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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**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  SEPTEMBER 30, 2008** |
| ** **                                             | ** ** | ** **                                                                                              |
| **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 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 o |   | Accelerated filer x |   | 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 October 31, 2008, there were **36,584,243** shares of the registrant’s common stockoutstanding.

 

 

 

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**RIGEL PHARMACEUTICALS, INC.QUARTERLY REPORT ON FORM 10-QFOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008**

** **

**INDEX**

** **
| ** **       | ** **                                                                                                          | **Page** |
|------------------|---------------------------------------------------------------------------------------------------------------------|----------|
| **PART I**  | **FINANCIAL INFORMATION**                                                                                           | 3        |
| **Item 1.**      | Condensed Financial  Statements                                                                                     | 3        |
|             | Condensed  Balance Sheets — September 30, 2008 (Unaudited) and December 31,  2007                    | 3        |
|             | Condensed  Statements of Operations (Unaudited) —three and nine months ended  September 30, 2008 and 2007 | 4        |
|             | Condensed  Statements of Cash Flows (Unaudited) — nine months ended September 30,  2008 and 2007          | 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                                                         | 22       |
| **Item 4.**      | Controls and  Procedures                                                                                            | 22       |
| **PART II** | **OTHER INFORMATION**                                                                                               | 22       |
| **Item 1A.**     | Risk Factors                                                                                                        | 22       |
| **Item 6.**      | Exhibits                                                                                                            | 32       |
|             |                                                                                                                |     |
| **Signatures**   |                                                                                                                | 34       |

 

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**PART I  FINANCIAL INFORMATION**

 

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

** **

**RIGEL PHARMACEUTICALS, INC.**

**CONDENSEDBALANCE SHEETS**

**(in thousands, except share and per share amounts)**

 
| ** **                                                                                                                                                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2008**               | ** ** | **2007 (1)**     | ** ** |
| ** **                                                                                                                                                                                   | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                                   |       |                   |       |                  |       |
| Current assets:                                                                                                                                                                              |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                    |       | $                      | 57,718     |                  | $          | 44,503 |   |
| Available-for-sale securities                                                                                                                                                                |       | 102,640                |       | 63,793                |       |
| Prepaid expenses and other current assets                                                                                                                                                    |       | 3,037                  |       | 2,834                 |       |
| Total current assets                                                                                                                                                                         |       | 163,395                |       | 111,130               |       |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| Property and equipment, net                                                                                                                                                                  |       | 3,198                  |       | 2,560                 |       |
| Other assets                                                                                                                                                                                 |       | 1,984                  |       | 2,099                 |       |
|                                                                                                                                                                                         |       | $                      | 168,577    |                  | $          | 115,789 |   |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                |       |                   |       |                  |       |
| Current liabilities:                                                                                                                                                                         |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                             |       | $                      | 4,851      |                  | $          | 4,320 |   |
| Accrued compensation                                                                                                                                                                         |       | 4,951                  |       | 8,133                 |       |
| Other accrued liabilities                                                                                                                                                                    |       | 8,958                  |       | 2,031                 |       |
| Deferred rent                                                                                                                                                                                |       | 2,540                  |       | 638                   |       |
| Capital lease obligations                                                                                                                                                                    |       | 1,040                  |       | 990                   |       |
| Total current liabilities                                                                                                                                                                    |       | 22,340                 |       | 16,112                |       |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| Long-term portion of capital lease  obligations                                                                                                                                              |       | 1,194                  |       | 784                   |       |
| Long-term portion of deferred rent                                                                                                                                                           |       | 14,114                 |       | 16,486                |       |
| Other long-term liabilities                                                                                                                                                                  |       | 189                    |       | 225                   |       |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| Commitments and contingencies                                                                                                                                                                |       |                   |       |                  |       |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                   |       |                   |       |                  |       |
| Common stock, $0.001 par value; 100,000,000  shares authorized; 36,584,243 and 31,381,774 shares issued and outstanding on  September 30, 2008 and December 31, 2007, respectively |       | 37                     |       | 31                    |       |
| Additional paid-in capital                                                                                                                                                                   |       | 599,128                |       | 451,384               |       |
| Accumulated other comprehensive income  (loss)                                                                                                                                               |       | (12                    | )          | 198                   |       |
| Accumulated deficit                                                                                                                                                                          |       | (468,413               | )          | (369,431              | )          |
| Total stockholders’ equity                                                                                                                                                              |       | 130,740                |       | 82,182                |       |
|                                                                                                                                                                                         |       | $                      | 168,577    |                  | $          | 115,789 |   |

 

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(1)  Thebalance sheet at December 31, 2007 has been derived from the audited financialstatements at that date included in Rigel’s Annual Report on Form 10-K forthe year ended December 31, 2007.

 

See Accompanying Notes.

 

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**RIGEL PHARMACEUTICALS, INC.**

**CONDENSEDSTATEMENTS OF OPERATIONS**

**(In thousands, except per share amounts)**

**(unaudited)**

 
| ** **                                                                              | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Contract revenues                                                                       |       | $                                                        | —     |                                                    | $          | — |   | $ | — |   | $ | 4,600 |   |
| Costs and expenses:                                                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Research and development                                                                |       | 31,232                                                   |       | 15,372                                                  |       | 81,268 |   | 48,404 |   |
| General and administrative                                                              |       | 7,450                                                    |       | 5,054                                                   |       | 21,436 |   | 15,466 |   |
|                                                                                    |       | 38,682                                                   |       | 20,426                                                  |       | 102,704 |   | 63,870 |   |
|                                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Loss from operations                                                                    |       | (38,682                                                  | )          | (20,426                                                 | )          | (102,704 | ) | (59,270 | ) |
| Interest income                                                                         |       | 1,034                                                    |       | 1,538                                                   |       | 3,853 |   | 4,172 |   |
| Interest expense                                                                        |       | (43                                                      | )          | (56                                                     | )          | (131 | ) | (172 | ) |
|                                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Net loss                                                                                |       | $                                                        | (37,691    | )                                                       | (18,944    | ) | $ | (98,982 | ) | (55,270 | ) |
|                                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Net loss per share, basic and diluted                                                   |       | $                                                        | (1.03      | )                                                       | $          | (0.61 | ) | $ | (2.76 | ) | $ | (1.96 | ) |
|                                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average shares used in computing net loss per  common share, basic and diluted |       | 36,581                                                   |       | 31,030                                                  |       | 35,837 |   | 28,211 |   |

 

See Accompanying Notes.

 

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**RIGEL PHARMACEUTICALS, INC.**

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**

**(unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **September 30,**          | ** ** |
| ** **                                                                   | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| **Operating activities**                                                     |       |                            |       |   |   |
| Net loss                                                                     |       | $                               | (98,982    | ) | $ | (55,270 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                |       | 1,064                           |       | 1,009 |   |
| Stock-based compensation expense                                             |       | 17,801                          |       | 9,121 |   |
| Changes in assets and liabilities:                                           |       |                            |       |   |   |
| Prepaid expenses and other current assets                                    |       | (203                            | )          | 1,326 |   |
| Other assets                                                                 |       | 115                             |       | 114 |   |
| Accounts payable                                                             |       | 588                             |       | 555 |   |
| Accrued compensation                                                         |       | (3,182                          | )          | (255 | ) |
| Other accrued liabilities                                                    |       | 6,927                           |       | (95 | ) |
| Deferred revenue                                                             |       | —                          |       | (3,066 | ) |
| Deferred rent and other long-term  liabilities                               |       | (506                            | )          | 2,729 |   |
| Net cash used in operating activities                                        |       | (76,378                         | )          | (43,832 | ) |
|                                                                         |       |                            |       |   |   |
| **Investing activities**                                                     |       |                            |       |   |   |
| Purchases of available-for-sale securities                                   |       | (170,146                        | )          | (100,125 | ) |
| Maturities of available-for-sale securities                                  |       | 131,089                         |       | 83,240 |   |
| Capital expenditures                                                         |       | (1,759                          | )          | (864 | ) |
| Net cash used in investing activities                                        |       | (40,816                         | )          | (17,749 | ) |
|                                                                         |       |                            |       |   |   |
| **Financing activities**                                                     |       |                            |       |   |   |
| Proceeds from capital lease financings                                       |       | 1,363                           |       | 640 |   |
| Payments on capital lease obligations                                        |       | (903                            | )          | (1,154 | ) |
| Net proceeds from issuances of common stock                                  |       | 129,949                         |       | 53,137 |   |
| Net cash provided by financing activities                                    |       | 130,409                         |       | 52,623 |   |
|                                                                         |       |                            |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                        |       | 13,215                          |       | (8,958 | ) |
|                                                                         |       |                            |       |   |   |
| Cash and cash equivalents at beginning of  period                            |       | 44,503                          |       | 47,727 |   |
|                                                                         |       |                            |       |   |   |
| Cash and cash equivalents at end of period                                   |       | $                               | 57,718     |   | $ | 38,769 |   |

 

See Accompanying Notes.

 

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**RigelPharmaceuticals, Inc.**

**Notes toCondensed Financial Statements**

**(unaudited)**

 

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

 

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

 

We wereincorporated in the state of Delaware on June 14, 1996. We are engaged inthe discovery and development of novel, small-molecule drugs for the treatmentof inflammatory/autoimmune diseases and cancer, as well as viral and metabolicdiseases.

 

**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 generally acceptedaccounting principles for complete financial statements. These unauditedcondensed financial statements include all normal and recurring adjustmentsthat we believe are necessary to fairly state our financial position and theresults of our operations and cash flows. Interim-period results are notnecessarily indicative of results of operations or cash flows for a full-year.The balance sheet at December 31, 2007 has been derived from auditedfinancial statements at that date, but does not include all disclosuresrequired by U.S. generally accepted accounting principles for completefinancial statements. Because all of the disclosures required by U.S. generallyaccepted accounting principles for complete financial statements are notincluded herein, these interim unaudited condensed financial statements and thenotes 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, 2007.

 

Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes. We base our estimates on historical experience and on various otherassumptions that we believe to be reasonable under the circumstances. Actualresults could differ from these estimates.

 

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

 

On December 12, 2007, theFinancial Accounting Standards Board, or FASB, ratified the consensus reachedby the Emerging Issues Task Force, or EITF, on EITF Issue No. 07-1, “Accountingfor Collaborative Arrangements,” or EITF 07-1. EITF 07-1 defines collaborativearrangements and establishes reporting requirements for transactions betweenparticipants in a collaborative arrangement and between participants in thearrangement and third parties. EITF 07-1 is effective for financial statementsissued for fiscal years beginning after December 15, 2008 and will beapplied retrospectively to all prior period presented for all collaborativearrangements existing as of the effective date. We are currently evaluating theimpact of adopting EITF 07-1 on our financial statements and can not estimatethe impact of adoption at this time.

 

On June 27, 2007, the FASBratified the consensus reached by the EITF on EITF Issue No. 07-3, “Accountingfor Advance Payments for Goods or Services to Be Used in Future Research andDevelopment Activities,” or EITF 07-3. EITF 07-3 requires companies to deferand capitalize prepaid, nonrefundable research and development payments tothird parties, and amortize them over the period that the research anddevelopment activities are performed or the services are provided, subject toan assessment of recoverability. EITF 07-3 is effective for new contractsentered into during fiscal years beginning after December 15, 2007,including interim periods within those fiscal years. We adopted EITF 07-3 inthe first quarter of 2008.  There was nomaterial impact on our financial statements upon adoption.

 

In February 2007, the FASBissued Statement of Financial Accounting Standards, or SFAS, No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities - including anamendment of FASB Statement No. 115.” SFAS No. 159 permits entitiesto choose to measure financial instruments and certain other items at fairvalue. Entities that elect the fair value option will report unrealized gainsand losses in earnings at each subsequent reporting date. The fair value optionmay be elected on an instrument-by-instrument basis, with few exceptions. SFAS No. 159also establishes presentation and disclosure requirements to facilitatecomparisons between companies that choose different measurement attributes forsimilar assets and liabilities. SFAS No. 159 is effective for fiscal yearsbeginning after November 15, 2007. We elected not to adopt the fair valueoption permitted by SFAS No. 159 at this time.

 

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In September 2006, the FASBissued SFAS No. 157, “Fair Value Measurements.” This standard defines fairvalue, establishes a framework for measuring fair value under generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements. SFAS No.157 is effective for financial statements issued forfiscal years beginning after November 15, 2007, except that under FASBStaff 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.  We adopted SFAS No. 157with regard to all financial assets and liabilities in our financial statementsin the first quarter of 2008 and have elected to delay the adoption of SFAS No. 157for non-financial assets and non-financial liabilities until the first quarterof 2009.  The adoption of SFAS 157 hadno material impact on our financial statements.

 

**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**

 

Totalstock-based compensation expense related to all of our share-based awards thatwe recognized for the three and nine months ended September 30, 2008 and2007 was comprised as follows (in thousands):

 
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                              | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Research and  development               |       | $                                | 3,035      |                            | $          | 1,294 |   | $ | 9,229 |   | $ | 4,212 |   |
| General and  administrative             |       | 3,001                            |       | 1,500                           |       | 8,572 |   | 4,909 |   |
| Total stock-based  compensation expense |       | $                                | 6,036      |                            | $          | 2,794 |   | $ | 17,801 |   | $ | 9,121 |   |

 

UnderSFAS No. 123(R), the fair value of each option award is estimated on thedate of grant using the Black-Scholes option pricing model. We have segregatedoption awards into three homogenous groups, officers and directors, all otheremployees, and consultants, for purposes of determining fair values of options.

 

Wedetermined weighted-average valuation assumptions separately for each of thesegroups as follows:

 

·                  Volatility- We estimated volatility using the historical share price performance over theexpected life of the option up to the point where we have historical marketdata. We also considered other factors, such as implied volatility, our currentclinical trials and other company activities that may affect the volatility ofour stock in the future. We determined that at this time historical volatilityis more indicative of our expected future stock performance.

 

·                  Expectedterm - We worked with various historical data to determine the most applicableexpected term for each option group. These data included: (1) for optionsexercised, term of the options from option grant date to exercise date; (2) foroptions cancelled, term of the options from grant date to cancellation date,excluding unvested option forfeitures; and (3) for options which remainedoutstanding at the balance sheet date, term of the options from grant date tothe end of the reporting period, and the estimated remaining term of theoptions. The consideration and calculation of the above data gave us reasonableestimates of the expected term for each option group. We also considered thevesting schedules of the options granted and factors surrounding exercisebehavior of the option groups, our current market price and company activitythat may affect our market price. In addition, we also considered the vestingschedules of the options, the optionee type (i.e., officers and directors, allother employees and consultants) and other factors that may affect the expectedterm of the option. For options granted to consultants, we use the contractualterm of the option, which is generally ten years, for the initial valuation ofthe option and the remaining contractual term of the option for the succeedingperiods.

 

·                  Risk-freeinterest rate - The risk-free interest rate is based on U.S. Treasury constantmaturity rates with similar terms to the expected term of the options for eachoption group.

 

·                  Forfeiturerate - We estimated the forfeiture rate using our historical experience withpre-vesting options. We review our 

 

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forfeiturerates each quarter and make changes as factors affecting our forfeiture ratecalculations and assumptions change.

 

·                  Dividendyield - The expected dividend yield is 0% as we have not paid and do not expectto pay dividends.

 

Thefollowing table summarizes the weighted-average assumptions relating to optionsgranted pursuant to our equity incentive plans for the three and nine monthsended September 30, 2008 and 2007:

 
| ** **               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **               | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Risk-free interest rate  |       | 3.1                              | %          | 4.5                             | %          | 2.8 | % | 4.7 | % |
| Expected term (in years) |       | 4.0                              |       | 4.0                             |       | 4.5 |   | 4.1 |   |
| Dividend yield           |       | 0.0                              | %          | 0.0                             | %          | 0.0 | % | 0.0 | % |
| Expected volatility      |       | 92.1                             | %          | 71.1                            | %          | 93.0 | % | 79.2 | % |

 

Optionexercise prices are set at not less than the closing price of our common stockon the trading day immediately preceding the date of grant, become exercisableat varying dates and generally expire ten years from the date of grant. Wegranted options to purchase 1,528,180 shares of common stock during the ninemonths ended September 30, 2008, with a grant-date weighted average fairvalue of $18.03 per share. We granted options to purchase 1,032,843 shares ofcommon stock during the nine months ended September 30, 2007, with agrant-date weighted average fair value of $6.96 per share.  As of September 30, 2008, there wasapproximately $16.1 million of total unrecognized stock-based compensationcost, net of estimated forfeitures, related to unvested options granted underour stock option plans. At September 30, 2008, 4,458,954 shares of commonstock were available for future grant under our equity incentive plans andoptions to purchase 164,309 shares were exercised during the nine months ended September 30,2008.

 

***Employee Stock Purchase Plan (ESPP)***

 

The fairvalue of awards granted under our ESPP is estimated on the date of grant usingthe Black-Scholes option pricing model, which uses the weighted-averageassumptions set forth in the table on the next page. Our ESPP provides for atwenty-four month offering period comprised of four six-month purchase periodswith a look-back option. A look-back option is a provision in our ESPP underwhich eligible employees can purchase shares of our common stock at a price pershare equal to the lesser of 85% of the fair market value on the first day ofthe offering period or 85% of the fair market value on the purchase date.

 

Our ESPPplan also includes a feature that provides for a new offering period to beginwhen the fair market value of our common stock on any purchase date during anoffering period falls below the fair market value of our commonstock on the first day of such offering period. This feature is called a “reset.”We had a “reset” for a new twenty-four month offering period starting on July 1,2008 because the fair market value of our stock on June 30, 2008 was lowerthan the fair market value of our stock on January 2, 2008, the first dayof the offering period. We applied modification accounting in accordance withSFAS 123(R) to determine the incremental fair value associated with thisESPP “reset” and recognized the related stock-based compensation expenseaccording to the FASB Technical 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 $849,155,which will be recognized over the new twenty-four month offering period.

 

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As of September 30,2008, there were approximately 1,472,085 shares reserved for future issuanceunder the ESPP and 38,160 shares were purchased under the ESPP during the ninemonths ended September 30, 2008. The following table summarizes theweighted-average assumptions related to our ESPP for the nine months ended September 30,2008 and 2007. Expected volatilities for our ESPP are based on the historicalvolatility of our stock. Expected term represents the weighted average of thepurchase periods within the offering period. The risk-free interest rate forperiods within the expected term is based on U.S. Treasury constant maturityrates. There have been no significant changes in the assumptions before andafter the “reset” of our ESPP plan.

 
| ** **               | ** ** | **Nine Months Ended** | ** ** |
|--------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **September 30,**          | ** ** |
| ** **               | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| Risk-free interest rate  |       | 2.1                             | %          | 4.7 | % |
| Expected term (in years) |       | 1.3                             |       | 0.6 |   |
| Dividend yield           |       | 0.0                             | %          | 0.0 | % |
| Expected volatility      |       | 99.0                            | %          | 45.5 | % |

 

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

 

Werecognize revenue from our collaboration arrangements. Our revenue arrangementswith multiple elements are accounted for under EITF No. 00-21, “RevenueArrangements with Multiple Deliverables,” and are divided into separate unitsof accounting if certain criteria are met, including whether the deliveredelement has stand-alone value to the customer and whether there is objectiveand reliable evidence of the fair value of the undelivered items. Theconsideration we receive is allocated among the separate units based on theirrespective fair values, and the applicable revenue recognition criteria areapplied to each of the separate units. Advance payments received in excess ofamounts earned are classified as deferred revenue until earned.

 

Non-refundable, up-front paymentsreceived in connection with research and development collaboration agreements,including technology access fees, are deferred and recognized on astraight-line basis over the relevant periods of continuing involvement,generally the research term. When a research term is not specified, we estimatethe time it will take us to complete our deliverables under the contract andrecognize the upfront fee using the straight-line method over that time period.We review our estimates every quarter for reasonableness.

 

Revenue related to collaborative research with our corporatecollaborators is recognized as research services are performed over the relateddevelopment funding periods for each contract. Under these agreements, we arerequired to perform research and development activities as specified in theapplicable agreement. The payments received are not refundable and aregenerally based on a contractual cost per full-time equivalent employee workingon the project. Research and development expenses under the collaborativeresearch agreements, except for the Merck collaboration signed in November 2004related to ubiquitin ligases, approximate or exceed the revenue recognizedunder such agreements over the term of the respective agreements. For the Merckcollaboration, we recognized a pro-rata portion of the invoiced amounts forfunding of our research scientists based on the headcount dedicated to theproject for the quarter. When the research portion of the collaboration endedin May 2007, we recognized the full amount of the deferred revenue relatedto the contract because we had no further obligations. It is our policy torecognize revenue based on our level of effort expended, and that revenuerecognized will not exceed amounts billable under the arrangement.

 

Revenue associated with at-risk milestones pursuant to collaborativeagreements is recognized based upon the achievement of the milestones as setforth in the applicable agreement.

 

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

 

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

 
| ** **                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| Checking account                           |       | $                      | 433        |                  | $          | 425 |   |
| Money market funds                         |       | 40,787                 |       | 15,051                |       |
| U. S. treasury bills                       |       | 24,858                 |       | —                |       |
| Government-sponsored enterprise securities |       | 57,865                 |       | 38,262                |       |
| Corporate bonds and commercial paper       |       | 36,415                 |       | 54,558                |       |
|                                       |       |                   |       |                  |       |
|                                       |       | $                      | 160,358    |                  | $          | 108,296 |   |
| Reported as:                               |       |                   |       |                  |       |
| Cash and cash equivalents                  |       | $                      | 57,718     |                  | $          | 44,503 |   |
| Available-for-sale securities              |       | 102,640                |       | 63,793                |       |
|                                       |       |                   |       |                  |       |
|                                       |       | $                      | 160,358    |                  | $          | 108,296 |   |

 

Cash equivalents andavailable-for-sale securities included the following securities with unrealizedgains and losses (in thousands):

 
| ** **                                 | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|--------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                                 | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **          | ** ** |
| **September 30, 2008**           | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| U. S. treasury bills                       |       | $             | 24,835     |           | $          | 23             |       | $                   | —     |   | $ | 24,858 |   |
| Government-sponsored enterprise securities |       | 57,983        |       | 10             |       | (128           | )          | 57,865              |       |
| Corporate bonds and commercial paper       |       | 36,332        |       | 94             |       | (11            | )          | 36,415              |       |
|                                       |       |          |       |           |       |           |       |                |       |
| Total                                      |       | $             | 119,150    |           | $          | 127            |       | $                   | (139       | ) | $ | 119,138 |   |

 
| ** **                                 | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|--------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                                 | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **          | ** ** |
| **December 31, 2007**            | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| Government-sponsored enterprise securities |       | $             | 38,256     |           | $          | 18             |       | $                   | —     |   | $ | 38,274 |   |
| Corporate bonds and commercial paper       |       | 54,366        |       | 197            |       | (5             | )          | 54,558              |       |
|                                       |       |          |       |           |       |           |       |                |       |
| Total                                      |       | $             | 92,622     |           | $          | 215            |       | $                   | (5         | ) | $ | 92,832 |   |

 

*Available-for-saleSecurities. *AtSeptember 30, 2008, the above available-for-sale securities had a weightedaverage time to maturity of approximately 117 days. We have the ability to holdall investments as of September 30, 2008 to maturity.

 

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The following table shows the fair value and grossunrealized losses of our investments in individual securities that are in anunrealized loss position, aggregated by investment category (in thousands):

 
| ** **                                 | ** ** | ** **          | ** ** | **Unrealized** | ** ** |
|--------------------------------------------|------------|---------------------|------------|----------------|------------|
| **September 30, 2008**           | ** ** | **Fair Value** | ** ** | **Losses**     | ** ** |
| Government-sponsored enterprise securities |       | $                   | 43,151     |           | $          | (128 | ) |
| Corporate bonds and commercial paper       |       | 4,052               |       | (11            | )          |
| Total                                      |       | $                   | 47,203     |           | $          | (139 | ) |

 
| ** **                                 | ** ** | ** **          | ** ** | **Unrealized** | ** ** |
|--------------------------------------------|------------|---------------------|------------|----------------|------------|
| **December 31, 2007**            | ** ** | **Fair Value** | ** ** | **Losses**     | ** ** |
| Government-sponsored enterprise securities |       | $                   | —     |           | $          | — |   |
| Corporate bonds and commercial paper       |       | 6,394               |       | (5             | )          |
| Total                                      |       | $                   | 6,394      |           | $          | (5 | ) |

 

At September 30, 2008 and December 31,2007, we had no investment that had been in a continuous unrealized lossposition for more than twelve months.  Asof September 30, 2008 and December 31, 2007, a total of sixteen andthree individual securities, respectively, were in an unrealized loss positionfor twelve months or less, which loss was deemed to be temporary.

 

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

 

Fair value is defined as the price at which an assetcould 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.

 

Financialassets recorded at fair value in the Condensed Financial Statements arecategorized based upon the level of judgment associated with the inputs used tomeasure their fair value. Hierarchical levels, defined by SFAS 157 and directlyrelated to the amount of subjectivity associated with the inputs to fairvaluation of these assets and liabilities, are as follows:

 

Level 1 — Inputs are unadjusted, quoted prices in activemarkets for identical 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 includedin this category are money market securities where fair value were based onpublicly quoted prices.

 

Level 2 — Inputs are other than quoted prices included inLevel 1, which are either directly or indirectly observable for the asset orliability through correlation with market data at the reporting date and forthe duration of the instrument’s anticipated life.

 

The fair valued assets we hold that are generally includedin this category were 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, suchas benchmark yields, reported trades, broker/dealer quotes, bids, offers andother reference data.

 

Level 3 — Unobservable inputs that are supported by littleor no market activity and that are significant to the fair value of the assetsor liabilities 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.

 

We carry no investments classified under Level 3.

 

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***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 September 30, 2008** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Level 1**                                                                          | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Money market fund                          |       | $                                                                                         | 40,787     |   | $ | — |   | $ | — |   | $ | 40,787 |   |
| U. S. treasury bills                       |       |                                                                                      |       | 24,858 |   | — |   | 24,858 |   |
| Government-sponsored enterprise securities |       | —                                                                                    |       | 57,865 |   | — |   | 57,865 |   |
| Corporate bonds and commercial paper       |       | —                                                                                    |       | 36,415 |   | — |   | 36,415 |   |
| Total                                      |       | $                                                                                         | 40,787     |   | $ | 119,138 |   | $ | — |   | $ | 159,925 |   |

 

**9.****             ****Equipment Lease Line**

 

In January 2008,we obtained a new equipment lease line with a borrowing capability of $1.5million.  Our borrowing capacity underthis equipment lease line was increased to $3.2 million in July 2008. Wehave the ability to draw down on this line until the end of 2008.  The repayment period will be for three yearsbeginning on the date of each draw down, with the interest rate on the linefixed at each draw down. Each draw down has a bargain purchase buyout provisionof $1. During the nine months ended September 30, 2008, we drew downapproximately $1.4 million, which is included in our capital lease obligationon our balance sheet.  As of September 30,2008, approximately $1.8 million of the equipment lease line remainedavailable.

 

**10.****      ****Equity Financings**

 

During the first quarter of 2008,we completed an underwritten public offering in which we sold 5,000,000 sharesof our common stock at a price to the public of $27.00 per share. We receivednet proceeds of approximately $127.5 million after deducting underwritingdiscounts and commissions and offering expenses.

 

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**Report of Independent Registered PublicAccounting Firm**

 

The Board of Directors

Rigel Pharmaceuticals, Inc.

 

We have reviewed the condensedbalance sheet of Rigel Pharmaceuticals, Inc. as of September 30,2008, and the related condensed statements of operations for the three andnine-month periods ended September 30, 2008 and 2007, and the condensedstatements of cash flows for the nine-month periods ended September 30,2008 and 2007. These financial statements are the responsibility of the Company’smanagement.

 

We conducted our review inaccordance with the standards of the Public Company Accounting Oversight Board(United States). A review of interim financial information consists principallyof applying analytical procedures and making inquiries of persons responsiblefor financial and accounting matters. It is substantially less in scope than anaudit conducted in accordance with the standards of the Public CompanyAccounting Oversight Board, the objective of which is the expression of anopinion regarding the financial statements taken as a whole. Accordingly, we donot express such an opinion.

 

Based on our review, we are notaware of any material modifications that should be made to the condensedinterim financial statements referred to above for them to be in conformitywith U.S. generally accepted accounting principles.

 

We have previously audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the balance sheet of Rigel Pharmaceuticals, Inc. as of December 31,2007, and the related statements of operations, stockholders’ equity, and cashflows for the year then ended (not presented herein) and in our report dated March 6,2008, we expressed an unqualified opinion on those financial statements andincluded an explanatory paragraph referencing Rigel Pharmaceuticals, Inc.’schange in method of accounting for share-based compensation as of January 1,2006 and Note 1 to the financial statements. In our opinion, the information set forth in the accompanying condensedbalance sheet as of December 31, 2007, is fairly stated, in all materialrespects, in relation to the balance sheet from which it has been derived.

 
|                  |   | /s/ Ernst & Young  LLP |
|-----------------------|--------|---------------------------------|
| Palo Alto, California |   |                            |
| October 31, 2008 |   |                            |

 

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**Item 2.****          ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

*This discussion and analysisshould be read in conjunction with our financial statements and theaccompanying notes included in this report and the audited financial statementsand accompanying notes included in our Annual Report on Form 10-K for theyear ended December 31, 2007. Operating results for the nine months ended September 30,2008 are not necessarily indicative of results that may occur in futureperiods.*

 

*This report contains statementsthat involve expectations, plans or intentions. We usually use words such as “may,”“will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”“predict,” “intend,” or the negative of these terms or similar expressions toidentify these forward-looking statements. These statements appear throughoutthis quarterly report on Form 10-Q and are statements regarding ourcurrent expectation, belief or intent, primarily with respect to our operationsand related industry developments. Examples of these statements include, but arenot limited to, statements regarding the following: our business and scientificstrategies; the progress of our product development programs, includingclinical testing, and the timing of results thereof; our corporatecollaborations, including revenues that may be received from thesecollaborations; our drug discovery technologies; our research and developmentexpenses; protection of our intellectual property; sufficiency of our cashresources; and our operations and legal risks. You should not place unduereliance on these forward-looking statements. Our actual results could differmaterially from those anticipated in these forward-looking statements for manyreasons, including as a result of the risks and uncertainties discussed in the “RiskFactors” in Item 1A of Part II of this quarterly report on Form 10-Q.Any forward-looking statement speaks only as of the date on which it is made,and we undertake no obligation to update any forward-looking statement toreflect events or circumstances after the date on which the statement is madeor to reflect the occurrence of unanticipated events. New factors emerge fromtime to time, and it is not possible for us to predict which factors willarise. In addition, we cannot assess the impact of each factor on our businessor the extent to which any factor, or combination of factors, may cause actualresults to differ materially from those contained in any forward-lookingstatements.*

 

**Overview**

 

Weare a clinical-stage drug development company that discovers and developsnovel, small-molecule drugs for the treatment of inflammatory/autoimmunediseases and cancer, as well as viral and metabolic diseases. Our pioneeringresearch focuses on intracellular signaling pathways and related targets thatare critical to disease mechanisms. Our productivity has resulted in strategiccollaborations with large pharmaceutical partners to develop and market ourproduct candidates. We have product development programs ininflammatory/autoimmune diseases such as rheumatoid arthritis, thrombocytopeniaand asthma, as well as in cancer and viral and metabolic diseases.

 

We have multipleproduct candidates in development as follows:

 

·                  *R788 (fostamatinib disodium)—Product Candidate for Rheumatoid Arthritis(RA). *R788 is our lead productcandidate. It has a novel mechanism of action, inhibiting immunoglobulins G(IgG) receptor signaling in macrophages and B-cells.

 

In December 2007, we announcedthe results of a Phase 2 clinical trial of R788 in RA patients simultaneouslyreceiving methotrexate, in which doses of 100 mg bid and 150 mg bid of R788produced statistically 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 of the patients whohad their doses reduced successfully completed the clinical trial with minimalsafety issues.

 

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In June 2008, we announced thecommencement of two concurrent Phase 2b clinical trials of R788 in RA patientsat a number of clinical research centers throughout the United States, LatinAmerica, and Europe to evaluate the efficacy of R788 compared to placebo indistinct RA patient groups.  The firstPhase 2b clinical trial (TASKi 2) is evaluating RA patients receiving 100 mg ofR788 PO bid (orally, twice daily) or 150 mg of R788 PO qd (orally, once daily),compared with those receiving placebo, in a multi-center, randomized, doubleblind, placebo controlled, parallel dose study of R788 in patients who havefailed to respond to methotrexate. The second Phase 2b clinical trial (TASKi 3)is evaluating a group of RA patients receiving 100 mg of R788 PO bid, comparedwith a group receiving placebo, in a multi-center, randomized, double blind,placebo controlled, parallel dose study of R788 in patients who have failed atleast one marketed biologic agent. The class of biologic agents generallyincludes anti-tumor necrosis factor injectables commonly used to treat RA, butcould include other therapies as well. The primary objective of both TASKi 2and TASKi 3 is to measure the efficacy of R788 as determined by ACR20 scores(American College of Rheumatology responder rates showing a minimum of 20%improvement in RA symptoms and pain) at 6 months and 3 months, respectively.Secondary objectives include comparing higher ACR response rates (ACR 50 andACR 70) and DAS28 (Disease Activity Score including a 28-joint inspection)rates, in addition to evaluating various safety measures. TASKi 3 will alsoinclude measurement of changes in bone morphology using magnetic resonanceimaging (MRI) scans.  Initial results ofthe clinical trials are expected to be available by late summer 2009.

 

·                  *R788—Product Candidate 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 trial ofR788 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 overactivity of the signaling enzyme spleen tyrosine kinase, or Syk, appears to bean essential mechanism in several types of B-cell lymphoma proliferation andthat R788 can inhibit the growth of B-cell lymphoma driven by Syk overactivity. In June 2008, we reported preliminary results of a Phase 2clinical trial of R788 in patients with relapsed or refractory B-cellnon-Hodgkin’s lymphoma (NHL).  Wereported favorable responses for patients suffering from small lymphocyticlymphoma/chronic lymphocytic leukemia (SLL/CLL) or from diffuse large B-celllymphoma (DLBCL), particularly in view of the advanced and refractory stage ofthe disease in the treated patients.

 

·                  *R**788—Product Candidate for T-CellLymphoma.*  We expect toinitiate a Phase 2 trial for T-cell Lymphoma within the next several months.

 

·                  *R788—Product Candidate for Systemic Lupus Erythematosus (SLE or Lupus).*  Preclinical studies have shown that R788 ishighly effective in a murine model of lupus. We have postponed the initiation of the Lupus trial until we havefurther clarity on development priorities from a potential partner for R788.

 

·                  *R348—Product Candidate for Psoriasis and other immune disorders. *R348 is an orally-available potent, selective janus kinase 3 (JAK3)inhibitor. JAK3 is a cytoplasmic tyrosine kinase that plays an important rolein lymphocyte differentiation and proliferation in a variety of autoimmunediseases. Moving forward, we plan to focus on psoriasis and possible topicalapplications with R348 and to do so with a collaboration partner. We will moveforward with another selective JAK3 inhibitor compound for transplantrejection.  We expect to select this newJAK3 inhibitor compound by the end of 2008. We will proceed on our own withthis compound in transplant rejection. We do not plan to start a second rheumatoid arthritis program at thistime so as not to compete with the more advanced R788 program in the clinic.

 

·                  *R763—Product Candidate for Oncology. *R763/AS703569 is a potent, highly-selective, small-moleculeinhibitor of aurora kinase. In October 2005, we signed a licensingagreement with Merck Serono that gave Merck Serono an exclusive license todevelop and commercialize inhibitors in our aurora kinase program, includingR763/AS703569. In November 2007, Merck Serono exercised its option to addJapan to the territories covered under the current aurora kinase collaborationwith respect to R763/AS703569, resulting in a milestone payment to us of $3.0million. Under the agreement, Merck Serono is responsible for the furtherdevelopment and commercialization of R763/AS703569. In September 2006,Merck Serono initiated a Phase 1 multi-center clinical trial to evaluateR763/AS703569 for the treatment of patients with refractory solid tumors. In February 2007,Merck Serono began an additional Phase 1 clinical trial evaluatingR763/AS703569 in patients with hematological malignancies. In July 2007,Merck Serono initiated its third Phase 1 clinical trial, designed to determinethe maximum tolerated dose, safety and dosing regimen of R763/AS703569 incombination with gemcitabine, a commonly prescribed chemotherapeutic agentadministered by intravenous infusion. The clinical trial is evaluating twodifferent treatment regimens in which R763/AS703569 is given in sequence withgemcitabine over 21-day cycles. As many as 72 patients with advancedmalignancies, including pancreatic, ovarian, breast, non-small cell lung andcolorectal, will be evaluated.

 

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·                  *R343—Product Candidate for Asthma. *In the first quarter of 2005, we announced a collaborativeresearch and license agreement with Pfizer for the development of inhaledproducts for the treatment of allergic asthma and other respiratory diseases,such as chronic obstructive pulmonary disease. The collaboration initiallyfocused on our preclinical small molecule compounds, which inhibitimmunoglobulin E, or IgE, receptor signaling in respiratory tract mast cells byblocking Syk, a novel drug target for respiratory diseases. Mast cells playimportant roles in both early and late phase allergic reactions, and Sykinhibitors could prevent both phases.

 

Thecollaboration is now centered on the development of R343. Pfizer has completedthe Phase 1 clinical trial of an inhaled formulation of R343.  We expect that Pfizer will begin a Phase 1ballergen challenge trial at the beginning of 2009.

 

**Corporate Collaborations**

 

We conduct research and developmentprograms independently and in connection with our corporate collaborations. Wecurrently have collaborations with six major pharmaceutical/biotechnologycompanies. These collaborations include a collaboration with JanssenPharmaceutica N.V., a division of Johnson & Johnson, relating tooncology therapeutics and diagnostics; two collaborations with Pfizer, oneinitiated in 1999 in immunology and the other in January 2005, relating tointrapulmonary asthma and allergy therapeutics; a collaboration with NovartisPharma AG, or Novartis, with respect to four different programs relating toimmunology, oncology and chronic bronchitis; a collaboration with DaiichiPharmaceuticals Co., Ltd., or Daiichi, relating to oncology; a collaborationwith Merck & Co., Inc., or Merck, also relating to oncology; anda collaboration with Merck Serono, relating to our aurora kinase inhibitorprogram. None of these collaborations currently provides us with regularresearch reimbursement. In all of these collaborations, if certain conditionsare met, we are entitled to receive future milestone payments and royalties. Wecan not guarantee that these conditions will be met or that research anddevelopment efforts will be successful. As a result, we may not receive anyfurther milestone payments or royalties under these agreements.

 

**Equity Financings**

 

During the first quarter of 2008,we completed an underwritten public offering in which we sold 5,000,000 sharesof our common stock at a price to the public of $27.00 per share. We receivednet proceeds of approximately $127.5 million after deducting underwritingdiscounts and commissions and offering expenses.

 

**Recent Accounting Pronouncements**

 

On December 12, 2007, theFinancial Accounting Standards Board, or FASB, ratified the consensus reachedby the Emerging Issues Task Force, or EITF, on EITF Issue No. 07-1, “Accountingfor Collaborative Arrangements,” or EITF 07-1. EITF 07-1 defines collaborativearrangements and establishes reporting requirements for transactions betweenparticipants in a collaborative arrangement and between participants in thearrangement and third parties. EITF 07-1 is effective for financial statementsissued for fiscal years beginning after December 15, 2008 and will beapplied retrospectively to all prior period presented for all collaborativearrangements existing as of the effective date. We are currently evaluating theimpact of adopting EITF 07-1 on our financial statements and can not estimatethe impact of adoption at this time.

 

On June 27, 2007, the FASBratified the consensus reached by the EITF on EITF Issue No. 07-3, “Accountingfor Advance Payments for Goods or Services to Be Used in Future Research andDevelopment Activities,” or EITF 07-3. EITF 07-3 requires companies to deferand capitalize prepaid, nonrefundable research and development payments tothird parties, and amortize them over the period that the research anddevelopment activities are performed or the services are provided, subject toan assessment of recoverability. EITF 07-3 is effective for new contractsentered into during fiscal years beginning after December 15, 2007,including interim periods within those fiscal years. We adopted EITF 07-3 inthe first quarter of 2008.  There was nomaterial impact on our financial statements upon adoption.

 

In February 2007, the FASBissued Statement of Financial Accounting Standards, or SFAS, No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities—including anamendment of FASB Statement No. 115.” SFAS No. 159 permits entitiesto choose to measure financial instruments and certain other items at fairvalue. Entities that elect the fair value option will report unrealized gainsand losses in earnings at each subsequent reporting date. The fair value optionmay be elected on an instrument-by-instrument basis, with few exceptions. SFAS No. 159also establishes presentation and disclosure requirements to facilitatecomparisons between companies that choose different measurement attributes forsimilar assets and liabilities. SFAS No. 159 is effective for fiscal yearsbeginning after November 15, 2007. We elected not to adopt the fair valueoption permitted by SFAS No. 159 at this time.

 

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In September 2006, the FASBissued SFAS No. 157, “Fair Value Measurements.” This standard defines fairvalue, establishes a framework for measuring fair value under generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements. SFAS No.157 is effective for financial statements issued forfiscal years beginning after November 15, 2007, except that under FASBStaff 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.  We adopted SFAS No. 157with regard to all financial assets and liabilities in our financial statementsin the first quarter of 2008 and have elected to delay the adoption of SFAS No. 157for non-financial assets and non-financial liabilities until the first quarterof 2009.  The adoption of SFAS 157 hadno material impact on our financial statements.

 

**Critical Accounting Policies andthe Use of Estimates**

 

Our discussion and analysis of ourfinancial condition and results of operations is based upon our condensedfinancial statements, which have been prepared in accordance with U.S generallyaccepted accounting principles for interim financial information. Thepreparation of these condensed financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. We evaluate our estimates, including those related to terms ofthe research collaborations (i.e. amortization of upfront fees and certainmilestone payments), investments, stock compensation, impairment issues, theestimated useful life of assets and contingencies, on an on-going basis. Webase our estimates on historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions. Webelieve that there were no significant changes in our critical accountingpolicies during the quarter ended September 30, 2008 as compared to thosepreviously disclosed in our annual report on Form 10-K for the year ended December 31,2007. We believe the following critical accounting policies affect our moresignificant judgments and estimates used in the preparation of our financialstatements:

 

***Revenue Recognition***

 

We recognize revenue from ourcollaboration arrangements. Our revenue arrangements with multiple elements areevaluated under Emerging Issues Task Force No. 00-21, “RevenueArrangements with Multiple Deliverables,” and are divided into separate unitsof accounting if certain criteria are met, including whether the deliveredelement has stand-alone value to the customer and whether there is objectiveand reliable evidence of the fair value of any undelivered items. Theconsideration we receive is allocated among the separate units based on theirrespective fair values, and the applicable revenue recognition criteria areapplied to each of the separate units. Advance payments received in excess ofamounts earned are classified as deferred revenue until earned.

 

Non-refundable, up-front paymentsreceived in connection with research and development collaboration agreements,including technology access fees, are deferred and recognized on astraight-line basis over the relevant periods of continuing involvement, generallythe research term. When a research term is not specified, we estimate the timeit will take us to complete our deliverables under the contract and recognizethe upfront fee using the straight-line method over that time period. We reviewour estimates every quarter for reasonableness.

 

Revenue related to collaborativeresearch with our corporate collaborators is recognized as research servicesare performed over the related development periods for each contract. Underthese agreements, we are required to perform research and developmentactivities as specified in the applicable agreement. The payments received arenot refundable and are generally based on a contractual cost per full-timeequivalent employee working on the project. Research and development expensesunder the collaborative research agreements, except for the Merck collaborationsigned in November 2004 related to ubiquitin ligases, approximate orexceed the revenue recognized under such agreements over the term of therespective agreements. For the Merck collaboration, we recognized a pro-rataportion of the invoiced amounts for funding of our research scientists based onthe headcount dedicated to the project. When the research portion of thecollaboration ended in May 2007, we recognized the full amount of thedeferred revenue related to the contract because we had no further obligationsunder the Merck collaboration. It is our policy to recognize revenue based onour level of effort expended, and that revenue recognized will not exceedamounts billable under the arrangement.

 

Revenues associated with at-riskmilestones pursuant to collaborative agreements are recognized based upon theachievement of the milestones as set forth in the applicable agreement.

 

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***Stock-based Compensation***

 

Thedetermination of the fair value of share-based payment awards on the date ofgrant using the Black-Scholes option-pricing model is affected by our stockprice as well as assumptions regarding a number of complex and subjectivevariables. These variables include, but are not limited to, volatility,expected term, risk-free interest rate and dividends. We estimate volatilityusing our historical share price performance over the expected life of theoption up to the point where we have historical market data. For expected term,among other things, we take into consideration our historical data of optionsexercised, cancelled and expired. The risk-free rate is based on the U.S.Treasury constant maturity rate. We have not paid and do not expect to paydividends. In order to calculate share-based expense, we also estimate theforfeiture rate using our historical experience with options that cancel beforethey vest.

 

If thesefactors change and we employ different assumptions in the application of SFAS123(R) in future periods, the compensation expense that we record underSFAS 123(R) may differ significantly from what we have recorded in thecurrent period. Therefore, we believe it is important to be aware of the highdegree of subjectivity involved when using option pricing models to estimateshare-based compensation under SFAS 123(R).

 

**Results of Operations**

** **

**Three and Nine Months Ended September 30,2008 and 2007**

 

**Revenues**

 
| *** ***             |   | **Three Months Ended** | ** ** | ** ** | ** ** | **Nine Months Ended** | ** ** | ** ** |       |
|--------------------------|--------|----------------------------------|------------|------------|------------|---------------------------------|------------|------------|------------|
| *** ***             |   | **September 30,**           | ** ** | ** ** | ** ** | **September 30,**          | ** ** | ** ** |       |
| *** ***             |   | **2008**                         | ** ** | **2007**   |       | **Aggregate Change**       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Aggregate Change** |   |
| *** ***             |   | **(in thousands)**          |       |
| ***Contract  revenues*** |   | $                                | —     |       | $          | —                          |       | $          | —     |   | $ | — |   | $ | 4,600 |   | $ | (4,600 | ) |
|                          |        |                                  |            |            |            |                                 |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Contractrevenues by collaborator were:

 
| ** **   | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|--------------|------------|----------------------------------|------------|------------|------------|---------------------------------|------------|------------|------------|
| ** **   | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **September 30,**          | ** ** | ** ** | ** ** |
| ** **   | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Aggregate Change**       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Aggregate Change** | ** ** |
| ** **   | ** ** | **(in thousands)**          | ** ** |
| ***Merck***  |       | $                                | —     |       | $          | —                          |       | $          | —     |   | $ | — |   | $ | 3,841 |   | $ | (3,841 | ) |
| ***Pfizer*** |       | —                           |       | —     |       | —                          |       | —     |       | 759 |   | (759 | ) |
| ***Total***  |       | $                                | —     |       | $          | —                          |       | $          | —     |   | $ | — |   | $ | 4,600 |   | $ | (4,600 | ) |
|              |            |                                  |            |            |            |                                 |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Therewere no contract revenues reported during the three and nine months ended September 30,2008 or for the three months ended September 30, 2007. Contract revenuesfor the nine months ended September 30, 2007 consisted of approximately$2.5 million in full time employee, or FTE, revenue from Merck, approximately$1.3 million in amortization of license and milestone payments from Merck andapproximately $0.8 million amortization of license payments from Pfizer. We hadno deferred revenue as of September 30, 2008. Our potential revenues forthe remainder of 2008 is expected to only include revenues from any potentialnew collaboration arrangements, if any, we may enter into the future.

 

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**Research and Development Expenses**

 
| ** **                                                                            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|---------------------------------|------------|------------|------------|
| ** **                                                                            | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **September 30,**          | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Aggregate Change**       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Aggregate Change** | ** ** |
| ** **                                                                            | ** ** | **(in thousands)**          | ** ** |
| ***Research  and development expenses***                                              |       | $                                | 31,232     |       | $          | 15,372                          |       | $          | 15,860     |   | $ | 81,268 |   | $ | 48,404 |   | $ | 32,864 |   |
| ***Stock-based  compensation expense included in research and development expenses*** |       | 3,035                            |       | 1,294      |       | 1,741                           |       | 9,229      |       | 4,212 |   | 5,017 |   |
|                                                                                       |            |                                  |            |            |            |                                 |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Theincrease in research and development expenses for the three and nine monthsended September 30, 2008, compared to the same periods in 2007, wasprimarily due to an increase in clinical costs and stock-based compensationexpense, as discussed under “Stock-Based Compensation” below.  The increase in clinical costs was primarilyattributable to increased costs associated with initiating and running our twoPhase 2b clinical trials and the extension trial of R788 in RA patients atclinical research centers throughout the United States, Latin America, andEurope, and manufacturing R788 material to be used in these clinical trials.

 

The scopeand magnitude of future research and development expenses are difficult topredict given the number of clinical trials that we will need to conduct forany of our potential products, as well as our limited capital resources. Ingeneral, biopharmaceutical development involves a series of steps, beginningwith identification of a potential target and including, among others, proof ofconcept in animals and Phase 1, 2 and 3 clinical studies in humans. Each ofthese steps is typically more expensive than the previous step. Success inearly stages of development often results in increasing expenditures for agiven product candidate. Our research and development expenditures currentlyinclude costs for scientific personnel, supplies, equipment, consultants,sponsored research, allocated facility costs, costs related to preclinical andclinical trials, and stock-based compensation.

 

**General and AdministrativeExpenses**

 
| ** **                                                                              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|---------------------------------|------------|------------|------------|
| ** **                                                                              | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **September 30,**          | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Aggregate Change**       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Aggregate Change** | ** ** |
| ** **                                                                              | ** ** | **(in thousands)**          | ** ** |
| ***General  and administrative expenses***                                              |       | $                                | 7,450      |       | $          | 5,054                           |       | $          | 2,396      |   | $ | 21,436 |   | $ | 15,466 |   | $ | 5,970 |   |
| ***Stock-based  compensation expense included in general and administrative expenses*** |       | 3,001                            |       | 1,500      |       | 1,501                           |       | 8,572      |       | 4,909 |   | 3,663 |   |
|                                                                                         |            |                                  |            |            |            |                                 |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Theincrease in general and administrative expenses for the three and nine monthsended September 30, 2008, as compared to the same periods in 2007, wasprimarily attributable to an increase in stock-based compensation expense, asdiscussed under “Stock-Based Compensation” below, and increased legal costsassociated with the increase in our patent portfolio.

 

**Stock-Based Compensation**

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|------------|------------|---------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **September 30,**          | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Aggregate Change**       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Aggregate Change** | ** ** |
| ** **                                    | ** ** | **(in thousands)**          | ** ** |
| **Stock-based compensation expense from:**    |       |                             |       |       |       |                            |       |       |       |   |   |   |   |
| ***Officer,  director and employee options*** |       | $                                | 6,027      |       | $          | 2,739                           |       | $          | 3,288      |   | $ | 17,607 |   | $ | 9,011 |   | $ | 8,596 |   |
| ***Consultant  options***                     |       | 9                                |       | 55         |       | (46                             | )          | 194        |       | 110 |   | 84 |   |
| ***Total***                                   |       | $                                | 6,036      |       | $          | 2,794                           |       | $          | 3,242      |   | $ | 17,801 |   | $ | 9,121 |   | $ | 8,680 |   |

 

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Theincrease in stock-based compensation expense for the three and nine monthsended September 30, 2008, as compared to the same periods in 2007, was dueto an increased valuation of options granted in January 2008 attributableto our increased stock price and volatility, as well as an increased number ofshares subject to options granted in the nine months ended September 30,2008 as compared to the same period in 2007.

 

**Interest Income**

 
| ** **             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|------------------------|------------|----------------------------------|------------|------------|------------|---------------------------------|------------|------------|------------|
| ** **             | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **September 30,**          | ** ** | ** ** | ** ** |
| ** **             | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Aggregate Change**       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Aggregate Change** | ** ** |
| ** **             | ** ** | **(in thousands)**          | ** ** |
| ***Interest  income*** |       | $                                | 1,034      |       | $          | 1,538                           |       | $          | (504       | ) | $ | 3,853 |   | $ | 4,172 |   | $ | (319 | ) |
|                        |            |                                  |            |            |            |                                 |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Interestincome results from our interest-bearing cash and investment balances. Thedecrease in interest income for the three and nine months ended September 30,2008, as compared to the same periods in 2007, was due to lower interest ratesearned on our investments in 2008.

 

**Interest Expense**

 
| ** **              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|-------------------------|------------|----------------------------------|------------|------------|------------|---------------------------------|------------|------------|------------|
| ** **              | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **September 30,**          | ** ** | ** ** | ** ** |
| ** **              | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Aggregate Change**       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Aggregate Change** | ** ** |
| ** **              | ** ** | **(in thousands)**          | ** ** |
| ***Interest  expense*** |       | $                                | 43         |       | $          | 56                              |       | $          | (13        | ) | $ | 131 |   | $ | 172 |   | $ | (41 | ) |
|                         |            |                                  |            |            |            |                                 |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Interestexpense results from our capital lease obligations associated with fixed assetacquisitions. The decrease in interest expense for the three and nine monthsended September 30, 2008, as compared to the same periods in 2007, was dueto lower interest rates on capital lease obligations outstanding during thoseperiods.

 

**Liquidity and Capital Resources**

 

***Cash Requirements***

 

We havefinanced 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.

 

Webelieve that our existing capital resources will be sufficient to support ourcurrent operating plan through at least the next 12 months.  Our forecast of the period of time throughwhich our capital resources will be adequate to support our current operatingplan is a forward-looking statement and involves risks and uncertainties, andactual results could vary as a result of a number of factors, including thefactors discussed under Part II, Item 1A, “Risk Factors” of this QuarterlyReport on Form 10-Q.  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 the numerous risks anduncertainties associated with the development of our product candidates andother research and development activities, including risks and uncertaintiesthat could impact the rate of progress of our development activities, we areunable to estimate with certainty the amounts of increased capital outlays andoperating expenditures associated with our current and anticipated clinicaltrials and other research and development activities.

 

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In theforeseeable future, our operations will require significant additional funding,in large part due to our research and development expenses, future preclinicaland clinical testing costs and the absence of any revenues from product sales.The amount of future funds needed will depend largely on the timing andstructure of potential future collaborations. Until we can generate a sufficient amount of product revenue, we expectto finance future cash needs through public or private equity offerings, debtfinancings or collaboration and licensing arrangements, as well as throughinterest income earned on the investment of our cash balances and short-terminvestments.  With the exception ofmilestone and royalty payments that we may receive under our existingcollaborations, we do not currently have any commitments for futurefunding.  Our ability to raise funds maybe adversely impacted by current economic conditions, including the effects ofthe recent disruptions to the credit and financial markets in the U. S. andworldwide. As a result of these and other factors, we do not know whether additionalfinancing will be available when needed, or that, if available, we will be ableobtain financing on terms favorable to our stockholders or us.

 

To theextent we raise additional capital by issuing equity securities, ourstockholders may experience substantial dilution. To the extent that we raiseadditional funds through collaboration and licensing arrangements, we may berequired to relinquish some of our rights to our technologies or productcandidates, or grant licenses on terms that are not favorable to us.

 

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

 

·                  theprogress and success of clinical trials and preclinical activities (includingstudies and manufacture of materials) of our product candidates conducted by usor our collaborative partners or licensees;

 

·                  ourability to establish new collaborations and the terms thereof;

 

·                  theprogress of research programs carried out by us;

 

·                  anychanges in the breadth of our research and development programs;

 

·                  ourability to meet the milestones identified in our collaborative agreements thattrigger payments;

 

·                  theprogress of the research and development efforts of our collaborative partners;

 

·                  ourability to acquire or license other technologies or compounds that we seek topursue;

 

·                  ourability to manage our growth;

 

·                  competingtechnological and market developments;

 

·                  thecosts and timing of obtaining, enforcing and defending our patent andintellectual property rights;

 

·                  thecosts and timing of regulatory approvals and filings by us and ourcollaborators; and

 

·                  expensesassociated with 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. As of September 30,2008, we had approximately $160.4 million in cash, cash equivalents andavailable-for-sale securities, as compared to approximately $108.3 million asof December 31, 2007, an increase of approximately $52.1 million. Theincrease was primarily attributable to net proceeds of approximately $127.5million from our public offering in the first quarter of 2008, offset byoperating spending for the nine months ended September 30, 2008. For thenine months ended September 30, 2008 and 2007, we maintained an investmentportfolio primarily in money market funds, U. S. treasury bills,government-sponsored enterprise securities, 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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**Contractual Obligations**

 

As of September 30,2008, we had the following contractual commitments (by fiscal year):

 
| ** **                        | ** ** | **Total**               | ** **  | **Less Than 1 Yr** | ** ** | **1-3 Yrs** | ** ** | **3-5 Yrs** | ** ** | **More Than 5 Yrs** | ** ** |
|-----------------------------------|------------|-------------------------|-------------|-----------------------------------|------------|------------------|------------|------------------|------------|------------------------------------|------------|
| ** **                        | ** ** | **(in thousands)** | ** **  |
| **Capital Lease obligations (1)** | ** ** | **$**                   | **2,443**   |                              | $          | 268              |       | $                | 1,851      |                               | $          | 324 |   | $ | — |   |
| **Facilities lease**              | ** ** | **140,852**             |        | 3,495                             |       | 31,042           |       | 30,192           |       | 76,123                             |       |
| **Total**                         | ** ** | **$**                   | **143,295** |                              | $          | 3,763            |       | $                | 32,893     |                               | $          | 30,516 |   | $ | 76,123 |   |

 

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(1)             Asof September 30, 2008, we had approximately $2.4 million in capital leaseobligations (including the interest portion) associated with our equipment. Allexisting capital lease agreements as of September 30, 2008 are secured bythe equipment financed, bear interest at rates between 5.8% and 10.85% and aredue in monthly installments through 2011.

 

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

 

During thenine months ended September 30, 2008, there were no material changes toour market 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, 2007.

 

**Item 4.****          ****Controls and Procedures**

 

*Evaluation of Disclosure Controlsand Procedures.*Based on our management’sevaluation (with the participation of our chief executive officer and chieffinancial officer), our chief executive officer and chief financial officerhave concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended), wereeffective as of September 30, 2008.

 

*Changes in Internal Controls.*Therewere no changes in our internal control over financial reporting during thequarter ended September 30, 2008 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

*Limitations on the Effectivenessof Controls.*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 quarterly report on Form 10-Q,that our disclosure controls and procedures were sufficiently effective toprovide reasonable assurance that the objectives of our disclosure controlsystem were met.

 

**PART II. OTHER INFORMATION**

 

**Item1A. Risk Factors**

** **

*Inevaluating our business, you should carefully consider the following risks, aswell as the other information contained in this Quarterly Report on Form 10-Q.If any of the following risks actually occurs, our business, financialcondition and operating results could be harmed. The risks and uncertaintiesdescribed below are not the only ones facing us. Additional risks anduncertainties not presently known to us, or that we currently see asimmaterial, may also harm our business. We have marked with an asterisk (*)those risk factors below that reflect a substantive change from the riskfactors included in our Annual Report on Form 10-K filed with the Securitiesand Exchange Commission on March 7, 2008.*

 

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**Wewill need additional capital in the future to sufficiently fund our operationsand research.***

** **

We have consumedsubstantial amounts of capital to date, and our operating expenditures areexpected to increase over the next several years as we expand our research anddevelopment activities.

 

We believe that ourexisting capital resources will be sufficient to support our current operatingplan through at least the next 12 months. Our forecast of the period of time through which our capitalresources will be adequate to support our current operating plan is a forward-lookingstatement and involves risks and uncertainties, and actual results could varyas a result of a number of factors, including the factors discussed under thissection.  We have based this estimate onassumptions that may prove to be wrong, and we could utilize our availablecapital resources sooner than we currently expect.  Because of the numerous risks anduncertainties associated with the development of our product candidates andother research and development activities, including risks and uncertaintiesthat could impact the rate of progress of our development activities, we areunable to estimate with certainty the amounts of increased capital outlays andoperating expenditures associated with our current and anticipated clinicaltrials and other research and development activities.

 

In the foreseeable future, ouroperations will require significant additional funding, in large part due toour research and development expenses, future preclinical and clinical-testingcosts, and the absence of any revenues from product sales. The amount of futurefunds needed will depend largely on the timing and structure of potentialfuture collaborations.  Until we cangenerate a sufficient amount of product revenue, we expect to finance futurecash needs through public 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.  With the exception of milestone and royalty paymentsthat we may receive under our existing collaborations, we do not currently haveany commitments for future funding.  Ourability to raise funds may be adversely impacted by current economicconditions, including the effects of the recent disruptions to the credit andfinancial market in the U. S. and worldwide. 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 terms favorable toour stockholders or us.

 

To the extent we raise additionalcapital by issuing equity securities, our stockholders could at that timeexperience substantial dilution. To the extent that we raise additional fundsthrough collaboration and licensing arrangements, we may be required torelinquish some rights to our technologies or product candidates, or grantlicenses on terms that are not favorable to us.

 

**Ourfuture funding requirements will depend on many uncertain factors.**

** **

Our future fundingrequirements will depend upon many factors, including, but not limited to:

 

·                  theprogress and success of clinical trials and preclinical activities (includingstudies and manufacture of materials) of our product candidates conducted by usor our collaborative partners or licensees;

 

·                  ourability to establish new collaborations and the terms thereof;

 

·                  theprogress of research programs carried out by us;

 

·                  anychanges in the breadth of our research and development programs;

 

·                  ourability to meet the milestones identified in our collaborative agreements thattrigger payments;

 

·                  theprogress of the research and development efforts of our collaborative partners;

 

·                  ourability to acquire or license other technologies or compounds that we seek topursue;

 

·                  ourability to manage our growth;

 

·                  competingtechnological and market developments;

 

·                  thecosts and timing of obtaining, enforcing and defending our patent andintellectual property rights;

 

·                  thecosts and timing of regulatory approvals and filings by us and ourcollaborators; and

 

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·                  expensesassociated with unforeseen litigation.

 

Insufficient funds may require usto delay, scale back or eliminate some or all of our research and developmentprograms, to lose rights under existing licenses or to relinquish greater orall rights to product candidates at an earlier stage of development or on lessfavorable terms than we would otherwise choose or may adversely affect ourability to operate as a going concern.

 

**Oursuccess as a company is uncertain due to our history of operating losses andthe uncertainty of future profitability.***

** **

Due in large partto the significant research and development expenditures required to identifyand validate new product candidates and pursue our development efforts, we havenot been profitable and have incurred operating losses since we wereincorporated in June 1996.  Theextent of our future losses and the timing of potential profitability arehighly uncertain, and we may never achieve profitable operations. We incurrednet losses of approximately $37.7 million and $99.0 million for the three andnine months ended September 30, 2008, $74.3 million in fiscal year 2007and $37.6 million in fiscal year 2006. Currently, our revenues are generatedsolely from research milestone payments pursuant to our collaborationagreements and licenses and are insufficient to generate profitable operations.As of September 30, 2008, we had an accumulated deficit of approximately$468.4 million. We expect to incur losses for at least the next several yearsand expect that these losses could increase as we expand our research anddevelopment activities and incur significant clinical and testing costs.

 

**Thereis a high risk that drug discovery and development efforts might notsuccessfully 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 and B-cell lymphoma,which is proprietary to our company; one in safety testing and intended forpsoriasis, RA, and other immunological indications, which is proprietary to ourcompany; one with six indications for oncology, which is subject to acollaboration agreement with Merck Serono; and one in safety testing andintended for allergic asthma, which is subject to a collaboration agreementwith Pfizer. In our industry, it is statistically unlikely that the limitednumber of compounds that we have identified as potential product candidateswill actually lead to successful product development efforts, and we do notexpect any drugs resulting from our research to be commercially available forseveral 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 rheumatoid arthritis, themost common clinically meaningful adverse events noted in the clinical trialincluded dose-related neutropenia, mild elevations of liver function tests andgastrointestinal side effects.  In larger future clinical trials, we may discover additionalside effects and/or higher frequency of side effects than those observed incompleted clinical trials. If approved by the U.S. Food and Drug Administration,or FDA, the side effect profile of R788 may also result in a narrowly approvedindication for use of the product, especially in light of other drugs currentlyavailable to treat RA, dependent on the safety profile of R788 relative tothose drugs.

 

The results ofpreliminary studies do not necessarily predict clinical or commercial success,and larger later-stage clinical trials may fail to confirm the results observedin the preliminary studies. Our lead product candidate is in early development,having recently completed initial Phase 2 clinical trials in two indications.We are conducting additional Phase 2b trials, with larger numbers of patients,before proceeding into Phase 3 trials with R788 for RA. Furthermore, our Phase2 clinical trial for ITP was conducted in highly refractory patients, asopposed to treatment-naive patients. If efficacy is not demonstrated amongtreatment-naive patients, any approved indication for ITP will be limited to asubset of the patient population. Finally, with respect to our own compounds indevelopment, we have established anticipated timelines with respect to theinitiation or completion of clinical studies based on existing knowledge of thecompound. However, we cannot provide assurance that we will meet any of thesetimelines for clinical development.

 

Because of theuncertainty of whether the accumulated preclinical evidence (pharmacokinetic,pharmacodynamic, safety and/or other factors) or early clinical results will beobserved in later clinical trials, we can make no assurances regarding thelikely results from our future clinical trials or the impact of those resultson our business.

 

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**Wemight not be able to commercialize our product candidates successfully ifproblems arise in the clinical testing and approval process.**

** **

Commercializationof our product candidates depends upon successful completion of preclinicalstudies and clinical trials. Preclinical testing and clinical development arelong, expensive and uncertain processes. We do not know whether we, or any ofour collaborative partners, will be permitted to undertake clinical trials ofpotential products beyond the trials already concluded and the trials currentlyin process. It will take us, or our collaborative partners several years tocomplete any such testing, and failure can occur at any stage of testing.Interim results of trials do not necessarily predict final results, andacceptable results in early trials may not be repeated in later trials. Anumber of companies in the pharmaceutical industry, including biotechnologycompanies, have suffered significant setbacks in advanced clinical trials, evenafter achieving promising results in earlier trials. Moreover, we or ourcollaborative partners or regulators may decide to discontinue development ofany or all of these projects at any time for commercial, scientific or otherreasons.

 

**Delaysin clinical testing could result in increased costs to us.**

** **

Significant delaysin clinical testing could materially impact our product development costs andtiming. We do not know whether planned clinical trials will begin on time, willneed to be halted or revamped or will be completed on schedule, or at all.Clinical trials can be delayed for a variety of reasons, including delays inobtaining regulatory approval to commence a study, delays from scale up, delaysin reaching agreement on acceptable clinical study agreement terms withprospective 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.

 

In addition, wetypically rely on third-party clinical investigators to conduct our clinicaltrials and other third-party organizations to oversee the operations of suchtrials and to perform data collection and analysis. As a result, we may faceadditional delaying factors outside our control if these parties do not performtheir obligations in a timely fashion. While we have not yet experienced delaysthat have 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.

 

**Welack the capability to manufacture compounds for development and rely on thirdparties to manufacture our product candidates, and we may be unable to obtainrequired material in a timely manner, at an acceptable cost or at a qualitylevel required to receive regulatory approval.**

** **

We currently do nothave manufacturing capabilities or experience necessary to produce our productcandidate R788. We rely on a single manufacturer of R788 for our R788 clinicaltrials. We will rely on manufacturers to deliver materials on a timely basisand to comply with applicable regulatory requirements, including the FDA’scurrent Good Manufacturing Practices, or GMP. These outsourcing efforts withrespect to manufacturing preclinical and clinical supplies will result in adependence on our suppliers to timely manufacture and deliver sufficientquantities of materials produced under GMP conditions to enable us to conductplanned preclinical studies, clinical trials and, if possible, to bringproducts to market in a timely manner.

 

Our current andanticipated future dependence upon these third-party manufacturers mayadversely affect our ability to develop and commercialize product candidates ona timely and competitive basis. These manufacturers may not be able to producematerial on a timely basis or manufacture material at the quality level or inthe quantity required to meet our development timelines and applicableregulatory requirements. 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 ordecline to renew our manufacturing arrangements based on their own businesspriorities, at a time that is costly or inconvenient for us. If we are unableto contract for the production of materials in sufficient quantity and ofsufficient quality on acceptable terms, our planned clinical trials may besignificantly delayed. Manufacturing delays could postpone the filing of ourinvestigational new drug, or IND, applications and/or the initiation ofclinical trials that we have currently planned.

 

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Our third-partymanufacturers may not be able to comply with the GMP regulations, otherapplicable FDA regulatory requirements or similar regulations applicableoutside of the United States. Additionally, if we are required to enter intonew supply arrangements, we may not be able to obtain approval from the FDA of anyalternate supplier in a timely manner, or at all, which could delay or preventthe clinical development and commercialization of any related productcandidates. Failure of our third-party manufacturers or us to obtain approvalfrom the FDA or to comply with applicable regulations could result in sanctionsbeing imposed on us, including fines, civil penalties, delays in or failure togrant marketing approval of our product candidates, injunctions, delays,suspension or withdrawal of approvals, license revocation, seizures or recallsof products and compounds, operating restrictions and criminal prosecutions,any of which could significantly and adversely affect our business.

 

**Becausemost of our expected future revenues are contingent upon collaborative andlicense agreements, we might not meet our strategic objectives.***

** **

Our ability togenerate revenue in the near term depends on our ability to enter intoadditional collaborative agreements with third parties and to maintain theagreements we currently have in place. Our ability to enter into newcollaborations and the revenue, if any, that may be recognized under thesecollaborations is highly uncertain. If we are unable to enter into newcollaborations, our business prospects could be harmed, which could have animmediate adverse effect on the trading price of our stock. Our ability to enter into a collaboration maybe dependent on many factors such as the fit of one of our programs withanother company’s regulatory risk tolerance, their patent portfolio expirationtimeline, clinical pipeline, overall corporate goals and financial position.

 

To date, most ofour revenues have been related to the research phase of each of ourcollaborative 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 animmediate adverse effect on the trading price of our stock.

 

Our businessrequires us to generate meaningful revenue from royalties and licensingagreements. To date, we have not received any revenue from royalties for thecommercial sale of drugs, and we do not know when we will receive any suchrevenue, if at all. Likewise, we have not licensed any lead compounds or drugdevelopment candidates to third parties, and we do not know whether any suchlicense will be entered into on acceptable terms in the future, if at all.

 

**Ifour current corporate collaborations or license agreements are unsuccessful,our research and development efforts could be delayed.**

** **

Our strategydepends upon the formation and sustainability of multiple collaborativearrangements and license agreements with third parties in the future. We relyon these arrangements for not only financial resources, but also for expertisethat we expect to need in the future relating to clinical trials,manufacturing, sales and marketing, and for licenses to technology rights. Todate, we have entered into several such arrangements with corporatecollaborators; however, we do not know if such third parties will dedicatesufficient resources or if any development or commercialization efforts bythird parties will be successful. Should a collaborative partner fail todevelop or commercialize a compound or product to which it has rights from usfor any reason including corporate restructuring, such failure might delayongoing research and development efforts at Rigel, because we might not receiveany 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.

 

The research phaseof our collaboration with Johnson & Johnson ended in 2003, and theresearch phases conducted at our facilities under our broad collaboration withNovartis ended in 2004. The research phase of our corporate collaborationagreement with Daiichi ended in 2005. In 2004, we signed a new corporatecollaboration with Merck, and the research phase of this collaboration ended inMay 2007. In 2005, we signed additional collaborations with Pfizer andMerck Serono. Each of our collaborations could be terminated by the other partyat any time, and we may not be able to renew these collaborations on acceptableterms, if at all, or negotiate additional corporate collaborations onacceptable terms, if at all. If these collaborations terminate or are notrenewed, any 

 

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resultant loss of revenues from these collaborations or loss of theexpertise of our collaborative partners could adversely affect our business.

 

Conflicts alsomight 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.

 

We are also a partyto various license agreements that give us rights to use specified technologiesin our research and development processes. The agreements pursuant to which wehave in-licensed technology permit our licensors to terminate the agreementsunder certain circumstances. If we are not able to continue to license theseand future technologies on commercially reasonable terms, our productdevelopment and research may be delayed.

 

**If conflicts arise between ourcollaborators or advisors and us, any of them may act in their self-interest,which may be adverse to our stockholders’ interests.**

 

If conflicts arisebetween us and our corporate collaborators or scientific advisors, the otherparty may act in its self-interest and not in the interest of our stockholders.Some of our corporate collaborators are conducting multiple product developmentefforts within each disease area that is the subject of the collaboration withus or may be acquired or merged with a company having a competing program. Insome of our collaborations, we have agreed not to conduct, independently orwith any third party, any research that is competitive with the researchconducted under our collaborations. Our collaborators, however, may develop,either alone or with others, products in related fields that are competitivewith the products or potential products that are the subject of thesecollaborations. Competing products, either developed by our collaborators or towhich our collaborators have rights, may result in their withdrawal of supportfor our product candidates.

 

If any of ourcorporate collaborators were to breach or terminate its agreement with us orotherwise fail to conduct the collaborative activities successfully and in atimely manner, the preclinical or clinical development or commercialization ofthe affected product candidates or research programs could be delayed orterminated. We generally do not control the amount and timing of resources thatour corporate collaborators devote to our programs or potential products. We donot know whether current or future collaborative partners, if any, might pursuealternative technologies or develop alternative products either on their own orin collaboration with others, including our competitors, as a means fordeveloping treatments for the diseases targeted by collaborative arrangementswith us.

 

**Our success is dependent onintellectual property rights held by third parties and us, and our interest insuch rights is complex and uncertain.***

 

Our success willdepend to a large part on our own, our licensees’ and our licensors’ ability toobtain and defend patents for each party’s respective technologies and thecompounds and other products, if any, resulting from the application of suchtechnologies. We have over 220 pending patent applications and over 120 issuedpatents in the United States that are owned or exclusively licensed in ourfield as well as pending corresponding foreign patent applications. In thefuture, our patent position might be highly uncertain and involve complex legaland factual questions. For example, we may be involved in interferences beforethe United States Patent and Trademark Office. Interferences are complex andexpensive legal proceedings and there is no assurance we will be successful insuch proceedings. An interference could result in our losing our patent rightsand/or our freedom to operate and/or require us to pay significant royalties.Additional uncertainty may result because no consistent policy regarding thebreadth of legal claims allowed in biotechnology patents has emerged to date.Accordingly, we cannot predict the breadth of claims allowed in our or othercompanies’ patents.

 

Because the degreeof future protection for our proprietary rights is uncertain, we cannot ensurethat:

 

·                  wewere the first to make the inventions covered by each of our pending patentapplications;

 

·                  wewere the first to file patent applications for these inventions;

 

·                  otherswill not independently develop similar or alternative technologies or duplicateany of our technologies;

 

·                  anyof our pending patent applications will result in issued patents;

 

·                  anypatents issued to us or our collaborators will provide a basis forcommercially-viable products or will provide us with any competitive advantagesor will not be challenged by third parties;

 

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·                  wewill develop additional proprietary technologies that are patentable; or

 

·                  thepatents of others will not have a negative effect on our ability to dobusiness.

 

We rely on tradesecrets to protect technology where we believe patent protection is notappropriate or obtainable; however, trade secrets are difficult to protect.While we require employees, collaborators and consultants to enter intoconfidentiality agreements, we may not be able to adequately protect our tradesecrets or other proprietary information in the event of any unauthorized useor disclosure or the lawful development by others of such information.

 

We are a party tocertain in-license agreements that are important to our business, and wegenerally do not control the prosecution of in-licensed technology.Accordingly, we are unable to exercise the same degree of control over thisintellectual property as we exercise over our internally-developed technology.Moreover, some of our academic institution licensors, research collaboratorsand scientific advisors have rights to publish data and information in which wehave rights. If we cannot maintain the confidentiality of our technology andother confidential information in connection with our collaborations, then ourability to receive patent protection or protect our proprietary informationwill be impaired. In addition, some of the technology we have licensed relieson patented inventions developed using U.S. government resources. The U.S.government retains certain rights, as defined by law, in such patents, and maychoose to exercise such rights. Certain of our in-licenses may be terminated ifwe fail to meet specified obligations. If we fail to meet such obligations andany of our licensors exercise their termination rights, we could lose ourrights under those agreements. If we lose any of our rights, it may adverselyaffect the way we conduct our business. In addition, because certain of ourlicenses are sublicenses, the actions of our licensors may affect our rightsunder those licenses.

 

**If a dispute arises regardingthe infringement or misappropriation of the proprietary rights of others, suchdispute could be costly and result in delays in our research and developmentactivities and partnering.**

 

Our success willalso depend, in part, on our ability to operate without infringing ormisappropriating 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:

 

·                  requireour collaborators or us to obtain a license to continue to use, manufacture ormarket the affected products, methods or processes, which may not be availableon commercially reasonable terms, if at all;

 

·                  preventus from using the subject matter claimed in the patents held by others;

 

·                  subjectus to potential liability for damages;

 

·                  consumea substantial portion of our managerial and financial resources; and

 

·                  resultin litigation or administrative proceedings that may be costly, whether we winor lose.

 

**If we are unable to obtainregulatory approval to market products in the United States and foreignjurisdictions, we will not be permitted to commercialize products from ourresearch and development.**

 

Due, in part, tothe early stage of our product candidate research and development process, wecannot predict whether regulatory clearance will be obtained for any productthat we, or our collaborative partners, hope to develop. Satisfaction ofregulatory requirements typically takes many years, is dependent upon the typecomplexity and novelty of the product and requires the expenditure ofsubstantial resources. Of particular significance to us are the requirementsrelating to research and development and testing.

 

Before commencingclinical trials in humans in the United States, we, or our collaborativepartners, will need to submit and receive approval from the FDA of an IND.Clinical trials are subject to oversight by institutional review boards and theFDA and:

 

·                  mustbe conducted in conformance with the FDA’s good clinical practices and otherapplicable regulations;

 

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·                  mustmeet requirements for institutional review board oversight;

 

·                  mustmeet requirements for informed consent;

 

·                  aresubject to continuing FDA oversight;

 

·                  mayrequire large numbers of test subjects; and

 

·                  maybe suspended by us, our collaborators or the FDA at any time if it is believedthat the subjects participating in these trials are being exposed tounacceptable health risks or if the FDA finds deficiencies in the IND or theconduct of these trials.

 

While we havestated that we intend to file additional INDs, this is only a statement ofintent, and we may not be able to do so because we may not be able to identifypotential product candidates. In addition, the FDA may not approve any IND in atimely manner, or at all.

 

Before receivingFDA approval to market a product, we must demonstrate that the product is safeand effective in the patient population and the indication that will betreated. Data obtained from preclinical and clinical activities are susceptibleto varying interpretations that could delay, limit or prevent regulatoryapprovals. In addition, delays or rejections may be encountered based uponadditional government regulation from future legislation or administrativeaction or changes in FDA policy during the period of product development,clinical trials and FDA regulatory review. Failure to comply with applicableFDA or other applicable regulatory requirements may result in criminalprosecution, civil penalties, recall or seizure of products, total or partialsuspension of production or injunction, as well as other regulatory actionagainst our potential products or us. Additionally, we have limited experiencein conducting and managing the clinical trials necessary to obtain regulatoryapproval.

 

If regulatoryapproval of a product is granted, this approval will be limited to thoseindications 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.

 

Outside the UnitedStates, our ability, or that of our collaborative partners, to market a productis contingent upon receiving a marketing authorization from the appropriateregulatory authorities. This foreign regulatory approval process typicallyincludes all of the risks associated with FDA approval described above and mayalso include additional risks.

 

**If our competitors developtechnologies that are more effective than ours, our commercial opportunity willbe reduced or eliminated.**

 

The biotechnologyand pharmaceutical industries are intensely competitive and subject to rapidand significant technological change. Many of the drugs that we are attemptingto discover will be competing with existing therapies. In addition, a number ofcompanies are pursuing the development of pharmaceuticals that target the samediseases and conditions that we are targeting. We face competition frompharmaceutical and biotechnology companies both in the United States andabroad.

 

Our competitors mayutilize discovery technologies and techniques or partner with collaborators inorder to develop products more rapidly or successfully than we, or ourcollaborators, are able to do. Many of our competitors, particularly largepharmaceutical companies, have substantially greater financial, technical andhuman resources than we do. In addition, academic institutions, governmentagencies and other public and private organizations conducting research mayseek patent protection with respect to potentially competitive products ortechnologies and may establish exclusive collaborative or licensingrelationships with our competitors.

 

We believe that ourability to compete is dependent, in part, upon our ability to create, maintainand license scientifically-advanced technology and upon our and ourcollaborators’ ability to develop and commercialize pharmaceutical productsbased 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.

 

Our competitorsmight develop technologies and drugs that are more effective or less costlythan any that are being developed by us or that would render our technology andpotential drugs obsolete and noncompetitive. In addition, our competitors maysucceed in obtaining the approval of the FDA or other regulatory agencies forproduct candidates more rapidly. Companies that complete clinical trials,obtain required regulatory agency approvals and commence commercial sale oftheir drugs before their 

 

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competitors may achieve a significant competitive advantage, includingcertain patent and FDA marketing exclusivity rights that would delay or preventour ability to market certain products. Any drugs resulting from our researchand development efforts, or from our joint efforts with our existing or futurecollaborative partners, might not be able to compete successfully withcompetitors’ existing or future products or obtain regulatory approval in theUnited States or elsewhere.

 

**Our ability to generaterevenues will be diminished if our collaborative partners fail to obtainacceptable prices or an adequate level of reimbursement for products from third-partypayors or government agencies.**

 

The drugs we hopeto develop may be rejected by the marketplace due to many factors, includingcost. Our ability to commercially exploit a drug may be limited due to thecontinuing efforts of government and third-party payors to contain or reducethe costs of health care through various means. For example, in some foreignmarkets, pricing and profitability of prescription pharmaceuticals are subjectto government control. In the United States, we expect that there will continueto be a number of federal and state proposals to implement similar governmentcontrol. In addition, increasing emphasis on managed care in the United Stateswill likely continue to put pressure on the pricing of pharmaceutical products.Cost control initiatives could decrease the price that any of our collaboratorswould receive for any products in the future. Further, cost control initiativescould adversely affect our collaborators’ ability to commercialize our productsand our ability to realize royalties from this commercialization.

 

Our ability tocommercialize pharmaceutical products with collaborators may depend, in part,on the extent to which reimbursement for the products will be available from:

 

·                  governmentand health administration authorities;

 

·                  privatehealth insurers; and

 

·                  otherthird-party payors.

 

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 liabilitylawsuits are successfully brought against us, we may incur substantialliabilities and may be required to limit commercialization of our products.***

 

The testing andmarketing of medical products entail an inherent risk of product liability. Ifwe cannot successfully defend ourselves against product liability claims, wemay incur substantial liabilities or be required to limit commercialization ofour products. We are not currently aware of any specific causes for concernwith respect to clinical liability claims. We carry product liability insurancethat is limited in scope and amount and may not be adequate to fully protect usagainst product liability claims. Our inability to obtain sufficient productliability insurance at an acceptable cost to protect against potential productliability claims could prevent or inhibit the commercialization ofpharmaceutical products we develop, alone or with corporate collaborators. We,or our corporate collaborators, might not be able to obtain insurance at areasonable cost, if at all. While under various circumstances we are entitledto be indemnified against losses by our corporate collaborators,indemnification may not be available or adequate should any claim arise.

 

**Our research and developmentefforts will be seriously jeopardized, if we are unable to attract and retainkey employees and relationships.***

 

As a small companywith only 185 employees as of September 30, 2008, our success depends onthe continued contributions of our principal management and scientificpersonnel and on our ability to develop and maintain important relationshipswith leading academic institutions, scientists and companies in the face ofintense competition for such personnel. In particular, our research programsdepend on our ability to attract and retain highly skilled chemists, otherscientists, and development, regulatory and clinical personnel. If we lose theservices of any of our key personnel, our research and development effortscould be seriously and adversely affected. Our employees can terminate theiremployment with us at any time.

 

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**We depend on various scientificconsultants and advisors for the success and continuation of our research anddevelopment efforts.**

 

We work extensivelywith various scientific consultants and advisors. The potential success of ourdrug discovery and development programs depends, in part, on continuedcollaborations with certain of these consultants and advisors. We, and variousmembers of our management and research staff, rely on certain of theseconsultants and advisors for expertise in our research, regulatory and clinicalefforts. Our scientific advisors are not our employees and may have commitmentsto, or consulting or advisory contracts with, other entities that may limittheir availability to us. We do not know if we will be able to maintain suchconsulting agreements or that such scientific advisors will not enter intoconsulting arrangements, exclusive or otherwise, with competing pharmaceuticalor biotechnology companies, any of which would have a detrimental impact on ourresearch objectives and could have a material adverse effect on our business,financial condition and results of operations.

 

**If we use biological and hazardousmaterials in a manner that causes injury or violates laws, we may be liable fordamages.**

** **

Our research anddevelopment activities involve the controlled use of potentially harmfulbiological materials as well as hazardous materials, chemicals and variousradioactive compounds. We cannot completely eliminate the risk of accidentalcontamination or injury from the use, storage, handling or disposal of thesematerials. In the event of contamination or injury, we could be held liable fordamages that result, and such liability could exceed our resources. We are alsosubject to federal, state and local laws and regulations governing the use,storage, handling and disposal of these materials and specified waste products.The cost of compliance with, or any potential violation of, these laws andregulations could be significant.

 

**Our facilities are located nearknown earthquake fault zones, and the occurrence of an earthquake or othercatastrophic disaster could cause damage to our facilities and equipment, whichcould require us to cease or curtail operations.**

 

Our facilities arelocated in the San Francisco Bay Area near known earthquake fault zones and arevulnerable to significant damage from earthquakes. We are also vulnerable todamage from other types of disasters, including fires, floods, power loss,communications failures and similar events. If any disaster were to occur, ourability to operate our business at our facilities would be seriously, orpotentially completely, impaired, and our research could be lost or destroyed.In addition, the unique nature of our research activities and of much of ourequipment could make it difficult for us to recover from a disaster. Theinsurance we maintain may not be adequate to cover our losses resulting fromdisasters or other business interruptions.

 

**Future interest income andvalue of our investments may be impacted by further declines in interest ratesand broader effect of the recent disruption of credit markets.**

 

While we areconservative in our investment policies and invest only in fixed incomesecurities, the interest paid on this type of investment and the value ofcertain securities may decline in the future as credit markets adjust to themortgage crisis.

 

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

 

The market pricesfor our securities and those of other biotechnology companies have been highlyvolatile and may continue to be highly volatile in the future. The followingfactors, in addition to other risk factors described in this section, may havea significant impact on the market price of our common stock:

 

·                  theprogress and success of clinical trials and preclinical activities (i.e.,studies, manufacture of materials) of our product candidates conducted by us orour collaborative partners or licensees;

 

·                  thereceipt or failure to receive the additional funding necessary to conduct ourbusiness;

 

·                  sellingby large stockholders;

 

·                  presentationsof detailed clinical trial data at medical and scientific conferences andinvestor perception thereof;

 

·                  announcementsof technological innovations or new commercial products by our competitors orus;

 

·                  developmentsconcerning proprietary rights, including patents;

 

·                  developmentsconcerning our collaborations;

 

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·                  publicityregarding actual or potential medical results relating to products underdevelopment by our competitors or us;

 

·                  regulatorydevelopments in the United States and foreign countries;

 

·                  litigation;

 

·                  economicand other external factors or other disaster or crisis; and

 

·                  period-to-periodfluctuations in financial results.

 

**Future equity issuances or asale of a substantial number of shares of our common stock may cause the priceof our common stock to decline.**

 

Because we may needto raise additional capital in the future to continue to expand our businessand our research and development activities, among other things, we may conductadditional equity offerings. If we or our stockholders sell substantial amountsof our common stock (including shares issued upon the exercise of options andwarrants) in the public market, the market price of our common stock couldfall. A decline in the market price of our common stock could make it moredifficult for us to sell equity or equity-related securities in the future at atime and price that we deem appropriate.

 

**Anti-takeover provisions in ourcharter documents and under Delaware law may make an acquisition of us, whichmay be beneficial to our stockholders, more difficult.**

 

Provisions of ouramended 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:

 

·                  establishthat members of the board of directors may be removed only for cause upon theaffirmative vote of stockholders owning a majority of our capital stock;

 

·                  authorizethe issuance of “blank check” preferred stock that could be issued by our boardof directors to increase the number of outstanding shares and thwart a takeoverattempt;

 

·                  limitwho may call a special meeting of stockholders;

 

·                  prohibitstockholder action by written consent, thereby requiring all stockholderactions to be taken at a meeting of our stockholders;

 

·                  establishadvance notice requirements for nominations for election to the board ofdirectors or for proposing matters that can be acted upon at stockholdermeetings;

 

·                  providefor a board of directors with staggered terms; and

 

·                  providethat the authorized number of directors may be changed only by a resolution ofour board of directors.

 

In addition, Section 203of the Delaware General Corporation Law, which imposes certain restrictionsrelating to transactions with major stockholders, may discourage, delay orprevent a third party from acquiring us.

 

**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)                        |

 

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| 4.1    |   | Form of warrant to purchase  shares of common stock. (3)                                                                                                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                              |
| 4.2    |   | Warrant issued to TBCC Funding  Trust II for the purchase of shares of common stock. (4)                                                                                                          |
|   |   |                                                                                                                                                                                              |
| 4.3    |   | Amended and Restated Warrant issued  to Kwacker Limited for the purchase of shares of common stock. (5)                                                                                           |
|   |   |                                                                                                                                                                                              |
| 4.4    |   | Warrant issued to Kwacker Limited  for the purchase of shares of common stock. (5)                                                                                                                |
|   |   |                                                                                                                                                                                              |
| 4.5    |   | Specimen Common Stock  Certificate. (6)                                                                                                                                                           |
|   |   |                                                                                                                                                                                              |
| 4.6    |   | Warrant issued to Kwacker Limited  for the purchase of shares of common stock. (7)                                                                                                                |
|   |   |                                                                                                                                                                                              |
| 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  Quarterly Report on Form 10-Q for the quarter ended March 31, 2002  and incorporated herein by reference.                          |
|   |   |                                                                                                                                                                              |
| (5)    |   | Filed as an exhibit to Rigel’s  Annual Report on Form 10-K, as amended, for the fiscal year ended  December 31, 2002 and incorporated herein by reference.         |
|   |   |                                                                                                                                                                              |
| (6)    |   | 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.                        |
|   |   |                                                                                                                                                                              |
| (7)    |   | Filed as an exhibit to Rigel’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2006 (No. 000-29889) and incorporated herein by reference. |

 

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**SIGNATURES**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|       | RIGEL PHARMACEUTICALS, INC.      |
|------------|----------------------------------|
|       |                             |   |
|       | By:                              | /s/ JAMES M. GOWER |
|       |                             | James M. Gower |
|       |                             | Chief Executive Officer |
|       |                             | (Principal Executive Officer) |
|       |                             |   |
|       | Date: November 4, 2008      |
| ** ** |                             |   |
|       | By:                              | /s/ RYAN D. MAYNARD |
|       |                             | Ryan D. Maynard |
|       |                             | Vice President and Chief  Financial Officer |
|       |                             | (Principal Financial and  Accounting Officer) |
|       |                             |   |
| ** ** | **Date: November 4,  2008** |

 

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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                 |       | Warrant issued to TBCC Funding  Trust II for the purchase of shares of common stock. (4)                                                                                                          |
|                |       |                                                                                                                                                                                              |
| 4.3                 |       | Amended and Restated Warrant  issued to Kwacker Limited for the purchase of shares of common stock. (5)                                                                                           |
|                |       |                                                                                                                                                                                              |
| 4.4                 |       | Warrant issued to Kwacker Limited  for the purchase of shares of common stock. (5)                                                                                                                |
|                |       |                                                                                                                                                                                              |
| 4.5                 |       | Specimen Common Stock  Certificate. (6)                                                                                                                                                           |
|                |       |                                                                                                                                                                                              |
| 4.6                 |       | Warrant issued to Kwacker Limited  for the purchase of shares of common stock. (7)                                                                                                                |
|                |       |                                                                                                                                                                                              |
| 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  Quarterly Report on Form 10-Q for the quarter ended March 31, 2002  and incorporated herein by reference.                          |
|   |   |                                                                                                                                                                              |
| (5)    |   | Filed as an exhibit to Rigel’s  Annual Report on Form 10-K, as amended, for the fiscal year ended  December 31, 2002 and incorporated herein by reference.         |
|   |   |                                                                                                                                                                              |
| (6)    |   | 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.                        |
|   |   |                                                                                                                                                                              |
| (7)    |   | Filed as an exhibit to Rigel’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2006 (No. 000-29889) and incorporated herein by reference. |

 

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