The statements contained in this Quarterly Report on Form 10-Q that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. We intend that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward-looking statements that reflect our current views with respect to future events and financial performance. We use words such as we "expect," "anticipate," "believe," and "intend" and similar expressions to identify forward-looking statements. A number of important factors could, individually or in the aggregate, cause actual results to differ materially from those expressed or implied in any forward-looking statement, including those set forth under "Item 1A. Part 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 and under "Part II. Item 1A. Risk Factors" of this report.

Overview

We are a development stage pharmaceutical company that seeks to acquire, develop and commercialize innovative products for the treatment of a variety of human diseases. Our strategy is to develop technologies that address important unmet medical needs or offer improved alternatives to current methods of treatment. Specifically, we are developing Northera™ (droxidopa), a novel therapeutic agent, for the treatment of symptomatic neurogenic orthostatic hypotension, or Neurogenic OH, in patients with primary autonomic failure (Parkinson's disease, or PD, multiple systems atrophy, or MSA, and pure autonomic failure, or PAF), dopamine-?-hydroxylase, or DBH, deficiency and non-diabetic autonomic neuropathy. We are also evaluating the potential therapeutic applications of droxidopa in reducing the frequency of falls in patients with Neurogenic OH associated with PD as well as other potentially norepinephrine related conditions and diseases including intradialytic hypotension, fibromyalgia and adult attention deficit hyperactivity disorder. In addition, we have a portfolio of metabolically inert antifolates that we have studied as a potential treatment of rheumatoid arthritis and that might also be suitable for the treatment of multiple other autoimmune disorders including psoriasis, Crohn's disease, uveitis, ankylosing spondylitis, inflammatory bowel disease, cancer and other immunological disorders.

Northera, our most advanced investigational product candidate, is an orally-active synthetic precursor of norepinephrine being developed for the treatment of symptomatic Neurogenic OH. In Japan, Northera has been approved since 1989 and is marketed by Dainippon Sumitomo Pharma Co., Ltd., or DSP, for the treatment of frozen gait and dizziness on standing in PD, orthostatic hypotension, syncope and dizziness on standing in MSA (Shy-Drager Syndrome) and familial amyloid polyneuropathy and symptoms of orthostatic hypotension in hemodialytic patients. During 2007, the U. S. Food and Drug Administration, or FDA, granted orphan drug status to Northera for the treatment of symptomatic Neurogenic OH and the European Medicines Agency, or EMA, granted orphan medicinal product designation for the treatment of patients with PAF and patients with MSA.

In November 2011, the FDA accepted for filing our New Drug Application, or NDA, seeking approval to market Northera for the treatment of Neurogenic OH in patients with primary autonomic failure (including PD, MSA and PAF), DBH deficiency and non-diabetic autonomic neuropathy that we had submitted in September 2011. The clinical portion of the NDA included combined safety and efficacy data from our two completed Phase III studies in Neurogenic OH, Study 301 and Study 302, two long-term open-label extension studies, Study 303 and Study 304, a dedicated thorough QTc study and a 24-hour ambulatory blood pressure monitoring study, Study 305.

In February 2012, a meeting of the Cardiovascular and Renal Drugs Advisory Committee, or CRDAC, was held, at the request of the FDA, to review and discuss the Northera NDA. The CRDAC recommended, in a 7 to 4 vote, that the FDA approve our NDA to market Northera in the United States.

On March 28, 2012, we announced that the FDA had issued a Complete Response Letter, or a CRL, regarding our Northera NDA. The CRL included a request by the FDA that we submit data from an additional positive study to support efficacy along with a recommendation that such a study be designed to demonstrate durability of effect over a 2- to 3-month period. Notably, given the emphasis on safety in the briefing document released by the FDA prior to the advisory committee meeting in February 2012, the CRL did not identify any outstanding safety concerns. The FDA also noted in the CRL that they did not currently anticipate the need for a Risk Evaluation and Mitigation Strategy, or REMS, program.

In addition to the clinical requests, the FDA indicated that additional bioequivalence work would be needed to support the approval of a 300mg capsule that we were considering making commercially available to complement availability of 100mg and 200mg capsules utilized in our clinical program.

While we were not able to engage in active labeling discussions with the FDA and certain sections will be subject to the completion and review of additional data submitted, the FDA did provide draft recommendations to several sections of the draft labeling submitted for Northera. Most notable was the narrowing of the symptomatic benefits claim to emphasize dizziness, lightheadedness, feeling faint or "feeling like you might black out" as the clinical benefit associated with Northera treatment. Further, the FDA, at that time, made a preliminary recommendation to include a black box warning related to supine hypertension. However, the CRL indicates that such a boxed warning could be reconsidered if suitable data demonstrating a lack of severe hypertension in a fully prone position versus the 30-degree head-up tilt, the standard of care and criteria used in our clinical program, were provided. Given the relative lack of severe supine hypertension compared to placebo seen in our trials using the standard of care, we would expect to see a similar lack of severe hypertension compared to placebo in a fully prone position.

In May 2012, we completed an End-of-Review Meeting, or EOR, with the FDA to review the CRL and more fully understand the FDA's concerns regarding the Northera NDA. In preparation for this meeting, we prepared an information package, including a proposal for utilizing data from our then ongoing Study 306B to support the NDA for Northera that called for a change in the primary endpoint of Study 306B to the orthostatic hypotension symptom assessment, or OHSA, item #1 score (dizziness, lightheadedness, feeling faint or "feeling like you might black out") at visit 4 (one-week post titration) and a recommendation to increase the number of patients targeted for enrollment in the study to approximately 200. Based on feedback received during the EOR, we submitted a revised protocol for Study 306B proposing changing the endpoint to OHSA, item #1 at visit 5 (two-weeks post-titration) and blinding documentation for FDA review.

Also, given the concerns raised by the FDA regarding results from the highest enrolling site in Study 301, we agreed to submit all source documentation from all patients at the site as well as all information pertaining to two post-study independent site visits, neither of which found any significant errors in the conduct of the trial. These findings are in keeping with the official FDA site audit conducted during the review of the Northera NDA. We have also initiated further inquiries into the data and conduct of this center and the FDA has agreed to further review this data upon receipt. Should the FDA decide to disregard the results of this site, the results of Study 301 would not be statistically significant and the study may not be deemed positive.

In June 2012, we received the written response from the FDA to our proposal to modify and utilize data from the then ongoing Study 306B. In its response, the FDA advised that, based on the theoretical potential for certain patients enrolled in Study 306B to have been unblinded in conjunction with the reporting of Study 306A data, the FDA was not confident that this information did not influence an amendment of the statistical analysis plan, and therefore believes Study 306B is unlikely to provide sufficient confirmatory evidence to support the NDA. The FDA further recommended that we "design and conduct an additional trial to demonstrate that droxidopa has a significant and persistent effect" on symptoms of Neurogenic OH. The FDA did not provide feedback or express any concerns regarding our proposal to assess efficacy two-weeks post titration using OHSA item #1 (dizziness) nor did the FDA provide further guidance regarding the duration of clinical efficacy data needed to support a "persistent effect."

Upon review of anecdotal evidence in the adverse events reported in Study 301 and Study 302 suggesting that Northera treatment was associated with fewer falls, we decided to prospectively assess this benefit as a secondary efficacy parameter in Study 306, a Phase III trial initiated in 2010. Since Study 306 was originally intended to support our registration of Northera for the treatment of Neurogenic OH, the primary endpoint for Study 306 was the relative mean change in the Orthostatic Hypotension Questionnaire, or OHQ, composite between treatment and placebo arms. In February 2011, we modified Study 306 following a determination of futility at the planned interim analysis of the study's primary endpoint. A subsequent unblinded review of multiple, secondary outcome measures showed an approximate 60% reduction in patient reported falls and supportive signs of therapeutic activity associated with Northera in the first 51 patients to complete Study 306. We separated Study 306 such that the first 51 patients evaluated in the unblinded interim analysis were considered Part A (Study 306A) while an additional 160 patients, including the 62 patients enrolled in the study at the time of the interim analysis but not unblinded as part of that analysis, would form the basis for Part B (Study 306B). Based on the analysis of the unblinded interim data from Study 306A, we also modified the primary endpoint of Study 306B to be the reduction in the rate of falls per patient, per week in patients with Neurogenic OH associated with PD. Upon receipt of the Advice Letter indicating that data from Study 306B was unlikely to support resubmission of our Northera NDA on the basis of FDA's blinding concerns, we announced that we planned to stop patient enrollment in Study 306B in July 2012. As a result, we estimate data from Study 306B will be available by the end of 2012.

We did not seek a falls claim at the time we filed the NDA for approval of Northera for the treatment of symptomatic Neurogenic OH, but we intend to continue an ongoing clinical evaluation of the effects of Northera in reducing the number of falls in patients with Neurogenic OH associated with PD, including additional clinical trials as necessary and when resources permit, with the intent of pursuing label expansion opportunities for Northera.

In addition to droxidopa, we have devoted resources to the development of a portfolio of molecules for the treatment of various autoimmune/inflammatory diseases. The most advanced platform is a portfolio of metabolically-inert antifolate molecules engineered to have potent anti-inflammatory and anti-tumor activity to treat a range of immunological disorders, including two clinical stage product candidates designated as CH-1504 and CH-4051.

In May 2012, we announced the top-line results of our completed multinational, 12-week, double-blind Phase II trial of CH-4051 in patients with rheumatoid arthritis, designed to compare the efficacy and tolerability of CH-4051 against methotrexate, currently the leading antifolate treatment and standard of care for a broad range of abnormal cell proliferation diseases. This Phase II trial was conducted in 244 patients with rheumatoid arthritis who experience an inadequate response to methotrexate treatment. Results of this trial indicated that CH-4051 did not demonstrate superior efficacy to methotrexate in the dose range evaluated. CH-4051 was found to be safe and well-tolerated in the study, with no dose-limiting toxicities or clear differences in the overall adverse event rate between methotrexate and the CH-4051 treatment groups. While we believe that higher doses of CH-4051 might provide enhanced therapeutic benefit in rheumatoid arthritis and that CH-4051 could be developed for other anti-inflammatory and autoimmune indications, we decided that current resources would be better allocated toward the completion of our Northera development program in Neurogenic OH. As such, there are no immediate plans to continue the development of CH-4051.

Complementing our autoimmune/inflammatory program is a second platform consisting of a portfolio of therapeutics targeting immune-mediated inflammatory disorders and transplantation, known as our I-3D portfolio. We currently have no work underway related to this portfolio.

Since inception we have focused primarily on organizing and staffing our company, negotiating in-licensing agreements with our partners, acquiring, developing and securing our proprietary technology, participating in regulatory discussions with the FDA, the EMA and other regulatory agencies and undertaking preclinical and clinical trials of our product candidates. We are a development stage company and have generated no revenue since inception. We do not anticipate generating any product revenue until and unless we successfully obtain approval from the FDA or equivalent foreign regulatory bodies to begin selling our pharmaceutical candidates although we could potentially generate revenue by entering into strategic agreements including out-licensing, co-development or co-promotion of our drug candidates. Developing pharmaceutical products is a lengthy and expensive process and the process for obtaining approval to market a product in the United States or elsewhere is complex and subject to numerous regulatory hurdles. As we recently experienced, we might encounter unforeseen efficacy or safety issues with our clinical trials, experience delays in our estimated timeframes for obtaining marketing approval of our currently licensed product candidates or experience other delays. Based upon the receipt of the CRL in March 2012 and subsequent correspondence from the FDA, we would not currently anticipate being able to submit a revised NDA for Northera until, at the earliest, 2013 but it is more likely that a revised NDA would be submitted subsequent to that, depending on the design and duration of additional clinical trials. Currently, development expenses are being funded with proceeds from prior equity financings and, to a much lesser extent, through the prior issuance of our common stock pursuant to option or warrant exercises. We completed equity financings in December 2004, February 2006, March 2007, November 2007, July 2009, March 2010, October 2010, February 2011 and January 2012. In addition, we received additional proceeds under a controlled equity offering for sales made during September 2010. To the extent we move Northera into additional clinical trials, our need to finance operating costs will continue. Accordingly, our success will depend not only on the safety and efficacy of our product candidates, but also on our ability to finance the development of our products (see "Liquidity and Capital Resources").

Critical Accounting Policies

Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are more fully described in Note 1 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 that was filed on March 7, 2012. The following accounting policies are critical in fully understanding and evaluating our reported financial results.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements as well as the reported revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments. Management bases estimates on historical experience and on various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results might differ from these estimates under different assumptions or conditions.

Research and Development Expense. Research and development costs are expensed as incurred. We often contract with third parties to facilitate, coordinate and perform agreed upon research and development activities. To ensure that research and development costs are expensed as incurred, we measure expense based on work performed for the underlying contract, typically utilizing a percentage-of-completion approach, and record prepaid assets or accrue expenses on a monthly basis for such activities based on the measurement of liability from expense recognition and the receipt of invoices.

These contracts typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain milestones. In the event that we prepay fees for future milestones, we record the prepayment as a prepaid asset and amortize the asset into research and development expense over the period of time the contracted research and development services are performed. Most fees are incurred throughout the contract period and are expensed based on their percentage of completion at a particular date.

These contracts generally include pass-through fees. Pass-through fees include, but are not limited to, regulatory expenses, investigator fees, travel costs, and other miscellaneous costs including shipping and printing fees. Because these fees are incurred at various times during the contract term and they are used throughout the contract term, we record a monthly expense allocation to recognize the fees during the contract period. Fees incurred to set up the clinical trial are expensed during the setup period.

Costs related to the acquisition of technology rights and patents for which development work is still in process are expensed as incurred and considered a component of research and development costs. In addition, the purchase of active pharmaceutical ingredient and manufacturing supplies for potential commercial product is expensed as incurred and considered a component of research and development costs prior to obtaining approval from regulatory agencies to market the product.

Accounting for Stock-Based Compensation. We account for our stock options and warrants utilizing a fair value based method of accounting. In determining the fair value of the equity instrument, we consider, among other factors, (i) the risk-free interest rate, (ii) the expected life of the options granted, (iii) the anticipated dividend yield, (iv) the estimated future volatility of the underlying shares and (v) anticipated future forfeitures. To determine the risk-free interest rate, we utilize the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of our awards. We estimate the expected life of the options granted based on anticipated exercises in future periods assuming the success of our business model as currently forecasted. The expected dividends reflect our current and expected future policy for dividends on our common stock. To determine the expected stock price volatility for our stock options, we analyze the historical volatility of our stock price to determine an appropriate volatility factor. We plan to continue to analyze the expected stock price volatility, as well as other assumptions utilized in the calculations, at each grant date as more historical data becomes available. Based upon the recently announced corporate restructuring and the related reduction in force, we estimated that our rate of anticipated forfeitures for the six months ended June 30, 2012 was approximately 24%. Historically, given our low historical rate of attrition and the senior nature of the roles for a significant portion of our employees, we had estimated that our rate of anticipated future forfeitures would be 3% or less. We intend to closely monitor this estimated rate of future forfeitures and anticipate a reduction in that rate during the second six months of 2012 upon completion of the reduction in force. Our results of operations include non-cash compensation expense as a result of the issuance of stock option grants that are valued using this method. We expect to record additional non-cash compensation expense in the future, which might be significant. Due to the limited amount of historical data available to us, particularly with respect to employee exercise patterns and forfeitures, actual results could differ from our assumptions.

Results of Operations

Three Months Ended June 30, 2012 and 2011

The table below sets forth, for the periods indicated, certain items in our condensed consolidated statements of operations and other pertinent financial and operating data.

(in thousands, except percentages)

                                            For the three       For the three
                                            months ended        months ended            $
                                              June 30,            June 30,          Increase/           %
                                                2012                2011            (Decrease)        Change
Research and development expense           $     4,695,546     $    10,681,032     $ (5,985,486 )          -56 %
Sales and marketing expense                      1,753,166           1,324,217          428,949             32 %
General and administrative expense               1,441,167           1,317,454          123,713              9 %
Interest income                                     17,594              51,316          (33,722 )          -66 %

Research and development expenses. During the second quarter of 2012, we continued to incur costs for Study 306B and our open-label extension study, Study 304. We also had continuing expenses during the period for the Phase II trial of our antifolate, CH-4051, in rheumatoid arthritis and incurred costs supporting preparation for the Northera EOR meeting held with the FDA in May 2012. Specifically, expenses for the second quarter of 2012 included approximately $0.5 million of direct study costs for Study 306, $0.4 million for extension studies and $0.9 million of direct study costs related to the final activities for our completed Phase II trial of CH-4051. Additionally, we incurred costs during the period related to medical affairs activities, including a team of medical science liaison professionals, hired on a contract basis, generating period costs of $0.4 million. During 2011, primary expenditures were associated with manufacturing and process validation for commercial drug product, Phase III Neurogenic OH studies, Neurogenic OH extension studies, Neurogenic OH QTc study, Phase II trial of CH-4051, Phase II trial of droxidopa in fibromyalgia and costs related to the preparation and filing of our NDA for Northera. Also contributing to our expenses in both periods were compensation and related costs. As a percentage of operating expenses, research and development costs were 60% for 2012 and 80% for 2011.

From inception through June 30, 2012, cumulative research and development expenses related to our major research and development projects were approximately $159.2 million and are detailed as follows:

                                                                                                         Inception
(in thousands)           For the quarter ended                   For the six months ended             through June 30,
                  June 30, 2012         June 30, 2011       June 30, 2012         June 30, 2011             2012
Antifolates      $         1,500       $         2,000     $         4,000       $         4,200     $           43,500
Droxidopa                  3,200                 8,700               9,400                17,900                113,200
I-3D                           -                     -                   -                     -                  2,500
                 $         4,700       $        10,700     $        13,400       $        22,100     $          159,200

Droxidopa. From inception through June 30, 2012, we had spent approximately $113.2 million in research and development expenses on droxidopa. Research and development costs for the Northera Neurogenic OH core program include our Phase III trial, Study 306B, our access and safety program, Study 304, regulatory activity to support our NDA filing, advisory committee meeting and EOR meeting; and commercial supply purchases and related drug manufacture. Additional droxidopa-related clinical research and development costs during the remainder of 2012 are estimated at $4.1 million and include Study 306B and our access and safety program for Neurogenic OH patients. Currently, we can provide no guidance around the costs of required new trials, if any, which may be necessary for the advancement of our Northera NDA as the design of such a trial, or trials, has not been determined.

Antifolates. From inception through June 30, 2012, we had spent approximately $43.5 million in research and development expenses on our portfolio of antifolates. In May 2012, we announced the top-line results of our completed Phase II trial of CH-4051 in patients with rheumatoid arthritis. Results of this trial indicated that CH-4051 did not demonstrate superior efficacy to methotrexate in the dose range evaluated. While we believe that higher doses of CH-4051 might provide enhanced therapeutic benefit in rheumatoid arthritis and that CH-4051 could be developed for other anti-inflammatory and autoimmune indications, we determined that current resources would be better allocated toward the completion of our Northera development program in Neurogenic OH. As such, there are no immediate plans to continue the development of CH-4051.

I-3D Portfolio. From inception through June 30, 2012, we had spent approximately $2.5 million in research and development expenses on the I-3D portfolio of compounds. We have conducted compound discovery work on the portfolio to try and identify one or more lead compounds. All of the work completed to date was performed before 2008 and we do not expect to incur significant additional expenses for these compounds until we select a partner or obtain additional financing.

Sales and marketing expenses. Although we had no formalized selling activities, during the quarter ended June 30, 2012, sales and marketing expenses increased when compared to the quarter ended June 30, 2011. During the first quarter of 2012, we spent considerable resources on supporting the development and implementation of sales and marketing initiatives for Northera in anticipation of a planned 2012 commercial launch. During the second quarter of 2012, the majority of costs were related to bringing such activities to a close, cancelling related vendor contracts and finalizing projects that were in progress upon receipt of the CRL in March 2012. Such activities included market research, sales force strategy and planning, planning and development of advertising and promotional campaigns, website development, sales operations, sales support systems implementations, employee training programs, sales force . . .