incorporated and D-Pharm Ltd. If REN-1654 is approved and commercialized, it will face significant competition from currently marketed products commonly used to treat neuropathic pain and sciatica. The primary competition in the market for neuropathic pain is gabapentin, which is marketed by Pfizer under the brand name “Neurontin” and in generic form by other large pharmaceutical companies. Competitors working on new treatments for neuropathic pain include NeurogesX, Inc., Novartis AG, CeNeS Pharmaceuticals plc, Xenoport, Inc. and AstraZeneca. In addition to competition from medications used for the treatment of neuropathic pain, REN-1654 would face additional competition from other medications commonly used for the treatment of sciatica. Examples include over-the-counter analgesics, such as acetaminophen and non-steroidal anti-inflammatory drugs, such as aspirin, ibuprofen or naproxen as well as prescription anti-inflammatory drugs, such as muscle relaxants, opioids, and corticosteroid injections.

If REN-850 is approved and commercialized, it will face significant competition from currently marketed products for the treatment of multiple sclerosis (MS) including the beta interferons, Avonex marketed by Biogen Idec, Betaseron marketed by Schering AG, and Rebif marketed by Serono SA with Pfizer; the non-interferon, immunomodulator Copaxone marketed by Teva Pharmaceuticals Industries, Ltd.; and the recently approved Tysabri marketed by Biogen Idec and Elan Corporation. The newest product Tysabri, a monoclonal antibody that is administered intravenously once-a-month, received accelerated approval from the FDA in November 2004 because it has been shown to have a significant impact on disability, disease progression and rate of clinical relapses. In use as a combination therapy with Avonex, Tysabri significantly reduced the frequency of relapses. Tysabri was withdrawn from the market in February 2005 due to safety concerns. If it is reintroduced at a future date, it could offer significant competition to REN-850. In addition to existing drugs, REN-850 could also face competition from new treatments under development for MS including combination therapies and new oral product candidates. Competitors pursuing new product candidates for MS include Biogen Idec, Elan Pharmaceuticals, Schering AG, Serono SA, Teva Pharmaceuticals, Sanofi-Aventis, Active Biotech and Novartis.

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

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

If we receive regulatory approval to commence commercial sales of any of our product candidates other than Cerovive^{^®} (NXY-059), we will have to establish a sales and marketing organization with appropriate technical expertise and supporting distribution capability. At present, we have no sales or marketing personnel. Factors that may inhibit our efforts to commercialize our products without strategic partners or licensees include:

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

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

We have no manufacturing facilities, and we have no experience in the commercial manufacturing of drugs and no experience in designing drug manufacturing processes. We have contracted with third-party manufacturers to produce, in collaboration with us, our product candidates for clinical trials. We intend to rely on third-party contract manufacturers to manufacture, supply, store and distribute any resulting products.

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

Drug manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies to ensure strict compliance with cGMPs, other government regulations and corresponding foreign standards. We are not aware of any violations by our third-party manufacturers of any of these regulations or standards. While we are obligated to audit the performance of third-party contractors, we do not have control over our third-party manufacturers’ compliance with these regulations and standards. Failure by our third-party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of the government to grant premarket approval of drugs, delays, suspension or withdrawal of approvals, seizures or recalls of product, operating restrictions and criminal prosecutions.

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

To date, our product candidates have been manufactured in small quantities for preclinical and clinical trials. If any of these product candidates are approved by the FDA or other regulatory agencies for commercial sale, we will need to manufacture them in larger quantities. We may not be able to successfully increase the manufacturing capacity, whether in collaboration with third party manufacturers or on our own, for any of our product candidates in a timely or economic manner, or at all. Significant scale-up of manufacturing may require additional validation studies, which the FDA must review and approve. If we are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch of that product candidate may be delayed or there may be a shortage in supply. Our product candidates require precise, high quality manufacturing. Our failure to achieve and maintain these high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously hurt our business.

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

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

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

Since our inception, we have incurred significant net losses, including a net loss of $10.0 million for the three months ended March 31, 2005, and net losses of $39.9 million and $41.9 million for the years ended December 31, 2004 and 2003, respectively. As of March 31, 2005, our cumulative net loss was $132.0 million. We have not yet completed the development, including obtaining regulatory approvals, of any of our product candidates and, consequently, have not generated revenues from the sale of products and do not expect to do so for at least the next several years. Even if we succeed in developing and commercializing one or more of our product candidates, we expect to incur substantial losses for the foreseeable future. The development and sale of our products will require completion of clinical trials and significant additional research and development activities. We expect to continue to incur significant operating and capital expenditures and anticipate that our expenses will increase substantially in the foreseeable future as we:

We also expect to experience negative cash flow for the foreseeable future as we fund our operating losses and capital expenditures. We will need to generate significant revenues to achieve profitability. Our ability to generate revenues and achieve profitability depends on successful completion of clinical trials, our additional research and development efforts, our ability to successfully commercially introduce our products, market acceptance of our products, the competitive position of our products and the other risk factors set forth in this report. We may not be able to generate these revenues, and we may never achieve profitability. Our failure to achieve profitability could negatively impact the market price of our common stock. Even if we do become profitable, we may not be able to sustain or increase profitability on a quarterly or annual basis.

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

We believe that existing cash reserves will fund our planned activities for more than the next 12 months. However, we will require substantial future capital in order to continue to conduct the research and development, clinical and regulatory activities necessary to bring our product candidates to market and to establish commercial manufacturing, sales and marketing capabilities. During the three months ended March 31, 2005, our net cash used in operating activities was $10.4 million and we had capital expenditures of $0.8 million. During the year ended December 31, 2004, our net cash used in operating activities was $25.2 million and we had capital expenditures of $2.2 million for the same period. Our future capital requirements depend on many factors, including:

We intend to seek additional funding through strategic collaborations. We face intense competition from many other companies in the pharmaceutical and biotechnology industry for corporate collaborations, as well as

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

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

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

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

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

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

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

Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. Furthermore, as a result of a patent infringement suit brought against us or our strategic partners or licensees, we or our strategic partners or licensees may be forced to stop or delay developing, manufacturing or selling potential products, including Cerovive^{^®} (NXY-059), REN-1654 and REN-850 that are claimed to infringe a third party’s intellectual property unless that party grants us or our strategic partners or licensees rights to use its intellectual property. In such cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to commercialize our products. However, we may not be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if our strategic partners, licensees or we were able to obtain rights to the third party’s intellectual property, these rights may be non-exclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize some of our potential products or may have to discontinue development of a product candidate, such as Cerovive^{^®} (NXY-059), REN-1654 and REN-850, or cease some of our business operations as a result of patent infringement claims, which could severely harm our business.

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

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

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

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

We try to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Because the patent position of biotechnology and pharmaceutical companies involves complex legal and factual questions, the issuance, scope and enforceability of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. U.S. patents and patent applications may also be subject to interference proceedings and U.S. patents may be subject to reexamination proceedings in the U.S. Patent and Trademark Office (and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent office), which proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such interference, reexamination and opposition proceedings may be costly. Thus, any

patents that we own or license from others may not provide any protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. We rely on third-party payment services for the payment of foreign patent annuities and other fees. Non-payment or delay in payment of such fees, whether intentional or unintentional, may result in loss of patents or patent rights important to our business. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties (for example, the patent owner has failed to “work” the invention in that country, or the third party has patented improvements). In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. Compulsory licensing of life saving drugs is also becoming increasingly popular in developing countries either through direct legislation or international initiatives. Such compulsory licenses could be extended to include some of our product candidates, which could limit our potential revenue opportunities. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patent and other intellectual property protection which makes it difficult to stop infringement.

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

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

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

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

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

Our business is characterized by extensive research efforts, rapid developments and intense competition. Our competitors may have or may develop superior technologies or approaches to the development of competing products, which may provide them with competitive advantages. Our potential products may not compete successfully. We believe that successful competition in our industry depends on product efficacy, safety, reliability, availability, timing, scope of regulatory approval, acceptance and price, among other things. Important

factors to our success also include speed in developing product candidates, completing clinical development and laboratory testing, obtaining regulatory approvals and manufacturing and selling commercial quantities of potential products to the market.

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

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

Biopharmaceutical technologies have undergone rapid and significant change and we expect that they will continue to do so. Any compounds, products or processes that we develop may become obsolete or uneconomical before we recover any expenses incurred in connection with their development. Rapid technological change could make our products obsolete or uneconomical.

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

The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to product liability claims. These claims might be made directly by consumers, health care providers, pharmaceutical companies or others selling our products. We have obtained limited product liability insurance coverage for our clinical trials in the amount of $5,000,000 per occurrence and $5,000,000 in the aggregate. However, our insurance may not reimburse us or may not be sufficient to reimburse us for expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If we obtain marketing approval for any of our product candidates in development, we intend to expand our insurance coverage to include the sale of commercial products, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, juries have awarded large judgments in class action lawsuits based on drugs that had unanticipated side effects. In addition, the pharmaceutical and biotechnology industries, in general, have been subject to significant medical malpractice litigation. A successful product liability claim or series of claims brought against us would decrease our cash reserves and could cause our stock price to fall.

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

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

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

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company’s internal controls

over financial reporting in their Annual Reports on Form 10-K. This report is required to contain an assessment by management of the effectiveness of the company’s internal controls over financial reporting. We are required to comply with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 in our December 31, 2005 Form 10-K. In addition, the independent registered public accounting firm auditing a public company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting. Although we intend to diligently and vigorously review our internal controls over financial reporting in order to ensure compliance with the Section 404 requirements if our independent registered public accounting firm are not satisfied with our internal controls over financial reporting or the level at which these control are documented, designed, operated or reviewed, or if our independent auditors interpret the requirements, rules or regulations differently from us, then they may decline to attest to management’s assessment or may issue a report that is qualified or has a scope limitation. We anticipate expending significant resources in developing the necessary documentation and testing procedures required by Section 404, however there is a significant risk that we will not comply with all of the requirements imposed by Section 404. In addition, the very limited size of our organization could lead to conditions that could be considered material weaknesses, such as those related to segregation of duties that is possible in larger organizations but significantly more difficult in smaller organizations. Also, controls related to our general information technology infrastructure may not be as comprehensive as in the case of a larger organization with more sophisticated capabilities and more extensive resources. It is not clear how such circumstances should be interpreted in the context of an assessment of internal controls over financial reporting. If we fail to implement required new or improved controls, we may be unable to comply with the requirements of Section 404 in a timely manner. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline or could limit our ability to obtain additional financing.

Prior to our initial public offering, you could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained. The stock market, particularly in recent years, has experienced significant volatility particularly with respect to pharmaceutical and biotechnology stocks. The volatility of pharmaceutical and biotechnology stocks often does not relate to the operating performance of the companies represented by the stock. Factors that could cause this volatility in the market price of our common stock include:

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

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

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

Our directors and management exercise significant control over our company.

As of March 31, 2005 our directors and executive officers and their affiliates collectively control approximately 23% of our outstanding common stock. These stockholders, if they act together, can influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock.

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

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

As a result, these provisions and others available under Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock.

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

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

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

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term marketable securities. We maintain an investment portfolio of investment grade, liquid debt securities that limits the amount of credit exposure to any one issue, issuer or type of instrument. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure. We do not have any foreign currency or other derivative financial instruments.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in our internal controls over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Our Registration Statement on Form S-1 (Reg. No. 333-109806) in connection with our initial public offerings was declared effective by the SEC on February 4, 2004. We completed our initial public offering on February 10, 2004 for gross proceeds of $75,900,000. The Company paid the underwriters a commission of $5,313,000 and incurred offering expenses of $2,187,000. After deducting the underwriters’ commission and the offering expenses, the Company received net proceeds of $68,400,000.

No payments for such expenses were made directly or indirectly to (i) any of our directors, officers or their associates, (ii)

any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates.

The net proceeds have been invested into short-term investment grade securities and money market accounts.

We have begun to use, and intend to continue to use, these proceeds for general corporate purposes, including clinical trials, research and development expenses, general and administrative expenses, manufacturing expenses and potential acquisitions of companies, products and technologies that complement our businesses.

The following table shows our repurchases of common stock during the three months ended March 31, 2005:

None of the repurchases of common stock noted above were made pursuant to a publicly announced plan. The shares repurchased were related to the early exercise of options that had not yet vested upon termination of the purchaser’s employment or services. The repurchase price was at the exercise price paid by the option holder.

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of the 16^th day of May 2005.

Renovis, Inc.

/s/ John C. Doyle

John C. Doyle

Chief Financial Officer and Secretary

(Principal financial and accounting officer)


		Page
Part I.	Financial Information

	Item 1. Financial Statements (Unaudited)

	Condensed Balance Sheets – March 31, 2005 and December 31, 2004	3

	Condensed Statements of Operations – Three months ended March 31, 2005 and 2004	4

	Condensed Statements of Cash Flows – Three months ended March 31, 2005 and 2004	5

	Notes to Condensed Financial Statements	6

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	32

	Item 4. Controls and Procedures	32

Part II.	Other Information	33

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33

	Item 6. Exhibits	33

Signatures		34


	March 31, 2005			December 31, 2004
Assets
Current assets:
Cash and cash equivalents	$	6,460		$	5,580
Short-term investments		70,257			81,379
Prepaids and other current assets		2,475			1,831

Total current assets		79,192			88,790
Property and equipment, net		6,189			6,022
Intangible assets, net		765			1,052
Other assets		261			261

	$	86,407		$	96,125

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	652		$	1,701
Accrued compensation		1,125			1,418
Loan payable, current portion		1,520			1,420
Deferred revenue		1,969			2,625
Other accrued liabilities		3,055			3,146

Total current liabilities		8,321			10,310

Loan payable, noncurrent portion		2,609			2,138

Other long-term liabilities		975			901

Commitments

Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.001 par value; 100,000,000 shares authorized at March 31, 2005 and December 31, 2004, respectively; 24,581,316 and 24,466,314 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively.		24			24
Additional paid-in capital		214,878			214,283
Deferred stock compensation		(8,059	)		(9,163	)
Accumulated other comprehensive loss		(369	)		(386	)
Accumulated deficit		(131,972	)		(121,982	)

Total stockholders’ equity		74,502			82,776

	$	86,407		$	96,125


	Three Months Ended March 31,
	2005			2004
Contract revenues	$	656		$	656

Operating expenses:
Research and development		7,741			6,448
General and administrative		2,175			1,834
Amortization of employee stock-based compensation		1,032			1,184

Total operating expenses		10,948			9,466

Loss from operations		(10,292	)		(8,810	)
Interest income		413			245
Interest expense		(111	)		(111	)

Net loss	$	(9,990	)	$	(8,676	)

Basic and diluted net loss per share	$	(0.41	)	$	(0.63	)

Shares used to compute basic and diluted net loss per share		24,527,116			13,814,355


	Three Months Ended March 31,
	2005			2004
Cash flows from operating activities
Net loss	$	(9,990	)	$	(8,676	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on sale of fixed assets		186			—
Depreciation and amortization		753			715
Amortization of deferred stock compensation		1,032			1,184
Noncash interest and issuances of equity		252			506
Change in assets and liabilities:
Prepaids and other current assets		(644	)		743
Accounts payable		(1,049	)		(279	)
Accrued compensation		(293	)		(173	)
Deferred revenue		(656	)		4,594
Other accrued liabilities		29			(53	)

Net cash used in operating activities		(10,380	)		(1,439	)

Cash flows from investing activities
Capital expenditures		(820	)		(569	)
Purchases of short-term investments		(8,610	)		(113,003	)
Sales of short-term investments		12,650			28,350
Maturities of short-term investments		7,100			17,700

Net cash provided by (used in) investing activities		10,320			(67,522	)

Cash flows from financing activities
Principal payments on loan payable		(399	)		(705	)
Proceeds from loan payable		963			1,524
Proceeds from issuance of common stock, net of repurchases		376			71,454

Net cash provided by financing activities		940			72,273

Net increase in cash and cash equivalents		880			3,312
Cash and cash equivalents at beginning of period		5,580			1,752

Cash and cash equivalents at end of period	$	6,460		$	5,064

Supplemental schedule of noncash financing activities

Conversion of preferred stock into common stock	$	—		$	123,266


	Three Months Ended March 31,
	2005		2004
Dividend yield:	0		0
Risk-free interest rate:	3.8	%	2.9	%
Volatility:	0.8		0.8
Expected life:	5 years		5 years

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	March 31, 2005		December 31, 2004
Accrued professional fees	$	695	$	650
Rent obligation		206		312
Early exercise price payable		185		232
Clinical trials costs		1,305		1,427
Accrued other		664		525

Other current accrued liabilities	$	3,055	$	3,146


Program	Indication	Clinical Status	Commencement of Current Phase
Cerovive^® (NXY-059)	Acute Ischemic Stroke	Phase III	Second quarter 2003
REN-1654	Neuropathic Pain (Sciatica)	Phase II	Third quarter 2003
REN-850	Multiple Sclerosis	Phase I	First quarter 2005


Period	Total Number of Shares Purchased	Average Price Paid per Share
January 1-31	—	$	—
February 1-28	—		—
March 1-31	486		1.13

Total	486	$	1.13


Exhibit Number		Description of Document

31.1		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.

31.2		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.

32		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer