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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                              |
| ** ** | ** ** | **FOR THE QUARTERLY PERIOD ENDED MARCH 31,  2009**                                                 |
| ** ** | ** ** | ** **                                                                                              |
| ** ** | ** ** | **OR**                                                                                                  |
| ** ** | ** ** | ** **                                                                                              |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**FOR THE TRANSITION PERIOD FROM          TO          **

 

**Commission File Number 0-29889**

 

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**Rigel Pharmaceuticals, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                      | ** ** | **94-3248524**                        |
|---------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or |       | (I.R.S. Employer  Identification No.) |
| organization)                                     |       |                                  |
|                                              |       |                                  |
| **1180  Veterans Blvd.**                          | ** ** | ** **                            |
| **South  San Francisco, CA**                      | ** ** | **94080**                             |
| (Address of  principal executive offices)         |       | (Zip Code)                            |

 

**(650) 624-1100**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes  x  No  o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files). Yes  o  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 

| Large  accelerated filer x |   | Accelerated  filer o |   | Non-accelerated  filer o                      |   | Smaller  reporting company o |
|----------------------------|--------|----------------------|--------|-----------------------------------------------|--------|------------------------------|
|                       |   |                 |   | (Do not check if a smaller reporting company) |   |                         |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes  o  No  x

 

As of April 30, 2009, there were **36,700,860**shares of the registrant’s common stock outstanding.

 

 

 

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**Table of Contents**

** **

**RIGEL PHARMACEUTICALS, INC.QUARTERLY REPORT ON FORM 10-QFOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009**

** **

**INDEX**

** **
| ** **       | ** **                                                                                             | **Page** |
|------------------|--------------------------------------------------------------------------------------------------------|----------|
| **PART I**  | **FINANCIAL INFORMATION**                                                                              | 3        |
| **Item 1.**      | Condensed Financial Statements                                                                         | 3        |
|             | Condensed  Balance Sheets — March 31, 2009 (Unaudited) and December 31, 2008            | 3        |
|             | Condensed  Statements of Operations (Unaudited) —three months ended March 31, 2009 and  2008 | 4        |
|             | Condensed Statements of Cash Flows (Unaudited) — three  months ended March 31, 2009 and 2008 | 5        |
|             | Notes to Condensed Financial Statements (Unaudited)                                                    | 6        |
|             | Report of Independent Registered Public Accounting  Firm                                               | 13       |
| **Item 2.**      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations            | 14       |
| **Item 3.**      | Quantitative  and Qualitative Disclosures About Market Risk                                            | 24       |
| **Item 4.**      | Controls and  Procedures                                                                               | 24       |
| **PART II** | **OTHER INFORMATION**                                                                                  | 24       |
| **Item 1.**      | Legal Proceedings                                                                                      | 24       |
| **Item 1A.**     | Risk Factors                                                                                           | 25       |
| **Item 2.**      | Unregistered  Sales of Equity Securities and Use of Proceeds                                           | 36       |
| **Item 6.**      | Exhibits                                                                                               | 37       |
|             |                                                                                                   |     |
| **Signatures**   |                                                                                                   | 38       |

 

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**PART I.FINANCIAL INFORMATION**

 

**Item 1.****    Condensed Financial Statements**

 

**RIGELPHARMACEUTICALS, INC.**

**CONDENSED BALANCE SHEETS**

**(Inthousands, except share and per share amounts)**

** **
| ** **                                                                                                                                                                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2009**           | ** ** | **2008 (1)**     | ** ** |
| ** **                                                                                                                                                                               | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                               |       |               |       |                  |       |
| Current assets:                                                                                                                                                                          |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                |       | $                  | 36,729     |                  | $          | 46,005 |   |
| Available-for-sale securities                                                                                                                                                            |       | 68,082             |       | 88,472                |       |
| Prepaid expenses and other current assets                                                                                                                                                |       | 3,187              |       | 3,610                 |       |
| Total current assets                                                                                                                                                                     |       | 107,998            |       | 138,087               |       |
|                                                                                                                                                                                     |       |               |       |                  |       |
| Property and equipment, net                                                                                                                                                              |       | 3,258              |       | 3,567                 |       |
| Other assets                                                                                                                                                                             |       | 2,770              |       | 2,204                 |       |
|                                                                                                                                                                                     |       | $                  | 114,026    |                  | $          | 143,858 |   |
|                                                                                                                                                                                     |       |               |       |                  |       |
| **Liabilities and stockholders’ equity**                                                                                                                                            |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                                     |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                         |       | $                  | 6,790      |                  | $          | 5,984 |   |
| Accrued compensation                                                                                                                                                                     |       | 1,651              |       | 1,625                 |       |
| Other accrued liabilities                                                                                                                                                                |       | 9,400              |       | 12,029                |       |
| Deferred rent                                                                                                                                                                            |       | 634                |       | 3,174                 |       |
| Capital lease obligations                                                                                                                                                                |       | 1,226              |       | 1,339                 |       |
| Total current liabilities                                                                                                                                                                |       | 19,701             |       | 24,151                |       |
|                                                                                                                                                                                     |       |               |       |                  |       |
| Long-term portion of capital lease obligations                                                                                                                                           |       | 1,730              |       | 2,053                 |       |
| Long-term portion of deferred rent                                                                                                                                                       |       | 15,456             |       | 13,311                |       |
| Other long-term liabilities                                                                                                                                                              |       | 171                |       | 178                   |       |
|                                                                                                                                                                                     |       |               |       |                  |       |
| Commitments and contingencies                                                                                                                                                            |       |               |       |                  |       |
|                                                                                                                                                                                     |       |               |       |                  |       |
| Stockholders’ equity:                                                                                                                                                               |       |               |       |                  |       |
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; none  issued and outstanding as of March 31, 2009 and December 31, 2008                                       |       | —             |       | —                |       |
| Common stock, $0.001 par value; 100,000,000 shares authorized;  36,700,860 and 36,646,397 shares issued and outstanding on March 31,  2009 and December 31, 2008, respectively |       | 37                 |       | 37                    |       |
| Additional paid-in capital                                                                                                                                                               |       | 608,489            |       | 605,509               |       |
| Accumulated other comprehensive income                                                                                                                                                   |       | 141                |       | 396                   |       |
| Accumulated deficit                                                                                                                                                                      |       | (531,699           | )          | (501,777              | )          |
| Total stockholders’ equity                                                                                                                                                          |       | 76,968             |       | 104,165               |       |
|                                                                                                                                                                                     |       | $                  | 114,026    |                  | $          | 143,858 |   |

 

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(1)  Thebalance sheet at December 31, 2008 has been derived from the auditedfinancial statements at that date included in Rigel’s Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

See AccompanyingNotes.

 

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**RIGELPHARMACEUTICALS, INC.**

**CONDENSED STATEMENTS OF OPERATIONS**

**(Inthousands, except per share amounts)**

**(unaudited)**

 
| ** **                                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Contract revenues                                                                       |       | $                                                    | —     |   | $ | — |   |
| Costs and expenses:                                                                     |       |                                                 |       |   |   |
| Research and development                                                                |       | 24,538                                               |       | 21,620 |   |
| General and administrative                                                              |       | 4,603                                                |       | 7,125 |   |
| Restructuring charges                                                                   |       | 1,141                                                |       | — |   |
|                                                                                    |       | 30,282                                               |       | 28,745 |   |
|                                                                                    |       |                                                 |       |   |   |
| Loss from operations                                                                    |       | (30,282                                              | )          | (28,745 | ) |
| Interest income                                                                         |       | 347                                                  |       | 1,530 |   |
| Interest expense                                                                        |       | (53                                                  | )          | (47 | ) |
| Loss before income taxes                                                                |       | (29,988                                              | )          | (27,262 | ) |
| Income tax benefit                                                                      |       | 66                                                   |       | — |   |
| Net loss                                                                                |       | $                                                    | (29,922    | ) | $ | (27,262 | ) |
|                                                                                    |       |                                                 |       |   |   |
| Net loss per share, basic and diluted                                                   |       | $                                                    | (0.82      | ) | $ | (0.79 | ) |
|                                                                                    |       |                                                 |       |   |   |
| Weighted average shares used in computing net loss per common share,  basic and diluted |       | 36,699                                               |       | 34,417 |   |

 

See AccompanyingNotes.

 

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**RIGELPHARMACEUTICALS, INC.**

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(unaudited)**

 
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **March 31,**               | ** ** |
| ** **                                                                   | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| **Operating activities**                                                     |       |                             |       |   |   |
| Net loss                                                                     |       | $                                | (29,922    | ) | $ | (27,262 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |       |                             |       |   |   |
| Depreciation and amortization                                                |       | 320                              |       | 342 |   |
| Stock-based compensation expense                                             |       | 2,266                            |       | 5,846 |   |
| Changes in assets and liabilities:                                           |       |                             |       |   |   |
| Prepaid expenses and other current assets                                    |       | 423                              |       | (951 | ) |
| Other assets                                                                 |       | 50                               |       | 38 |   |
| Accounts payable                                                             |       | 806                              |       | (732 | ) |
| Accrued compensation                                                         |       | 26                               |       | (5,190 | ) |
| Other accrued liabilities                                                    |       | (2,629                           | )          | 974 |   |
| Deferred rent and other long-term liabilities                                |       | (402                             | )          | (145 | ) |
| Net cash used in operating activities                                        |       | (29,062                          | )          | (27,080 | ) |
|                                                                         |       |                             |       |   |   |
| **Investing activities**                                                     |       |                             |       |   |   |
| Purchases of available-for-sale securities                                   |       | (27,034                          | )          | (73,605 | ) |
| Maturities of available-for-sale securities                                  |       | 44,190                           |       | 30,676 |   |
| Sale of available-for-sale securities                                        |       | 2,979                            |       | — |   |
| Capital expenditures                                                         |       | (11                              | )          | (297 | ) |
| Net cash provided by (used in) investing activities                          |       | 20,124                           |       | (43,226 | ) |
|                                                                         |       |                             |       |   |   |
| **Financing activities**                                                     |       |                             |       |   |   |
| Proceeds from capital lease financings                                       |       | —                           |       | 219 |   |
| Payments on capital lease obligations                                        |       | (436                             | )          | (316 | ) |
| Net proceeds from issuances of common stock                                  |       | 98                               |       | 128,496 |   |
| Net cash (used in) provided by financing activities                          |       | (338                             | )          | 128,399 |   |
|                                                                         |       |                             |       |   |   |
| Net (decrease) increase in cash and cash equivalents                         |       | (9,276                           | )          | 58,093 |   |
|                                                                         |       |                             |       |   |   |
| Cash and cash equivalents at beginning of period                             |       | 46,005                           |       | 44,503 |   |
|                                                                         |       |                             |       |   |   |
| Cash and cash equivalents at end of period                                   |       | $                                | 36,729     |   | $ | 102,596 |   |
|                                                                         |       |                             |       |   |   |
| **Supplemental disclosure of cash  flow information**                        |       |                             |       |   |   |
| Interest paid                                                                |       | $                                | 55         |   | $ | 45 |   |
|                                                                         |       |                             |       |   |   |
| **Schedule of non cash transactions**                                        |       |                             |       |   |   |
| Issuance of warrants with lease amendment                                    |       | $                                | 616        |   | $ | — |   |

 

See Accompanying Notes.

 

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** **

**RigelPharmaceuticals, Inc.**

**Notes toCondensed Financial Statements**

**(unaudited)**

** **

In this report, “Rigel,” “we,” “us”and “our” refer to Rigel Pharmaceuticals, Inc.

 

**1.****             ****Nature of Operations**

 

We were incorporated in the state of Delaware on June 14,1996. We are engaged in the discovery and development of novel, small-moleculedrugs for the treatment of inflammatory/autoimmune diseases, as well as forcertain cancers and metabolic diseases.

 

**2.****             ****Basis of Presentation**

 

Our accompanying unaudited condensed financial statementshave been prepared in accordance with U.S. generally accepted accountingprinciples for interim financial information and pursuant to the instructionsto Form 10-Q and Article 10 of Regulation S-X. Accordingly, they donot include all of the information and notes required by U.S. generallyaccepted accounting principles for complete financial statements. Theseunaudited condensed financial statements include all normal and recurringadjustments that we believe are necessary to fairly state our financialposition and the results of our operations and cash flows. Interim-periodresults are not necessarily indicative of results of operations or cash flowsfor a full-year. The balance sheet at December 31, 2008 has been derivedfrom audited financial statements at that date, but does not include alldisclosures required by U.S. generally accepted accounting principles forcomplete financial statements. Because all of the disclosures required by U.S.generally accepted accounting principles for complete financial statements arenot included herein, these interim unaudited condensed financial statements andthe notes accompanying them should be read in conjunction with our auditedfinancial statements and the notes thereto included in our Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

The preparation of financialstatements in conformity with U.S. generally accepted accounting principlesrequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. We base ourestimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances. Actual results could differfrom these estimates.

 

**3.****             ****Recent Accounting Pronouncements**

 

OnJune 25, 2008, the Financial Accounting Standards Board, or FASB, ratifiedthe consensus reached by the Emerging Issues Task Force, or EITF, on EITF IssueNo. 07-5 *“Determining Whether anInstrument (or Embedded Feature) is Indexed to an Entity’s Own Stock,”*or EITF 07-5. EITF 07-5 provides guidance on how to determine whethercertain instruments or features were indexed to the company’s own stock.EITF 07-5 is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008, and interim periods within those fiscalyears. We adopted EITF 07-5 on January 1, 2009 and concluded it hadno material impact on our financial statements.

 

OnDecember 12, 2007, the FASB ratified the consensus reached by the EITF onEITF Issue No. 07-1, *“Accounting forCollaborative Arrangements,”* or EITF 07-1. EITF 07-1defines collaborative arrangements and establishes reporting requirements fortransactions between participants in a collaborative arrangement and betweenparticipants in the arrangement and third parties. EITF 07-1 is effectivefor financial statements issued for fiscal years beginning after December 15,2008 and will be applied retrospectively to all prior periods presented for allcollaborative arrangements existing as of the effective date. We adopted EITF07-1 on January 1, 2009 and concluded it had no material impact on ourfinancial statements.

 

InSeptember 2006, the FASB issued Statement of Financial AccountingStandards, or SFAS, No. 157, *“FairValue Measurements,”*or SFASNo. 157. This standard defines fair value, establishes a frameworkfor measuring fair value under U.S. generally accepted accounting principles,and expands disclosures about fair value measurements. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007, except that under FASB Staff Position, or FSP 157-2, *“Effective Date of FASB Statement No. 157,”*companies are allowed to delay the effective date of SFAS No. 157 fornon-financial assets and non-financial liabilities that are not recognized ordisclosed at fair value on a recurring basis until fiscal years beginning afterNovember 15, 2008. In October 2008, FSP 157-3, *“Determining the Fair Value of a Financial Asset Whenthe Market for that Asset is Not Active,”* or FSP 157-3, was issuedand effective upon issuance, including prior periods for which financialstatements have not been issued. FSP 157-3 clarified the application of SFAS No. 157in a market that is not active. Effective January 1, 2008, we adopted theprovisions of SFAS No. 157 for all financial assets and liabilities.  EffectiveJanuary 1, 2009, we adopted SFAS No. 157 for non-financial assets andliabilities. There was no material impact on our financial statements from theadoption of SFAS No. 157 for our financial or non-financial assets andliabilities.

 

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**4.****             ****Basic and Diluted Net Loss Per Share**

 

Basic and diluted net loss pershare was computed by dividing the net loss for the period by the weightedaverage number of shares of common stock outstanding during the period. Thecalculation of diluted net loss per share excluded shares of potential commonstock, consisting of stock options and warrants, because their effect wouldhave been anti-dilutive.

 

**5.****             ****Stock Award Plans**

 

Total stock-based compensation expense related toall of our stock-based awards that we recognized was as follows (in thousands):

 
| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **March 31,**               | ** ** |
| ** **                             | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Research and development               |       | $                                | 1,425      |   | $ | 3,092 |   |
| General and administrative             |       | 719                              |       | 2,754 |   |
| Restructuring charges                  |       | 122                              |       | — |   |
| Total stock-based compensation expense |       | $                                | 2,266      |   | $ | 5,846 |   |

 

In February 2009, we announced that we cut ourresearch programs in virology and oncology as well as terminated certainrelated development and administrative staff, which resulted in the dismissalof 36 employees, or approximately 20% of our workforce. This measure wasintended to maintain our emphasis on active preclinical and clinical programs,while conserving our resources. As part of a package we offered the terminatedemployees, we extended thedate the terminated employees had to exercise their vested options to December 31,2008 rather than 90 days from the termination date as is typically requiredunder our equity incentive plan. We recorded $122,000 of non-cash stock-basedcompensation expense related to this modification.

 

Under SFAS No. 123(R), “*Accounting for Stock-BasedCompensation*,” the fair value of each option award is estimated onthe date of grant using the Black-Scholes option pricing model. We havesegregated option awards into three homogenous groups for purposes ofdetermining fair values of options: officers and directors, all otheremployees, and consultants.

 

We determined weighted-average valuation assumptions separately foreach of these groups as follows:

 

·                  Volatility—We estimatedvolatility using the historical share price performance over the expected lifeof the option up to the point where we have historical market data. We alsoconsidered other factors, such as implied volatility, our current clinicaltrials and other company activities that may affect the volatility of our stockin the future. We determined that at this time historical volatility is moreindicative of our expected future stock performance than implied volatility.

 

·                  Expected term—We worked withvarious historical data to determine the applicable expected term for eachoption group. This data include: (1) for exercised options,  the term of the options from option grantdate to exercise date; (2) for cancelled options, the term of the optionsfrom option grant date to cancellation date, excluding unvested optionforfeitures; and (3) for options that remained outstanding at the balancesheet date, the term of the options from option grant date to the end of thereporting period and the estimated remaining term of the options. Theconsideration and calculation of the above data gave us reasonable estimates ofthe expected term for each option group. We also considered the vestingschedules of the options granted and factors surrounding exercise behavior ofthe option groups, our current market price and company activity that mayaffect our market price. In addition, we considered the optionee type(i.e., officers and directors, all other employees and consultants) andother factors that may affect the expected term of the option. For optionsgranted to consultants, we use the contractual term of the option, which isgenerally ten years, for the initial valuation of the option and the remainingcontractual term of the option for the succeeding periods.

 

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·                  Risk-free interest rate—Therisk-free interest rate is based on U.S. Treasury constant maturity rates withsimilar terms to the expected term of the options for each option group.

 

·                  Forfeiture rate—We estimatedthe forfeiture rate using our historical experience with pre-vesting options.We review our forfeiture rates each quarter and make changes as factorsaffecting our forfeiture rate calculations and assumptions change.

 

·                  Dividend yield—The expected dividend yield is0% as we have not paid and do not expect to pay dividends.

 

Thefollowing table summarizes the weighted-average assumptions relating to optionsgranted pursuant to our equity incentive plans for the three months ended March 31,2009 and 2008:

 
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **March 31,**               | ** ** |
| ** **               | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Risk-free interest rate  |       | 1.8                              | %          | 2.7 | % |
| Expected term (in years) |       | 4.4                              |       | 4.6 |   |
| Dividend yield           |       | 0.0                              | %          | 0.0 | % |
| Expected volatility      |       | 98.4                             | %          | 93.2 | % |

 

Options are priced at the market price of our commonstock on the date immediately preceding the date of grant, become exercisableat varying dates and generally expire ten years from the date of grant. Wegranted options to purchase 1,982,473 shares of common stock during the threemonths ended March 31, 2009, with a grant-date weighted average fair valueof $4.60 per share. We granted options to purchase 1,305,691 shares of commonstock during the three months ended March 31, 2008, with a grant-dateweighted average fair value of $18.48 per share.  As of March 31, 2009, there wasapproximately $17.9 million of total unrecognized stock-based compensationcost, net of estimated forfeitures, related to unvested options granted underour stock option plans. At March 31, 2009, 2,589,743 shares of commonstock were available for future grant under our equity incentive plans andoptions to purchase 54,463 shares were exercised during the three months ended March 31,2009.

 

***Employee Stock PurchasePlan (ESPP)***

 

The fair value of awards grantedunder our ESPP is estimated on the date of grant using the Black-Scholes optionpricing model, which uses the weighted-average assumptions set forth on the followingtable. Our ESPP provides for a twenty-four month offering period comprised offour six-month purchase periods with a look-back option. A look-back option isa provision in our ESPP under which eligible employees can purchase shares ofour common stock at a price per share equal to the lesser of 85% of the fairmarket value on the first day of the offering period or 85% of the fair marketvalue on the purchase date.

 

Our ESPP also includes a feature that provides for anew offering period to begin when the fair market value of our common stock onany purchase date during an offering period falls below the fair market valueof our common stock on the first day of such offering period. This feature iscalled a “reset.” Participants are automatically enrolled in the new offeringperiod. We had a “reset” on January 2, 2009 because the fair market valueof our stock on December 31, 2008 was lower than the fair market value ofour stock on July 1, 2008, the first day of the offering period. Weapplied modification accounting in accordance with SFAS No. 123(R) todetermine the incremental fair value associated with this ESPP “reset” andrecognized the related stock-based compensation expense according to the FASBTechnical Bulletin, or FTB, No. 97-1, *“AccountingUnder Statement 123 for Certain Employee Stock Purchase Plans with a Look-backOption.”* The total incremental fair value for this ESPP “reset” was$1,443,848, which will be recognized over the new twenty-four month offeringperiod.

 

As of March 31,2009, there were approximately 1,409,931 shares reserved for future issuanceunder the ESPP. The following table summarizes the weighted-average assumptionsrelated to our ESPP for the three months ended March 31, 2009 and 2008.Expected volatilities for our ESPP are based on the historical volatility ofour stock. Expected term represents the weighted average of the purchaseperiods within the offering period. The risk-free interest rate for periodswithin the expected term is based on U.S. Treasury constant maturity rates.

 
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **March 31,**               | ** ** |
| ** **               | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Risk-free interest rate  |       | 1.1                              | %          | 2.1 | % |
| Expected term (in years) |       | 1.3                              |       | 1.2 |   |
| Dividend yield           |       | 0.0                              | %          | 0.0 | % |
| Expected volatility      |       | 112.0                            | %          | 99.0 | % |

 

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**6.****             ****Revenue Recognition**

 

We recognize revenue from our collaboration arrangements in accordancewith Emerging Issues Task Force, or EITF, No. 07-1, *“Accountingfor Collaborative Arrangements”*. Our revenue arrangements withmultiple elements are evaluated under EITF No. 00-21, *“Revenue Arrangements with Multiple Deliverables,”*and are divided into separate units of accounting if certain criteria are met,including whether the delivered element has stand- alone value to the customerand whether there is objective and reliable evidence of the fair value of anyundelivered items. The consideration we receive is allocated among the separateunits based on their respective fair values, and the applicable revenuerecognition criteria are applied to each of the separate units. Advancepayments received in excess of amounts earned are classified as deferredrevenue until earned.

 

Non-refundable, up-front payments received in connection with researchand development collaboration agreements, including technology access fees, aredeferred and recognized on a straight-line basis over the relevant periods ofcontinuing involvement, generally the research term. When a research term isnot specified, we estimate the time it will take us to complete ourdeliverables under the contract and recognize the upfront fee using thestraight-line method over that time period. We review our estimates everyquarter for reasonableness.

 

Revenues related to collaborative research with our corporatecollaborators are recognized as research services are performed over therelated development periods for each agreement. Under these agreements, we arerequired to perform research and development activities as specified in eachrespective agreement. The payments received are not refundable and aregenerally based on a contractual cost per full-time equivalent employee workingon the project. Our research and development expenses under the collaborativeresearch agreements approximate the revenue recognized under such agreementsover the term of the respective agreements. It is our policy to recognizerevenue based on our level of effort expended, however, revenue recognized willnot exceed amounts billable under the agreement.

 

Revenues associated with at-risk milestones pursuantto collaborative agreements are recognized upon achievement of the milestonesas set forth in the applicable agreement.

 

**7.****             ****Cash, Cash Equivalents and Available-For-Sale Securities**

 

Cash, cash equivalents andavailable-for-sale securities consisted of the following (in thousands):

 
| ** **                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Checking account                           |       | $                  | 904        |                  | $          | 491 |   |
| Money market funds                         |       | 30,825             |       | 45,514                |       |
| U. S. treasury bills                       |       | 24,941             |       | 26,085                |       |
| Government-sponsored enterprise securities |       | 28,610             |       | 34,641                |       |
| Corporate bonds and commercial paper       |       | 19,531             |       | 27,746                |       |
|                                       |       |               |       |                  |       |
|                                       |       | $                  | 104,811    |                  | $          | 134,477 |   |
| Reported as:                               |       |               |       |                  |       |
| Cash and cash equivalents                  |       | $                  | 36,729     |                  | $          | 46,005 |   |
| Available-for-sale securities              |       | 68,082             |       | 88,472                |       |
|                                       |       |               |       |                  |       |
|                                       |       | $                  | 104,811    |                  | $          | 134,477 |   |

 

Cash equivalents and available-for-sale securities includethe following securities with unrealized gains and losses (in thousands):

 
| ** **                                 | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|--------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                                 | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **          | ** ** |
| **March 31, 2009**               | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| U. S. treasury bills                       |       | $             | 24,910     |           | $          | 31             |       | $                   | —     |   | $ | 24,941 |   |
| Government-sponsored enterprise securities |       | 28,567        |       | 49             |       | (6             | )          | 28,610              |       |
| Corporate bonds and commercial paper       |       | 19,464        |       | 67             |       | —         |       | 19,531              |       |
|                                       |       |          |       |           |       |           |       |                |       |
| Total                                      |       | $             | 72,941     |           | $          | 147            |       | $                   | (6         | ) | $ | 73,082 |   |

 
| ** **                                 | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|--------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                                 | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **          | ** ** |
| **December 31, 2008**            | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| U. S. treasury bills                       |       | $             | 25,972     |           | $          | 113            |       | $                   | —     |   | $ | 26,085 |   |
| Government-sponsored enterprise securities |       | 34,501        |       | 140            |       | —         |       | 34,641              |       |
| Corporate bonds and commercial paper       |       | 27,603        |       | 143            |       | —         |       | 27,746              |       |
|                                       |       |          |       |           |       |           |       |                |       |
| Total                                      |       | $             | 88,076     |           | $          | 396            |       | $                   | —     |   | $ | 88,472 |   |

 

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*Available-for-sale Securities. *As of March 31, 2009, all of our cash equivalents andavailable-for-sale securities had maturities of less than one year. AtMarch 31, 2009, our available-for-sale securities had a weighted averagetime to maturity of approximately 106 days. We have the ability to hold allinvestments as of March 31, 2009 to maturity.

 

At March 31,2009 and December 31, 2008, we had no investments that had been in acontinuous unrealized loss position for more than twelve months.  As of March 31, 2009, a total of 8individual securities were in an unrealized loss position for twelve months orless and were deemed to be temporary.

 

Thefollowing table shows the fair value and gross unrealized losses of ourinvestments in individual securities that are in an unrealized loss position,aggregated by investment category (in thousands):

 
| ** **                                 | ** ** | ** **          | ** ** | **Unrealized** | ** ** |
|--------------------------------------------|------------|---------------------|------------|----------------|------------|
| **March 31, 2009**               | ** ** | **Fair Value** | ** ** | **Losses**     | ** ** |
| Government-sponsored enterprise securities |       | $                   | 7,835      |           | $          | (6 | ) |
| Corporate bonds and commercial paper       |       | 4,999               |       | —         |       |
| Total                                      |       | $                   | 12,834     |           | $          | (6 | ) |

 

**8.****             ****Fair Value**

 

Under SFAS No. 157, fair value is defined as the price at which anasset could be exchanged or a liability transferred in a transaction betweenknowledgeable, willing parties in the principal or most advantageous market forthe asset or liability. Where available, fair value is based on observablemarket prices or parameters or derived from such prices or parameters. Whereobservable prices or parameters are not available, valuation models areapplied.

 

Financial assets recorded at fair value in our financial statements arecategorized based upon the level of judgment associated with the inputs used tomeasure their fair value. Hierarchical levels, defined by SFAS No. 157 anddirectly related to the amount of subjectivity associated with the inputs tofair valuation of these assets and liabilities, are as follows:

 

Level 1—Inputs are unadjusted, quoted prices in active markets foridentical assets at the reporting date. Active markets are those in whichtransactions for the asset or liability occur in sufficient frequency andvolume to provide pricing information on an ongoing basis.

 

The fair valued assets we hold that are generally included under thisLevel 1 are money market securities where fair value is based on publiclyquoted prices.

 

Level 2—Are inputs,  otherthan quoted prices included in Level 1, that are either directly orindirectly observable for the asset or liability through correlation withmarket data at the reporting date and for the duration of the instrument’santicipated life.

 

The fair valued assets we hold that are generally assessed underLevel 2 included government-sponsored enterprise securities, U. S.Treasury bills, corporate bonds and commercial paper where fair value is basedon valuation methodologies such as models using observable market inputs,including benchmark yields, reported trades, broker/dealer quotes, bids, offersand other reference data.

 

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Level 3—Unobservable inputs that are supported by little or nomarket activity and that are significant to the fair value of the assets orliabilities and which reflect management’s best estimate of what marketparticipants would use in pricing the asset or liability at the reporting date.Consideration is given to the risk inherent in the valuation technique and therisk inherent in the inputs to the model.

 

***Fair Value on a Recurring Basis***

 

Financial assets measured at fair value on a recurringbasis are categorized in the tables below based upon the lowest level ofsignificant input to the valuations (in thousands):

 
| ** **                                 | ** ** | **Assets at Fair Value as of March 31, 2009** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Level 1**                                                                      | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Money market fund                          |       | $                                                                                     | 30,825     |   | $ | — |   | $ | — |   | $ | 30,825 |   |
| U. S. treasury bills                       |       | —                                                                                |       | 24,941 |   | — |   | 24,941 |   |
| Government-sponsored enterprise securities |       | —                                                                                |       | 28,610 |   | — |   | 28,610 |   |
| Corporate bonds and commercial paper       |       | —                                                                                |       | 19,531 |   | — |   | 19,531 |   |
|                                       |       |                                                                                  |       |   |   |   |   |   |   |
| Total                                      |       | $                                                                                     | 30,825     |   | $ | 73,082 |   | $ | — |   | $ | 103,907 |   |

 

***Fair Value on a Non-Recurring Basis***

 

On March 31, 2009, we issued a new warrantgranting our landlord the right to purchase 200,000 shares of common stock, andcancelled an existing warrant to purchase 100,000 shares of common stock, inconnection with the amendment of our build-to-suit lease agreement (see Note 10below for more details).   Weused the Black Scholes option-pricing model and calculated an incremental fairmarket value of $616,000 related to the new warrants in accordance with SFAS No. 123(R).  The new warrants was categorized as level 3under SFAS No. 157 due to the unobservable inputs we used in the BlackScholes option-pricing model.

 

Thefollowing table summarizes the assumptions used relating to the valuation ofthe new warrants at March 31, 2009:

 
| Risk-free interest rate  |   | 2.2  | %      |
|--------------------------|--------|------|--------|
| Expected term (in years) |   | 7.0  |   |
| Dividend yield           |   | 0.0  | %      |
| Expected volatility      |   | 99.2 | %      |

 

**9.****             ****Restructuring Charges**

 

In February 2009, we announced that we cut ourresearch programs in virology and oncology as well as terminated certainrelated development and administrative staff, which resulted in the dismissalof 36 employees, or approximately 20% of our workforce. This measure wasintended to maintain our emphasis on active preclinical and clinical programs,while conserving our resources. Consequently, we recorded restructuring chargesof $1.1 million, including $1.0 million of workforce reduction costs and$122,000 of non-cash stock-based compensation expense as a result of theextension of the date the terminated employees had to exercise their vestedoptions to December 31, 2008 rather than 90 days from termination date asis typically required under our equity incentive plan. At March 31, 2009,$28,000 of the restructuring charges related to COBRA benefits for theremaining periods of 2009 were unpaid and classified under accrued compensationon the balance sheet.

 

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**10.****      ****Amendment to the Build-to-Suit Lease Agreement**

 

On March 31, 2009, we amendedour build-to-suit lease agreement with our landlord HCP BTC, LLC (formerlyknown as Slough BTC, LLC) to defer certain rental obligations in the aggregateamount of $6.9 million for a period of up to seventeen months.  Under the terms of this amendment, we areobligated to repay the deferred rental amounts, including interest accruing at12% during the deferral period, based on a timeline that can vary dependingupon the occurrence of certain financing or collaborative transactions. Weconsider accrued interest on the deferred amounts to be contingent rentpayments and accordingly, recognize such amounts in rent expense asincurred.  The amount of contingent rentexpense we incurred in the first quarter of 2009 was approximately$138,000.  In addition, the amendment tothe lease agreement also provided for the cancellation of an existing warrantgranting HCP Estates USA Inc. (an affiliate of our landlord) the right topurchase 100,000 shares of common stock and the issuance of a new warrantgranting our landlord the right to purchase 200,000 shares of common stock.  The exercise price per share of the newwarrant is $6.61, which is the average closing price of our common stock forthe three business days immediately preceding the execution of the amendment tothe lease agreement. The new warrant remains exercisable for 7 years from thedate of issuance. We applied modification accounting in accordance with SFAS No. 123(R) andcalculated an incremental fair market value of the new warrant of $616,000.This amount has been deferred in other assets and is being amortized into rentexpense over the remaining term of the lease.

 

**11.****      ****Contingencies**

 

OnFebruary 6, 2009, a purported securities class action lawsuit wascommenced in the United States District Court for the Northern District ofCalifornia, naming us and certain of our officers, directors and underwritersas defendants for our February 2008 stock offering. The lawsuit allegesviolations of the Securities Act of 1933 and the Securities Exchange Act of1934 in connection with allegedly false and misleading statements made by usrelated to the results of a Phase 2a clinical trial of our productcandidate R788. The plaintiff seeks damages, including rescission or rescissorydamages for purchasers in the stock offering, an award of its costs andinjunctive and/or equitable relief for purchasers of our common stock duringthe period between December 13, 2007 and October 27, 2008, includingpurchasers in the stock offering. An additional purported securities classaction lawsuit containing similar allegations was subsequently filed in theUnited States District Court for the Northern District of California on February 20,2009. By order of the Court dated March 19, 2009, the two lawsuits wereconsolidated into a single action.  On April 7,2009, Inter-Local Pension Fund GCC/IBT filed a motion for appointment as leadplaintiff in the case, and for appointment of its counsel as lead counsel.  It is possible that additional suits will befiled, or allegations received from stockholders, with respect to these samematters and also naming us and/or our executive officers and directors asdefendants**.** If any such additional suits are filed in the same court, we believethat they would be consolidated into the consolidated action.

 

Thislawsuit and any other related lawsuits are subject to inherent uncertaintiesand the actual cost will depend upon many unknown factors. The outcome of thelitigation is necessarily uncertain and we could be forced to expendsignificant resources in the defense of this suit, and we may not prevail. Weare not currently able to estimate the possible cost to us from this matter, asthis lawsuit is currently at an early stage and we cannot ascertain how long itmay take to resolve this matter. We have not established any reserve for anypotential liability relating to this lawsuit. We believe that we havemeritorious defenses and intend to defend this lawsuit vigorously.

 

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**Report of Independent Registered Public Accounting Firm**

 

The Board of Directors

Rigel Pharmaceuticals, Inc.

 

We have reviewed the condensed balance sheet of RigelPharmaceuticals, Inc. as of March 31, 2009, and the related condensedstatements of operations and cash flows for the three-month periods ended March 31,2009 and 2008. These financial statements are the responsibility of the Company’smanagement.

 

We conducted our review in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). A review ofinterim financial information consists principally of applying analyticalprocedures and making inquiries of persons responsible for financial andaccounting matters. It is substantially less in scope than an audit conductedin accordance with the standards of the Public Company Accounting OversightBoard, the objective of which is the expression of an opinion regarding thefinancial statements taken as a whole. Accordingly, we do not express such anopinion.

 

Based on our review, we are not aware of any materialmodifications that should be made to the condensed interim financial statementsreferred to above for them to be in conformity with U.S. generally acceptedaccounting principles.

 

We have previously audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), thebalance sheet of Rigel Pharmaceuticals, Inc. as of December 31, 2008,and the related statements of operations, stockholders’ equity, and cash flowsfor the year then ended (not presented herein) and in our report dated February 24,2009, we expressed an unqualified opinion on those financial statements.  In our opinion, the information set forth inthe accompanying condensed balance sheet as of December 31, 2008, isfairly stated, in all material respects, in relation to the balance sheet fromwhich it has been derived.

 
|                  |   | /s/ Ernst & Young LLP |
|-----------------------|--------|--------------------------------|
| Palo Alto, California |   |                           |
| May 1, 2009      |   |                           |

 

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**Item 2.    Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

*This discussion and analysis should be readin conjunction with our financial statements and the accompanying notesincluded in this report and the audited financial statements and accompanyingnotes included in our Annual Report on Form 10-K for the year ended December 31,2008. Operating results for the three months ended March 31, 2009 are notnecessarily indicative of results that may occur in future periods.*

 

*This Quarterly Report on Form 10-Q containsstatements indication expectations about future performance and otherforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, that involve risks and uncertainties.**We usually use words such as “may,” “will,” “should,” “could,” “expect,”“plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” or thenegative of these terms or similar expressions to identify theseforward-looking statements. These statements appear throughout this QuarterlyReport on Form 10-Q and are statements regarding our current expectation,belief or intent, primarily with respect to our operations and related industrydevelopments. Examples of these statements include, but are not limited to,statements regarding the following: our business and scientific strategies; theprogress of our product development programs, including clinical testing, andthe timing of results thereof; our corporate collaborations, including revenuesthat may be received from these collaborations; our drug discoverytechnologies; our research and development expenses; protection of ourintellectual property; sufficiency of our cash resources; and our operationsand legal risks. You should not place undue reliance on these forward-lookingstatements. Our actual results could differ materially from those anticipatedin these forward-looking statements for many reasons, including as a result ofthe risks and uncertainties discussed in the “Risk Factors” in Item 1A of Part IIof this Quarterly Report on Form 10-Q. Any forward-looking statementspeaks only as of the date on which it is made, and we undertake no obligationto update any forward-looking statement to reflect events or circumstancesafter the date on which the statement is made or to reflect the occurrence ofunanticipated events. New factors emerge from time to time, and it is notpossible for us to predict which factors will arise. In addition, we cannotassess the impact of each factor on our business or the extent to which anyfactor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.*

 

**Overview**

 

We are a clinical-stage drug development company thatdiscovers and develops novel, small-molecule drugs for the treatment ofinflammatory/autoimmune diseases, as well as for certain cancers and metabolicdiseases. Our pioneering research focuses on intracellular signaling pathwaysand related targets that are critical to disease mechanisms. Our productivityhas resulted in strategic collaborations with large pharmaceutical partners todevelop and market our product candidates. We have product development programsin inflammatory/autoimmune diseases such as rheumatoid arthritis,thrombocytopenia and asthma, as well as in cancer.

 

Wehave not been profitable and have incurred operating losses since we wereincorporated in June 1996. The extent of our future losses and the timingof potential profitability are highly uncertain, and we may never achieveprofitable operations. We incurred net losses of approximately$29.9 million for the three months ended March 31, 2009,$132.3 million in 2008 and $74.3 million in 2007. Currently, ourrevenues may be generated solely from research milestone payments pursuant toour collaboration agreements and licenses and would be insufficient to generateprofitable operations. In addition, we have funded our operations primarilythrough private and public offerings of our common stock. As of March 31,2009, we had an accumulated deficit of approximately $531.7 million. Weexpect to incur losses for at least the next several years and expect thatthese losses could increase as we expand our research and developmentactivities and incur significant clinical and testing costs. Until we are ableto generate a sufficient amount of product revenue, we expect to finance futurecash needs through collaboration and licensing arrangements or public and/orprivate equity or debt offerings, as well as through interest income earned onthe investment of our cash balances and short-term investments.

 

Forthe foreseeable future, our operations will require significant additionalfunding, in large part due to our research and development expenses, futurepreclinical and clinical-testing costs, and the absence of any revenues fromproduct sales. The amount of future funds needed will depend largely on thetiming and structure of potential future collaborations. With the exception ofmilestone and royalty payments that we may receive under our existingcollaborations, we do not currently have any commitments for future funding. Wecontinue to pursue a collaboration partner for our lead product candidate,R788, prior to initiating Phase 3 clinical trials. We have engaged indiscussions with various parties regarding such a partnership. At the presenttime, while we have parties who have indicated an interest in entering into apartnership for R788, we believe we will be able to negotiate a more attractivearrangement for us and our stockholders once we have the results from the twoPhase 2b clinical trials of R788, *TASKi2*and *TASKi3*. Results from both of these clinical trials are expected to be availablein July 2009.

 

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We will have to raise additional capital if we do notidentify a collaboration partner for R788. Recently, the credit markets and thefinancial services industry have been experiencing a period of unprecedentedturmoil and upheaval characterized by the bankruptcy, failure, collapse or saleof various financial institutions and an unprecedented level of interventionfrom the United States federal government. These events have generally madeequity and debt financing more difficult to obtain. As a result of these and otherfactors, we do not know whether additional financing will be available whenneeded, or that, if available, we will obtain financing on reasonable terms.

 

We believe that our existingcapital resources will be sufficient to support our current and projectedfunding requirements through at least the next 12 months. We have basedthis estimate on assumptions that may prove to be wrong, and we could utilizeour available capital resources sooner than we currently expect. Because of thenumerous risks and uncertainties associated with the development of our productcandidates and other research and development activities, including risks anduncertainties that could impact the rate of progress of our developmentactivities, we are unable to estimate with certainty the amounts of increasedcapital outlays and operating expenditures associated with our current andanticipated clinical trials and other research and development activities.

 

##### **Product Development Programs**

##### ** **

Our product development portfoliofeatures multiple novel small molecule drug candidates whose specializedmechanisms of action are intended to provide therapeutic benefit for a range ofinflammatory/autoimmune diseases, as well as for certain cancers and metabolicdiseases. Our multiple product candidates in development are as follows:

 

·                  *R788 (fostamatinibdisodium)—Product Candidate for Rheumatoid Arthritis (RA). *R788is our lead product candidate. It has a novel mechanism of action, inhibitingimmunoglobulins G (IgG) receptor signaling in macrophages and B-cells. Previously, westudied R788 in a Phase 1, single center, double-blind, randomized,placebo-controlled, clinical trial evaluating the safety and pharmacokineticsof escalating single and multiple doses of R788. We also completed aPhase 2a clinical trial of R788 with 189 patients to evaluate its safetyand pharmacokinetics in combination with methotrexate, a commonly prescribedtreatment for RA. Results of this clinical trial suggested that there is not anadverse interaction between R788 and methotrexate.

 

InDecember 2007, we announced the results of a Phase 2a clinical trialof R788 in RA patients simultaneously receiving methotrexate, in which doses of100 mg PO bid (orally, twice daily) and 150 mg PO bid of R788 producedstatistically significant improvement in RA symptoms. The most commonclinically meaningful adverse events noted in the clinical trial includeddose-related neutropenia, mild elevations of liver function tests andgastrointestinal side effects. Dose reduction (to one-half the assigned dose bytaking the drug once per day) was pre-specified in the protocol and contingenton neutrophil counts and/or liver function tests. Notably, a vast majority ofthe patients who had their doses reduced successfully completed the clinicaltrial with minimal safety issues.

 

InJune 2008, we commenced two concurrent Phase 2b clinical trials ofR788 in RA patients at a number of clinical research centers throughout theUnited States, Latin America, and Europe to evaluate the efficacy of R788compared to placebo in distinct RA patient groups. The first Phase 2bclinical trial *(TASKi2)* isevaluating RA patients receiving 100 mg of R788 PO bid (orally, twice daily) or150 mg of R788 PO qd (orally, once daily), compared with those receivingplacebo, in a multi-center, randomized, double blind, placebo controlled,parallel dose study of R788 in patients who have failed to respond tomethotrexate. The second Phase 2b clinical trial *(TASKi3)* is evaluating a group of RApatients receiving 100 mg of R788 PO bid, compared with a group receivingplacebo, in a multi-center, randomized, double blind, placebo controlled,parallel dose study of R788 in patients who have failed at least one marketedbiologic agent. The marketed biologic agents generally includes anti-tumornecrosis factor injectables commonly used to treat RA, but could include othertherapies as well. The primary objectives for *TASKi2*and *TASKi3* are to measure theefficacy of R788 at 6 months and 3 months, respectively, asdetermined by ACR20 scores (American College of Rheumatology responder ratesshowing a minimum of 20% improvement in RA symptoms and pain). Secondaryobjectives include comparing higher ACR response rates (ACR 50 and ACR 70), aswell as DAS28 rates (Disease Activity Score including a 28-joint inspection),in addition to various safety measures. *TASKi3*will also include measurement of changes in bone morphology using MRI scans asa secondary measure.

 

Enrollmentfor the *TASKi2* clinical trial ofR788 in patients with RA who previously failed to respond to methotrexatetreatment was completed in December 2008, with 457 patients randomized.The smaller *TASKi3* clinical trialof R788 completed enrollment in March 2009, with 219 patientsrandomized.  *TASKi3* is for RA patients who previously failed to respondto at least one marketed biologic treatment. Results fromboth of these clinical trials are expected to be available in July 2009.  We expect that these results, involvingapproximately 670 additional patients, will substantially further theunderstanding of the potential of R788 and may therefore drive enhancedeconomics in a possible deal.

 

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The recently completeddouble-blind, double-dummy, randomized, positive and placebo-controlledparallel study of the effects of R788 on QT/QTc intervals in healthy subjectsconfirmed that R788 does not elicit a QT/QTc signal. Under a protocolpre-reviewed by the Food and Drug Administration (FDA), a total of 208 healthyvolunteers were divided into four dosage groups and were given, in a paralleldesign, either placebo, a standard dose of 100mg bid of R788, a super dose of300mg bid of R788, or moxifloxacin (known to elevate QT/QTc intervals in normalhealthy adults). All participants were dosed for four days and were evaluatedfor changes from the time-matched baseline QT/QTc intervals using extractionsfrom continuous Holter monitors. There were no significant effects on theQT/QTc intervals of participants in either the 100mg bid or the 300mg bid R788dosage groups. As expected, the study found that participants in themoxifloxacin group experienced QT/QTc elevations.

 

·                  *R788—ProductCandidate for Immune Thombocytopenic Purpura (ITP). *Platelet destruction from ITPis mediated by IgG signaling, and R788 is a potent inhibitor of IgG signaling.In preclinical studies, R788 was shown to improve thrombocytopenia in an ITPmouse model. We recently completed an exploratory Phase 2 clinical trialof R788 to evaluate its safety and initial efficacy in chronic ITP patients. Inthis clinical trial, R788 was orally administered in varying doses for 30 ormore days and demonstrated that it can improve platelet counts in highlyrefractory patients. We have postponed expanding this clinical trial of R788 inITP until we have further clarity on development priorities from a potentialpartner for R788.

 

·                  *R788—Product Candidate for B-Cell Lymphoma. *Research has shown that over activity of the signaling enzyme spleentyrosine kinase, or Syk, appears to have an essential role in the survival andproliferation of certain B-cell lymphoma cell lines, and that R788 can inhibitthe growth of B-cell lymphoma driven by Syk over activity. In December 2008,we reported that R788 is well-tolerated by B-cell Lymphoma patients and showstherapeutic benefit in patients suffering from diffuse large B-Cell lymphoma(DLBCL) and chronic lymphocytic leukemia/small lymphocytic lymphoma (CLL/SLL).A total of 68 patients received 200 mg PO bid (orally, twice daily) of R788until disease progression occurred. Treatment response rates from patientssuffering from DLBCL and CLL/SLL were 22% and 55%, respectively. Response totreatment was evaluated using standard NHL response criteria (The ChesonCriteria). Treatment-related adverse events included cytopenias, fatigue,diarrhea/abdominal discomfort and hypertension. Most adverse events were mildto moderate and were reversible.

 

·                  *R**788—ProductCandidate for T-Cell Lymphoma.*  Recent research has suggestedthat syk may be important in the growth of some types of T-cell lymphomas.

 

InMarch 2009, we announced the enrollment of the first patient ina Phase 2, multi-center clinical trial of R788 in patients with refractory orrelapsed peripheral T-cell lymphoma (PTCL). The primary objective of theclinical trial is to assess the efficacy of R788, an orally bio-available Sykkinase inhibitor, in patients suffering from this subset of non-Hodgkin’slymphoma that originates in the patient’s T-cells. Prior studies have suggestedincreased expression of syk at the cellular level in many of these patientswith PTCL.

 

The Phase 2 clinicaltrial will be conducted in two stages at several centers in North America witheach patient receiving 200mg of R788 orally twice a day for a minimum of 8weeks, or until disease progression or withdrawal from the clinical trial.During stage one, 19 patients with PTCL who previously failed to respond tostandard of care treatment for their disease are expected to be evaluated.Stage two is expected to include the enrollment of approximately 36 patients.Efficacy will be assessed by computerized tomography/positron emission tomography (CT/PET)scans at baseline and CT scans of the disease-involved areas at 8 weeks. Safetywill be assessed by periodic physical exams, blood tests and clinicallaboratory work, among others. Results of the clinical trial are expected inthe second half of 2010.

 

·                  *R788—Product Candidate for Systemic Lupus Erythematosus (SLE or Lupus).*  Preclinicalstudies have shown that R788 is highly effective in a murine model of lupus.The initiation of a clinical trial in Lupus patients has been postponed untilwe have further clarity on development priorities from a potential partner forR788.

 

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·                  *R348—Product Candidate for Psoriasis and other immune disorders. *R348 is a potent and selective JAK3 inhibitor. JAK3 is a cytoplasmictyrosine kinase that plays an important role in modulating cytokine signalingin T and B cells, as well as affecting lymphocyte differentiation andproliferation in a variety of autoimmune diseases. Moving forward, we plan tofocus on psoriasis and possible topical applications of R348 in conjunctionwith a collaboration partner.

 

·                  *R763—ProductCandidate for Oncology.* R763/AS703569 is a potent, highly-selective,small-molecule inhibitor of aurora kinase. In October 2005, we signed alicensing agreement with Merck Serono that gave Merck Serono an exclusivelicense to develop and commercialize inhibitors in our aurora kinase program,including R763/AS703569. In November 2007, Merck Serono exercised itsoption to add Japan to the territories covered under the current aurora kinasecollaboration with respect to R763/AS703569, resulting in a milestone paymentto us of $3.0 million. Under the agreement, Merck Serono is responsiblefor the further development and commercialization of R763/AS703569.

 

In September 2006, Merck Serono initiateda Phase 1, multi-center clinical trial to evaluate R763/AS703569 for thetreatment of patients with refractory solid tumors. In February 2007,Merck Serono began an additional Phase 1 clinical trial evaluatingR763/AS703569 on patients with hematological malignancies. In July 2007,Merck Serono initiated its third Phase 1 clinical trial, designed todetermine the maximum tolerated dose, safety and dosing regimen ofR763/AS703569 in combination with gemcitabine, a commonly prescribedchemotherapeutic agent administered by intravenous infusion. The clinical trialwill evaluate two different treatment regimens in which R763/AS703569 will begiven in sequence with the gemcitabine over 21-day cycles. As many as 72patients with advanced malignancies, including pancreatic, ovarian, breast,non-small cell lung and colorectal, will be evaluated. We expect that MerckSerono will initiate a Phase 2 trial by the end of 2009.

 

·                  *R343—ProductCandidate for Asthma**.*    Inthe first quarter of 2005, we announced a collaborative research and licenseagreement with Pfizer for the development of inhaled products for the treatmentof allergic asthma and other respiratory diseases, such as chronic obstructivepulmonary disease. The collaboration is focused on our preclinical smallmolecule compounds, which inhibit IgE receptor signaling in respiratory tractmast cells by blocking Syk, a novel drug target for respiratory diseases. Mastcells play important roles in both early and late phase allergic reactions, andSyk inhibitors could prevent both phases.

 

The collaboration is now centered on thedevelopment of R343. Pfizer has completed the Phase 1a clinical trial ofan inhaled formulation of R343, which commenced in December 2007,resulting in a milestone payment of $5.0 million to us by that time. We expect that Pfizer will initiate a Phase1b allergen challenge trial in 2009.

 

**Corporate Collaborations**

 

Weconduct research and development programs independently and in connection withour corporate collaborators. We currently have collaborations with six majorpharmaceutical/biotechnology companies.

 

Thesecollaborations are:

 

·                  Janssen Pharmaceutica N.V., a division ofJohnson & Johnson, relating to oncology therapeutics and diagnostics;

 

·                  Pfizer, Inc., one initiated in 1999 inimmunology and the other in January 2005, relating to intrapulmonaryasthma and allergy therapeutics;

 

·                  Novartis Pharma AG, or Novartis, with respectto four different programs relating to immunology, oncology and chronicbronchitis;

 

·                  Daiichi Pharmaceuticals Co., Ltd.,or Daiichi, relating to oncology;

 

·                  Merck & Co., Inc., orMerck, also relating to oncology;

 

·                  Merck Serono, relating to our aurora kinaseinhibitor program.

 

Noneof these collaborations currently provides us with regular researchreimbursement. In all of these collaborations, if certain conditions are met,we are entitled to receive future milestone payments and royalties. We cannotguarantee that these conditions will be met or that research and developmentefforts will be successful. As a result, we may not receive any furthermilestone payments or royalties under these agreements.

 

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**Recent Accounting Pronouncements**

 

OnJune 25, 2008, the Financial Accounting Standards Board, or FASB, ratifiedthe consensus reached by the Emerging Issues Task Force, or EITF, on EITF IssueNo. 07-5 *“Determining Whether anInstrument (or Embedded Feature) is Indexed to an Entity’s Own Stock,”*or EITF 07-5. EITF 07-5 provides guidance on how to determine whethercertain instruments or features were indexed to the company’s own stock.EITF 07-5 is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008, and interim periods within those fiscalyears. We adopted EITF 07-5 on January 1, 2009 and concluded it hadno material impact on our financial statements.

 

OnDecember 12, 2007, the FASB ratified the consensus reached by the EITF onEITF Issue No. 07-1, *“Accounting forCollaborative Arrangements,”* or EITF 07-1. EITF 07-1 definescollaborative arrangements and establishes reporting requirements fortransactions between participants in a collaborative arrangement and betweenparticipants in the arrangement and third parties. EITF 07-1 is effectivefor financial statements issued for fiscal years beginning after December 15,2008 and will be applied retrospectively to all prior periods presented for allcollaborative arrangements existing as of the effective date. We adopted EITF07-1 on January 1, 2009 and concluded it had no material impact on ourfinancial statements.

 

**Critical Accounting Policies and the Use ofEstimates**

 

Ourdiscussion and analysis of our financial condition and results of operations isbased upon our financial statements, which have been prepared in accordancewith U.S. generally accepted accounting principles. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. We evaluate our estimates,including those related to terms of the research collaborations(i.e. amortization of upfront fees and certain milestone payments),investments, stock compensation, impairment issues, the estimated useful lifeof assets and contingencies, on an on-going basis. We base our estimates onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. We believe the followingcritical accounting policies affect our more significant judgments andestimates used in the preparation of our financial statements:

 

***Revenue Recognition***

 

We recognize revenue from our collaboration arrangements in accordancewith Emerging Issues Task Force, or EITF, No. 07-1, *“Accountingfor Collaborative Arrangements”*. Our revenue arrangements withmultiple elements are evaluated under EITF No. 00-21, *“Revenue Arrangements with Multiple Deliverables,”*and are divided into separate units of accounting if certain criteria are met,including whether the delivered element has stand- alone value to the customerand whether there is objective and reliable evidence of the fair value of anyundelivered items. The consideration we receive is allocated among the separateunits based on their respective fair values, and the applicable revenuerecognition criteria are applied to each of the separate units. Advancepayments received in excess of amounts earned are classified as deferredrevenue until earned.

 

Non-refundable, up-front payments received in connection with researchand development collaboration agreements, including technology access fees, aredeferred and recognized on a straight-line basis over the relevant periods ofcontinuing involvement, generally the research term. When a research term isnot specified, we estimate the time it will take us to complete ourdeliverables under the contract and recognize the upfront fee using thestraight-line method over that time period. We review our estimates everyquarter for reasonableness.

 

Revenues related to collaborative research with our corporatecollaborators are recognized as research services are performed over therelated development periods for each agreement. Under these agreements, we arerequired to perform research and development activities as specified in eachrespective agreement. The payments received are not refundable and aregenerally based on a contractual cost per full-time equivalent employee workingon the project. Our research and development expenses under the collaborative researchagreements approximate the revenue recognized under such agreements over theterm of the respective agreements. It is our policy to recognize revenue basedon our level of effort expended, however, revenue recognized will not exceedamounts billable under the agreement.

 

Revenues associated with at-risk milestones pursuantto collaborative agreements are recognized upon achievement of the milestonesas set forth in the applicable agreement.

 

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***Stock-based Compensation***

 

The determination of the fair valueof stock-based payment awards on the date of grant using the Black-Scholesoption-pricing model is affected by our stock price as well as assumptionsregarding a number of complex and subjective variables. These variablesinclude, but are not limited to, volatility, expected term, risk-free interestrate and dividends. We estimate volatility using our historical stock priceperformance over the expected life of the option up to the point where we havehistorical market data. For expected term, among other things, we take intoconsideration our historical data of options exercised, cancelled and expired.The risk-free rate is based on the U.S. Treasury constant maturity rate. Wehave not paid and do not expect to pay dividends in the foreseeable future. Inorder to calculate stock-based expense, we also estimate the forfeiture rateusing our historical experience with options that cancel before they vest.

 

###### ***Research and Development Accruals***

###### *** ***

We have various contracts with third parties relatedto our research and development activities. Costs that are incurred but notbilled to us as of the end of the period are accrued. We make estimates of theamounts incurred in each period based on the information available to us andour knowledge of the nature of the contractual activities generating suchcosts. Clinical trial contract expenses are accrued based on units of activitycompleted and reported by third parties. Expenses related to other research anddevelopment contracts, such as research contracts, toxicology study contractsand manufacturing contracts are estimated to be incurred generally on astraight-line basis over the duration of the contracts. Raw materials and studymaterials purchased by the third parties are expensed at the time of purchase.Many of our estimates are based significantly or in part on informationprovided by the third parties. If such information were not reported properly,our research and development expense amounts could be misstated.

 

**Results of Operations**

** **

**Three Months Ended March 31,2009 and 2008**

 

**Revenues**

 

There were no contract revenuesreported during the three months ended March 31, 2009 and 2008. We had nodeferred revenue as of March 31, 2009. Our potential future revenues mayinclude certain milestone payments from our current collaboration partners ornew collaboration partners with whom we enter into agreements in the future.

 

**Research and Development Expenses**

 
| ** **                                                                            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                                                            | ** ** | **March 31,**               | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **2009**                         | ** ** | **2008**   | ** ** | **Aggregate Change** | ** ** |
| ** **                                                                            | ** ** | **(in thousands)**          | ** ** |
| ***Research and development expenses***                                               |       | $                                | 24,538     |       | $          | 21,620 |   | $ | 2,918 |   |
| ***Stock-based compensation expense included in  research and development expenses*** |       | 1,425                            |       | 3,092      |       | (1,667 | ) |
|                                                                                       |            |                                  |            |            |            |  |  |  |  |  |

 

The increase in research and development expenses for the three monthsended March 31, 2009, compared to the same period in 2008, was primarilydue to an increase in clinical costs, partially offset by the combination of adecrease in stock-based compensation expense as discussed under “Stock-BasedCompensation” below and a decrease in bonus expense as we did not book a bonusaccrual in the first quarter of 2009. The increase in clinical costs wasprimarily attributable to increased costs associated with our two Phase 2bclinical trials (*TASKi2* and *TASKi3*), as well as the related extensiontrials in RA patients and manufacturing R788 material to be used in theseclinical trials.

 

The scope and magnitude of future research anddevelopment expenses are difficult to predict given the number of clinicaltrials that we will need to conduct for any of our potential products, as wellas our limited capital resources. In general, biopharmaceutical developmentinvolves a series of steps, beginning with identification of a potential targetand including, among others, proof of concept in animals and Phase 1, 2and 3 clinical trials in humans. Each of these steps is typically moreexpensive than the previous step. Success in early stages of development oftenresults in increasing expenditures for a given product candidate. Our researchand development expenditures currently include costs for scientific personnel,supplies, equipment, consultants, sponsored research, allocated facility costs,costs related to preclinical and clinical trials, and stock-based compensation.

 

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**General and Administrative Expenses**

 
| ** **                                                                              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                                                              | ** ** | **March 31,**               | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **2009**                         | ** ** | **2008**   | ** ** | **Aggregate Change** | ** ** |
| ** **                                                                              | ** ** | **(in thousands)**          | ** ** |
| ***General and administrative expenses***                                               |       | $                                | 4,603      |       | $          | 7,125 |   | $ | (2,522 | ) |
| ***Stock-based compensation expense included in  general and administrative expenses*** |       | 719                              |       | 2,754      |       | (2,035 | ) |
|                                                                                         |            |                                  |            |            |            |  |  |  |  |  |

 

The decrease in general and administrative expensesfor the three months ended March 31, 2009, as compared to the same periodin 2008, was primarily attributable to the decrease in stock-based compensationexpense as discussed under “Stock-Based Compensation” below and a decrease inbonus expense as we did not book a bonus accrual in the first quarter of 2009.Due to the purported securities class action lawsuit recently filed against us,we expect that our legal expenses will increase in 2009, as we will vigorouslydefend the lawsuit.

 

**Restructuring Charges**

 
| ** **                                                                | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                                                | ** ** | **March 31,**               | ** ** | ** ** | ** ** |
| ** **                                                                | ** ** | **2009**                         | ** ** | **2008**   | ** ** | **Aggregate Change** | ** ** |
| ** **                                                                | ** ** | **(in thousands)**          | ** ** |
| ***Restructuring Charges***                                               |       | $                                | 1,141      |       | $          | — |   | $ | 1,141 |   |
| ***Stock-based compensation expense included in  restructuring charges*** |       | 122                              |       | —     |       | 122 |   |
|                                                                           |            |                                  |            |            |            |  |  |  |  |  |

 

InFebruary 2009, we announced that we cut our research programs in virologyand oncology as well as terminated certain related development andadministrative staff, which resulted in the dismissal of 36 employees, orapproximately 20% of our workforce. This measure was intended to maintain ouremphasis on our active preclinical and clinical programs, while conserving ourresources. As aresult of the restructuring implemented in the first quarter of 2009, werecorded restructuring charges of $1.1 million, including $1.0 million ofworkforce reduction costs and $122,000 of non-cash stock-based compensationexpense as a result of the extension of the option cancellation date for terminatedemployees to December 31, 2008 rather than 90 days from termination date.

 

**Stock-Based Compensation**

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                   | ** ** | **March 31,**               | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **2009**                         | ** ** | **2008**   | ** ** | **Aggregate Change** | ** ** |
| ** **                                   | ** ** | **(in thousands)**               | ** ** |
| **Stock-based compensation expense from:**   |       |                             |       |       |       |   |   |
| ***Officer, director and employee options*** |       | $                                | 2,266      |       | $          | 5,733 |   | $ | (3,467 | ) |
| ***Consultant options***                     |       | —                           |       | 113        |       | (113 | ) |
| *** ***                                 |       |                             |       |       |       |   |   |
| ***Total***                                  |       | $                                | 2,266      |       | $          | 5,846 |   | $ | (3,580 | ) |

 

The decrease in stock-based compensation expense for thethree months ended March 31, 2009, as compared to the same period in 2008,was primarily due tothe higher valuation of options granted in the first quarterof 2008 and the full recognition of most of the expense associated with thoseoptions as of the end of 2008. The decrease was also due to the fact that amajority of the options were being granted at the end of the first quarter of2009 and had only vested for one day. As a result, the 2009 option grants didnot result in a significant recognition of stock-based compensation expense inthe first quarter of 2009.

 

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**Interest Income**

 
| ** **            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|-----------------------|------------|----------------------------------|------------|------------|------------|
| ** **            | ** ** | **March 31,**               | ** ** | ** ** | ** ** |
| ** **            | ** ** | **2009**                         | ** ** | **2008**   | ** ** | **Aggregate Change** | ** ** |
| ** **            | ** ** | **(in thousands)**          | ** ** |
| ***Interest income*** |       | $                                | 347        |       | $          | 1,530 |   | $ | (1,183 | ) |
|                       |            |                                  |            |            |            |  |  |  |  |  |

 

Interest income results from our interest-bearingcash and investment balances. The decrease in interest income for the threemonths ended March 31, 2009, as compared to the same period in 2008, wasdue to a lower cash balance and lower interest rates earned on our investmentsin 2009.

 

**Interest Expense**

 
| ** **             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|------------------------|------------|----------------------------------|------------|------------|------------|
| ** **             | ** ** | **March 31,**               | ** ** | ** ** | ** ** |
| ** **             | ** ** | **2009**                         | ** ** | **2008**   | ** ** | **Aggregate Change** | ** ** |
| ** **             | ** ** | **(in thousands)**          | ** ** |
| ***Interest expense*** |       | $                                | 53         |       | $          | 47 |   | $ | 6 |   |
|                        |            |                                  |            |            |            |  |  |  |  |  |

 

Interest expense results from our capital leaseobligations associated with fixed asset acquisitions. The increase in interestexpense for the three months ended March 31, 2009, as compared to the sameperiod in 2008, was due to higher outstanding balances on capital leaseobligations outstanding during the period.

 

##### **Incometax benefit**

 
| ** **               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|--------------------------|------------|----------------------------------|------------|------------|------------|
| ** **               | ** ** | **March 31,**               | ** ** | ** ** | ** ** |
| ** **               | ** ** | **2009**                         | ** ** | **2008**   | ** ** | **Aggregate Change** | ** ** |
| ** **               | ** ** | **(in thousands)**          | ** ** |
| ***Income tax benefit*** |       | $                                | 66         |       | $          | — |   | $ | 66 |   |
|                          |            |                                  |            |            |            |  |  |  |  |  |

 

We recorded an income taxbenefit of approximately $66,000 for the period ended March 31, 2009 toreflect tax refunds in accordance with the provisions of the American Recoveryand Reinvestment Act of 2009.

 

**Liquidity and Capital Resources**

 

**Cash Requirements**

 

Wehave financed our operations from inception primarily through sales of equitysecurities, contract payments under our collaboration agreements and equipmentfinancing arrangements. We have consumed substantial amounts of capital todate, and our operating expenditures are expected to increase over the nextseveral years, in large part due to our research and development expenses,future preclinical and clinical testing costs and the absence of any revenuesfrom product sales.

 

Asof March 31, 2009, we had approximately $104.8 million in cash, cashequivalents and available-for-sale securities, as compared to approximately$134.5 million as of December 31, 2008, a decrease of approximately$29.7 million. The decrease was primarily attributable to the costsassociated with our research and development activities.  We believe that our existing capitalresources will be sufficient to support our current and projected fundingrequirements through at least the next 12 months. We have based thisestimate on assumptions that may prove to be wrong, and we could utilize ouravailable capital resources sooner than we currently expect. Because of thenumerous risks and uncertainties associated with the development of our productcandidates and other research and development activities, including risks anduncertainties that could impact the rate of progress of our developmentactivities, we are unable to estimate with certainty the amounts of increasedcapital outlays and operating expenditures associated with our current andanticipated clinical trials and other research and development activities.

 

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Ouroperations will require significant additional funding for the foreseeablefuture. The amount of future funds needed will depend largely on the timing andstructure of potential future collaborations. Until we are able to generate asufficient amount of product revenue, we expect to finance future cash needsthrough public and/or private equity offerings, debt financings orcollaboration and licensing arrangements, as well as through interest incomeearned on the investment of our cash balances and short-term investments. Withthe exception of milestone and royalty payments that we may receive under ourexisting collaborations, we do not currently have any commitments for futurefunding. Recently, the credit markets and the financial services industry havebeen experiencing a period of unprecedented turmoil and upheaval characterizedby the bankruptcy, failure, collapse or sale of various financial institutionsand an unprecedented level of intervention from the United States federalgovernment. These events have generally made equity and debt financing moredifficult to obtain. As a result of these and other factors, we do not knowwhether additional financing will be available when needed, or that, ifavailable, we will be able to obtain financing on reasonable terms.

 

Tothe extent we raise additional capital by issuing equity securities, ourstockholders could at that time experience substantial dilution. Any debtfinancing that we are able to obtain may involve operating covenants thatrestrict our business. To the extent that we raise additional funds throughcollaboration and licensing arrangements, we may be required to relinquish someof our rights to our technologies or product candidates, or grant licenses onterms that are not favorable to us.

 

Ourfuture funding requirements will depend upon many factors, including, but notlimited to:

 

·                  the progress and success of clinical trialsand preclinical activities (including studies and manufacture of materials) ofour product candidates conducted by us or our collaborative partners orlicensees;

 

·                  our ability to establish new collaborations andthe terms thereof;

 

·                  the progress of research programs carried outby us;

 

·                  any changes in the breadth of our research anddevelopment programs;

 

·                  our ability to meet the milestones identifiedin our collaborative agreements that trigger payments to us from ourcollaboration partners;

 

·                  the progress of the research and developmentefforts of our collaborative partners;

 

·                  our ability to acquire or license othertechnologies or compounds that we seek to pursue;

 

·                  our ability to manage our growth;

 

·                  competing technological and marketdevelopments;

 

·                  the costs and timing of obtaining, enforcingand defending our patent and intellectual property rights;

 

·                  the costs and timing of regulatory approvalsand filings by us and our collaborators; and

 

·                  expenses associated with the pending andpotential additional related purported securities class action lawsuits, aswell as any unforeseen litigation.

 

Insufficientfunds may require us to delay, scale back or eliminate some or all of ourresearch or development programs, to lose rights under existing licenses or torelinquish greater or all rights to product candidates at an earlier stage ofdevelopment or on less favorable terms than we would otherwise choose or mayadversely affect our ability to operate as a going concern. For the threemonths ended March 31, 2009 and 2008, we maintained an investmentportfolio primarily in money market funds, U. S. treasury bills,government-sponsored enterprise securities, and corporate bonds and commercialpaper. Cash in excess of immediate requirements is invested with regard toliquidity and capital preservation. Wherever possible, we seek to minimize thepotential effects of concentration and degrees of risk.

 

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**Cash Flows from Operating, Investing and Financing Activities**

** **
| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **March 31,**               | ** ** |
| ** **                                           | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Net cash provided by (used in):                      |       |                             |       |   |   |
| Net cash used in operating activities                |       | $                                | (29,062    | ) | $ | (27,080 | ) |
| Net cash provided by (used in) investing activities  |       | 20,124                           |       | (43,226 | ) |
| Net cash (used in) provided by financing activities  |       | (338                             | )          | 128,399 |   |
| Net (decrease) increase in cash and cash equivalents |       | $                                | (9,276     | ) | $ | 58,093 |   |

 

Netcash used in operating activities was $29.1 million for the three monthsended March 31, 2009, compared to $27.1 million for the three monthsended March 31, 2008. The increase in net cash used in operatingactivities was primarily due to the increase in costs related to our twoPhase 2b clinical trials (*TASKi2*and *TASKi3*), as well as therelated extension trials in RA patients and manufacturing R788 material to beused in these clinical trials. The timing of cash requirements may varyfrom period to period depending on our research and development activities,including our planned preclinical and clinical trials, and future requirementsto establish commercial capabilities for any products that we may develop.

 

Netcash provided by investing activities was $20.1 million for the threemonths ended March 31, 2009, compared to net cash used in investingactivities of $43.2 million for the three months ended March 31,2008. Net cash provided by investing activities in 2009 was due to maturitiesof available-for-sale securities of $44.2 million and sale ofavailable-for-sale securities of $3.0 million, partially offset by purchases ofavailable-for-sale securities of $27.0 million. Net cash used in investing activities for the three months ended March 31,2008 related primarily to purchases of short-term investments, partially offsetby maturities of short-term investments. Capital expenditures were $11,000 in2009 compared to $297,000 in 2008.

 

Netcash used in financing activities was $338,000 for the three months ended March 31,2009, compared to net cash provided by financing activities of$128.4 million for the same period in 2008. Net cash used in financingactivities in first quarter of 2009 related mainly to payments of capital leaseobligations of $436,000, partially offset by proceeds from the exercise ofoutstanding options of $98,000. In the first quarter of 2008, we completed apublic offering in which we received net proceeds of approximately$127.5 million. We also receive proceeds from the exercise of outstandingoptions of approximately $1 million in the first quarter of 2008. Proceeds fromcapital lease financing were $219,000 and payments for capital leasefinancing were $316,000 in the first quarter of 2008.

 

**Off-Balance Sheet Arrangements**

 

As of March 31, 2009, we hadno contractual arrangements that create potential material risks for us and arenot recognized in our balance sheets.

 

**Contractual Obligations**

 

As of March 31, 2009, we hadthe following contractual commitments (by fiscal year):

 
| ** **                        | ** ** | **Total**               | ** **  | **2009** | ** ** | **2010 - 2011** | ** ** | **2012 - 2014** | ** ** | **2015 - 2018** | ** ** |
|-----------------------------------|------------|-------------------------|-------------|----------|------------|---------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                        | ** ** | **(in thousands)** | ** **  |
| **Capital Lease obligations (1)** | ** ** | **$**                   | **3,182**   |     | $          | 1,013                     |       | $                         | 2,124      |                      | $          | 45 |   | $ | — |   |
| **Facilities lease (2)**          | ** ** | **134,876**             |        | 10,828   |       | 29,621                    |       | 31,245                    |       | 63,182                    |       |
| ** **                        | ** ** | ** **              |        |     |       |                      |       |                      |       |                      |       |
| **Total**                         | ** ** | **$**                   | **138,058** |     | $          | 11,841                    |       | $                         | 31,745     |                      | $          | 31,290 |   | $ | 63,182 |   |

 

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(1)          Asof March 31, 2009, we had approximately $3.2 million in capital leaseobligations (including the interest portion) associated with our equipment. Allexisting capital lease agreements as of March 31, 2009 are secured by theequipment financed, bear interest at rates between 4.99% and 10.85% and are duein monthly installments through 2012.

 

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(2)         OnMarch 31, 2009, we amended our build-to-suit lease agreement to defercertain rental obligations in the aggregate amount of $6.9 million, for aperiod of up to seventeen months.  Underthe terms of this amendment, we are obligated to repay the deferred amounts,including interest accruing at 12% during the deferral period, based on atimeline that can vary depending upon the occurrence of certain financing orcollaborative transactions.  Accordingly,the timing and the aggregate amount of our rental obligations may change. Theaccompanying schedule reflects the outcome that we consider to be the mostlikely, which will result in the highest amount of rental obligations.

 

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

 

During thethree months ended March 31, 2009, there were no material changes to ourmarket risk disclosures as set forth in Part II, Item 7A, “Quantitativeand Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

**Item 4.    Controlsand Procedures**

 

*Evaluation of Disclosure Controls andProcedures.*Based on the evaluation of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended), ourchief executive officer and chief financial officer have concluded that, as ofthe period covered by this report, our disclosure controls and procedures wereeffective.

 

*Changes in Internal Controls.*Therewere no changes in our internal control over financial reporting that occurredduring the period covered by this report that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

*Limitations on the Effectiveness ofControls.*A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the controls are met. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues, if any, within a company have beendetected. Accordingly, our disclosure controls and procedures are designed toprovide reasonable, not absolute, assurance that the objectives of ourdisclosure control system are met and, as set forth above, our chief executiveofficer and chief financial officer have concluded, based on their evaluationas of the end of the period covered by this report, that our disclosurecontrols and procedures were sufficiently effective to provide reasonableassurance that the objectives of our disclosure control system were met.

 

**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

OnFebruary 6, 2009, a purported securities class action lawsuit was commencedin the United States District Court for the Northern District of California,naming as defendants us and certain of our officers, directors and underwritersfor our February 2008 stock offering. The lawsuit alleges violations ofthe Securities Act of 1933 and the Securities Exchange Act of 1934 inconnection with allegedly false and misleading statements made by us related tothe results of the Phase 2a clinical trial of our product candidate R788. Theplaintiff seeks damages, including rescission or rescissory damages forpurchasers in the stock offering, an award of its costs and injunctive and/orequitable relief for purchasers of our common stock during the period between December 13,2007 and October 27, 2008, including purchasers in the stock offering. Anadditional purported securities class action lawsuit containing similarallegations was subsequently filed in the United States District Court for theNorthern District of California on February 20, 2009. By order of theCourt dated March 19, 2009, the two lawsuits were consolidated into asingle action.  On April 7, 2009,Inter-Local Pension Fund GCC/IBT filed a motion for appointment as leadplaintiff in the case, and for appointment of its counsel as lead counsel.  It is possible that additional suits will befiled, or allegations received from stockholders, with respect to these samematters and also naming us and/or our officers and directors asdefendants.  If any such additional suitsare filed in the same court, we believe that they would be consolidated intothe consolidated action.

 

Webelieve that we have meritorious defenses and intend to defend the lawsuitvigorously. This lawsuit and any other related lawsuits are subject to inherentuncertainties, and the actual cost will depend upon many unknown factors. Theoutcome of the litigation is necessarily uncertain, we could be forced toexpend significant resources in the defense of this lawsuit and we may notprevail.

 

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**Item 1A.    Risk Factors**

 

*In evaluating our business, youshould carefully consider the following risks, as well as the other informationcontained in this Quarterly Report on Form 10-Q. These risk factors couldcause our actual results to differ materially from those contained inforward-looking statements we have made in this Quarterly Report on Form 10-Qand those we may make from time to time. If any of the following risks actuallyoccurs, our business, financial condition and operating results could beharmed. The risks and uncertainties described below are not the only onesfacing us. Additional risks and uncertainties not presently known to us, orthat we currently see as immaterial, may also harm our business. We have markedwith an asterisk (*) those risk factors below that reflect a substantive changefrom the risk factors included in our Annual Report on Form 10-K filedwith the Securities and Exchange Commission on February 27, 2009.*

 

**We will need additional capital in the future to sufficientlyfund our operations and research.**

 

Wehave consumed substantial amounts of capital to date, and our operatingexpenditures are expected to increase over the next several years as wecontinue our research and development activities, including preclinical studiesand clinical trials.

 

Webelieve that our existing capital resources will be sufficient to support ourcurrent and projected funding requirements through at least the next 12 months.We have based this estimate on assumptions that may prove to be wrong, and wecould utilize our available capital resources sooner than we currently expect.Because of the numerous risks and uncertainties associated with the developmentof our product candidates and other research and development activities,including risks and uncertainties that could impact the rate of progress of ourdevelopment activities, we are unable to estimate with certainty the amounts ofincreased capital outlays and operating expenditures associated with ourcurrent and anticipated clinical trials and other research and developmentactivities.

 

Forthe foreseeable future, our operations will require significant additionalfunding, in large part due to our research and development expenses, futurepreclinical and clinical-testing costs, and the absence of any revenues fromproduct sales. The amount of future funds needed will depend largely on thetiming and structure of potential future collaborations, including in particularwith respect to R788. We anticipate that we will enter into a collaborationagreement with respect to R788 after the results of ongoing Phase 2bclinical trials of R788 are available, but we may not be able to do so onacceptable terms, or at all. Until we are able to generate a sufficient amountof product revenue, we expect to finance future cash needs through publicand/or private equity offerings, debt financings or collaboration and licensingarrangements, as well as through interest income earned on the investment ofour cash balances and short-term investments. With the exception of milestoneand royalty payments that we may receive under our existing collaborations, wedo not currently have any commitments for future funding. Recently, the creditmarkets and the financial services industry have been experiencing a period ofunprecedented turmoil and upheaval characterized by the bankruptcy, failure,collapse or sale of various financial institutions and an unprecedented levelof intervention from the United States federal government. These events havegenerally made equity and debt financing more difficult to obtain. As a resultof these and other factors, we do not know whether additional financing will beavailable when needed, or that, if available, we will obtain financing onreasonable terms.

 

Tothe extent we raise additional capital by issuing equity securities, ourstockholders could at that time experience substantial dilution. Any debtfinancing that we are able to obtain may involve operating covenants thatrestrict our business. To the extent that we raise additional funds throughcollaboration and licensing arrangements, we may be required to relinquish somerights to our technologies or product candidates, or grant licenses on terms thatare not favorable to us.

 

**Our future funding requirements will depend on many uncertainfactors.**

 

Ourfuture funding requirements will depend upon many factors, including, but notlimited to:

 

·                  the progress and success of clinical trialsand preclinical activities (including studies and manufacture of materials) ofour product candidates conducted by us or our collaborative partners orlicensees;

 

·                  our ability to establish new collaborations andthe terms thereof;

 

·                  the progress of research programs carried outby us;

 

·                  any changes in the breadth of our research anddevelopment programs;

 

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·                  our ability to meet the milestones identifiedin our collaborative agreements that trigger payments to us from ourcollaboration partners;

 

·                  the progress of the research and developmentefforts of our collaborative partners;

 

·                  our ability to acquire or license othertechnologies or compounds that we seek to pursue;

 

·                  our ability to manage our growth;

 

·                  competing technological and marketdevelopments;

 

·                  the costs and timing of obtaining, enforcingand defending our patent and intellectual property rights;

 

·                  the costs and timing of regulatory approvalsand filings by us and our collaborators; and

 

·                  expenses associated with the pending andpotential additional related purported securities class action lawsuits, aswell as any unforeseen litigation.

 

Insufficientfunds may require us to delay, scale back or eliminate some or all of ourresearch and development programs, to lose rights under existing licenses or torelinquish greater or all rights to product candidates at an earlier stage ofdevelopment or on less favorable terms than we would otherwise choose or mayadversely affect our ability to operate as a going concern.

 

**Our success as a company is uncertain due to our history ofoperating losses and the uncertainty of future profitability.***

 

Duein large part to the significant research and development expenditures requiredto identify and validate new product candidates and pursue our developmentefforts, we have not been profitable and have incurred operating losses sincewe were incorporated in June 1996. The extent of our future losses and thetiming of potential profitability are highly uncertain, and we may neverachieve profitable operations. We incurred net losses of approximately $29.9million for the three months ended March 31, 2009, $132.3 million in2008 and $74.3 million in 2007. Currently, our revenues are generatedsolely from research milestone payments pursuant to our collaborationagreements and licenses and are insufficient to generate profitable operations.As of March 31, 2009, we had an accumulated deficit of approximately$531.7 million. We expect to incur losses for at least the next severalyears and expect that these losses could increase as we expand our research anddevelopment activities and incur significant clinical and testing costs.

 

**There is a high risk that drug discovery and developmentefforts might not successfully generate good product candidates.**

 

Atthe present time, the majority of our operations are in various stages of drugidentification and development. We currently have four product compounds in theclinical testing stage: one with indications for RA, ITP, B-cell lymphoma andT-cell lymphoma, which is proprietary to our company; one in safety testing andintended for psoriasis, which is proprietary to our company; one with sixindications for oncology, which is subject to a collaboration agreement withMerck Serono; and one in safety testing and intended for allergic asthma, whichis subject to a collaboration agreement with Pfizer. In our industry, it isstatistically unlikely that the limited number of compounds that we haveidentified as potential product candidates will actually lead to successfulproduct development efforts, and we do not expect any drugs resulting from ourresearch to be commercially available for several years, if at all.

 

Ourcompounds in clinical trials and our future leads for potential drug compoundsare subject to the risks and failures inherent in the development ofpharmaceutical products. These risks include, but are not limited to, theinherent difficulty in selecting the right drug and drug target and avoidingunwanted side effects as well as unanticipated problems relating to productdevelopment, testing, regulatory compliance, manufacturing, competition andcosts and expenses that may exceed current estimates. For example, in ourrecently completed Phase 2a clinical trial for R788 in RA, the most commonclinically meaningful adverse events noted in the clinical trial included dose-relatedneutropenia, mild elevations of liver function tests and gastrointestinal sideeffects. In larger future clinical trials, we may discover additional sideeffects and/or higher frequency of side effects than those observed incompleted clinical trials. If approved by the FDA, the side effect profile ofR788 may also result in a narrowly approved indication for use of the product,especially in light of other drugs currently available to treat RA, dependenton the safety profile of R788 relative to those drugs.

 

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Theresults of preliminary studies do not necessarily predict clinical orcommercial success, and larger later-stage clinical trials may fail to confirmthe results observed in the preliminary studies. Our lead product candidate isin early development, having recently completed initial Phase 2 clinicaltrials in two indications. We are conducting additional Phase 2b trials,with larger numbers of patients, before proceeding into Phase 3 trialswith R788 for RA. Furthermore, our Phase 2 clinical trial for ITP wasconducted in highly refractory patients, as opposed to treatment-naivepatients. If efficacy is not demonstrated among treatment-naive patients, anyapproved indication for ITP will be limited to a subset of the patientpopulation. Finally, with respect to our own compounds in development, we haveestablished anticipated timelines with respect to the initiation or completionof clinical studies based on existing knowledge of the compound. However, wecannot provide assurance that we will meet any of these timelines for clinicaldevelopment.

 

Becauseof the uncertainty of whether the accumulated preclinical evidence(pharmacokinetic, pharmacodynamic, safety and/or other factors) or earlyclinical results will be observed in later clinical trials, we can make noassurances regarding the likely results from our future clinical trials or theimpact of those results on our business.

 

**We might not be able to commercialize our product candidatessuccessfully if problems arise in the clinical testing and approval process.**

 

Commercializationof our product candidates depends upon successful completion of extensive preclinicalstudies and clinical trials to demonstrate their safety and efficacy forhumans. Preclinical testing and clinical development are long, expensive anduncertain processes.

 

Inconnection with clinical trials of our product candidates, we face the risksthat:

 

·                  the product candidate may not prove to beeffective;

 

·                  we may discover that a product candidate maycause harmful side effects;

 

·                  the results may not replicate the results ofearlier, smaller trials;

 

·                  we or the FDA or similar foreign regulatoryauthorities may suspend the trials;

 

·                  the results may not be statisticallysignificant;

 

·                  patient recruitment may be slower thanexpected;

 

·                  patients may drop out of the trials; and

 

·                  regulatory requirements may change.

 

Wedo not know whether we, or any of our collaborative partners, will be permittedto undertake clinical trials of potential products beyond the trials alreadyconcluded and the trials currently in process. It will take us, or ourcollaborative partners several years to complete any such testing, and failurecan occur at any stage of testing. Interim results of trials do not necessarilypredict final results, and acceptable results in early trials may not berepeated in later trials. A number of companies in the pharmaceutical industry,including biotechnology companies, have suffered significant setbacks inadvanced clinical trials, even after achieving promising results in earliertrials. Moreover, we or our collaborative partners or regulators may decide todiscontinue development of any or all of these projects at any time forcommercial, scientific or other reasons.

 

**Delays in clinical testing could result in increased costs tous.**

 

Significantdelays in clinical testing could materially impact our product developmentcosts and timing. We do not know whether planned clinical trials will begin ontime, will need to be halted or revamped or will be completed on schedule, orat all. Clinical trials can be delayed for a variety of reasons, includingdelays in obtaining regulatory approval to commence a study, delays from scaleup, delays in reaching agreement on acceptable clinical study agreement termswith prospective clinical sites, delays in obtaining institutional review boardapproval to conduct a study at a prospective clinical site or delays inrecruiting subjects to participate in a study.

 

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Inaddition, we typically rely on third-party clinical investigators to conductour clinical trials and other third-party organizations to oversee theoperations of such trials and to perform data collection and analysis. Theclinical investigators are not our employees, and we cannot control the amountor timing of resources that they devote to our programs. Failure of thethird-party organizations to meet their obligations could adversely affectclinical development of our products. As a result, we may face additionaldelaying factors outside our control if these parties do not perform theirobligations in a timely fashion. While we have not yet experienced delays thathave materially impacted our clinical trials or product development costs,delays of this sort could occur for the reasons identified above or otherreasons. If we have delays in testing or approvals, our product developmentcosts will increase. For example, we may need to make additional payments tothird-party investigators and organizations to retain their services or we mayneed to pay recruitment incentives. If the delays are significant, ourfinancial results and the commercial prospects for our product candidates willbe harmed, and our ability to become profitable will be delayed. Moreover,these third-party investigators and organizations may also have relationshipswith other commercial entities, some of which may compete with us. If these third-partyinvestigators and organizations assist our competitors at our expense, it couldharm our competitive position.

 

**We lack the capability to manufacture compounds fordevelopment and rely on third parties to manufacture our product candidates,and we may be unable to obtain required material in a timely manner, at anacceptable cost or at a quality level required to receive regulatory approval.**

 

Wecurrently do not have manufacturing capabilities or experience necessary toproduce our product candidates, including R788. We rely on a singlemanufacturer for all of our clinical trials. We rely on manufacturers toproduce and deliver all of the materials required for our preclinical andclinical efforts on a timely basis and to comply with applicable regulatoryrequirements, including the FDA’s current Good Manufacturing Practices, orcGMP. In addition, we rely on our suppliers to deliver sufficient quantities ofmaterials produced under cGMP conditions to enable us to conduct plannedpreclinical studies, clinical trials and, if possible, to bring products tomarket in a timely manner.

 

Ourcurrent and anticipated future dependence upon these third-party manufacturersmay adversely affect our ability to develop and commercialize productcandidates on a timely and competitive basis. These manufacturers may not beable to produce material on a timely basis or manufacture material at thequality level or in the quantity required to meet our development timelines andapplicable regulatory requirements and may also experience a shortage inqualified personnel. We may not be able to maintain or renew our existingthird-party manufacturing arrangements, or enter into new arrangements, onacceptable terms, or at all. Our third-party manufacturers could terminate or declineto renew our manufacturing arrangements based on their own business priorities,at a time that is costly or inconvenient for us. If we are unable to contractfor the production of materials in sufficient quantity and of sufficientquality on acceptable terms, our planned clinical trials may be significantlydelayed. Manufacturing delays could postpone the filing of our investigationalnew drug, or IND, applications and/or the initiation of clinical trials that wehave currently planned.

 

Drugmanufacturers are subject to ongoing periodic unannounced inspection by theFDA, the Drug Enforcement Agency, and other agencies to ensure strictcompliance with cGMP and other government regulations and corresponding foreignstandards. We do not have control over third-party manufacturers’ compliancewith these regulations and standards and they may not be able to comply.Switching manufacturers may be difficult because the number of potentialmanufacturers is limited. It may be difficult or impossible for us to find areplacement manufacturer quickly on acceptable terms, or at all. Additionally,if we are required to enter into new supply arrangements, we may not be able toobtain approval from the FDA of any alternate supplier in a timely manner, orat all, which could delay or prevent the clinical development andcommercialization of any related product candidates. Failure of our third-partymanufacturers or us to obtain approval from the FDA or to comply withapplicable regulations could result in sanctions being imposed on us, includingfines, civil penalties, delays in or failure to grant marketing approval of ourproduct candidates, injunctions, delays, suspension or withdrawal of approvals,license revocation, seizures or recalls of products and compounds, operatingrestrictions and criminal prosecutions, any of which could significantly andadversely affect our business.

 

**Because we expect to be dependent upon collaborative andlicense agreements, we might not meet our strategic objectives.***

 

Ourability to generate revenue in the near term depends on our ability to enterinto additional collaborative agreements with third parties, including inparticular with respect to R788, and to maintain the agreements we currentlyhave in place. Our ability to enter into new collaborations and the revenue, ifany, that may be recognized under these collaborations is highly uncertain. Ifwe are unable to enter into one or more new collaborations, our businessprospects could be harmed, which could have an immediate adverse effect on ourability to continue to develop our compounds, including R788, and on thetrading price of our stock. Our ability to enter into a collaboration may bedependent on many factors, such as the results of our clinical trials,competitive factors and the fit of one of our programs with another company’srisk tolerance, including toward regulatory issues, patent portfolio, clinicalpipeline, the stage of the available data, particularly if it is early, overallcorporate goals and financial position.

 

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Todate, most of our revenues have been related to the research phase of each ofour collaborative agreements. Such revenues are for specified periods, and theimpact of such revenues on our results of operations is partially offset bycorresponding research costs. Following the completion of the research phase ofeach collaborative agreement, additional revenues may come only from milestonepayments and royalties, which may not be paid, if at all, until some time wellinto the future. The risk is heightened due to the fact that unsuccessfulresearch efforts may preclude us from receiving any milestone payments underthese agreements. Our receipt of revenues from collaborative arrangements isalso significantly affected by the timing of efforts expended by us and ourcollaborators and the timing of lead compound identification. We have receivedmilestone payments from Johnson & Johnson, Novartis, Daiichi, Merck,Merck Serono and Pfizer. Under many agreements, however, milestone payments maynot be earned until the collaborator has advanced product candidates intoclinical testing, which may never occur or may not occur until some time wellinto the future. If we are not able to generate revenue under ourcollaborations when and in accordance with our expectations or the expectationsof industry analysts, this failure could harm our business and have an immediateadverse effect on the trading price of our stock.

 

Ourbusiness requires us to generate meaningful revenue from royalties andlicensing agreements. To date, we have not received any revenue from royaltiesfor the commercial sale of drugs, and we do not know when we will receive anysuch revenue, if at all. Likewise, we have not licensed any lead compounds ordrug development candidates to third parties, and we do not know whether anysuch license will be entered into on acceptable terms in the future, if at all.

 

**If our corporate collaborations or license agreements areunsuccessful, our research and development efforts could be delayed.**

 

Ourstrategy depends upon the formation and sustainability of multiplecollaborative arrangements and license agreements with third parties in thefuture. We rely on these arrangements for not only financial resources, butalso for expertise that we expect to need in the future relating to clinicaltrials, manufacturing, sales and marketing, and for licenses to technology rights.To date, we have entered into several such arrangements with corporatecollaborators; however, we do not know if such or additional third parties willdedicate sufficient resources or if any development or commercializationefforts by third parties will be successful. Should a collaborative partnerfail to develop or commercialize a compound or product to which it has rightsfrom us for any reason including corporate restructuring, such failure mightdelay ongoing research and development efforts at Rigel, because we might notreceive any future milestone payments, and we would not receive any royaltiesassociated with such compound or product. In addition, the continuation of someof our partnered drug discovery and development programs may be dependent onthe periodic renewal of our corporate collaborations.

 

Theresearch phase of our collaboration with Johnson & Johnson ended in2003, and the research phases conducted at our facilities under our broadcollaboration with Novartis ended in 2004. The research phase of our corporatecollaboration agreement with Daiichi ended in 2005. In 2004, we signed a newcorporate collaboration with Merck, and the research phase of thiscollaboration ended in May 2007. In 2005, we signed additionalcollaborations with Pfizer and Merck Serono. Each of our collaborations couldbe terminated by the other party at any time, and we may not be able to renewthese collaborations on acceptable terms, if at all, or negotiate additionalcorporate collaborations on acceptable terms, if at all. If thesecollaborations terminate or are not renewed, any resultant loss of revenuesfrom these collaborations or loss of the expertise of our collaborativepartners could adversely affect our business.

 

Conflictsalso might arise with collaborative partners concerning proprietary rights toparticular compounds. While our existing collaborative agreements typicallyprovide that we retain milestone payments and royalty rights with respect todrugs developed from certain derivative compounds, any such payments or royaltyrights may be at reduced rates, and disputes may arise over the application ofderivative payment provisions to such drugs, and we may not be successful insuch disputes.

 

Weare also a party to various license agreements that give us rights to usespecified technologies in our research and development processes. Theagreements pursuant to which we have in-licensed technology permit ourlicensors to terminate the agreements under certain circumstances. If we arenot able to continue to license these and future technologies on commerciallyreasonable terms, our product development and research may be delayed.

 

**If conflicts arise between our collaborators or advisors andus, any of them may act in their self-interest, which may be adverse to ourstockholders’ interests.**

 

Ifconflicts arise between us and our corporate collaborators or scientificadvisors, the other party may act in its self-interest and not in the interestof our stockholders. Some of our corporate collaborators are conductingmultiple product development efforts within each disease area that is thesubject of the collaboration with us or may be acquired or merged with acompany having a competing program. In some of our collaborations, we haveagreed not to conduct, independently or with any third party, any research thatis competitive with the research conducted under our collaborations. Ourcollaborators, however, may develop, either alone or with others, products inrelated fields that are competitive with the products or potential productsthat are the subject of these collaborations. Competing products, eitherdeveloped by our collaborators or to which our collaborators have rights, mayresult in their withdrawal of support for our product candidates.

 

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Ifany of our corporate collaborators were to breach or terminate its agreementwith us or otherwise fail to conduct the collaborative activities successfullyand in a timely manner, the preclinical or clinical development orcommercialization of the affected product candidates or research programs couldbe delayed or terminated. We generally do not control the amount and timing ofresources that our corporate collaborators devote to our programs or potentialproducts. We do not know whether current or future collaborative partners, ifany, might pursue alternative technologies or develop alternative productseither on their own or in collaboration with others, including our competitors,as a means for developing treatments for the diseases targeted by collaborativearrangements with us.

 

**Our success is dependent on intellectual property rights heldby us and third parties, and our interest in such rights is complex anduncertain.***

 

Oursuccess will depend to a large part on our own, our licensees’ and ourlicensors’ ability to obtain and defend patents for each party’s respectivetechnologies and the compounds and other products, if any, resulting from theapplication of such technologies. We have over 190 pending patent applicationsand over 130 issued patents in the United States that are owned or exclusivelylicensed in our field as well as pending corresponding foreign patentapplications. In the future, our patent position might be highly uncertain andinvolve complex legal and factual questions. For example, we may be involved ininterferences before the United States Patent and Trademark Office.Interferences are complex and expensive legal proceedings and there is noassurance we will be successful in such proceedings. An interference couldresult in our losing our patent rights and/or our freedom to operate and/orrequire us to pay significant royalties. Additional uncertainty may resultbecause no consistent policy regarding the breadth of legal claims allowed inbiotechnology patents has emerged to date. Accordingly, we cannot predict thebreadth of claims allowed in our or other companies’ patents.

 

Becausethe degree of future protection for our proprietary rights is uncertain, wecannot ensure that:

 

·                  we were the first to make the inventionscovered by each of our pending patent applications;

 

·                  we were the first to file patent applicationsfor these inventions;

 

·                  others will not independently develop similaror alternative technologies or duplicate any of our technologies;

 

·                  any of our pending patent applications willresult in issued patents;

 

·                  any patents issued to us or our collaboratorswill provide a basis for commercially-viable products or will provide us withany competitive advantages or will not be challenged by third parties;

 

·                  we will develop additional proprietarytechnologies that are patentable; or

 

·                  the patents of others will not have a negativeeffect on our ability to do business.

 

Werely on trade secrets to protect technology where we believe patent protectionis not appropriate or obtainable; however, trade secrets are difficult toprotect. While we require employees, collaborators and consultants to enterinto confidentiality agreements, we may not be able to adequately protect ourtrade secrets or other proprietary information in the event of any unauthorizeduse or disclosure or the lawful development by others of such information.

 

Weare a party to certain in-license agreements that are important to ourbusiness, and we generally do not control the prosecution of in-licensedtechnology. Accordingly, we are unable to exercise the same degree of controlover this intellectual property as we exercise over our internally-developedtechnology. Moreover, some of our academic institution licensors, researchcollaborators and scientific advisors have rights to publish data andinformation in which we have rights. If we cannot maintain the confidentialityof our technology and other confidential information in connection with our collaborations,then our ability to receive patent protection or protect our proprietaryinformation will be impaired. In addition, some of the technology we havelicensed relies on patented inventions developed using U.S. governmentresources. The U.S. government retains certain rights, as defined by law, insuch patents, and may choose to exercise such rights. Certain of ourin-licenses may be terminated if we fail to meet specified obligations. If wefail to meet such obligations and any of our licensors exercise theirtermination rights, we could lose our rights under those agreements. If we loseany of our rights, it may adversely affect the way we conduct our business. Inaddition, because certain of our licenses are sublicenses, the actions of ourlicensors may affect our rights under those licenses.

 

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**If a dispute arises regarding the infringement ormisappropriation of the proprietary rights of others, such dispute could becostly and result in delays in our research and development activities andpartnering.**

 

Oursuccess will also depend, in part, on our ability to operate without infringingor misappropriating the proprietary rights of others. There are many issuedpatents and patent applications filed by third parties relating to products orprocesses that are similar or identical to our licensors or ours, and othersmay be filed in the future. There can be no assurance that our activities, orthose of our licensors, will not infringe patents owned by others. We believethat there may be significant litigation in the industry regarding patent andother intellectual property rights, and we do not know if our collaborators orwe would be successful in any such litigation. Any legal action against ourcollaborators or us claiming damages or seeking to enjoin commercial activitiesrelating to the affected products, our methods or processes could:

 

·                  require our collaborators or us to obtain alicense to continue to use, manufacture or market the affected products,methods or processes, which may not be available on commercially reasonableterms, if at all;

 

·                  prevent us from using the subject matterclaimed in the patents held by others;

 

·                  subject us to potential liability for damages;

 

·                  consume a substantial portion of ourmanagerial and financial resources; and

 

·                  result in litigation or administrativeproceedings that may be costly, whether we win or lose.

 

**The restructuring of our research programs could result inmanagement distractions, operational disruptions and other difficulties.**

 

InFebruary 2009, we announced that we cut our research programs in virologyand oncology as well as terminated certain related development andadministrative staff, which resulted in the dismissal of 36 employees, orapproximately 20% of our workforce. Employees whose positions were eliminatedin connection with this reduction may seek future employment with our competitors.Although all employees are required to sign a confidentiality agreement with usat the time of hire, we cannot assure you that the confidential nature of ourproprietary information will be maintained in the course of such futureemployment. Any additional restructuring efforts could divert the attention ofour management away from our operations, harm our reputation and increase ourexpenses. We cannot assure you that we will not undertake additionalrestructuring activities, that any of our restructuring efforts will besuccessful, or that we will be able to realize the cost savings and otheranticipated benefits from our previous or future restructuring plans. Inaddition, if we continue to reduce our workforce, it may adversely impact our abilityto continue to develop our product candidates.

 

**If we are unable to obtain regulatory approval to marketproducts in the United States and foreign jurisdictions, we will not bepermitted to commercialize products from our research and development.**

 

Due,in part, to the early stage of our product candidate research and developmentprocess, we cannot predict whether regulatory clearance will be obtained forany product that we, or our collaborative partners, hope to develop.Satisfaction of regulatory requirements typically takes many years, isdependent upon the type complexity and novelty of the product and requires theexpenditure of substantial resources. Of particular significance to us are therequirements relating to research and development and testing.

 

Beforecommencing clinical trials in humans in the United States, we, or ourcollaborative partners, will need to submit and receive approval from the FDAof an IND. Clinical trials are subject to oversight by institutional reviewboards and the FDA and:

 

·                  must be conducted in conformance with the FDA’sgood clinical practices and other applicable regulations;

 

·                  must meet requirements for institutionalreview board oversight;

 

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·                  must meet requirements for informed consent;

 

·                  are subject to continuing FDA oversight;

 

·                  may require large numbers of test subjects;and

 

·                  may be suspended by us, our collaborators or theFDA at any time if it is believed that the subjects participating in thesetrials are being exposed to unacceptable health risks or if the FDA findsdeficiencies in the IND or the conduct of these trials.

 

Whilewe have stated that we intend to file additional INDs, this is only a statementof intent, and we may not be able to do so because we may not be able toidentify potential product candidates. In addition, the FDA may not approve anyIND in a timely manner, or at all.

 

Beforereceiving FDA approval to market a product, we must demonstrate that theproduct is safe and effective in the patient population and the indication thatwill be treated. Data obtained from preclinical and clinical activities aresusceptible to varying interpretations that could delay, limit or preventregulatory approvals. In addition, delays or rejections may be encounteredbased upon additional government regulation from future legislation oradministrative action or changes in FDA policy during the period of productdevelopment, clinical trials and FDA regulatory review. Failure to comply withapplicable FDA or other applicable regulatory requirements may result incriminal prosecution, civil penalties, recall or seizure of products, total orpartial suspension of production or injunction, as well as other regulatoryaction against our potential products or us. Additionally, we have limitedexperience in conducting and managing the clinical trials necessary to obtainregulatory approval.

 

Ifregulatory approval of a product is granted, this approval will be limited tothose indications or disease states and conditions for which the product isdemonstrated through clinical trials to be safe and efficacious. We cannotensure that any compound developed by us, alone or with others, will prove tobe safe and efficacious in clinical trials and will meet all of the applicableregulatory requirements needed to receive marketing approval.

 

Outsidethe United States, our ability, or that of our collaborative partners, tomarket a product is contingent upon receiving a marketing authorization fromthe appropriate regulatory authorities. This foreign regulatory approvalprocess typically includes all of the risks associated with FDA approvaldescribed above and may also include additional risks.

 

**If our competitors develop technologies that are moreeffective than ours, our commercial opportunity will be reduced or eliminated.**

 

Thebiotechnology and pharmaceutical industries are intensely competitive andsubject to rapid and significant technological change. Many of the drugs thatwe are attempting to discover will be competing with existing therapies. Inaddition, a number of companies are pursuing the development of pharmaceuticalsthat target the same diseases and conditions that we are targeting. We face,and will continue to face, intense competition from pharmaceutical andbiotechnology companies, as well as from academic and research institutions andgovernment agencies, both in the United States and abroad. Some of thesecompetitors are pursuing the development of pharmaceuticals that target thesame diseases and conditions as our research programs. Our major competitorsinclude fully integrated pharmaceutical companies that have extensive drugdiscovery efforts and are developing novel small molecule pharmaceuticals. Wealso face significant competition from organizations that are pursuing the sameor similar technologies, including the discovery of targets that are useful incompound screening, as the technologies used by us in our drug discoveryefforts.

 

Competitionmay also arise from:

 

·                  new or better methods of target identificationor validation;

 

·                  other drug development technologies andmethods of preventing or reducing the incidence of disease;

 

·                  new small molecules; or

 

·                  other classes of therapeutic agents.

 

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Ourcompetitors or their collaborative partners may utilize discovery technologiesand techniques or partner with collaborators in order to develop products morerapidly or successfully than we or our collaborators are able to do. Many ofour competitors, particularly large pharmaceutical companies, havesubstantially greater financial, technical and human resources and largerresearch and development staffs than we do. In addition, academic institutions,government agencies and other public and private organizations conductingresearch may seek patent protection with respect to potentially competitiveproducts or technologies and may establish exclusive collaborative or licensingrelationships with our competitors.

 

Webelieve that our ability to compete is dependent, in part, upon our ability tocreate, maintain and license scientifically-advanced technology and upon ourand our collaborators’ ability to develop and commercialize pharmaceuticalproducts based on this technology, as well as our ability to attract and retainqualified personnel, obtain patent protection or otherwise develop proprietarytechnology or processes and secure sufficient capital resources for theexpected substantial time period between technological conception andcommercial sales of products based upon our technology. The failure by any ofour collaborators or us in any of those areas may prevent the successfulcommercialization of our potential drug targets.

 

Manyof our competitors, either alone or together with their collaborative partners,have significantly greater experience than we do in:

 

·                  identifying and validating targets;

 

·                  screening compounds against targets; and

 

·                  undertaking preclinical testing and clinicaltrials.

 

Accordingly,our competitors may succeed in obtaining patent protection, identifying orvalidating new targets or discovering new drug compounds before we do.

 

Ourcompetitors might develop technologies and drugs that are more effective orless costly than any that are being developed by us or that would render ourtechnology and potential drugs obsolete and noncompetitive. In addition, ourcompetitors may succeed in obtaining the approval of the FDA or otherregulatory agencies for product candidates more rapidly. Companies thatcomplete clinical trials, obtain required regulatory agency approvals andcommence commercial sale of their drugs before their competitors may achieve asignificant competitive advantage, including certain patent and FDA marketingexclusivity rights that would delay or prevent our ability to market certainproducts. Any drugs resulting from our research and development efforts, orfrom our joint efforts with our existing or future collaborative partners,might not be able to compete successfully with competitors’ existing or futureproducts or obtain regulatory approval in the United States or elsewhere.

 

Weface and will continue to face intense competition from other companies forcollaborative arrangements with pharmaceutical and biotechnology companies, forestablishing relationships with academic and research institutions and forlicenses to additional technologies. These competitors, either alone or withtheir collaborative partners, may succeed in developing technologies orproducts that are more effective than ours.

 

**Our ability to generate revenues will be diminished if ourcollaborative partners fail to obtain acceptable prices or an adequate level ofreimbursement for products from third-party payors or government agencies.**

 

Thedrugs we hope to develop may be rejected by the marketplace due to manyfactors, including cost. Our ability to commercially exploit a drug may belimited due to the continuing efforts of government and third-party payors tocontain or reduce the costs of health care through various means. For example,in some foreign markets, pricing and profitability of prescription pharmaceuticalsare subject to government control. In the United States, we expect that therewill continue to be a number of federal and state proposals to implementsimilar government control. In addition, increasing emphasis on managed care inthe United States will likely continue to put pressure on the pricing ofpharmaceutical products. Cost control initiatives could decrease the price thatany of our collaborators would receive for any products in the future. Further,cost control initiatives could adversely affect our collaborators’ ability tocommercialize our products and our ability to realize royalties from thiscommercialization.

 

Ourability to commercialize pharmaceutical products with collaborators may depend,in part, on the extent to which reimbursement for the products will beavailable from:

 

·                  government and health administrationauthorities;

 

·                  private health insurers; and

 

·                  other third-party payors.

 

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Significantuncertainty exists as to the reimbursement status of newly-approved healthcareproducts. Third-party payors, including Medicare, are challenging the pricescharged for medical products and services. Government and other third-partypayors increasingly are attempting to contain healthcare costs by limiting bothcoverage and the level of reimbursement for new drugs and by refusing, in somecases, to provide coverage for uses of approved products for diseaseindications for which the FDA has not granted labeling approval. Third-partyinsurance coverage may not be available to patients for any products wediscover and develop, alone or with collaborators. If government and otherthird-party payors do not provide adequate coverage and reimbursement levelsfor our products, the market acceptance of these products may be reduced.

 

**If product liability lawsuits are successfully broughtagainst us, we may incur substantial liabilities and may be required to limitcommercialization of our products.**

 

Thetesting and marketing of medical products entail an inherent risk of productliability. If we cannot successfully defend ourselves against product liabilityclaims, we may incur substantial liabilities or be required to limitcommercialization of our products. We are not currently aware of any specificcauses for concern with respect to clinical liability claims. We carry productliability insurance that is limited in scope and amount and may not be adequateto fully protect us against product liability claims. Our inability to obtainsufficient product liability insurance at an acceptable cost to protect againstpotential product liability claims could prevent or inhibit thecommercialization of pharmaceutical products we develop, alone or withcorporate collaborators. We, or our corporate collaborators, might not be ableto obtain insurance at a reasonable cost, if at all. While under variouscircumstances we are entitled to be indemnified against losses by our corporatecollaborators, indemnification may not be available or adequate should anyclaim arise.

 

**Our research and development efforts will be seriouslyjeopardized, if we are unable to attract and retain key employees andrelationships.**

 

Asa small company, our success depends on the continued contributions of ourprincipal management and scientific personnel and on our ability to develop andmaintain important relationships with leading academic institutions, scientistsand companies in the face of intense competition for such personnel. Inparticular, our research programs depend on our ability to attract and retainhighly skilled chemists, other scientists, and development, regulatory andclinical personnel. If we lose the services of any of our key personnel, ourresearch and development efforts could be seriously and adversely affected. Ouremployees can terminate their employment with us at any time.

 

**We depend on various scientific consultants and advisors forthe success and continuation of our research and development efforts.**

 

Wework extensively with various scientific consultants and advisors. Thepotential success of our drug discovery and development programs depends, inpart, on continued collaborations with certain of these consultants andadvisors. We, and various members of our management and research staff, rely oncertain of these consultants and advisors for expertise in our research,regulatory and clinical efforts. Our scientific advisors are not our employeesand may have commitments to, or consulting or advisory contracts with, otherentities that may limit their availability to us. We do not know if we will beable to maintain such consulting agreements or that such scientific advisorswill not enter into consulting arrangements, exclusive or otherwise, withcompeting pharmaceutical or biotechnology companies, any of which would have adetrimental impact on our research objectives and could have a material adverseeffect on our business, financial condition and results of operations.

 

**If we use biological and hazardous materials in a manner thatcauses injury or violates laws, we may be liable for damages.**

 

Ourresearch and development activities involve the controlled use of potentiallyharmful biological materials as well as hazardous materials, chemicals andvarious radioactive compounds. We cannot completely eliminate the risk ofaccidental contamination or injury from the use, storage, handling or disposalof these materials. In the event of contamination or injury, we could be heldliable for damages that result, and such liability could exceed our resources.We are also subject to federal, state and local laws and regulations governingthe use, storage, handling and disposal of these materials and specified wasteproducts. The cost of compliance with, or any potential violation of, theselaws and regulations could be significant.

 

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**Our facilities are located near known earthquake fault zones,and the occurrence of an earthquake or other catastrophic disaster could causedamage to our facilities and equipment, which could require us to cease orcurtail operations.**

 

Ourfacilities are located in the San Francisco Bay Area near known earthquakefault zones and are vulnerable to significant damage from earthquakes. We arealso vulnerable to damage from other types of disasters, including fires,floods, power loss, communications failures and similar events. If any disasterwere to occur, our ability to operate our business at our facilities would beseriously, or potentially completely, impaired, and our research could be lostor destroyed. In addition, the unique nature of our research activities and ofmuch of our equipment could make it difficult for us to recover from adisaster. The insurance we maintain may not be adequate to cover our lossesresulting from disasters or other business interruptions.

 

**Future interest income and value of our investments may beimpacted by further declines in interest rates and the broader effects of therecent turmoil in the global credit markets.**

 

Recently,the credit markets and the financial services industry have been experiencing aperiod of unprecedented turmoil and upheaval. As a result of this turmoil, theinterest paid on certain of our investments may decrease and the value ofcertain securities we hold may decline in the future, which could negativelyaffect our financial condition, cash flow and reported earnings.

 

**We have been named a defendant in a purported securitiesclass action lawsuit. These, and potential similar or related litigation, couldresult in substantial damages and may divert management’s time and attentionfrom our business.***

 

OnFebruary 6, 2009, a purported securities class action lawsuit wascommenced in the United States District Court for the Northern District ofCalifornia, naming as defendants us and certain of our officers, directors andunderwriters for our February 2008 stock offering. The lawsuit allegesviolations of the Securities Act of 1933 and the Securities Exchange Act of1934 in connection with allegedly false and misleading statements made by usrelated to the results of the Phase 2a clinical trial of our productcandidate R788. The plaintiff alleges that we failed to disclose facts relatedto the response rates of trial patients in Mexico compared to trial patients inthe U.S., an increase in average blood pressure of trial patients treated withR788 and an increase in liver enzymes in trial patients treated with R788compared to those treated with placebo. The plaintiff seeks damages, includingrescission or rescissory damages for purchasers in the stock offering, an awardof its costs and injunctive and/or equitable relief for purchasers of ourcommon stock during the period between December 13, 2007 and October 27,2008, including purchasers in the stock offering. An additional purportedsecurities class action lawsuit containing similar allegations was subsequentlyfiled in the United States District Court for the Northern District ofCalifornia on February 20, 2009.  Byorder of the Court dated March 19, 2009, the two lawsuits wereconsolidated into a single action.  On April 7,2009, Inter-Local Pension Fund GCC/IBT filed a motion for appointment as leadplaintiff in the case, and for appointment of its counsel as lead counsel.   It is possible that additional suits will befiled, or allegations received from stockholders, with respect to these samematters and also naming us and/or our officers and directors as defendants. Ifany such additional suits are filed in the same court, we believe that theywould be consolidated into the consolidated action.

 

Webelieve that we have meritorious defenses and intend to defend the lawsuitvigorously. This lawsuit and any other related lawsuits are subject to inherentuncertainties, and the actual cost will depend upon many unknown factors. Theoutcome of the litigation is necessarily uncertain, we could be forced toexpend significant resources in the defense of this suit and we may notprevail. Monitoring and defending against legal actions is time-consuming forour management and detracts from our ability to fully focus our internalresources on our business activities. In addition, we may incur substantiallegal fees and costs in connection with the litigation. We are not currentlyable to estimate the possible cost to us from this matter, as this lawsuit iscurrently at an early stage and we cannot be certain how long it may take toresolve this matter or the possible amount of any damages that we may berequired to pay. We have not established any reserves for any potentialliability relating to this lawsuit. It is possible that we could, in thefuture, incur judgments or enter into settlements of claims for monetarydamages. A decision adverse to our interests on this action could result in thepayment of substantial damages, or possibly fines, and could have a materialadverse effect on our cash flow, results of operations and financial position.In addition, the uncertainty of the currently pending litigation could lead tomore volatility in our stock price.

 

**Our stock price may be volatile, and our stockholders’investment in our stock could decline in value.**

 

Themarket prices for our securities and those of other biotechnology companieshave been highly volatile and may continue to be highly volatile in the future.The following factors, in addition to other risk factors described in thissection, may have a significant impact on the market price of our common stock:

 

·                  the progress and success of clinical trialsand preclinical activities (i.e., studies, manufacture of materials) ofour product candidates conducted by us or our collaborative partners orlicensees;

 

·                  the receipt or failure to receive theadditional funding necessary to conduct our business;

 

·                  selling by large stockholders;

 

·                  presentations of detailed clinical trial dataat medical and scientific conferences and investor perception thereof;

 

·                  announcements of technological innovations ornew commercial products by our competitors or us;

 

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·                  developments concerning proprietary rights,including patents;

 

·                  developments concerning our collaborations;

 

·                  publicity regarding actual or potentialmedical results relating to products under development by our competitors orus;

 

·                  regulatory developments in the United Statesand foreign countries;

 

·                  litigation;

 

·                  economic and other external factors or otherdisaster or crisis; and

 

·                  period-to-period fluctuations in financialresults.

 

**Future equity issuances or a sale of a substantial number ofshares of our common stock may cause the price of our common stock to decline.**

 

Becausewe may need to raise additional capital in the future to continue to expand ourbusiness and our research and development activities, among other things, wemay conduct additional equity offerings. If we or our stockholders sellsubstantial amounts of our common stock (including shares issued upon theexercise of options and warrants) in the public market, the market price of ourcommon stock could fall. A decline in the market price of our common stockcould make it more difficult for us to sell equity or equity-related securitiesin the future at a time and price that we deem appropriate.

 

**Anti-takeover provisions in our charter documents and underDelaware law may make an acquisition of us, which may be beneficial to ourstockholders, more difficult.**

 

Provisionsof our amended and restated certificate of incorporation and bylaws, as well asprovisions of Delaware law, could make it more difficult for a third party toacquire us, even if doing so would benefit our stockholders. These provisions:

 

·                  establish that members of the board ofdirectors may be removed only for cause upon the affirmative vote ofstockholders owning a majority of our capital stock;

 

·                  authorize the issuance of “blank check”preferred stock that could be issued by our board of directors to increase thenumber of outstanding shares and thwart a takeover attempt;

 

·                  limit who may call a special meeting ofstockholders;

 

·                  prohibit stockholder action by writtenconsent, thereby requiring all stockholder actions to be taken at a meeting ofour stockholders;

 

·                  establish advance notice requirements fornominations for election to the board of directors or for proposing mattersthat can be acted upon at stockholder meetings;

 

·                  provide for a board of directors withstaggered terms; and

 

·                  provide that the authorized number ofdirectors may be changed only by a resolution of our board of directors.

 

Inaddition, Section 203 of the Delaware General Corporation Law, whichimposes certain restrictions relating to transactions with major stockholders,may discourage, delay or prevent a third party from acquiring us.

 

**Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds**

 

In connection with an amendment toour build-to-suit lease agreement in order to defer certain repayment of rentalobligations, we cancelled an existing warrant granting HCP Estates USA Inc., anaffiliate of our landlord, the right to purchase 100,000 shares of common stockand issued a new warrant granting HCP BTC, LLC, our landlord, the right topurchase 200,000 shares of common stock at an exerciseprice per share of $6.61.  The newwarrant remains exercisable until March 2016.  The warrant was issued in reliance on theexemptions from registration under Regulation D of the Securities Act of 1933,as amended.  We relied on our landlord’srepresentations and covenants in support of the satisfaction of the conditionscontained in Regulation D.  See Note 10 (Amendment to the Build-to-Suit LeaseAgreement) to the Financial Statements above for a discussion of the warrant.

 

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** **

**Item 6.****    Exhibits**

 

The exhibits listed on theaccompanying index to exhibits are filed or incorporated by reference (asstated therein) as part of this Quarterly Report on Form 10-Q.

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                            |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                       |
| 3.1                 |       | Amended and Restated Certificate of Incorporation. (1)                                                                                                                                           |
|                |       |                                                                                                                                                                                             |
| 3.2                 |       | Amended and Restated Bylaws. (2)                                                                                                                                                                 |
|                |       |                                                                                                                                                                                             |
| 4.1                 |       | Form of warrant to purchase shares of common stock.  (3)                                                                                                                                    |
|                |       |                                                                                                                                                                                             |
| 4.2                 |       | Specimen Common Stock Certificate. (4)                                                                                                                                                           |
|                |       |                                                                                                                                                                                             |
| 4.3                 |       | Warrant issued to HCP BTC, LLC for the purchase of shares  of common stock.                                                                                                                      |
|                |       |                                                                                                                                                                                             |
| 10.1                |       | Amendment No. Four to the Build-to-Suit Lease  between Rigel and HCP BTC, LLC dated February 1, 2009.                                                                                  |
|                |       |                                                                                                                                                                                             |
| 10.24               |       | 2009 Cash Incentive Plan. (5)                                                                                                                                                                    |
|                |       |                                                                                                                                                                                             |
| 15.1                |       | Letter regarding unaudited interim financial information.                                                                                                                                        |
|                |       |                                                                                                                                                                                             |
| 31.1                |       | Certification required by Rule 13a-14(a) or  Rule 15d-14(a) of the Exchange Act.                                                                                             |
|                |       |                                                                                                                                                                                             |
| 31.2                |       | Certification required by Rule 13a-14(a) or  Rule 15d-14(a) of the Exchange Act.                                                                                             |
|                |       |                                                                                                                                                                                             |
| 32.1                |       | Certification required by Rule 13a-14(b) or  Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter  63 of Title 18 of the United States Code (18 U.S.C. 1350). |

 

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| (1)    |   | Filed as an exhibit to Rigel’s Current Report on  Form 8-K filed on June 24, 2003 and incorporated herein by  reference.                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                        |
| (2)    |   | Filed as an exhibit to Rigel’s  Current Report on Form 8-K filed on February 2, 2007 and  incorporated herein by reference.                  |
|   |   |                                                                                                                                                        |
| (3)    |   | Filed as an exhibit to Rigel’s  Registration Statement on Form S-1 (No. 333-45864), as amended, and  incorporated herein by reference.       |
|   |   |                                                                                                                                                        |
| (4)    |   | Filed as an exhibit to Rigel’s  Current Report on Form 8-K (No. 000-29889) dated June 24,  2003, and incorporated herein by reference.  |
|   |   |                                                                                                                                                        |
| (5)    |   | Filed as an exhibit to Rigel’s  Current Report on Form 8-K (No. 000-29889) dated March 30,  2009, and incorporated herein by reference. |

** **

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** **

**SIGNATURES**

** **

Pursuant to the requirements of theSecurities Exchange Act of 1934, as amended, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|       | RIGEL PHARMACEUTICALS, INC. |
|------------|-----------------------------|
|       |                        |
|       | By:                         | /s/ JAMES M. GOWER |
|       |                        | James M. Gower |
|       |                        | Chief Executive Officer |
|       |                        | (Principal Executive Officer) |
|       |                        |
|       | Date: May 5,  2009     |
|       |                        |
|       | By:                         | /s/ RYAN D. MAYNARD |
|       |                        | Ryan D. Maynard |
|       |                        | Vice President and Chief Financial Officer |
|       |                        | (Principal Financial and Accounting Officer) |
|       |                        |
| ** ** | **Date:**May 5, 2009   |

** **

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** **

**INDEX TO EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                            |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Amended and Restated Certificate of Incorporation. (1)                                                                                                                                           |
|                |       |                                                                                                                                                                                             |
| 3.2                 |       | Amended and Restated Bylaws. (2)                                                                                                                                                                 |
|                |       |                                                                                                                                                                                             |
| 4.1                 |       | Form of warrant to purchase shares of common stock.  (3)                                                                                                                                    |
|                |       |                                                                                                                                                                                             |
| 4.2                 |       | Specimen Common Stock Certificate. (4)                                                                                                                                                           |
|                |       |                                                                                                                                                                                             |
| 4.3                 |       | Warrant issued to HCP BTC, LLC for the purchase of shares  of common stock.                                                                                                                      |
|                |       |                                                                                                                                                                                             |
| 10.1                |       | Amendment No. Four to the Build-to-Suit Lease  between Rigel and HCP BTC, LLC dated February 1, 2009.                                                                                  |
|                |       |                                                                                                                                                                                             |
| 10.24               |       | 2009 Cash Incentive Plan. (5)                                                                                                                                                                    |
|                |       |                                                                                                                                                                                             |
| 15.1                |       | Letter regarding unaudited interim financial information.                                                                                                                                        |
|                |       |                                                                                                                                                                                             |
| 31.1                |       | Certification required by Rule 13a-14(a) or  Rule 15d-14(a) of the Exchange Act.                                                                                             |
|                |       |                                                                                                                                                                                             |
| 31.2                |       | Certification required by Rule 13a-14(a) or  Rule 15d-14(a) of the Exchange Act.                                                                                             |
|                |       |                                                                                                                                                                                             |
| 32.1                |       | Certification required by Rule 13a-14(b) or  Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter  63 of Title 18 of the United States Code (18 U.S.C. 1350). |

 

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| (1)    |   | Filed as an exhibit to Rigel’s Current Report on  Form 8-K filed on June 24, 2003 and incorporated herein by  reference.                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                        |
| (3)    |   | Filed as an exhibit to Rigel’s  Current Report on Form 8-K filed on February 2, 2007 and  incorporated herein by reference.                  |
|   |   |                                                                                                                                                        |
| (3)    |   | Filed as an exhibit to Rigel’s  Registration Statement on Form S-1 (No. 333-45864), as amended, and  incorporated herein by reference.       |
|   |   |                                                                                                                                                        |
| (4)    |   | Filed as an exhibit to Rigel’s  Current Report on Form 8-K (No. 000-29889) dated June 24,  2003, and incorporated herein by reference.  |
|   |   |                                                                                                                                                        |
| (5)    |   | Filed as an exhibit to Rigel’s  Current Report on Form 8-K (No. 000-29889) dated March 30,  2009, and incorporated herein by reference. |

 

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