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Article by DailyStocks_admin    (01-22-09 09:57 AM)

Filed with the SEC from Jan 08 to Jan 14:

Neurobiological Technologies (NTII)
Highland Capital Management urged the board to liquidate the company. Highland's request came amid the company's failure in its clinical trial for Viprinex, a drug for the treatment of acute ischemic stroke. Highland Capital has 4,737,479 shares (17.6%).

BUSINESS OVERVIEW

This report contains forward-looking statements. These forward-looking statements are based on our current expectations about our business and industry. In some cases, these statements may be identified by terminology such as “anticipates,” “believes,” “continue,” “estimates,” “expects,” “may,” “plans,” “potential,” “predicts,” “should,” “will,” or the negative of such terms and other comparable terminology. These statements involve known and unknown risks and uncertainties that may cause our results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, among others, those discussed in this report under Item 1A.—“Risk Factors.” Except as may be required by law, we do not intend to update any forward-looking statement to reflect events after the date of this report.
Overview
We are a biopharmaceutical company focused on developing novel, first-in-class treatments for central nervous system conditions and other serious unmet medical needs. Our most advanced product candidate, Viprinex™, is in Phase 3 clinical testing as a novel investigational drug for treating acute ischemic stroke. Stroke is one of the most prevalent, debilitating and costly diseases in the world, and there are few acceptable treatment options. Viprinex is a fibrinogen-reducing agent that is designed to expand the treatment window from three hours to six hours. In addition to Viprinex, we have rights to receive royalty payments from the sales of memantine, an approved drug marketed for Alzheimer’s disease. We also have rights to receive payments from the development of XERECEPT ® , another investigational drug which is in Phase 3 clinical trials for the treatment of swelling associated with brain tumors. Our earlier stage pipeline also includes rights to two proteins in preclinical development for the treatment of Alzheimer’s disease and Huntington’s disease.
In the most recent fiscal year, Viprinex accounted for approximately 94% of the research and development expenses for which we were not reimbursed by other parties. Viprinex is designed to restore blood flow to areas of the brain impacted by an ischemic stroke. Known generically as ancrod, Viprinex is an enzyme derived from the venom of the Malayan pit viper. Five human clinical trials, including two Phase 3 clinical trials, were conducted with this investigational drug before we acquired the rights in 2004. These trials enrolled a total of nearly 2,000 patients and were sponsored by the German pharmaceutical company Knoll AG, or Knoll, before Abbott Laboratories, or Abbott, purchased Knoll and subsequently discontinued the Knoll stroke program (and later their own stroke program). The first of the two Knoll Phase 3 trials met its primary efficacy endpoint of improvement in stroke outcome measured 90 days after the stroke with statistical significance. The second Knoll Phase 3 trial was discontinued after an interim analysis concluded that the trial was unlikely to reach its primary efficacy endpoint. Our retrospective analyses of the safety and efficacy data from the Knoll clinical trials led us to believe that the dosing strategy used by Knoll was flawed, accounting for the inability of the second Knoll Phase 3 trial to meet its primary endpoint.
Based on our analyses, we made significant changes to the Knoll dosing regimen when we initiated our pivotal Phase 3 clinical trials in 2005. We provide the drug in a single infusion given over a period of up to three hours, as compared to Knoll which had provided the drug in multiple infusions for up to five days. Based on our analysis of data from hundreds of patients that were given Viprinex in the earlier clinical studies, we believe that our dosing regimen in the current Phase 3 studies has the potential to demonstrate that Viprinex is safe and effective when treatment is initiated within six hours of stroke onset. We expect to announce results of an interim futility analysis for the Phase 3 clinical trials no later than the first quarter of calendar year 2009.
Over 1.4 million patients suffer from stroke each year in the United States and Europe. The only approved drug treatment for acute ischemic stroke is recombinant tissue plasminogen activator, or rt-PA, which is currently approved for use within three hours of stroke onset. In addition, there are safety concerns regarding increased risks of intracranial hemorrhage for patients that receive rt-PA. We believe that Viprinex would be used to treat a substantially broader population of stroke patients than rt-PA if we are able to demonstrate it is safe and effective in treating acute ischemic stroke in the current clinical trials.
Consequences of Stroke and Current Medical Care
Stroke Background
Stroke is an acute medical condition caused by blockage or rupture of the blood vessels leading to or within the brain. When a stroke occurs, blood flow and the supply of nutrients and oxygen to an area of the brain are interrupted, leading to death of brain tissue. There are two major types of stroke: ischemic and hemorrhagic. Ischemic stroke is caused by blockage of a blood vessel in the brain due to a clot. The lack of blood flow, or ischemia, leads to cell death. Hemorrhagic stroke is caused by the sudden rupture of a blood vessel in the brain which causes bleeding into the surrounding tissue.

Clot formation in an ischemic stroke results from a chain of events that is often triggered by the disruption of the smooth lining of a blood vessel by the formation of cholesterol plaque, which activates the blood coagulation system. Fibrinogen, a protein found in the blood, is a primary component in the clotting process. As part of the blood coagulation process, fibrinogen is converted into fibrin, a smaller protein. Fibrin strands form a web of fibers that create the backbone of the clot. Red blood cells, platelets and other blood components then become trapped in the web and form the solid clot. Drugs that are called fibrinolytic drugs, such as rt-PA, operate by breaking up the fibrin web of the blood clot, and thus destroy the clot and restore blood flow to the area that was compromised by the clot formation.
According to the American Heart Association, 87% of the 700,000 annual strokes in the United States are ischemic. Stroke is the third leading cause of death in the United States, behind heart disease and cancer, and the leading cause of disability.
Investigative Drug Treatments
Drug treatments that have been investigated for acute ischemic stroke fall into two broad categories: neuroprotectants and reperfusion agents.
Neuroprotectants. Neuroprotectants are designed to protect brain cells from damage triggered by a stroke. Typically these compounds attempt to block one of the various biochemical pathways that lead to neuronal death. To date, more than 100 neuroprotectants have been studied in clinical trials in the United States and Europe. None of these compounds has demonstrated efficacy in Phase 3 trials with one exception, which was subsequently negated by a larger Phase 3 trial. One reason cited for the failure of neuroprotectants is that, in general, they target only one among many pathways leading to cell death.
Reperfusion Agents. Reperfusion agents are designed to reverse the primary cause of stroke by removing the obstructing blood clot and restoring blood flow to the affected area of the brain. In contrast to neuroprotectants, fewer than 15 reperfusion agents have been studied in clinical trials in the United States and Europe, three of which, including Viprinex, have resulted in successful Phase 3 trials. Most reperfusion agents tested belong to a class called fibrinolytic agents. These agents are used as “clot-busters” to dissolve existing clots by generating plasmin, which dissolves the fibrin in the clot through a process called fibrinolysis. A significant concern with reperfusion therapy is the potential for intracranial bleeding, in particular, symptomatic intracranial hemorrhage, or SICH, which can lead to death.
The only drug approved today for the treatment of acute ischemic stroke is the reperfusion agent rt-PA (recombinant tissue plasminogen activator), known as Activase in the United States. The use of rt-PA for stroke involves a variety of risks and potential side effects that are common for fibrinolytic drugs and limit its use:
• Risk of Bleeding — Fibrinolytic drugs dissolve blood clots, including those formed naturally as a protective response to vessel injury, which can result in bleeding. The risk of intracranial hemorrhaging increases as the dosage increases. Patients who are already taking other medications to prevent formation of clots, such as anticoagulants or antiplatelets, may not be good candidates for the use of fibrinolytic drugs due to the increased difficulty of controlling bleeding. In the study that led to FDA approval of rt-PA, the incidence of SICH in rt-PA patients was 6.4%, compared to 0.6% in the placebo group. As a result, rt-PA is subject to strict limitations on when, how long and in what dosages it may be administered.

• Time Window for Administration — Due to its decreasing efficacy the later it is administered, rt-PA is approved for administration to acute ischemic stroke patients when started within three hours of stroke onset. This three-hour window is considered to be a limiting factor in treating acute ischemic stroke with rt-PA, and is one of the reasons a small percentage of U.S. acute ischemic stroke patients receive rt-PA.
Our Product Candidate for Stroke — Viprinex
Mechanism of Action
The formation of a blood clot is a natural process by which blood coagulates into a mass of blood cells, platelets and strands of fibrin. Fibrin is the protein that provides the structural scaffold of a clot. Most reperfusion agents utilize a single mechanism of action, fibrinolysis, or the break-up of fibrin in clots. In contrast, Viprinex’s direct mechanism of action is to break up fibrinogen, the precursor to fibrin. This has several effects on blood clotting and blood flow that may be beneficial for the treatment of acute ischemic stroke:
• Anticoagulation — By removing fibrinogen, a key requirement of clot formation, Viprinex impairs further growth of the clot. The reduction of fibrinogen levels also reduces the likelihood of further clot formation, including reocclusion, or reclotting, after use of fibrinolytic drugs, a concern in stroke patients treated with rt-PA.

• Decreased blood viscosity — By removing fibrinogen, an abundant protein in human plasma, Viprinex decreases the protein content of blood plasma and reduces blood viscosity. The reduction in blood viscosity generally improves blood flow. We believe this should enhance blood flow to the affected areas of the brain even before a clot has been broken up.

• Clot break-up — The proteins formed by Viprinex’s break-up of fibrinogen appear to indirectly stimulate the conversion of plasminogen to plasmin, which dissolves clots by removing the fibrin within the clot.
By breaking up fibrinogen, Viprinex not only produces a fibrinolytic effect similar to rt-PA, but also improves blood viscosity and anticoagulation. We believe that this mechanism of action will prove more effective than rt-PA and, at the current lower dose used in our current trials, will also lower the risk of SICH relative to rt-PA.
Market Opportunity
According to the World Health Organization, 15 million people worldwide suffer a stroke each year, including 1.4 million in the United States and Europe. Stroke is the third leading cause of death in the United States, behind heart disease and cancer, and the leading cause of disability. 87% of the strokes that occur in the United States are ischemic. Approximately three million Americans are currently disabled from stroke. The American Stroke Association estimates that approximately $65 billion will be spent in the United States in 2008 for stroke-related medical costs and disability.
rt-PA is the only drug therapy approved in the United States and Europe for acute ischemic stroke. However, the potential to treat patients with rt-PA is limited, as the treatment currently must be initiated within three hours of stroke onset and the treatment poses a risk of symptomatic intracranial bleeding. As a result of these and other factors, fewer than 10% of acute ischemic stroke patients receive rt-PA. We believe that, if Viprinex proves safe and effective in treating acute ischemic stroke when initiated within six hours of stroke onset, it has potential to treat a substantially broader population of acute ischemic stroke patients than rt-PA.
Viprinex History
Beginning in the late 1980s and ending in 2000, Knoll and independent investigators conducted five clinical trials of Viprinex for the treatment of acute ischemic stroke, including two Phase 3 trials, one in the United States and one in Europe. The North American trial, STAT, met its primary efficacy endpoint. The European trial, ESTAT, was terminated after an interim analysis concluded that Viprinex was unlikely to reach the primary efficacy endpoint. Subsequent to the trials, Knoll undertook extensive retrospective analyses to understand the cause of failure in ESTAT and identify the factors that would result in a more favorable safety and efficacy profile in future Phase 3 clinical trials. However, when Abbott acquired Knoll in 2001, Abbott chose not to pursue any further clinical development activity of Viprinex.
In 2002, Empire Pharmaceuticals Inc., or Empire, a company whose founders included a former Knoll employee, acquired the exclusive worldwide rights to Viprinex from Abbott in a royalty-bearing license. Empire received the data from the clinical trials conducted by Knoll, including the retrospective analyses referenced above. Empire then expanded the retrospective analysis done by Knoll, examining the clinical trial data from multiple perspectives to develop better dosing regimen.
In July 2004, we acquired Empire, including all of its rights to Viprinex and the associated clinical trial data. We then conducted our own review of Knoll’s clinical trial data and further expanded on the prior retrospective analysis. Based on the cumulative analysis of the prior trials, we finalized our new dosing strategy, developed the protocol for our new Phase 3 clinical trials, and subsequently received permission from the FDA to commence the Ancrod Stroke Program, or ASP, trials.

A-20 Phase 2 Clinical Trial Conducted by Knoll
The A-20 Phase 2 clinical trial was a double-blind, randomized trial conducted by Knoll from 1989 to 1992 that included 132 patients. Patients received either intermittent intravenous Viprinex or placebo over a period of seven days, initiated within six hours of stroke onset. The dosing regimen was designed to keep the target fibrinogen levels between 70 and 100 mg/dL over several days. The primary endpoint of the clinical trial was based on the Scandinavian Stroke Scale, or SSS, in which lower scores represent increasingly severe stroke outcomes.
Patients treated with Viprinex had a three-month unadjusted median SSS score of 39, while patients treated with placebo had a median SSS score of 35. Knoll initially analyzed the A-20 clinical trial data using a center-weighted analysis of the primary endpoint, rather than the patient-weighted analysis that was used in subsequent STAT and ESTAT clinical trials. The published center-weighted analysis, which gives each stroke center equal weight, showed that the median total SSS score at three months for the Viprinex-treated group was not statistically different from the placebo group. However, a patient-weighted analysis undertaken by Knoll, which gives each patient equal weight, showed that the trial results were statistically significant.
At one-month follow-up, mortality was 4.7% in the Viprinex-treated group compared to 14.7% for the placebo group. At three-month follow-up, mortality was 9.4% for the Viprinex-treated group compared to 16.2% for the placebo group. None of the patients in the Viprinex-treated group had a symptomatic intracranial hemorrhage, compared to 2.9% of patients in the placebo group. The trial results are summarized in the graph below. References to a “p-value” in this and other graphs contained in this Annual Report on Form 10-K are references to a statistical measure of significance, with a p-value less than 0.05 indicating a statistically significant difference and smaller values indicating an increasingly greater difference.

The STAT Phase 3 clinical trial was a double-blind, randomized trial conducted by Knoll that included 500 patients. Within three hours of stroke onset, patients received a three-day continuous intravenous infusion of either placebo or Viprinex, followed by two days of intermittent intravenous administration of placebo or Viprinex. In this clinical trial, the dosing regimen was designed to keep target fibrinogen levels between 40 and 69 mg/dL over several days. The primary endpoint of this trial was functional success, which was defined as three-month survival with a Barthel’s Index, or BI score, of at least 95 or a return to prestroke levels, adjusted for age and pretreatment stroke severity, which are strong prognostic factors for outcome. The BI scores various components of daily living, with higher scores representing better outcomes, and scores of at least 95 suggest that there are no limitations in basic functions. The results of the clinical trial met the primary endpoint and were statistically significant. The functional success score for the Viprinex-treated group was 42.2% compared to 34.3% for the placebo group. The Viprinex-treated group demonstrated numerically higher rates of functional success than the placebo group regardless of patient age, pretreatment stroke severity, gender, race, time-to-treat or prestroke disability.

As shown in the chart below, mortality was similar for both the Viprinex-treated and placebo groups at three-month follow-up. SICH occurred in Viprinex-treated patients at a rate of 5.2% compared to the 2.0% placebo rate. This was less than the difference noted in a trial of rt-PA conducted by the National Institute of Neurological Disorders and Stroke, or the NINDS, where SICH occurred in 6.4% of rt-PA-treated patients compared to 0.6% of placebo patients.

The improvement in functional success from the STAT trial suggested that the use of Viprinex was effective for the treatment of acute ischemic stroke. Results of STAT were unblinded after Knoll initiated the ESTAT trial.
ESTAT: Phase 3 European Clinical Trial Conducted by Knoll
The ESTAT Phase 3 clinical trial, a double-blind, randomized trial initiated by Knoll in 1996, was designed to include 1,680 patients. ESTAT was designed to assess the efficacy and safety of Viprinex in treating acute ischemic stroke patients starting within six hours of stroke onset in contrast to the three hours used in STAT. Patients received a three-day continuous intravenous infusion of either placebo or Viprinex, followed by two days of intermittent intravenous administration of placebo or Viprinex. The Data Safety Monitoring Board, or DSMB, halted enrollment in the clinical trial in 2000 after 1,222 patients had been enrolled. The DSMB’s decision to halt the trial was based on a conclusion that Viprinex was unlikely to reach the primary efficacy endpoint after an interim analysis of the first 670 patients tested in the trial.
As in the STAT trial, the primary endpoint of the ESTAT trial was functional success, defined as three-month survival with a BI score of at least 95 or a return to prestroke levels. In this study, Viprinex treatment did not differentiate from placebo for efficacy. In contrast to previous studies, there was a statistically significant increase in mortality and SICH among the Viprinex-treated patients.

Retrospective Analysis: ESTAT
The authors of a publication on the results of ESTAT attributed the trial’s lack of success to its six-hour treatment window. However, our analysis of the data from the patient records leads us to believe that time was not the primary reason for failure of the trial. We believe that if the time-to-treat had been the cause for the trial not meeting its primary endpoint, then patients treated later in the six-hour window (greater than 3 hours) should have had a worse outcome relative to placebo than patients treated early (less than 3 hours) in the six-hour window. Our analysis of time-to-treat data shows that patients treated with Viprinex earlier in the window actually had a worse outcome than placebo-treated patients, while patients treated later in the window had an outcome similar to placebo. Thus, the patients treated with Viprinex early had more negative impact on the overall results in ESTAT than the patients treated later.

The retrospective analysis made several other key findings regarding the failure of the ESTAT trial. For patients randomized to receive Viprinex, the median dose received was 23% higher in the ESTAT trial than in the STAT trial. In addition to the higher median dose, there was a statistically significant age imbalance between treatment groups. The mean age of patients in the Viprinex-treated group was 69.3 years compared to 67.7 years for the placebo group. While the age difference may initially appear to be relatively small, it is substantial in stroke treatment due to the significant influence of age on stroke outcome. A further analysis of the age data showed that there was a greater proportion of younger patients, defined as younger than 65 years of age, in the placebo group than in the Viprinex-treated group. Conversely, there was a greater proportion of older patients, defined as greater than or equal to 85 years of age, in the Viprinex-treated group. In addition, although not statistically significant, 22.9% of Viprinex-treated patients were categorized in the most severe pretreatment stroke severity group, defined as SSS scores of 0 to 19, compared to 19.6% for the placebo group.
The ESTAT trial also enrolled patients with pretreatment blood pressure of up to 220/120 in contrast to many other trials for acute ischemic stroke, including rt-PA trials and STAT, where the maximum pretreatment blood pressure was 185/105. Additionally, ESTAT permitted concomitant use of low-dose prophylactic heparin, a blood thinner, while in STAT, use of heparin was not permitted. ESTAT Viprinex-treated patients who would have exceeded the STAT systolic blood pressure entry criteria had a SICH rate of 10.1% compared to 6.9% for Viprinex-treated patients who met the STAT criterion. SICH in these ESTAT Viprinex-treated patients carried a high 90-day mortality rate of 59%, which was not published in the trial manuscript. We believe the high 90-day mortality rate in the ESTAT Viprinex-treated patients emphasizes the importance of minimizing any controllable variable like blood pressure that might contribute to an increased incidence of SICH.
Although ESTAT was designed to be similar to STAT, the higher median dose and the difference in age, pretreatment stroke-severity and higher blood pressure entry criteria are notable differences that we believe played a critical role in the different outcome of ESTAT.

CEO BACKGROUND

EXECUTIVE OFFICERS

Our current executive officers and their respective positions are set forth in the following table. Biographical information regarding each executive officer who is not also a director is set forth following the table.


Name



Position

Paul E. Freiman Age
74 President and Chief Executive Officer
David E. Levy, M.D.
67 Vice President, Clinical Development
Matthew M. Loar
45 Vice President and Chief Financial Officer
Karl G. Trass
48 Vice President, Regulatory Affairs & Quality Assurance
Warren W. Wasiewksi, M.D.
56 Vice President and Chief Medical Officer


MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW
We are a biopharmaceutical company focused on developing novel, first-in-class treatments for central nervous system conditions and other serious unmet medical needs. Our most advanced product candidate, Viprinex™ (ancrod), is in Phase 3 clinical testing as a novel investigational drug for the treatment of acute ischemic stroke. Stroke is one of the most prevalent, debilitating and costly diseases in the world, and there are few acceptable treatment options. Viprinex is a fibrinogen-reducing agent that is designed to expand the treatment window from three hours to six hours. In addition to Viprinex, we have rights to receive royalty payments from the sales of Namenda ® (memantine HCL), an approved drug marketed for Alzheimer’s disease. We also have rights to receive payments from the development of another investigational drug which is in Phase 3 clinical trials for the treatment of swelling associated with cerebral tumors. Our earlier stage pipeline also includes rights to two proteins in preclinical development for the treatment of Alzheimer’s disease and Huntington’s disease.
Below is an overview of key developments affecting our business over the course of fiscal 2008.
Financing activity
In September 2007 we implemented a one-for-seven reverse stock split and then in November 2007 completed an underwritten offering of approximately 21.8 million shares of common stock, at a price of $2.75 per share, raising $60.0 million in gross proceeds. After underwriting commissions and expenses, net proceeds of the offering were $54.8 million. All share and per-share information contained in this report reflect the stock split and historical numbers have been restated to reflect the split.
Viprinex™, our Phase 3 investigational drug for acute ischemic stroke
We are currently conducting two Phase 3 clinical trials of Viprinex (ancrod) for acute ischemic stroke. The trials are referred to as Ancrod Stroke Program I and Ancrod Stroke Program II, or ASP I and ASP II. Although patient enrollment in the ASP trials in fiscal 2008 has been slower than planned, we have recently reached the number of patients required to conduct an interim analysis. We currently anticipate completing this interim analysis no later than the first quarter of calendar 2009. The interim analysis will be conducted based on the outcome of the first 500 patients treated in the studies, aggregated together as a single data set. For this interim analysis, an independent data safety monitoring board, or DSMB, will conduct a review of the outcome of the patients receiving Viprinex compared to the outcome of patients receiving placebo. If Viprinex does not meet specified minimum efficacy criteria, the DSMB has been instructed to inform us that it is futile for us to continue the trial, and we would then stop the studies. If the data indicates overwhelming efficacy, the DSMB may recommend stopping the studies for superiority. In addition to the interim efficacy analysis, the DSMB will also evaluate safety. If the trials continue following the interim analysis, we will not have access to any efficacy data until the trials are completed and full analysis on all patients has been completed.
XERECEPT ® , a Phase 3 investigational drug for which we have rights to receive milestone and royalty/profit-sharing payments
Celtic continues to develop XERECEPT (corticorelin acetate) for the treatment of brain edema associated with cerebral tumors, and has informed us that it expects to report results of a Phase 3 clinical trial during late calendar 2008.
Amendment to Merz Agreement
In February 2008, we amended the agreement under which we receive royalties for sales of memantine from Merz and CMCC. We agreed to discontinue receiving royalties on sales of memantine outside of the United States, and agreed to a staged reduction in the royalty rate for sales in the United States. In return, Merz and CMCC agreed that they would not provide us notice of termination of the agreement before an effective date of January 1, 2010. As a result, we expect that we will continue to receive royalty payments from Merz through at least January 1, 2010, but the amount of the payments will decrease from historical levels and will continue to decrease over this time.

Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make judgments, assumptions and estimates that affect the amounts reported and the disclosures made. Actual results could differ materially from those estimates. The following are critical accounting policies and estimates that we believe are the most important and/or subjective items used in determining our financial condition and results of operations as presented in the consolidated financial statements.
Revenue recognition
Revenue from nonrefundable up-front fees where we continue involvement through a service agreement or other obligation is initially classified as “deferred revenue,” a liability on our consolidated balance sheet. We subsequently amortize the deferred revenue into “collaboration service revenue” in the consolidated statement of operations over the period of our service obligations. Technology and collaboration service revenue is recognized according to the terms of the contractual agreements to which we are a party, when our performance requirements have been fulfilled, the amount is fixed and determinable, and collection is reasonably assured. Revenue from license fees with non-cancelable, non-refundable terms and no future performance obligations is recognized when collection is assured. Milestone payments are recognized when we have fulfilled development milestones and collection is also assured. Revenue from services performed for other parties is recorded during the period in which the expenses are incurred. As of June 30, 2008, we had $18.8 million in deferred revenue related to our agreements with Celtic. We are amortizing this into the consolidated statement of operations on a straight-line basis through November 2011, when our service obligations to Celtic are scheduled to end.
Royalty revenue is generally recorded when payments are received, which is often one quarter after the period in which the products sales have occurred, because there is no information available to us on the product sales until the time we receive the royalty payment.
Revenue arrangements with multiple components are divided into separate units of accounting if certain criteria are met, including whether the delivered component has stand-alone value to the customer, and whether there is objective reliable evidence of the fair value of the undelivered items. Consideration received is allocated among the separate units of accounting based on their relative fair values, and the applicable revenue recognition criteria are identified and applied to each of the units.
Research and development expenses
Our research and development costs are expensed as incurred. Research and development includes clinical trial costs, development and manufacturing costs for investigational drugs, payments to clinical and contract research organizations, compensation expenses for drug development personnel, consulting and advisor costs, preclinical studies and other costs related to development of our product candidates. Research and development expenses include expenses that are incurred over multiple reporting periods, such as fees for contractors and consultants, patient treatment costs related to clinical trials and investigational drug manufacturing costs. We assess the level and related costs of the services provided during each reporting period, including the percentage of work completed through each reporting period, to determine the portion to expense in each period. The assessment of the percentage of work completed that determines the amount of research and development expense that should be recognized in a given period sometimes requires significant judgment. We apply our judgment and base our estimates on historical experience and the information available at the time of reporting.
Estimates Involved in Determining Fair Value of Investments
We estimate the fair value of our investments in Auction Rate Securities, or ARS, based on models of discounted cash flow and assumptions regarding future interest rates. The Company’s investments in ARS were initially structured to provide liquidity via an auction process that reset the applicable interest rate at predetermined calendar intervals. Beginning in February 2008, failed auctions occurred throughout the ARS market, and since then all auctions for our ARS have been unsuccessful. While the credit rating of these securities remains high and the ARS are paying interest according to their terms, as a result of the potentially long maturity and lack of liquidity for ARS, we believe that the value of the ARS in our portfolio has been impaired. In the third quarter of fiscal 2008, we recorded an impairment charge to reduce the carrying value of the ARS by $1,778,000, based on our judgment that the decline in value is other-than-temporary. Models estimating the value of ARS are complex and require estimates that can significantly change their value.

Equity Financing Warrants
We have issued warrants in connection with sales of our common stock to raise capital. We generally account for warrants we issue as a component of stockholders’ equity when permitted under accounting rules. However, when the terms of the warrants require registered shares to be delivered to the investors, or require potential cash payments to be made under specified circumstances, we account for the estimated fair value of the warrants as a liability under the terms of Emerging Issues Task Force 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock . This standard specifies that our ability to deliver registered shares upon an exercise of the warrants and our potential obligation to cash-settle the warrants are deemed to be beyond our control, and therefore the value of the warrants must be accounted for as a liability. As with stock-based compensation, there is a high degree of subjectivity involved in determining the input values needed to estimate the fair value of the warrants. Changes in these assumptions, particularly the estimated volatility, can materially affect the resulting estimates of the fair values of the warrants on our consolidated balance sheet.
Stock-based compensation
We account for stock options granted to employees using an estimate of the fair value of the stock option on the date that it is granted. This estimated fair value is recognized as an expense in the consolidated statement of operations on a straight-line basis over the vesting period of the underlying stock option, generally four years for employees and one to three years for directors. There is a high degree of subjectivity involved in estimating the input values needed to estimate the fair value of stock options. Changes in these assumptions, particularly the estimated volatility and the estimated term of the options, can materially affect the resulting estimates of the fair values of the options that are granted. In addition, the expenses recorded for stock-based compensation in our financial statements may differ significantly from the actual value realized by the recipients of the stock options — the stock options may expire worthless or otherwise result in little or no value to the recipient, or the stock options may be exercised when the stock price is significantly in excess of the option exercise price, resulting in value to the recipient greater than that estimated by the fair values reported in consolidated financial statements. Under accounting requirements, the expenses recorded in the consolidated financial statements are not adjusted to the actual amounts realized by stock option recipients. Users of the financial statements should understand that the expenses we recognize for stock-based compensation will not result in any payment of cash by us.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements , or SFAS 157. SFAS 157 defines fair value, establishes a market-based hierarchy for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value, but it does not expand or require any new fair value measures. The provisions of SFAS 157 are to be applied prospectively and are effective for our fiscal year beginning July 1, 2008. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, delaying the effective date for non-financial assets and liabilities until fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We do not expect the adoption of SFAS 157 to have a material effect on our consolidated financial statements.
In June 2007, the Emerging Issues Task Force issued EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, or EITF 07-3, which requires nonrefundable advance payments for future research and development activities to be recorded as an asset and recognized as an expense as the goods are delivered or services are performed. EITF 07-3 will be effective for our fiscal year beginning July 1, 2008. We do not expect the adoption of EITF 07-3 to have a material effect on our consolidated financial statements.
In November 2007, the Emerging Issues Task Force, or EITF, issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property (“EITF 07-1”). EITF 07-1 addresses arrangements with other companies to jointly develop, manufacture, distribute, and market products when the activities associated with these arrangements are conducted by the collaborators without the creation of a separate legal entity (that is, the arrangement is operated as a “virtual joint venture”). EITF 07-1 requires collaborators in such virtual joint venture arrangements to present the results of activities for which they act as the principal on a gross basis, and to report any payments received from or made to its other collaborators based on other applicable accounting guidance. EITF 07-1 is effective for collaborative arrangements in place at the beginning of annual periods beginning after December 15, 2008; for us this will be the fiscal year beginning July 1, 2009, and we will evaluate what effect, if any, the adoption of EITF 07-1 will have on our consolidated financial statements at a later date.

Total revenues of $14,760,000 for fiscal year ended June 30, 2008 decreased by $2,913,000 from revenues of $17,673,000 in fiscal 2007. Our fiscal 2008 revenues consisted of $8,253,000 from royalties on the commercial sales of memantine by Merz and its marketing partners, $5,500,000 recognized from the fiscal 2006 sale of our rights and interests in XERECEPT to Celtic, and $1,007,000 from the reimbursement of the direct expenses incurred for services provided to Celtic for administering the Phase 3 clinical trials and manufacturing of XERECEPT in the United States. Royalties were higher for fiscal year 2008 compared to fiscal 2007 because of higher sales of memantine by Merz and its marketing partners. Royalty payments we receive for future periods will be based on an amended royalty structure with Merz, and we will no longer receive royalties for sales of memantine outside the United States, which were $1,064,000 and $1,107,000 for fiscal 2008 and 2007, respectively. Revenues from the sale of XERECEPT were the same for fiscal 2008 and 2007 because we are recognizing the up-front payment of $33 million we received in November 2005 on a straight-line basis over the estimated term of our obligations, which extends to November 2011. Revenues from collaboration services declined by $4,313,000, or 81%, to $1,007,000 for fiscal 2008 compared to fiscal 2007 because we have transitioned most of the XERECEPT drug development work to Celtic.
Revenues of $17,673,000 in fiscal 2007 increased by $5,334,000 compared to revenues of $12,339,000 in fiscal 2006. All categories for which we report revenue increased from the prior year. The amount we recognize from the sale of XERECEPT increased by $2,291,000 because our collaboration and service agreement with Celtic was in place for the full twelve months of fiscal 2007, as compared to approximately seven months during fiscal 2006. Collaboration services revenue also increased in fiscal 2007 as compared to fiscal 2006 because, likewise, there was a twelve month period in fiscal 2007 over which we provided services to Celtic as compared to seven months in fiscal 2006. Royalty revenue increased in fiscal 2007 as compared to fiscal 2006 because of higher sales of memantine by Merz and its marketing partners.
In future periods, we expect to record revenue from the sale of our rights and assets related to XERECEPT in the amount of $5.5 million annually through November 2011, unless the agreements with Celtic are modified. We expect revenue from collaboration services to decline further since Celtic has directly assumed many of the responsibilities we previously handled on its behalf. We expect royalty revenue to decrease in future periods because we will no longer receive royalties on sales of memantine for Alzheimer’s disease in Europe and there will be a staged reduction in royalty rates for sales in the United States.
Research and Development Expenses
Because we are in the business of drug development and our current drug candidates have not been approved for sale, our research and development costs are expensed as incurred. Research and development includes clinical trial costs, development and manufacturing costs for investigational drugs, payments to clinical and contract research organizations, compensation expenses for drug development personnel, consulting and advisor costs, preclinical studies and other costs related to development of our product candidates. The following table shows our research and development costs by product under development (in thousands):

The majority of our research and development efforts are focused on Viprinex, a Phase 3 investigational drug for the treatment of acute ischemic stroke which we acquired rights to in July 2004. Since acquiring these rights we have established GMP manufacturing capability and initiated two large, international, well-controlled, double-blind, randomized Phase 3 studies designed to determine whether Viprinex is a safe and effective treatment for stroke when given within six hours of onset.
For fiscal year 2008, our expenditures on Viprinex aggregated $22,071,000, an increase of 4% from expenses of $21,208,000 for fiscal 2007. In fiscal year 2008 the Viprinex clinical trials and associated costs increased $2,216,000 due to an increase in salaries and benefits as we hired additional personnel to oversee the clinical trials and qualify additional investigator sites for enrollment of patients, increased costs for training clinical investigators, increased clinical trial site expenses and lab costs. The increased clinical trial costs were partially offset by lower manufacturing expenses of $1,243,000 following the completion of certain development work on the Nordmark snake facility in the 2007 fiscal year (the active ingredient in Viprinex is derived from the venom of the Malayan pit viper).
For fiscal year 2007, Viprinex expenses increased to $21,208,000 compared to expenses of $15,962,000 in fiscal 2006. The increase in our expenditures for Viprinex was due to increased manufacturing costs, related to costs of developing the snake farm, manufacturing and purification processes, and completing finished drug supply for use in the clinical trials and stability testing for the drug. Clinical costs also increased in fiscal 2007 compared to fiscal 2006 as we hired additional employees to manage the increase in enrollment and number of sites in our Phase 3 clinical trials of Viprinex.
For fiscal year 2008, our expenditures for XERECEPT of $1,061,000 decreased $4,468,000 from $5,529,000 in fiscal 2007. Following our earlier sale of XERECEPT to Celtic, during fiscal 2008 we transitioned substantially all drug development activities to Celtic and are no longer incurring these costs. The decrease in our research and development costs for XERECEPT is comparable to the decrease in revenue for reimbursement of these costs by Celtic. In future periods, we expect our costs (and comparable reimbursement revenues) for XERECEPT to be similar to the levels of fiscal 2008.
Expenses for the XERECEPT program decreased in fiscal 2007 compared to fiscal 2006 because our agreement with Celtic was in place for the full fiscal 2007 compared to only a portion of fiscal 2006, and we began transitioning activities to Celtic which we previously handled directly, reducing costs that we incurred.
In fiscal 2008 we entered into two collaboration and license agreements with the Buck Institute for Age Research, or Buck, for the development of proteins in preclinical development for the treatment of Alzheimer’s and Huntington’s diseases. Under the agreements, we fund specified preclinical research work as performed by Buck in return for development rights to the proteins that are the subject of their research. There were no comparable costs for fiscal 2007 or 2006. If our research funding continues at the current level for fiscal 2009, we expect 2009 research costs for these proteins to be approximately $2 million.
Through June 30, 2008, we have incurred approximately $66 million of direct expenses on the development of Viprinex since our acquisition of Empire in July 2004, when we acquired the rights to Viprinex. These expenses are in addition to Viprinex-related expenditures of approximately $24 million which we recorded as in-process research and development expenses related to our acquisition of Empire. We presently cannot estimate the cost of completing the development work on Viprinex required to receive approval from the FDA and begin marketing the drug candidate. These costs cannot be estimated because we are unable to reliably estimate future enrollment rates into the studies, and costs are highly dependent on the enrollment rates. If the rate of enrollment decreases from recent levels, it will take a longer period of time to complete the clinical trials, resulting in higher total costs; in such a case it is possible that we may not even be able to complete the trials. In addition, the outcome of the trials may not support an FDA approval of the drug candidate, or the FDA may require additional trials after reviewing the outcome of the current trials. We expect fiscal 2009 research and development costs to increase for the Viprinex program as additional patients are enrolled into our clinical trials, although we are still seeking to reduce expenses in areas where possible.
Acquired In-Process Research and Development Expenses
We acquired Empire Pharmaceuticals, Inc. in July 2004 to obtain the worldwide rights to Viprinex. In connection with the acquisition, a portion of the purchase price we agreed to pay was contingent upon our commencement of Phase 3 clinical trials. After we started these trials in November 2005, we made the contingency payment of $11,501,000, consisting of cash of $2,000,000 and 339,000 shares of common stock valued at $9,501,000. Because the contingency was fulfilled and no further contingency payments were included in the agreement to acquire Empire, this item did not recur in fiscal 2008 or 2007.

General and administrative expenses, which include costs relating to our corporate operations in California and administrative operations for our office in New Jersey, were $6,876,000 for fiscal 2008, a 5% increase from the expenses of $6,537,000 for fiscal 2007. The increase of $339,000 for fiscal 2008 is due primarily due to an increase in compensation and benefits after we hired additional personnel during the latter half of fiscal 2007 to address the earlier material weaknesses in our internal control, and an increase in legal and consulting fees related to new contracts entered into during the fiscal 2008 period, both partially offset by a reduction in audit and consulting fees following our hiring of the additional administrative personnel.
General and administrative expenses of $6,537,000 in fiscal 2007 increased by $569,000 compared to expenses of $5,968,000 in fiscal 2006. The increase in general and administrative expenses resulted primarily from increases for consultants and audit fees associated with a restatement of our financial statements, and higher employee salaries for employees hired during the year, partially offset by lower legal fees.
We are currently conducting a review of our operating structure and expenses, seeking areas in general and administrative expenses where there are potential cost savings.
Interest Expense
Interest expense relates to charges incurred for a bridge financing transaction in fiscal 2008 for which there was no comparable transaction in fiscal years 2007 or 2006.
Impairment Charge for Decrease in Fair Value of Investments
We recorded a charge of $1,778,000 for the fiscal year ended June 30, 2008 for the decrease in value of our investments in ARS. ARS were structured to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals. Beginning in February 2008, auctions failed to settle for the ARS held in our investment portfolio and we believe the value of these investments have been impaired. We recorded a charge for the impairment in the third quarter of our fiscal year based on a model of discounted future cash flows and assumptions regarding interest rates. There were no comparable charges for the periods in fiscal 2007 or 2006.
Interest Income
Interest income was $1,254,000 for the fiscal year ended June 30, 2008; an increase of $761,000 compared to the fiscal year ended June 30, 2007. The increased interest income in fiscal 2008 was due to our higher cash and investments balances following the underwritten public offering in November 2007, more than offsetting the decline in interest rates between the periods. Interest income increased by $94,000 for the fiscal year ended June 30, 2007 compared to the fiscal year ended June 30, 2006 primarily due to higher cash and investment balances in fiscal 2007.
Non-cash Gain on Decrease in Fair Value of Warrants
The non-cash gain on decrease in fair value of warrants was $3,378,000 for the fiscal year ended June 30, 2008, an increase of $2,398,000 from the gain recorded in fiscal 2007. There was no comparable item in fiscal 2006. The non-cash gain on decrease in fair value of warrants represents changes in the Black-Scholes value of warrants we issued in April 2007, and this has occurred primarily as a result of the decrease in the price of our common stock for each of the fiscal 2008 and 2007 reporting periods. The April 2007 warrants require us to provide the investors with registered shares upon the warrants’ exercise. The warrants may also require cash payments to be made in connection with certain fundamental transactions involving us or our common stock. Because accounting rules specify that delivery of registered shares is beyond the control of the company that issued the warrants, and also because in some circumstances there may be cash payments to the investors in lieu of a warrant exercise, we are required to account for the value of these warrants as a liability. We have estimated the liability based on the Black-Scholes option pricing model, and this warrant liability is re-valued on each reporting date with changes in the fair value from prior periods reported as a non-cash charge or gain to earnings.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Except for the historical information contained herein, the matters discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-Q are forward-looking statements that involve risks and uncertainties. The factors referred to in the section captioned “Risk Factors,” as well as any cautionary language in this Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from those projected. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this report.

OVERVIEW

We are a specialty biopharmaceutical company with expertise in identifying and acquiring promising drug candidates and in designing and managing late-stage clinical trials for central nervous system conditions. Below is an overview of the material developments and trends that affected our results of operations and financial condition for the periods presented.

Viprinex development activity . Following our acquisition of Empire in July 2004, we established facilities and operations in New Jersey, where the Empire development team had been located, and we commenced planning for two Phase 3 clinical trials designed to enable us to seek regulatory approval for Viprinex. Commencing in early 2005, we contracted to procure a clinical supply of Viprinex and, in addition to our clinical management team and clinical research assistants, or CRAs, engaged clinical research organizations, or CROs, to oversee our trials. We enrolled our first patient in the first trial in late 2005 and have expanded the clinical trials since that time with the inclusion of additional sites and countries in an effort to enhance trial enrollment.

These activities have resulted in a significant increase in our research and development expenses since fiscal 2005, during which time we have spent approximately $56 million on the development of Viprinex. We currently anticipate completing the interim analysis, or futility analysis, in the fourth quarter of calendar 2008 and anticipate completing enrollment in both Viprinex trials in mid calendar 2009. Our expectations regarding the timing for the trials are based on historical levels of patient enrollment and our projections for future site recruitment and patient enrollment. We expect that our development expenses will continue to increase as the number of patients in our Phase 3 trials increases. If we are not successful in scaling up the number of sites and increasing the rate of patient enrollment as planned, our trials will take longer than projected and the costs of the trials will increase. For risks relating to potential delays in our trials, see Item IA, “Risk Factors.”

XERECEPT sale . In November 2005, we sold our rights in XERECEPT to two subsidiaries of Celtic for approximately $33 million in upfront payments. We may receive up to an additional $15 million in contingent payments if Celtic achieves certain development milestones for XERECEPT and we will be entitled to profit-sharing and royalty payments if XERECEPT receives regulatory approval and is sold commercially. The principal purpose of the XERECEPT sale was to focus our operations and limited capital resources on developing our core asset, Viprinex. Through the sale of XERECEPT, we have been able to finance a portion of our operations while retaining a financial interest in the drug and have maintained some of our existing personnel and infrastructure as we provide clinical trial and manufacturing support services to Celtic on a fee-for-services basis. We expect that Celtic will transition much of this support work to third party vendors in fiscal 2008. Any reduction in the scope of our services to Celtic will result in a decrease in our expected expenses and revenues under our arrangement with Celtic.

Memantine revenue . Since the commercial launch of Ebixa by Merz and Namenda by Forest, our royalties from memantine sales have grown considerably. In October 2007, we received quarterly royalty payments of $2.1 million compared to royalty payments of $1.7 million for the same period in the prior year. Although we are not provided with sales estimates from Merz, Forest or any other Merz marketing partner, we expect that memantine sales will remain at or increase from these recent levels. However, we are continuing discussions with Merz and CMCC regarding our license and collaboration agreement and it is possible that this agreement could be amended or even terminated. As a result, we cannot be certain that our royalty payments from memantine sales will continue in future periods.

Except for fiscal 2001, we have incurred significant losses each year since our inception. We expect to incur additional operating losses at least through fiscal 2010 as we continue our product development efforts. Our development expenses were higher during the three months ended December 31, 2007 compared to the same period last year as a result of the increase in spending on the development of Viprinex offset by a decrease in the scope of our services to Celtic. We expect development costs for Viprinex during the remainder of fiscal 2008 to increase significantly compared to fiscal 2007 as the number of clinical sites and patients enrolled in the trials are expected to increase significantly. Since the sale of our worldwide rights and assets related to XERECEPT, we are being reimbursed by Celtic for the cost of development services incurred for this drug candidate. Although we expect that the funds we have will provide sufficient cash to fund our ongoing operations, including two Phase 3 clinical trials for Viprinex, at least through fiscal 2009, we may seek to raise additional capital as market conditions permit.

CRITICAL ACCOUNTING POLICIES

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates based on historical experience and various other factors that we believe are reasonable under the circumstances. The results of our evaluation form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider our accounting policies related to revenue recognition, research and development expenses, stock-based compensation and valuation of equity financing warrants to be critical.

Revenue Recognition

Revenues are recorded according to the terms of formal agreements to which we are a party, when our performance requirements have been fulfilled, the fee is fixed and determinable and collection of the fee is probable or reasonably assured. Revenue related to license fees with non-cancelable, non-refundable terms and no future performance obligations are recognized when collection is reasonably assured. Revenues associated with milestone payments, pursuant to the non-cancelable and non-refundable terms of agreements to which we are a party, are recognized when we have fulfilled development milestones and when collection of the fee is reasonably assured. Revenues resulting from royalty fees earned from the sale of the product are based upon the sales reported by our licensees and determined in accordance with the specific terms of the license agreements. We record royalty revenue when payments are received because we are unable to estimate and accrue royalty revenues due to the limited sales history of memantine. We have made no material adjustments to date for revenues recorded from royalty fees. Revenues received as a reimbursement of direct expenses incurred for performing services to administer clinical trials are recorded in the period during which the expenses are incurred.

We recognize revenue in accordance with Emerging Issues Task Force, or EITF Issue 00-21, Revenue Arrangements with Multiple Deliverables and the Securities and Exchange Commission or SEC, Staff Accounting Bulletin 104, Revenue Recognition . Revenue arrangements with multiple components are divided into separate units of accounting if certain criteria are met, including whether the delivered component has stand-alone value to the customer, and whether there is objective reliable evidence of fair value of the undelivered items. Consideration received is allocated among the separate units of accounting based on their relative fair values, and the applicable revenue recognition criteria are identified and applied to each of the units.

Technology sale and collaboration services revenues represent fees received from Celtic under an asset purchase agreement and a collaboration and services agreement related to the sale of our worldwide rights and assets in XERECEPT in November 2005. In accordance with EITF Issue 00-21, the asset sale, together with the related clinical development services we provide, is treated as one unit of accounting because we are unable to determine the fair value of the future services to be provided by us under the collaboration and services agreement. Accordingly, we are recording the total up-front revenues of $33 million from the sale of technology ratably over the six-year term of the collaboration and services agreement, which began November 29, 2005. Costs of collaboration services provided by us are billed on a monthly basis to Celtic, generally based on actual internal and external expenses incurred to administer the clinical trials and manufacturing of XERECEPT, and recognized as revenues combined with the amount of revenue from the sale of technology. Costs of development services paid and related expenses are recognized as incurred. Potential future milestone payments and royalty-sharing payments will be recognized as earned, provided that payment is reasonably assured.

Research and Development Expenses

Our research and development expenses include certain expenses that are incurred over multiple reporting periods, such as fees for contractors and consultants, patient treatment costs related to clinical trials and related clinical manufacturing costs, and license fees for use of third-party intellectual property rights. Management assesses how much of these multi-period costs should be charged to research and development expense in each reporting period by assessing the level and related costs of the services provided during each reporting period. In determining whether clinical trial activities performed by third parties should be recognized in a specific reporting period, management considers:


•

estimates of the percentage of work completed through the applicable reporting period in accordance with agreements established with the third-party service providers; and


•

estimates of the percentage of work completed through the applicable reporting period in accordance with discussions with internal clinical and preclinical personnel and independent service providers as to the progress or stage of completion of trials or services and the agreed upon fee to be paid for such services.

The assessment of the percentage of work completed that determines the amount of research and development expense that should be recognized in a given period requires significant judgment and could have a material impact on our balance sheet and results of operations. Management applies judgment and bases its estimates with the benefit of historical experience with the development of similar drugs and with third party contracts structured with similar performance and payment terms. While our historical estimates have been materially accurate, we recognize that estimates of expenses incurred during current and future periods are determined greatly by patient enrollment levels and related activities, which may vary from historical patterns. We monitor service providers’ activities to the extent possible in order to assess current enrollment levels and related activities; however, if we under- or overestimate activity levels associated with various studies at a given point in time, we could materially under- or overestimate research and development expenses in future periods.

Stock-Based Compensation

During the quarter and six months ended December 31, 2007, the Company granted options to purchase a total of 11,424 and 12,323 shares of common stock for which the aggregate grant-date fair value was $19,172 and $27,153, respectively. The amount of stock-based compensation expense recognized during the three and six months ended December 31, 2007 under these plans was $217,000 and $458,000, respectively. The amount of stock-based compensation expense recognized during the three and six months ended December 31, 2006 under these plans was $134,000 and $347,000, respectively. The Company recorded no income tax benefits for stock-based compensation arrangements for the quarters ended December 31, 2007 and 2006, as the Company has cumulative operating losses, for which a valuation allowance has been established. As of December 31, 2007, there was $1,013,000 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the 2003 Equity Plan, which is expected to be recognized over the next four years.

Under SFAS 123(R), Share Based Payment, the fair value of each option award is estimated on the date of grant using the Black Scholes option valuation model. Under that method, assumptions are made with respect to the expected lives of the options granted, the expected volatility of our stock, its dividend yield percentage and the risk-free interest rate at the date of grant. In addition, under SFAS 123(R), we recognize and report stock-based compensation expense net of pre-vesting forfeitures, which we estimate on the basis of historical forfeiture experience or other factors that could affect future forfeitures. If factors change and we employ different assumptions in the application of SFAS 123(R) in future periods, the compensation expense that we record under SFAS 123(R) may differ significantly from what we have recorded in the current period.

Valuation of Equity Financing Warrants

We have issued warrants in connection with equity financings pursuant to effective shelf registration statements. We account for these warrants at fair value in accordance with EITF No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Stock . We use the Black Scholes option valuation model to determine the fair value of these warrants. Use of this model requires us to make assumptions regarding stock volatility, dividend yields, expected term of the warrants and risk-free interest rates. If factors change and we employ different assumptions in future periods, the fair value of these warrants reflected as of each balance sheet date and resulting change in fair value that we record may differ significantly from what we have recorded in the previous periods.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board, or FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 or FIN No. 48, which clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires a company to recognize in its financial statements the impact of a tax position if that position is more likely than not to be sustained on audit, based on the technical merits of the position. The provisions of FIN No. 48 are effective for our fiscal year beginning July 1, 2007, with the cumulative effect, if any, of the change in accounting principle recorded as an adjustment to opening retained earnings or accumulated deficit. On July 1, 2007, we adopted FIN No. 48 and there was no material impact on our consolidated results of operations and financial position.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements or SFAS No. 157. SFAS No. 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. SFAS No. 157 does not expand or require any new fair value measures. The provisions of SFAS No. 157 are to be applied prospectively and are effective for our fiscal year beginning July 1, 2008. We are currently evaluating what effect, if any, the adoption of SFAS No. 157 will have on our consolidated results of operations and financial position.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities or SFAS No. 159. SFAS No. 159 permits the measurement of many financial instruments and certain other items at fair value. Entities may choose to measure eligible items at fair value at specified election dates, reporting unrealized gains and losses on such items at each subsequent reporting period. The objective of SFAS No. 159 is to provide entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. It is intended to expand the use of fair value measurement. SFAS No. 159 is effective for our fiscal year beginning July 1, 2008. We are currently evaluating what effect, if any, the adoption of SFAS No. 159 will have on our consolidated results of operations and financial position.

In June 2007, the FASB ratified EITF 07-03, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, or EITF No. 07-03 which requires nonrefundable advance payments for future research and development activities to be capitalized and recognized as an expense as the goods are delivered or services are performed. EITF No. 07-03 will be effective for our fiscal year beginning July 1, 2008. We are currently evaluating the effect, if any, that the adoption of EITF No. 07-03 will have on our consolidated results of operations and financial position.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, or SFAS No. 141(R), which replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after an entity’s fiscal year that begins after December 15, 2008. We will assess the impact of SFAS No. 141(R) if and when a future acquisition occurs.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51, or SFAS No. 160. SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains it controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We are currently evaluating the impact, if any, the adoption of SFAS No. 160 will have on our consolidated financial statements.

Revenues of $3,663,000 in the three months ended December 31, 2007, decreased by $357,000 from revenues of $4,020,000 in the same period of 2006. Our second quarter fiscal 2008 revenues consisted of $2,103,000 from royalty fees from the commercial sales of memantine by Merz and its marketing partners in the United States and certain European countries, $1,375,000 from the sale of our rights and interests in XERECEPT to Celtic and $185,000 primarily from the reimbursement of the direct expenses incurred for services provided to Celtic for administering the Phase 3 clinical trials and manufacturing of XERECEPT in the United States. Revenues for the three months ended December 31, 2006 consisted of $1,655,000 from royalty fees from the commercial sales of memantine by Merz and its marketing partners in the United States and certain European countries, $1,375,000 from the sale of our rights and interests in XERECEPT to Celtic and $990,000 from the reimbursement of the direct expenses incurred for services provided to Celtic for administering the Phase 3 clinical trials and manufacturing of XERECEPT in the United States.

Revenues of $7,563,000 in the six months ended December 31, 2007, decreased by $1,238,000 from revenues of $8,801,000 in the same period of 2006. Fiscal 2008 revenues consisted of $4,084,000 from royalty fees from the commercial sales of memantine by Merz and its marketing partners in the United States and certain European countries, $2,750,000 from the sale of our rights and interests in XERECEPT to Celtic and $729,000 primarily from the reimbursement of the direct expenses incurred for services provided to Celtic for administering the Phase 3 clinical trials and manufacturing of XERECEPT in the United States. Revenues for the six months ended December 31, 2006 consisted of $3,244,000 from royalty fees from the commercial sales of memantine by Merz and its marketing partners in the United States and certain European countries, $2,750,000 from the sale of our rights and interests in XERECEPT to Celtic and $2,807,000 from the reimbursement of the direct expenses incurred for services provided to Celtic for administering the Phase 3 clinical trials and manufacturing of XERECEPT in the United States.



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Table of Contents

We expect to record revenues from the sale of our worldwide rights and assets related to XERECEPT in the approximate amount of $1,375,000 quarterly, or $5,500,000 annually, through November 2011, the period through which we provide services to Celtic under a related collaboration and services agreement. During the six months ended December 31, 2007, we recorded reimbursement revenue of $729,000 for administering the clinical trials and manufacturing of XERECEPT in the United States. We anticipate that the expense reimbursement we receive may vary in future periods, but that over the next several quarters, expenses are likely to be incurred at a rate that is comparable with that of the service period during the three months ended December 31, 2007 and that we will be reimbursed for all of the direct expenses we incur in behalf of Celtic. Royalty revenues result from sales of memantine by Merz and its marketing partners, who do not make anticipated future sales volumes available to us. Because we do not have data for anticipated future sales volume, and because of the limited history of memantine sales, we are currently unable to estimate future royalty revenues.

CONF CALL

Paul Freiman

You know somebody said timing is everything and what a weekend, what a Tuesday to have a conference call with the market collapsing all around our ears and company’s falling out of bed. And in the process of that our stock continues to take a hammering which is really causing ulcers amongst all of the management and board of this company and I am sure the shareholders, but the fact remains that we believe that there is light at the end of the tunnel, so let me make a couple of comments to you and share my own feelings with you.

This call is intended to report out the fourth quarter and the year-end financials for fiscal 2008 and probably the biggest event for us in 2008w as the raising of $55 million net in a public offering. We have been criticized from some investors for doing that. We certainly have diluted shareholders, which we never want to do, but we have felt and continue to feel that we have an asset that may be an unusual benefit to everyone at the end of the day; everyone being shareholders, employees and probably most important, victims of stroke.

The window for raising money has pretty well been closed. There are a few exceptions to that, but by and large being able to raise this $55 million in November has allowed us to continue to plow ahead in terms of recruitment of patients and moving toward a definitive moment in the life of the product Viprinex and that is really what is driving the company.. I will talk about a few other things, but the central piece is the fact that Viprinex is really the assets that this company has, a major asset that it has.

So, I think all of you as shareholders are aware of the fact that we surpassed a 500 patient enrollment back in August. That allowed us to move forward to an interim analysis which we are saying, conservatively, will take place in the first quarter of calendar 2009 and that is a conservative estimate.

The analysis itself is a futility analysis and that will be explained in a little more detail by my colleague on this call, Dr. Warren Wasiewski. Warren is a chief medical officer and is really driving this process forward very well.

I can say that the recruitment for the trial, which has been slow historically, has gained some legs over the past few months and in fact we are sitting in one of our best months this month.

Matt Loar will be on the phone to talk to you about the financial position of our company and share with you where we stand from a cat standpoint and from a burn standpoint.

In terms of other products beyond Viprinex, XERECEPT continues to be developed by the Celtic company. Celtic has told me that there will be some announcement before the end of this year with regards to the Phase III clinical trials for peritumoral brain edema and we do not have any more information then you do or they do at this point, because a trial can be disblinded and we continue to receive income from the sale of Mementine by Forest in the United States. But, you are going to see a decline in that amount of income, as we announced previously, based on a, we call it a settlement between our companies, or an agreement between Merz and ourselves where there will continue to be a declining rate of royalty payments made until 2010. There are special circumstances that would allow this to go further, but I would not count on that and I would rather not get into any detail on that at this point.

Again, our focus, as we move into questions and answers later on, is going to be on Viprinex. We will share that with you and try, in these very difficult times, to just let you know what is going on, to be as transparent as we can and to share what truly is an enthusiasm towards a very exciting stroke drug.

With that, let me turn this over to Matt Loar to talk about our financials. Matt joined us less than a year ago. He has done a fabulous job, in my eyes, with regards to hammering the cash, keeping the books balanced, and working very well with our auditors. So Matt, please add your words of wisdom.

Matthew Loar

I will try not to belabor points with your financial results so we can get to the Q&A session a little bit sooner, but let me hit certain highlights.

First I will talk about the fiscal fourth quarter. During that period we had revenues of $3.5 million with three major components to that. The first is the Mementine royalties and then two other components related to our sale of XERECEPT. There is revenue amortization for some up front consideration we received, as well as expense reimbursement. Turning to operating expenses for the fourth quarter, was $7.3 million. Most of that was research and development costs, which were $5.8 million and then general and administrative expenses of about $1.5 million.

For the quarter there was non-operating income of about $300,000.00, resulting in a net loss for the period of $3.5 million.

I will turn to the full fiscal year and for 2008 we had revenues of $14.8 million; same components for the full year as we had for the quarter. There was $8.3 million in Mementine royalties that we received, $5.5 million from our amortization of consideration received earlier for the sale of XERECEPT and about $1 million in expense reimbursement related to XERECEPT. Compared to the prior fiscal year we had Mementine royalties go up. XERECEPT

revenue amortization was the same and there was lower cost reimbursement from Celtic, namely because we had lower costs in that area.

Turning to operating expenses for the fiscal year, they aggregated about $31.5 million, $24.6 of that was research and development and $6.9 million was general and administrative expenses. Of the $24.6 million in research and development, $22.1 million was related to Viprinex, so you can really see that’s the bulk of our R&D costs. The remaining $2.5 million in research and development was a combination of costs we incurred related to XERECEPT, which were reimbursed by Celtic and then also funding preclinical programs for Alzheimer’s and Huntington’s disease at the Buck Institute.

Compared to the earlier fiscal year, Viprinex expenditures increased, because we had a greater number of net patients enrolled into the clinical trial during fiscal 2008 than fiscal 2007 and the other non-Viprinex related research and development costs went down/

General and Administrative expenses in fiscal 2008 went up about 5% from the prior fiscal year, mainly related to higher staffing that occurred in the later of half of fiscal 2007 and then additional legal costs related to a number of contracts that we entered into during fiscal 2008.

I am not going to belabor the non-operating expenses. Most of these are accounting concepts, but just to touch on them there was $2.5 million in an interest charge related to a bridge financing from September 2007; a $1.8 million charge for impairment of the auction rate securities; there was $1.3 million in interest income for the year; and a $3.4 million gain on the decrease in fair value of warrants that we had issued in a prior fiscal year.

I will turn to the balance sheet, which is always important in the biotech companies and in particular Paul mentioned our financing that we concluded in the early part of the fiscal year. As a result of that we ended the fiscal year with $41.8 million in net cash and short and long-term investments, $30 million of that $41.8 million was classified as current in cash and short-term investments and $11.8 to $11.9 million was classified as long-term and those are our auction rate securities holdings, which we earlier took a write down on.

Total liabilities were $22.9 million at the end of the fiscal year, of which $18.8 million is deferred revenue from an agreement with Celtic; so that is not something that is going to be repaid by us, but it will be recognized into income through 2011.

Cash flows, the important points to note are the $55 million net provided from the underwritten offering in November of 2007 and it is also important to note there was about $20.7 million in cash used in operations for the fiscal year.

I am going to talk a little bit about what to expect going forward, but not provide formal guidance for where specific numbers will be in fiscal 2009. We have an upcoming interim analysis of the data, which is now just months away, and the outcome of that interim analysis can significantly sway our operating expenses, both research and development, as well as general and administrative expenses. So, until we get to the interim in terms of operating expenses, you should expect to see research and development costs for fiscal 2009 to be more or less comparable to what it was in fiscal 2008.

General and administrative expenses will be down from where they were in fiscal 2008 and as Paul also mentioned, the revenue will decrease somewhat related to a staged reduction in the Mementine royalties, under the agreements with Merz and CMCC.

Finally, looking at the all important cash and investments balance going forward, expect roughly $30 million in cash and investments combined, which is both short and long-term investments, around the time of the interim analysis, which would be the early part of 2009 that we are targeting.

Please remember that these are forward-looking statements and before we get to the Q&A session, I will turn it back over to Paul to make some comments before he gives it over to Warren.

Paul Freiman

Yes I would like to spend a little time talking about the fact that I announced my retirement several months back. This retirement process really is a succession process for a guy that is aging. I am now at the age of 74 years. I feel vigorous, happy and excited and I am really a great supporter of both NTI and Viprinex. I think my name is associated with Viprinex and I believe in it fully, wholly and totally.

We are in the process of recruiting for a replacement CEO. A couple of the members of our board plus myself are working with one of the traditional global headhunters. We are in the middle of the process of interviewing people and the end of that process will be announced when we find the right candidate. It is too early to really comment on the process, because we are in a screening mode at this point in time.

My biggest disappointment, frankly, is to see the collapse of the stock, but I honestly, honest to God, feel that there is great light at the end of this tunnel. We have an asset of product on our hands that is kind of the last player standing from a group of five products that existed only 2 ½ years ago. I am an optimist, but the fact of the matter is, when this interim analysis comes through we will know whether we truly have an asset or not. We are feeling pretty good about it and with that I would like to move over to Warren Wasiewski, who really is the man who is driving this process, so Warren when you share the, you will look at the futility analysis.

Warren Wasiewski, M.D

As Matt and Paul have both alluded to, we are in the throws of performing the interim analysis and just to give you an idea of what that incurs, or means for us to do is that we have, as we announced, enrolled the 500th patient back in August. Those patients now have to go through their 90-day follow up period and at that point I will begin to complete collecting all of the data. The data then needs to be what we call cleaned on the database and then the data will be delivered to the DSMB to review.

The Data Safety Monitoring Board has looked at the data on a number of occasions for safety already. There were five safety reviews so far and as you all know they have always continued as planned. This will be the first time that the Data Monitoring Board will get a look at efficacy. So, they have a plan in their hands that tells them which aspects of the efficacy we are going to look at. Of course the primary endpoint is the most important one and they will determine whether or not the study is futile, meaning that there is no difference between placebo and ancrod in outcome or if it is in fact superior to ancrod.

There are three possible outcomes. The first one would be that the study is futile and that no matter how many more patients you enroll in the study you will never be able to demonstrate that ancrod is better than placebo. The second outcome is that we will be told to continue as planned, which means the study is not futile and that in fact there is some difference and the difference may be significant at the end of the studies and then finally, the drug is superior to placebo, and again there are guidelines set forth for them to declare superiority. At that point the drug is considered superior; we will be instructed to consider closing the studies down and discussing with the agency the next step forward.

This is an important step for this company. It is an important step for this compound and for the patients involved in the study and as Matt indicated, we will be delivering that to the market sometime the first quarter of ’09.

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