** **

**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 THEQUARTERLY PERIOD ENDED MARCH 31, 2008**

**OR**

** **

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

** **

**FOR THETRANSITION PERIODFROM             TO**

 

**CommissionFile 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 forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes  x  No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

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

 

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

 

As of May 1, 2008, there were 36,481,084 sharesof the registrant’s common stock outstanding.

 

 

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**RIGELPHARMACEUTICALS, INC.**QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008

** **

**INDEX**

** **
| ** **       |                                                                                                   | **Page** |
|------------------|--------------------------------------------------------------------------------------------------------|----------|
| **PART I**  | **FINANCIAL  INFORMATION**                                                                             | 3        |
| **Item 1.**      | Condensed  Financial Statements                                                                        | 3        |
| ** **       | Condensed Balance Sheets — March 31, 2008  (Unaudited) and December 31, 2007            | 3        |
| ** **       | Condensed Statements of Operations (Unaudited) — three  months ended March 31, 2008 and 2007 | 4        |
| ** **       | Condensed Statements of Cash Flows (Unaudited) — three  months ended March 31, 2008 and 2007 | 5        |
| ** **       | Notes to Condensed Financial Statements (Unaudited)                                                    | 6        |
| ** **       | Report of Independent Registered Public Accounting  Firm                                               | 12       |
| **Item 2.**      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations            | 13       |
| **Item 3.**      | Quantitative  and Qualitative Disclosures About Market Risk                                            | 20       |
| **Item 4.**      | Controls and  Procedures                                                                               | 20       |
| **PART II** | **OTHER INFORMATION**                                                                                  | 20       |
| **Item 1A.**     | Risk  Factors                                                                                          | 20       |
| **Item  6.**     | Exhibits                                                                                               | 31       |
| ** **       |                                                                                                   |     |
| **Signatures**   |                                                                                                   | 32       |

 

3

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**PART I FINANCIAL INFORMATION**

 

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

 

**RIGEL PHARMACEUTICALS, INC.**

**CONDENSEDBALANCE SHEETS**

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

 
| ** **                                                                                                                                                                               | ** ** | **March 31** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2008**          | ** ** | **2007 (1)**          | ** ** |
| ** **                                                                                                                                                                               | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                               | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                          |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                |       | $                 | 102,596    |                  | $          | 44,503 |   |
| Available-for-sale securities                                                                                                                                                            |       | 107,074           |       | 63,793                |       |
| Other receivables                                                                                                                                                                        |       | 299               |       | 442                   |       |
| Prepaid expenses and other current assets                                                                                                                                                |       | 3,486             |       | 2,392                 |       |
| Total current assets                                                                                                                                                                     |       | 213,455           |       | 111,130               |       |
|                                                                                                                                                                                     |       |              |       |                  |       |
| Property and equipment, net                                                                                                                                                              |       | 2,515             |       | 2,560                 |       |
| Other assets                                                                                                                                                                             |       | 2,061             |       | 2,099                 |       |
|                                                                                                                                                                                     |       | $                 | 218,031    |                  | $          | 115,789 |   |
|                                                                                                                                                                                     |       |              |       |                  |       |
| **Liabilities and stockholders’ equity**                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                                                                     |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                         |       | $                 | 3,588      |                  | $          | 4,320 |   |
| Accrued compensation                                                                                                                                                                     |       | 2,943             |       | 8,133                 |       |
| Other accrued liabilities                                                                                                                                                                |       | 3,005             |       | 2,031                 |       |
| Deferred rent                                                                                                                                                                            |       | 1,271             |       | 638                   |       |
| Capital lease obligations                                                                                                                                                                |       | 954               |       | 990                   |       |
| Total current liabilities                                                                                                                                                                |       | 11,761            |       | 16,112                |       |
|                                                                                                                                                                                     |       |              |       |                  |       |
| Long-term portion of capital lease obligations                                                                                                                                           |       | 723               |       | 784                   |       |
| Long-term portion of deferred rent                                                                                                                                                       |       | 15,720            |       | 16,486                |       |
| Other long-term liabilities                                                                                                                                                              |       | 213               |       | 225                   |       |
|                                                                                                                                                                                     |       |              |       |                  |       |
| Commitments and contingencies                                                                                                                                                            |       |              |       |                  |       |
|                                                                                                                                                                                     |       |              |       |                  |       |
| Stockholders’ equity:                                                                                                                                                               |       |              |       |                  |       |
| Common stock, $0.001 par value; 100,000,000 shares authorized;  36,472,564 and 31,381,774 shares issued and outstanding on March 31,  2008 and December 31, 2007, respectively |       | 36                |       | 31                    |       |
| Additional paid-in capital                                                                                                                                                               |       | 585,721           |       | 451,384               |       |
| Accumulated other comprehensive income                                                                                                                                                   |       | 550               |       | 198                   |       |
| Accumulated deficit                                                                                                                                                                      |       | (396,693          | )          | (369,431              | )          |
| Total stockholders’ equity                                                                                                                                                          |       | 189,614           |       | 82,182                |       |
|                                                                                                                                                                                     |       | $                 | 218,031    |                  | $          | 115,789 |   |

 

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(1)   The balance sheet at December 31, 2007has been derived from the audited financial statements at that date included inRigel’s Annual Report on Form 10-K for the year ended December 31,2007.

 

See accompanying notes.

 

3

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**RIGEL PHARMACEUTICALS, INC.**

**CONDENSEDSTATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                       | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| Contract revenues                                                                |       | $                                     | —     |   | $ | 2,644 |   |
| Costs and expenses:                                                              |       |                                  |       |   |   |
| Research and development                                                         |       | 21,620                                |       | 15,843 |   |
| General and administrative                                                       |       | 7,125                                 |       | 5,039 |   |
|                                                                             |       | 28,745                                |       | 20,882 |   |
|                                                                             |       |                                  |       |   |   |
| Loss from operations                                                             |       | (28,745                               | )          | (18,238 | ) |
| Interest income                                                                  |       | 1,530                                 |       | 1,215 |   |
| Interest expense                                                                 |       | (47                                   | )          | (58 | ) |
| Net loss                                                                         |       | $                                     | (27,262    | ) | $ | (17,081 | ) |
| Net loss per share, basic and diluted                                            |       | $                                     | (0.79      | ) | $ | (0.68 | ) |
| Weighted average shares used in computing net loss per share, basic  and diluted |       | 34,417                                |       | 25,184 |   |

 

See accompanying notes.

 

4

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**RIGEL PHARMACEUTICALS, INC.**

**STATEMENTSOF CASH FLOWS**

**(Inthousands)**

**(unaudited)**

 
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                   | ** ** | **March 31**      | ** ** |
| ** **                                                                   | ** ** | **2008**               | ** ** | **2007** | ** ** |
| **Operating activities**                                                     |       |                   |       |   |   |
| Net loss                                                                     |       | $                      | (27,262    | ) | $ | (17,081 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |                   |       |   |   |
| Depreciation and amortization                                                |       | 342                    |       | 336 |   |
| Stock-based compensation expense                                             |       | 5,846                  |       | 2,622 |   |
| Changes in assets and liabilities:                                           |       |                   |       |   |   |
| Other receivables                                                            |       | 143                    |       | (10 | ) |
| Prepaid expenses and other current assets                                    |       | (1,094                 | )          | 13 |   |
| Other assets                                                                 |       | 38                     |       | 37 |   |
| Accounts payable                                                             |       | (732                   | )          | (214 | ) |
| Accrued compensation                                                         |       | (5,190                 | )          | (1,432 | ) |
| Other accrued liabilities                                                    |       | 974                    |       | 924 |   |
| Deferred revenue                                                             |       | —                 |       | (1,595 | ) |
| Deferred rent and other long-term liabilities                                |       | (145                   | )          | 963 |   |
| Net cash used in operating activities                                        |       | (27,080                | )          | (15,437 | ) |
|                                                                         |       |                   |       |   |   |
| **Investing activities**                                                     |       |                   |       |   |   |
| Purchases of available-for-sale securities                                   |       | (73,605                | )          | (17,959 | ) |
| Maturities of available-for-sale securities                                  |       | 30,676                 |       | 29,269 |   |
| Capital expenditures                                                         |       | (297                   | )          | (455 | ) |
| Net cash (used in) provided by investing activities                          |       | (43,226                | )          | 10,855 |   |
|                                                                         |       |                   |       |   |   |
| **Financing activities**                                                     |       |                   |       |   |   |
| ** **                                                                   |       |                   |       |   |   |
| Proceeds from capital lease financings                                       |       | 219                    |       | 399 |   |
| Payments on capital lease obligations                                        |       | (316                   | )          | (434 | ) |
| Net proceeds from issuances of common stock                                  |       | 128,496                |       | 56 |   |
| Net cash provided by financing activities                                    |       | 128,399                |       | 21 |   |
|                                                                         |       |                   |       |   |   |
| Net increase/(decrease) in  cash and cash equivalents                        |       | 58,093                 |       | (4,561 | ) |
|                                                                         |       |                   |       |   |   |
| Cash and cash equivalents  at beginning of period                            |       | 44,503                 |       | 47,727 |   |
|                                                                         |       |                   |       |   |   |
| Cash and cash equivalents  at end of period                                  |       | $                      | 102,596    |   | $ | 43,166 |   |

 

See accompanying notes.

 

5

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**Rigel Pharmaceuticals, Inc.**

**Notes to Condensed Financial Statements**

**(unaudited)**

** **

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

 

**1. Nature of Operations**

 

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

 

**2. Basis of Presentation**

 

Our accompanyingunaudited condensed financial statements have been prepared in accordance withU.S. generally accepted accounting principles for interim financialinformation and pursuant to the instructions to Form 10-Q and Article 10of Regulation S-X. Accordingly, they do not include all of the information andnotes required by generally accepted accounting principles for completefinancial statements. These unaudited condensed financial statements includeall normal and recurring adjustments that we believe are necessary to fairlystate our financial position and the results of our operations and cash flows.Interim-period results are not necessarily indicative of results of operationsor cash flows for a full-year. The balance sheet at December 31, 2007 hasbeen derived from audited financial statements at that date, but does notinclude all disclosures required by U.S. generally accepted accountingprinciples for complete financial statements. Because all of the disclosuresrequired by U.S. generally accepted accounting principles for complete financialstatements are not included herein, these unaudited interim condensed financialstatements and the notes accompanying them should be read in conjunction withour audited financial statements and the notes thereto included in our AnnualReport on Form 10-K for the year ended December 31, 2007.

 

The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. We base our estimates onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances. Actual results could differ from theseestimates.

 

**3.Recent** Accounting Pronouncements

** **

On December 12, 2007, the Financial Accounting Standards Board, orFASB, ratified the consensus reached by the Emerging Issues Task Force, orEITF, on EITF Issue No. 07-1. “Accounting for Collaborative Arrangements,”or EITF 07-1. EITF 07-1 defines collaborative arrangements andestablishes reporting requirements for transactions between participants in acollaborative arrangement and between participants in the arrangement and thirdparties. EITF 07-1 is effective for financial statements issued for fiscalyears beginning after December 15, 2008. We are currently evaluating theimpact of adopting EITF 07-1 on our financial statements and cannotestimate the impact of adoption at this time.

 

On June 27, 2007, the FASB ratified the consensus reached by theEITF on EITF Issue No. 07-3, “Accounting for Advance Payments for Goods orServices to Be Used in Future Research and Development Activities,” orEITF 07-3. EITF 07-3 requires companies to defer and capitalizeprepaid, nonrefundable research and development payments to third parties, andamortize them over the period that the research and development activities areperformed or the services are provided, subject to an assessment ofrecoverability. EITF 07-3 is effective for new contracts entered into duringfiscal years beginning after December 15, 2007, including interim periodswithin those fiscal years. The adoption of EITF 07-3 did not have a materialaffect on our financial statements.

 

In September 2006, the FASB issued Statement of FinancialAccounting Standards No 157, “Fair Value Measurements,” or SFAS 157. Thisstandard defines fair value, establishes a framework for measuring fair valueunder generally accepted accounting principles, and expands disclosures aboutfair value measurements. SFAS 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007, except thatunder FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157,”companies are allowed to delay the effective date of SFAS 157 for non-financialassets and non-financial liabilities that are not recognized or disclosed atfair value on a recurring basis until fiscal years beginning after November 15,2008. We have adopted SFAS 157 with regard to all financial assets andliabilities for our financial statements going forward, and have elected todelay the adoption of SFAS 157 for non-financial assets and non-financialliabilities for one year.  For furtherdiscussion of SFAS 157, see Note 8 to these Condensed Financial Statements.

 

6

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InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities—Including an amendment of FASBStatement No. 115,” or SFAS 159. SFAS 159 permits entities tochoose to measure many 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 159 also establishes presentation and disclosure requirements tofacilitate comparisons between companies that choose different measurementattributes for similar assets and liabilities. Companies may elect the fairvalue option under SFAS 159 for fiscal years beginning after November 15,2007. We elected not to adopt the fair value option of SFAS 159 at thistime.

 

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

 

Basic and diluted net loss per share was computed bydividing the net loss for the period by the weighted average number of sharesof common stock outstanding during the period. The calculation of diluted netloss per share excluded shares of potential common stock, consisting of stockoptions and warrants, because their effect would have been anti-dilutive.

 

**5. Stock Award Plans**

 

Total stock-based compensation expense related toall of our share-based awards that we recognized for the three months ended March 31,2008 and 2007 is comprised as follows (in thousands):

 
| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **March 31,**               | ** ** |
| ** **                              | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Research and development                |       | $                                | 3,092      |   | $ | 1,200 |   |
| General and administrative              |       | 2,754                            |       | 1,422 |   |
| Total stock-based  compensation expense |       | $                                | 5,846      |   | $ | 2,622 |   |

 

Under SFAS 123(R), the fair value of each optionaward is estimated on the date of grant using the Black-Scholes option pricingmodel. We have segregated option awards into three homogenous groups, officersand directors, all other employees, and consultants, for purposes ofdetermining fair values of options.

 

We determined weighted-average valuation assumptionsseparately for each of these groups as follows:

 

·                  Volatility - Weestimated volatility using the historical share price performance over theexpected life of the option up to the point where we have historical marketdata. As our options are not actively traded, implied volatility was notrepresentative of our current volatility. We also considered other factors,such as our current clinical trials and other company activities that mayaffect the volatility of our stock in the future, but determined that at thistime historical volatility is more indicative of our expected future stockperformance.

 

·                  Expected term -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 our groups, our current market price and company activity that mayaffect our market price. In addition, we also considered the vesting schedulesof the options, the optionee type (i.e., officers and directors, all otheremployees and consultants) and other factors that may affect the expected termof the option. For options granted to consultants, we use the contractual termof the option, which is generally ten years, for the initial valuation of theoption and the remaining contractual term of the option for the succeedingyears.

 

·                  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.

 

·                  Forfeiture rate- We estimated the forfeiture rate using our historical experience withpre-vesting options. We review our forfeiture rates each quarter and makechanges as factors affecting our forfeiture rate calculations and assumptionschange.

 

·                  Dividend yield- The expected dividend yield is 0% as we have not paid and do not expect topay dividends.

 

7

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The following table summarizes the weighted-averageassumptions relating to options granted for the three months ended March 31,2008 and 2007:

 
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **March 31,**               | ** ** |
| ** **               | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Risk-free interest rate  |       | 2.7                              | %          | 4.6 | % |
| Expected life (in years) |       | 4.6                              |       | 4.0 |   |
| Dividend yield           |       | 0.0                              | %          | 0.0 | % |
| Expected volatility      |       | 93.2                             | %          | 79.3 | % |

 

Option exercise prices are set at not less than theclosing price of our common stock on the trading day immediately preceding thedate of grant, become exercisable at varying dates and generally expire tenyears from the date of grant. We granted options to purchase 1,305,691 shares ofcommon stock in the three months ended March 31, 2008, with a grant-dateweighted average fair value of $18.48 per share. We granted options to purchase887,087 shares of common stock during the three months ended March 31,2007 with a grant-date weighted average fair value of $7.10 per share.  At March 31, 2008,options to purchase 1,205,465 shares of common stock were available for futuregrant under our stock option plans.

 

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

 

The fair value of awards granted under our ESPP isestimated on the date of grant using the Black-Scholes option pricing model,which uses the weighted-average assumptions set forth in the table below. OurESPP provides for a twenty-four month offering period comprised of foursix-month purchase periods with a look-back option. A look-back option is aprovision in our ESPP where eligible employees can purchase shares of ourcommon stock at a price per share equal to the lesser of 85% of the fair marketvalue on the first day of the offering period or 85% of the fair market valueon the purchase date. The plan also includes a feature that provides for a newoffering period to begin when the fair market value of our common stock on anypurchase date during an offering period falls below the fairmarket value of our common stock on the first day of such offeringperiod.  Participants are automatically enrolled in the new offering. Expectedvolatilities are based on historical volatility of our stock. Expected termrepresents the purchase periods within our offering period. The risk-free ratefor periods within the expected life is based on U.S. Treasury constantmaturity rates. Stock-basedcompensation expense relating to our ESPP is recognized according to the FASBTechnical Bulletin No. 97-1, “Accounting under Statement 123 for CertainEmployee Stock Purchase Plans with a Look-back Option,” or FTB 97-1. As of March 31,2008, there were approximately 1,510,200 shares in reserve for future issuanceunder the ESPP. The following table summarizes the weighted-averageassumptions relating to our ESPP for the three months ended March 31, 2008 and 2007:

 

| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **March 31,**               | ** ** |
| ** **               | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Risk-free interest rate  |       | 2.1                              | %          | 5.1 | % |
| Expected life (in years) |       | 1.2                              |       | 0.7 |   |
| Dividend yield           |       | 0.0                              | %          | 0.0 | % |
| Expected volatility      |       | 99.0                             | %          | 43.5 | % |

 

**6. Revenue Recognition**

 

We recognize revenue from our contract arrangements.Our revenue arrangements with multiple elements are evaluated under EITF No. 00-21,*“Revenue Arrangements with MultipleDeliverables,”* and are divided into separate units of accounting ifcertain criteria are met, including whether the delivered element hasstand-alone value to the customer and whether there is objective and reliableevidence of the fair value of the undelivered items. The consideration wereceive is allocated among the separate units based on their respective fairvalues, and the applicable revenue recognition criteria are applied to each ofthe separate units. Advance payments received in excess of amounts earned areclassified as deferred revenue until earned.

 

Non-refundable, up-front payments received inconnection with research and development collaboration agreements, includingtechnology access fees, are deferred and recognized on a straight-line basisover the relevant periods of continuing involvement, generally the researchterm. When a research term is not specified, we estimate the time it will takeus to complete our deliverables under the contract and recognize the upfrontfee using the straight-line method over that time period. We review ourestimates every quarter for reasonableness.

 

8

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Revenue related to collaborative research with ourcorporate collaborators is recognized as research services are performed overthe related development funding periods for each contract. Under theseagreements, we are required to perform research and development activities asspecified in the applicable agreement. The payments received are not refundableand are generally based on a contractual cost per full-time equivalent employeeworking on the project. Research and development expenses under thecollaborative research agreements, except for the Merck collaboration signed inNovember 2004 related to ubiquitin ligases, approximate or exceed therevenue recognized under such agreements over the term of the respectiveagreements. For the Merck collaboration, we recognized a pro-rata portion ofthe invoiced amounts for funding of our research scientists based on theheadcount dedicated to the project for the quarter. When the research portionof the collaboration ended in May 2007, we recognized the full amount ofthe deferred revenue related to the contract because we had no furtherobligations. It is our policy to recognize revenue based on our level of effortexpended, and that revenue recognized will not exceed amounts billable underthe arrangement.

 

Revenue associated with at-risk milestones pursuantto collaborative agreements is recognized based upon the achievement of themilestones as set forth in the applicable agreement.

 

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

 

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

 
| ** **                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Checking account                            |       | $                  | 856        |                  | $          | 425 |   |
| Money market funds                          |       | 6,463              |       | 15,051                |       |
| US treasury securities                      |       | 13,436             |       | —                |       |
| Government-sponsored  enterprise securities |       | 93,192             |       | 38,262                |       |
| Corporate bonds and  commercial paper       |       | 95,723             |       | 54,558                |       |
|                                        |       | $                  | 209,670    |                  | $          | 108,296 |   |
| Reported as:                                |       |               |       |                  |       |
| Cash and cash equivalents                   |       | $                  | 102,596    |                  | $          | 44,503 |   |
| Available-for-sale  securities              |       | 107,074            |       | 63,793                |       |
|                                        |       | $                  | 209,670    |                  | $          | 108,296 |   |

 

Cash equivalents and available-for-sale securitiesincluded the following securities with unrealized gains and losses (inthousands):

 

 
| ** **                                  | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **     | ** ** |
|---------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **                                  | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **     | ** ** |
| **March 31, 2008**                     | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| US treasury securities                      |       | $             | 13,436     |           | $          | —         |       | $              | —     |   | $ | 13,436 |   |
| Government-sponsored  enterprise securities |       | 93,128        |       | 64             |       | —         |       | 93,192         |       |
| Corporate bonds and commercial  paper       |       | 95,236        |       | 490            |       | (3             | )          | 95,723         |       |
|                                        |       |          |       |           |       |           |       |           |       |
| Total                                       |       | $             | 201,800    |           | $          | 554            |       | $              | (3         | ) | $ | 202,351 |   |

 
|                                        | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **      | ** ** |
|---------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|-----------------|------------|
|                                        | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **      | ** ** |
| **December 31, 2007**                  | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair  Value** | ** ** |
| US treasury securities                      |       | $             | —     |           | $          | —         |       | $               | —     |   | $ | — |   |
| 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-sale Securities. *At March 31, 2008, the above available-for-salesecurities had a weighted average maturity of approximately 139 days.

 

We had$761,000 in government-sponsored enterprise securities at fair values with deminimus gross unrealized losses at March 31,2008.

 

9

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**8.Fair Value**

 

In September of 2006, the FASB issued Statement No. 157,*Fair Value Measurements,*or**SFAS 157.  SFAS 157 establishes a standard framework formeasuring fair value in generally accepted accounting principles (GAAP),clarifies the definition of “fair value” within that framework, and expandsdisclosures about the use of fair value measurements.  We have adopted SFAS 157 with regard toall financial assets and liabilities in our financial statements going forward,and, consistent with FASB Staff Position 157-2, “Effective Date of FASBStatement No. 157,” we have elected to delay the adoption of SFAS 157 fornon-financial assets and liabilities for one year.  We have no financial liabilities recorded atfair value.  Financial assets recorded at fair value are discussed below.  The adoption of SFAS 157 had no materialimpact to our financial statements.

 

Fair value is defined as theprice at which an asset could be exchanged or a liability transferred (an exitprice) in an orderly transaction between knowledgeable, willing parties in theprincipal or most advantageous market for the asset or liability. Whereavailable, fair value is based on observable market prices or parameters orderived from such prices or parameters. Where observable prices or inputs arenot available, valuation models are applied.

 

Financial assets recorded at fairvalue in the Condensed Financial Statements are categorized based upon thelevel of judgment associated with the inputs used to measure their fair value.Hierarchical levels, defined by SFAS 157 and directly related to the amount ofsubjectivity associated with the inputs to fair valuation of these assets andliabilities, are as follows:

 

Level1 — Inputs are unadjusted, quoted prices in active markets for identical assetsat the reporting date.  Activemarkets are those in which transactions for the asset or liability occur insufficient frequency and volume to provide pricing information on an ongoingbasis.

 

Thefair valued assets we hold that are generally included in this category aremoney market securities where fair value is based on publicly quoted prices.

 

Level2 — Inputs are other than quoted prices included in Level 1, which are eitherdirectly or indirectly observable for the asset or liability throughcorrelation with market data at the reporting date and for the duration of theinstrument’s anticipated life.

 

Thefair valued assets we hold that are generally included in this category aregovernment sponsored enterprise securities, U.S. Treasury securities, corporatebonds and commercial paper where fair value is based on valuation methodologiessuch as models using observable market inputs, such as benchmark yields,reported trades, broker/dealer quotes, bids, offers and other reference data.

 

Level3 — Unobservable inputs that are supported by little or no marketactivity and that are significant to the fair value of the assets orliabilities and which reflect management’sbest estimate of what market participants would use in pricing the asset orliability at the reporting date. Consideration is given to the risk inherent inthe valuation technique and the risk inherent in the inputs to the model.

 

Wecarry no investments classified as Level 3.

 

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

 

Financial assets measured at fairvalue on a recurring basis are categorized in the tables below based upon thelowest level of significant input to the valuations:

 
| ** **                                  | ** ** | **Assets at Fair Value as of March 31, 2008** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|
| **March 31, 2008**                     | ** ** | **Level 1**                                        | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Money market funds                          |       | $                                                  | 6,463      |   | $ | — |   | $ | — |   | $ | 6,463 |   |
| US treasury securities                      |       | —                                             |       | 13,436 |   | — |   | 13,436 |   |
| Government-sponsored  enterprise securities |       | —                                             |       | 93,192 |   | — |   | 93,192 |   |
| Corporate bonds and  commercial paper       |       | —                                             |       | 95,723 |   | — |   | 95,723 |   |
|                                        |       |                                               |       |   |   |   |   |   |   |
| Total                                       |       | $                                                  | 6,463      |   | $ | 202,351 |   | $ | — |   | $ | 208,814 |   |

 

10

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**9.Equipment Lease Line**

 

In January 2008, we obtained a new equipmentlease line with a borrowing capability of $1,500,000. We have the ability todraw down on this line until the end of 2008. The repaymentperiod will be for three years beginning on the date of each draw down, withthe interest rate on the line fixed at each draw down. Each line has a bargainpurchase buyout provision of $1.  Duringthe three months ended March 31, 2008, we drew down approximately$219,000, which is included in our capital lease obligation on our balancesheet. Approximately $1.3 million remained available under the equipment leaseline as of March 31, 2008.

 

**10.Equity Financings**

 

During the first quarter of 2008, we completed an underwritten publicoffering in which we sold 5,000,000 shares of our common stock at a price tothe public of $27.00 per share. We received net proceeds of approximately$127.5 million after deducting underwriting discounts and commissions andoffering expenses.

 

11

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** **

**Report ofIndependent Registered Public Accounting Firm**

 

The Board of Directors

Rigel Pharmaceuticals, Inc.

 

We have reviewed thecondensed balance sheet of Rigel Pharmaceuticals, Inc. as of March 31,2008, and the related condensed statements of operations for the three-monthperiods ended March 31, 2008 and 2007, and the condensed statements ofcash flows for the three-month periods ended March 31, 2008 and 2007.These financial statements are the responsibility of the Company’s management.

 

We conducted our reviewin accordance with the standards of the Public Company Accounting OversightBoard (United States). A review of interim financial information consistsprincipally of applying analytical procedures and making inquiries of personsresponsible for financial and accounting matters. It is substantially less inscope than an audit conducted in accordance with the standards of the PublicCompany Accounting Oversight Board, the objective of which is the expression ofan opinion regarding the financial statements taken as a whole. Accordingly, wedo not express such an opinion.

 

Based on our review, weare not aware 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 previouslyaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the balance sheet of Rigel Pharmaceuticals, Inc.as of December 31, 2007, and the related statements of operations,stockholders’ equity, and cash flows for the year then ended (not presentedherein)and in ourreport dated March 6, 2008, we expressed an unqualified opinion on thosefinancial statements and included an explanatory paragraph referencing RigelPharmaceuticals, Inc.’s change in method of accounting for share-basedcompensation as of January 1, 2006 and Note 1 to the financial statements.  In our opinion, the information set forth inthe accompanying condensed balance sheet as of December 31, 2007, isfairly stated, in all material respects, in relation to the balance sheet fromwhich it has been derived.

 
|                   |   | /s/  Ernst & Young LLP |
|------------------------|--------|---------------------------------|
| Palo Alto,  California |   |                            |
| May 6, 2008       |   |                            |

 

12

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**Item 2.    Management’s Discussion and Analysis of Financial Condition andResults of Operations**

** **

*This discussion and analysis should be read in conjunctionwith our financial statements and the accompanying notes included in thisreport and the audited financial statements and accompanying notes included inour Annual Report on Form 10-K for the year ended December 31, 2007.Operating results for the three months ended March 31, 2008 are notnecessarily indicative of results that may occur in future periods.*

 

*This report contains statements that involve expectations,plans or intentions. We usually use words such as “may,” “will,” “should,” “could,”“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” orthe negative of these terms or similar expressions to identify theseforward-looking statements. These statements appear throughout this quarterlyreport on Form 10-Q and are statements regarding our current expectation,belief or intent, primarily with respect to our operations and related industrydevelopments. Examples of these statements include, but are not limited to,statements regarding the following: our business and scientific strategies; theprogress of our product development programs, including clinical testing; ourcorporate collaborations, 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 diseases andcancer, as well as viral and metabolic diseases. Our goal is to file one newinvestigational new drug, or IND, application in a significant indication eachyear.  We have achieved this goal everyyear since 2002. Our pioneering research focuses on intracellular signalingpathways and related targets that are critical to disease mechanisms. Ourproductivity has resulted in strategic collaborations with large pharmaceuticalpartners to develop and market our product candidates. We have productdevelopment programs in inflammatory/autoimmune diseases such as rheumatoidarthritis, thrombocytopenia and asthma, as well as in cancer.

 

 We have multiple productcandidates in development as follows:

 

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

 

We recently completed a Phase 2, multi-center, ascending dose, randomized,double-blind, placebo-controlled, dose-ranging clinical trial evaluating threedoses of R788 over a 12-week period in RA patients. All patients continued toreceive their previously scheduled dose of Methotrexate. In this clinicaltrial, R788 demonstrated statistically significant efficacy results in treatingRA patients at two dose levels. Efficacy assessments for each participant werebased on the American College of Rheumatology criteria, which denote a 20% (ACR20) improvement, at least a 50% (ACR 50) improvement, or at least a70% (ACR 70) improvement from the baseline assessment at the end of the12-week treatment period. Patients were also evaluated based on the DiseaseActivity Score using 28 joint counts, or DAS28, a commonly used measurementoutside of the U.S. of disease activity in RA patients. Groups treated withR788 at 100mg and 150mg po bid (orally, twice daily) showed higher ACR20,ACR50, ACR70 and DAS28 response rates than the placebo group. The most commonclinically meaningful adverse events noted in the clinical trial weredose-related neutropenia, mild elevations of liver function tests andgastrointestinal side effects. Dose reduction (to one-half the assigned dose bytaking the drug once per day) was pre-specified in the protocol and contingenton neutrophil counts and/or liver function tests. Notably, a vast majority ofthe patients who had their doses reduced successfully completed the clinicaltrial with minimal safety issues. We expect to initiate a Phase 2b clinicaltrial evaluating dosing of the patients receiving R788 or placebo over a24-week period in the first half of 2008. We also expect to initiate a secondPhase 2b clinical trial treating RA patients who have failed anti-TNFtherapy with R788 in the first half of 2008.

 

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·                  *R788—Product Candidate for Immune Thombocytopenic Purpura (ITP). *Platelet destruction from ITP ismediated by IgG signaling, and R788 is a potent inhibitor of IgG signaling. Inpreclinical studies, R788 was shown to improve thrombocytopenia in an ITP mousemodel. We recently completed an exploratory Phase 2 clinical trial of R788to evaluate its safety and initial efficacy in chronic ITP patients. In thisclinical trial, R788 was orally administered in varying doses for 30 or moredays and demonstrated that it can improve platelet counts in highly refractorypatients. We are investigating the design for our next clinical trial of R788,which we expect to initiate by the end of 2008.

 

·                  *R788—Product Candidate for B-Cell Lymphoma. *Research has shown thatoveractivity of the signaling enzyme spleen tyrosine kinase, or Syk, appears tobe an 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 April 2007, we began enrolling patients in a multi-center, Phase 1/2clinical trial to evaluate the safety and efficacy of R788 for the treatment ofpatients with B-cell lymphoma. The clinical trial has enrolled 80 patients at11 major treatment centers in the United States and will focus on certain typesof B-cell lymphomas. We expect to report interim results from this clinicaltrial in the first half of 2008.

 

·                  *R788—Product Candidate forSystemic Lupus Erythematosus (SLE or Lupus).*  Preclinical studies have also shown that R788is highly effective in murine model of lupus. We expect to initiate a Phase 2 clinical trial in the second half of2008.

 

·                  *R348—Product Candidate for RA and Other Immune Disorders. *R348  is an orally-available potent, selective JAK3inhibitor. JAK3 is a cytoplasmic tyrosine kinase that plays an important rolein lymphocyte differentiation and proliferation in a variety of autoimmune diseases.We recently began enrolling patients in a Phase 1 clinical trial toevaluate the safety and tolerability of R348. We expect to complete dosing forthis Phase 1 trial in the first half of 2008.

 

·                  *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$3.0 million. Under the agreement, Merck Serono is responsible for thefurther development and commercialization of R763/AS703569. In September 2006,Merck Serono initiated a Phase 1 multi-center clinical trial to evaluate R763/AS703569for the treatment of patients with refractory solid tumors. In February 2007,Merck Serono began an additional Phase 1 clinical trial evaluatingR763/AS703569 on patients with hematological malignancies. Merck Serono hasindicated that interim results from these Phase 1 clinical trials areexpected in the second half of 2008. In July 2007, Merck Serono initiatedits third Phase 1 clinical trial, designed to determine the maximumtolerated dose, safety and dosing regimen of R763/AS703569 in combination withgemcitabine, a commonly prescribed chemotherapeutic agent administered byintravenous infusion. The clinical trial will evaluate two different treatmentregimens in which R763/AS703569 will be given in sequence with gemcitabine over21-day cycles. As many as 72 patients with advanced malignancies, includingpancreatic, ovarian, breast, non-small cell lung and colorectal, will beevaluated.

 

·                  *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 is focused onour preclinical small molecule compounds, which inhibit IgE receptor signalingin respiratory tract mast cells by blocking Syk, a novel drug target forrespiratory diseases. Mast cells play important roles in both early and latephase allergic reactions, and Syk inhibitors could prevent both phases.

 

In May 2006, Pfizer selected R343 to commence advanced preclinicaldevelopment in allergic asthma via intrapulmonary delivery. In December 2007,Pfizer commenced a Phase 1 clinical trial of an inhaled formulation ofR343 for the treatment of allergic asthma, resulting in a milestone payment tous of $5.0 million.

 

**Corporate Collaborations**

 

Weconduct research and development programs independently and in connection withour corporate collaborations. We currently have collaborations with six majorpharmaceutical/biotechnology companies. These collaborations include acollaboration with Janssen Pharmaceutica N.V., a division of Johnson &Johnson, relating to oncology therapeutics and diagnostics; two collaborationswith Pfizer, one initiated in 1999 in immunology and the other in January 2005,relating to intrapulmonary asthma and allergy therapeutics; a collaborationwith Novartis Pharma AG, or Novartis, with respect to four different programsrelating to immunology, oncology and chronic bronchitis; a collaboration withDaiichi 

 

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Pharmaceuticals Co., Ltd.,or Daiichi, relating to oncology; a collaboration with Merck & Co., Inc.,or Merck, also relating to oncology, a collaboration with Merck Serono,relating to our aurora kinase inhibitor program. None of these collaborationscurrently provides us with regular research reimbursement. In all of thesecollaborations, if certain conditions are met, we are entitled to receivefuture milestone payments and royalties. We can not guarantee that theseconditions will be met or that research and development efforts will besuccessful. As a result, we may not receive any further milestone payments orroyalties under these agreements.

 

**EquityFinancings**

 

During the first quarter of 2008, we completed an underwritten publicoffering in which we sold 5,000,000 shares of our common stock at a price tothe public of $27.00 per share. We received net proceeds of approximately$127.5 million after deducting underwriting discounts and commissions andoffering expenses.

 

**RecentAccounting Pronouncements**

** **

On December 12, 2007, the FASB ratified the consensus reached bythe EITF on EITF Issue No. 07-1. “Accounting for CollaborativeArrangements,” 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 financialstatements issued for fiscal years beginning after December 15, 2008. Weare currently evaluating the impact of adopting EITF 07-1 on our financialstatements and cannot estimate the impact of adoption at this time.

 

On June 27, 2007, the FASB ratified the consensus reached by theEITF on EITF Issue No. 07-3, “Accounting for Advance Payments for Goods orServices to Be Used in Future Research and Development Activities,” orEITF 07-3. EITF 07-3 requires companies to defer and capitalizeprepaid, nonrefundable research and development payments to third parties, andamortize them over the period that the research and development activities areperformed or the services are provided, subject to an assessment ofrecoverability. EITF 07-3 is effective for new contracts entered intoduring fiscal years beginning after December 15, 2007, including interimperiods within those fiscal years. The adoption of EITF 07-3 did not have amaterial affect on our financial statements.

 

In September 2006, the FASB issued SFAS 157, “Fair ValueMeasurements,” or SFAS 157. This standard defines fair value, establishesa framework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements. SFAS 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007, except that under FASB Staff Position 157-2, “Effective Date of FASBStatement No. 157,” companies are allowed to delay the effective date ofSFAS 157 for non-financial assets and non-financial liabilities that arenot recognized or disclosed at fair value on a recurring basis until fiscalyears beginning after November 15, 2008. We have adopted SFAS 157 with regard to all financial assets andliabilities in our financial statements going forward, including the threemonths ended March 31, 2008 and have elected to delay the adoption of SFAS157 for non-financial assets and non-financial liabilities for one year.  For further discussion of SFAS 157, see Note8 to the Condensed Financial Statements.

 

In February 2007, the FASB issued SFAS No. 159, “The FairValue Option for Financial Assets and Financial Liabilities—Including anamendment of FASB Statement No. 115,” or SFAS 159. SFAS 159permits entities to choose to measure many financial instruments and certainother items at fair value. Entities that elect the fair value option willreport unrealized gains and losses in earnings at each subsequent reportingdate. The fair value option may be elected on an instrument-by-instrumentbasis, with few exceptions. SFAS 159 also establishes presentation anddisclosure requirements to facilitate comparisons between companies that choosedifferent measurement attributes for similar assets and liabilities.SFAS 159 is effective for fiscal years beginning after November 15,2007. We elected not to adopt the fair value option of SFAS 159 at thistime.

 

**CriticalAccounting Policies and the Use of Estimates**

 

Our discussion and analysis of our financial condition and results ofoperations is based upon our condensed financial statements, which have beenprepared in accordance with U.S generally accepted accounting principles forinterim financial information. The preparation of these condensed financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. We evaluate our estimates, includingthose related to terms of the research collaborations (i.e. amortizationof upfront fees and certain milestone payments), investments, stockcompensation, impairment issues, the estimated useful life of assets andcontingencies, on an on-going basis. We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for making 

 

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judgmentsabout the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimatesunder different assumptions or conditions. We believe that there were nosignificant changes in our critical accounting policies during the quarterended March 31, 2008 as compared to those previously disclosed in ourannual report on Form 10-K for the year ended December 31, 2007. Webelieve the following critical accounting policies affect our more significantjudgments and estimates used in the preparation of our financial statements:

 

***Revenue Recognition***

 

We recognize revenue from our collaboration arrangements. Our revenuearrangements with multiple elements are evaluated under Emerging Issues Task ForceNo. 00-21, *“Revenue Arrangements withMultiple Deliverables,”* and are divided into separate units ofaccounting if certain criteria are met, including whether the delivered elementhas stand-alone value to the customer and whether there is objective andreliable evidence of the fair value of any undelivered items. The considerationwe receive is allocated among the separate units based on their respective fairvalues, and the applicable revenue recognition criteria are applied to each ofthe separate units. Advance payments received in excess of amounts earned areclassified as deferred revenue until earned.

 

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

 

Revenue related to collaborative research with our corporatecollaborators is recognized as research services are performed over the relateddevelopment periods for each contract. Under these agreements, we are requiredto perform research and development activities as specified in the applicableagreement. The payments received are not refundable and are generally based ona contractual cost per full-time equivalent employee working on the project.Research and development expenses under the collaborative research agreements,except for the Merck collaboration signed in November 2004 related toubiquitin ligases, approximate or exceed the revenue recognized under suchagreements 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. When the research portion of the collaboration ended in May 2007,we recognized the full amount of the deferred revenue related to the contractbecause we had no further obligations under the Merck collaboration. It is ourpolicy to recognize revenue based on our level of effort expended, and thatrevenue recognized will not exceed amounts billable under the arrangement.

 

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

 

***Stock-based Compensation***

 

The determinationof the fair value of share-based payment awards on the date of grant using theBlack-Scholes option-pricing model is affected by our stock price as well asassumptions regarding a number of complex and subjective variables. Thesevariables include, but are not limited to, volatility, expected term, risk-freeinterest rate and dividends. We estimate volatility using our historical shareprice performance over the expected life of the option up to the point where wehave historical market data. For expected term, among other things, we takeinto consideration our historical data of options exercised, cancelled andexpired. The risk-free rate is based on the U.S. Treasury constant maturityrate. We have not paid and do not expect to pay dividends. In order tocalculate share-based expense, we also estimate the forfeiture rate using ourhistorical experience with options that cancel before they vest.

 

Ifthese factors change and we employ different assumptions in the application ofSFAS 123(R) in future periods, the compensation expense that we recordunder SFAS 123(R) may differ significantly from what we have recorded inthe current period. Therefore, we believe it is important to be aware of thehigh degree of subjectivity involved when using option pricing models toestimate share-based compensation under SFAS 123(R).

 

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**Resultsof Operations**

 

**ThreeMonths Ended March 31, 2008 and 2007**

 

**Revenues**

 
| ** **               | ** ** | **Three months ended** | ** ** | ** ** | ** ** |
|--------------------------|------------|------------------------|------------|------------|------------|
| ** **               | ** ** | **March 31,**     | ** ** | ** ** | ** ** |
| ** **               | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Aggregate Change** | ** ** |
| ** **               | ** ** | **(in thousands)**     | ** ** |
| ***Contract  revenues*** |       | $                      | —     |       | $          | 2,644 |   | $ | (2,644 | ) |
|                          |            |                        |            |            |            |  |  |  |  |  |

 

Contractrevenues by collaborator were:

 
| ** **   | ** ** | **Three months ended** | ** ** | ** ** | ** ** |
|--------------|------------|------------------------|------------|------------|------------|
| ** **   | ** ** | **March 31,**     | ** ** | ** ** | ** ** |
| ** **   | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Aggregate Change** | ** ** |
| ** **   | ** ** | **(in thousands)**     | ** ** |
| ***Merck***  |       | $                      | —     |       | $          | 1,885 |   | (1,885 | ) |
| ***Pfizer*** |       | —                 |       | 759        |       | (759 | ) |
| *** *** |       |                   |       |       |       |   |   |
| ***Total***  |       | $                      | —     |       | $          | 2,644 |   | $ | (2,644 | ) |
|              |            |                        |            |            |            |  |  |  |  |  |

 

Therewere no contract revenues reported during the three months ended March 31,2008. Contract revenues from collaborations for the three months ended March 31,2007 consisted of approximately $1.0 million in FTE revenue from Merck,approximately $0.9 million amortization of license and milestone payments fromMerck, and approximately $0.7 million amortization of license payments fromPfizer. We have no deferred revenue as of March 31, 2008. Our potentialrevenues for the remainder of 2008 may include certain milestone payments fromour current collaborations and any new collaboration arrangement we mayenter into.

 

**Researchand Development Expenses**

** **
| ** **                                                                            | ** ** | **Three months ended** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                                            | ** ** | **March 31,**     | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Aggregate Change** | ** ** |
| ** **                                                                            | ** ** | **(in thousands)**     | ** ** |
| ***Research and development expenses***                                               |       | $                      | 21,620     |       | $          | 15,843 |   | $ | 5,777 |   |
| ***Stock-based compensation expense included in  research and development expenses*** |       | 3,092                  |       | 1,200      |       | 1,892 |   |
|                                                                                       |            |                        |            |            |            |  |  |  |  |  |

 

Theincrease in research and development expenses for the three months ended March 31,2008, as compared to the same period in 2007, was primarily due to an increase inclinical costs and stock-based compensation expense, as discussed under “Stock-basedCompensation” below.  The increase inclinical costs was attributable to increased costs associated withmanufacturing R788 material to be used in the Phase 2b clinical studies of R788in RA.  We expect our research anddevelopment expenses to increase for the remainder of 2008 as we commencedosing patients in our Phase 2b clinical trials of R788 for RA and initiate ourPhase 2 trial of R788 in lupus and continue to manufacture R788 material to beused in these trials.

 

Thescope and magnitude of future research and development expenses are difficultto predict given the number of studies that we will need to conduct for any ofour potential products, as well as our limited capital resources. In general,biopharmaceutical development involves a series of steps, beginning withidentification 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, therefore, results in increasing expenditures 

 

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for such productcandidate. Our research and development expenditures currently include costsfor scientific personnel, supplies, equipment, consultants, sponsored research,allocated facility costs, costs related to preclinical and clinical trials, andstock-based compensation.

 

**Generaland Administrative Expenses**

** **
| ** **                                                                              | ** ** | **Three months ended** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                                              | ** ** | **March 31,**     | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Aggregate Change** | ** ** |
| ** **                                                                              | ** ** | **(in thousands)**     | ** ** |
| ***General and administrative expenses***                                               |       | $                      | 7,125      |       | $          | 5,039 |   | $ | 2,086 |   |
| ***Stock-based compensation expense included in  general and administrative expenses*** |       | 2,754                  |       | 1,422      |       | 1,332 |   |
|                                                                                         |            |                        |            |            |            |  |  |  |  |  |

 

Theincrease in general and administrative expenses for the three months ended March 31,2008, as compared to the same period in 2007, is primarily attributable to anincrease in stock-based compensation expense, as discussed under “Stock-basedCompensation” below, and personnel costs.

 

**Stock-BasedCompensation**

 
| ** **                                   | ** ** | **Three months ended** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                   | ** ** | **March 31,**     | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Aggregate Change** | ** ** |
| ** **                                   | ** ** | **(in thousands)**     | ** ** |
| **Stock-based compensation expense from:**   | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ***Officer, director and employee options*** |       | $                      | 5,733      |       | $          | 2,616 |   | $ | 3,117 |   |
| ***Consultant options***                     |       | 113                    |       | 6          |       | 107 |   |
| *** ***                                 |       |                   |       |       |       |   |   |
| ***Total***                                  |       | $                      | 5,846      |       | $          | 2,622 |   | $ | 3,224 |   |

 

Theincrease in stock-based compensation expense for the three months ended March 31,2008, as compared to the same period in 2007, was due to an increased valuationof options granted in January 2008 attributable to our increased stockprice and volatility, as well as increased number of shares subject to optionsgranted in the first quarter of 2008 as compared to the first quarter of 2007.

 

**InterestIncome**

** **
| ** **             | ** ** | **Three months ended** | ** ** | ** ** | ** ** |
|------------------------|------------|------------------------|------------|------------|------------|
| ** **             | ** ** | **March 31,**     | ** ** | ** ** | ** ** |
| ** **             | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Aggregate Change** | ** ** |
| ** **             | ** ** | **(in thousands)**     | ** ** |
| ***Interest  income*** |       | $                      | 1,530      |       | $          | 1,215 |   | $ | 315 |   |
|                        |            |                        |            |            |            |  |  |  |  |  |

 

Interestincome results from our interest-bearing cash and investment balances. Interestincome increased for the three months ended March 31, 2008, as compared tothe same period in 2007, due to an increase in our cash resulting from ourpublic offering completed in February 2008 in which we received netproceeds of approximately $127.5 million.

 

**InterestExpense**

** **
| ** **              | ** ** | **Three months ended** | ** ** | ** ** | ** ** |
|-------------------------|------------|------------------------|------------|------------|------------|
| ** **              | ** ** | **March 31,**     | ** ** | ** ** | ** ** |
| ** **              | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Aggregate Change** | ** ** |
| ** **              | ** ** | **(in thousands)**     | ** ** |
| ***Interest  expense*** |       | $                      | 47         |       | $          | 58 |   | $ | (11 | ) |
|                         |            |                        |            |            |            |  |  |  |  |  |

 

18

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Interestexpense is the result of our capital lease obligations associated with fixedasset acquisitions. Interest expense decreased for the three months ended March 31,2008, as compared to the same period in 2007, due to the decrease in capitallease obligations outstanding during those periods.

 

**Liquidityand Capital Resources**

 

***Cash Requirements***

 

Wehave financed our operations from inception primarily through sales of equitysecurities, contract payments under our collaboration agreements and equipmentfinancing arrangements. We have consumed substantial amounts of capital todate, and our operating expenditures are expected to increase over the nextseveral years.

 

Webelieve that our existing capital resources will be sufficient to support ourcurrent operating plan through at least the next 12 months. In the foreseeablefuture, our operations will require significant additional funding, in largepart due to our research and development expenses, future preclinical andclinical testing costs and the absence of any revenues from product sales. Theamount of future funds needed will depend largely on the timing and structureof potential future collaborations. We do not know whether additional financingwill be available when needed, or that, if available, we will obtain financingon terms favorable to our stockholders or us.

 

To theextent we raise additional capital by issuing equity securities, ourstockholders could at that time experience substantial dilution. To the extentthat we raise additional funds through collaboration and licensingarrangements, we may be required to relinquish some rights to our technologiesor product candidates, 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;

 

·                  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 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 

 

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going concern. As of March 31,2008, we had approximately $209.7 million in cash, cash equivalents andavailable-for-sale securities, as compared to approximately $108.3 millionas of December 31, 2007, an increase of approximately $101.4 million.The increase 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 three months ended March 31, 2008. For thethree months ended March 31, 2008 and 2007, we maintained an investmentportfolio primarily in money market funds, government-sponsored enterprisesecurities, corporate bonds and commercial paper. Cash in excess of immediaterequirements is invested with regard to liquidity and capital preservation.Wherever possible, we seek to minimize the potential effects of concentrationand degrees of risk.

 

**ContractualObligations**

 

As of March 31,2008, we had the following contractual commitments (by fiscal year):

 

 
| ** **                     | ** ** | **Total**          | ** ** | **2008** | ** ** | **2009-2011** | ** ** | **2012-2014** | ** ** | **2015-2019** | ** ** |
|--------------------------------|------------|--------------------|------------|----------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Capital Lease obligations  (1) |       | $                  | 1,836      |     | $          | 808           |       | $             | 1,028      |          | $          | — |   | $ | — |   |
| Facilities lease               |       | 147,844            |       | 10,486   |       | 45,881        |       | 43,514        |       | 47,963        |       |
|                           |       |               |       |     |       |          |       |          |       |          |       |
| Total                          |       | $                  | 149,680    |     | $          | 11,294        |       | $             | 46,909     |          | $          | 43,514 |   | $ | 47,963 |   |

 

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(1)             As of March 31, 2008, we hadapproximately $1.8 million in capital lease obligations (including theinterest portion) associated with our equipment. All existing capital leaseagreements as of March 31, 2008 are secured by the equipment financed,bearing interest at rates between 5.8% and 12.2% and are due in monthlyinstallments through 2010.

 

**Item 3.****          ****Quantitative and QualitativeDisclosures About Market Risk**

 

During the three months ended March 31, 2008,there were no material changes to our market risk disclosures as set forth in Part II,Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of ourAnnual Report on Form 10-K for the year ended December 31, 2007.

 

**Item 4.    Controls andProcedures**

 

*Evaluation of Disclosure Controls and Procedures.*Based on our management’s evaluation(with the participation of our chief executive officer and chief financialofficer), our chief executive officer and chief financial officer haveconcluded 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 March 31, 2008.

 

*Changes in Internal Controls.*There were no changes in our internalcontrols over financial reporting during the quarter ended March 31, 2008that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

*Limitations on the Effectiveness of Controls.*A control system, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat 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 our disclosurecontrol system are met and, as set forth above, our chief executive officer andchief financial officer have concluded, based on their evaluation as of the endof the period covered by this quarterly report on Form 10-Q, that ourdisclosure controls and procedures were sufficiently effective to providereasonable assurance that the objectives of our disclosure control system weremet.

 

**PART II. OTHER INFORMATION**

 

**Item 1A. Risk Factors**

** **

*In evaluating our business, you should carefullyconsider the following risks, as well as the other information contained inthis Quarterly Report on Form 10-Q. If any of the following risks actuallyoccurs, our business, financial condition and operating results could beharmed. The risks and uncertainties described below are not the only onesfacing*

 

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*us. Additional risks and uncertainties not presently knownto us, or that we currently see as immaterial, may also harm our business. Wehave marked with an asterisk (*) those risk factors below that reflect asubstantive change from the risk factors included in our Annual Report on Form 10-Kfiled with the Securities and Exchange Commission on March 7, 2008.*

 

**We will need additional capital in the future tosufficiently fund our operations and research.***

 

We have consumed substantial amounts of capital to date, and operatingexpenditures are expected to increase over the next several years as we expandour research and development activities. We believe that our existing capitalresources will be sufficient to support our current operating plan through atleast the next 12 months. In the foreseeable future, our operations willrequire significant additional funding, in large part due to our research anddevelopment expenses, future preclinical and clinical-testing costs, and theabsence of any revenues from product sales. The amount of future funds neededwill depend largely on the timing and structure of potential futurecollaborations. We do not know whether additional financing will be availablewhen needed, or that, if available, we will obtain financing on terms favorableto our stockholders or us.

 

To the extent we raise additional capital by issuing equity securities,our stockholders could at that time experience substantial dilution. To theextent that we raise additional funds through collaboration and licensingarrangements, we may be required to relinquish some rights to our technologiesor product candidates, or grant licenses on terms that are not favorable to us.

 

**Our future funding requirements will depend on manyuncertain factors.**

** **

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

** **

·                  the progress andsuccess of clinical trials and preclinical activities (including studies andmanufacture of materials) of our product candidates conducted by us or ourcollaborative partners or licensees;

 

·                  our ability toestablish new collaborations;

 

·                  the progress ofresearch programs carried out by us;

 

·                  any changes inthe breadth of our research and development programs;

 

·                  our ability tomeet the milestones identified in our collaborative agreements that triggerpayments;

 

·                  the progress ofthe research and development efforts of our collaborative partners;

 

·                  our ability toacquire or license other technologies or compounds that we seek to pursue;

 

·                  our ability tomanage our growth;

 

·                  competingtechnological and market developments;

 

·                  the costs andtiming of obtaining, enforcing and defending our patent and intellectualproperty rights;

 

·                  the costs andtiming of regulatory approvals and filings by us and our collaborators; and

 

·                  expensesassociated with unforeseen litigation.

 

Insufficient funds may require us to delay, scale back or eliminatesome or all of our research and development programs, to lose rights underexisting licenses or to relinquish greater or all rights to product candidatesat an earlier stage of development or on less favorable terms than we wouldotherwise choose or may adversely affect our ability to operate as a goingconcern.

 

21

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**Our success as a company is uncertain due to ourhistory of operating losses and the uncertainty of future profitability.***

 

Due in large part to the significant research and developmentexpenditures required to identify and validate new product candidates andpursue our development efforts, we have not been profitable and have incurredoperating losses since we were incorporated in June 1996.   The extent of our future losses and thetiming of potential profitability are highly uncertain, and we may neverachieve profitable operations. We incurred net losses of approximately $27.3million for the three months ended March 31, 2008, $74.3 million in2007 and $37.6 million in 2006. Currently, our revenues are generated solelyfrom research milestone payments pursuant to our collaboration agreements andlicenses and are insufficient to generate profitable operations. As of March 31,2008, we had an accumulated deficit of approximately $396.7 million. We expectto incur losses for at least the next several years and expect that theselosses could increase as we expand our research and development activities andincur significant clinical and testing costs.

 

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

** **

At the present time, the majority of our operations are in variousstages of drug identification and development. We currently have four productcompounds in the clinical testing stage: one with indications for RA, ITP andB-cell lymphoma, which is proprietary to our company; one in safety testing andintended for psoriasis, RA, and other immunological indications, which isproprietary to our company; one with three indications for oncology, which issubject to a collaboration agreement with Merck Serono; and one in safetytesting and intended for allergic asthma, which is subject to a collaborationagreement with Pfizer. In our industry, it is statistically unlikely that thelimited number of compounds that we have identified as potential productcandidates will actually lead to successful product development efforts, and wedo not expect any drugs resulting from our research to be commerciallyavailable for several years, if at all.

 

Our compounds in clinical trials and our future leads for potentialdrug compounds are subject to the risks and failures inherent in thedevelopment of pharmaceutical products. These risks include, but are notlimited to, the inherent difficulty in selecting the right drug and drug targetand avoiding unwanted side effects as well as unanticipated problems relatingto product development, testing, regulatory compliance, manufacturing,competition and costs and expenses that may exceed current estimates. Forexample, in our clinical trials conducted to-date, use of R788 has resulted indose related neutropenia, elevated liver enzymes and gastrointestinal sideeffects. These side effects may limit or delay enrollment of patients in futuretrials and we may observe additional side effects in larger clinical testing infuture trials. If approved by the FDA, the side effect profile of R788 may alsoresult in a narrowly approved indication for use of the product, especially inlight of other drugs currently available to treat RA, dependent on the safetyprofile of R788 relative to those drugs.

 

The results of preliminary studies do not necessarily predict clinicalor commercial success, and larger later-stage clinical trials may fail toconfirm the results observed in the preliminary studies. Our lead productcandidate is in early development, having recently completed initialPhase 2 clinical trials in two indications. We will need to conductadditional Phase 2 trials, with larger numbers of patients, beforeproceeding into Phase 3 trials with R788 for either indication.Furthermore, our Phase 2 clinical trial for ITP was conducted in highlyrefractory patients, as opposed to treatment-naive patients. If efficacy is notdemonstrated among treatment-naive patients, any approved indication for ITPwill be limited to a subset of the patient population. Finally, with respect toour own compounds in development, we have established anticipated timelineswith respect to the initiation or completion of clinical studies based onexisting knowledge of the compound. However, we cannot provide assurance thatwe will meet any of these timelines for clinical development.

 

Because of the uncertainty of whether the accumulated preclinicalevidence (pharmacokinetic, pharmacodynamic, safety and/or other factors) orearly clinical results will be observed in later clinical trials, we can makeno assurances regarding the likely results from our future clinical trials orthe impact of those results on our business

 

**We might not be able to commercialize our productcandidates successfully if problems arise in the clinical testing and approvalprocess.**

** **

Commercialization of our product candidates depends upon successfulcompletion of preclinical studies and clinical trials. Preclinical testing andclinical development are long, expensive and uncertain processes. We do notknow whether we, or any of our collaborative partners, will be permitted toundertake clinical trials of potential products beyond the trials alreadyconcluded and the trials currently in process. It will take us, or ourcollaborative partners several years to complete any such testing, and failurecan occur at any stage of testing. Interim results of trials do not necessarilypredict final results, and acceptable results in early trials may not berepeated in later trials. A number of companies in the pharmaceutical industry,including biotechnology companies, have suffered significant setbacks inadvanced clinical trials, even after achieving promising results in earliertrials. Moreover, we or our collaborative partners or regulators may decide todiscontinue development of any or all of these projects at any time forcommercial, scientific or other reasons.

 

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**Delays in clinical testing could result in increasedcosts to us.**

** **

Significant delays in clinical testing could materially impact ourproduct development costs and timing. We do not know whether planned clinicaltrials will begin on time, will need to be halted or revamped or will becompleted on schedule, or at all. Clinical trials can be delayed for a varietyof reasons, including delays in obtaining regulatory approval to commence astudy, delays from scale up, delays in reaching agreement on acceptableclinical study agreement terms with prospective clinical sites, delays inobtaining institutional review board approval to conduct a study at aprospective clinical site or delays in recruiting subjects to participate in astudy.

 

In addition, we typically rely on third-party clinical investigators toconduct our clinical trials and other third-party organizations to oversee theoperations of such trials and to perform data collection and analysis. As aresult, we may face additional delaying factors outside our control if theseparties do not perform their obligations in a timely fashion. While we have notyet experienced delays that have materially impacted our clinical trials orproduct development costs, delays of this sort could occur for the reasons identifiedabove or other reasons. If we have delays in testing or approvals, our productdevelopment costs will increase. For example, we may need to make additionalpayments to third-party investigators and organizations to retain theirservices or we may need to pay recruitment incentives. If the delays aresignificant, our financial results and the commercial prospects for our productcandidates will be harmed, and our ability to become profitable will bedelayed.

** **

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

** **

We currently do not have manufacturing capabilities or experiencenecessary to produce our product candidate R788. We rely on a singlemanufacturer for the R788 product for clinical trials. We will rely onmanufacturers to deliver materials on a timely basis and to comply withapplicable regulatory requirements, including the FDA’s current GoodManufacturing Practices, or GMP. These outsourcing efforts with respect tomanufacturing preclinical and clinical supplies will result in a dependence onour suppliers to timely manufacture and deliver sufficient quantities ofmaterials produced under GMP conditions to enable us to conduct plannedpreclinical studies, clinical trials and, if possible, to bring products tomarket in a timely manner.

 

Our current and anticipated future dependence upon these third-partymanufacturers may adversely affect our ability to develop and commercializeproduct candidates on a timely and competitive basis. These manufacturers maynot be able to produce material on a timely basis or manufacture material atthe quality level or in the quantity required to meet our development timelinesand applicable regulatory requirements. We may not be able to maintain or renewour existing third-party manufacturing arrangements, or enter into new arrangements,on acceptable terms, or at all. Our third-party manufacturers could terminateor decline 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 ourIND applications and/or the initiation of clinical trials that we havecurrently planned.

 

Our third-party manufacturers may not be able to comply with the GMPregulations, other applicable FDA regulatory requirements or similarregulations applicable outside of the United States. Additionally, if we arerequired to enter into new supply arrangements, we may not be able to obtainapproval from the FDA of any alternate supplier in a timely manner, or at all,which could delay or prevent the clinical development and commercialization ofany related product candidates. Failure of our third-party manufacturers or usto obtain approval from the FDA or to comply with applicable regulations couldresult in sanctions being imposed on us, including fines, civil penalties,delays in or failure to grant marketing approval of our product candidates,injunctions, delays, suspension or withdrawal of approvals, license revocation,seizures or recalls of products and compounds, operating restrictions andcriminal prosecutions, any of which could significantly and adversely affectour business.

 

**Because most of our expected future revenues arecontingent upon collaborative and license agreements, we might not meet ourstrategic objectives.**

** **

Our ability to generate revenue in the near term depends on our abilityto enter into additional collaborative agreements with third parties and tomaintain the agreements we currently have in place. Our ability to enter intonew collaborations 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.

 

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To date, most of our revenues have been related to the research phaseof each of our collaborative agreements. Such revenues are for specifiedperiods, and the impact of such revenues on our results of operations ispartially offset by corresponding research costs. Following the completion ofthe research phase of each collaborative agreement, additional revenues maycome only from milestone payments and royalties, which may not be paid, if atall, until some time well into the future. The risk is heightened due to thefact that unsuccessful research efforts may preclude us from receiving anymilestone payments under these agreements. Our receipt of revenues fromcollaborative arrangements is also significantly affected by the timing ofefforts expended by us and our collaborators and the timing of lead compoundidentification. In late 2001, we recorded the first revenue from achievement ofmilestones in both the Pfizer and Johnson & Johnson collaborations. Inaddition, we have subsequently received milestone payments from Novartis, Daiichi,Merck, Merck Serono and Pfizer. Under many agreements, however, milestonepayments may not be earned until the collaborator has advanced productcandidates into clinical testing, which may never occur or may not occur untilsome time well into the future. If we are not able to generate revenue underour collaborations when and in accordance with our expectations or theexpectations of industry analysts, this failure could harm our business andhave an immediate adverse effect on the trading price of our stock.

 

Our business requires us to generate meaningful revenue from royaltiesand licensing agreements. To date, we have not received any revenue fromroyalties for the commercial sale of drugs, and we do not know when we willreceive any such revenue, if at all. Likewise, we have not licensed any leadcompounds or drug development candidates to third parties, and we do not knowwhether any such license will be entered into on acceptable terms in thefuture, if at all.

 

**If our current corporate collaborations or licenseagreements are unsuccessful, our research and development efforts could bedelayed.**

** **

Our strategy depends upon the formation and sustainability of multiplecollaborative arrangements and license agreements with third parties in thefuture. We rely on these arrangements for not only financial resources, butalso for expertise that we expect to need in the future relating to clinicaltrials, manufacturing, sales and marketing, and for licenses to technologyrights. To date, 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 phase of our collaboration with Johnson & Johnsonended in 2003, and the research phases conducted at our facilities under ourbroad collaboration with Novartis ended in 2004. The research phase of ourcorporate collaboration agreement with Daiichi ended in 2005. In 2004, wesigned a new corporate collaboration with Merck, and the research phase of thiscollaboration ended in May 2007. In 2005, we signed additionalcollaborations with Pfizer and Merck Serono. Each of our collaborations couldbe terminated by the other party at any time, and we may not be able to renewthese collaborations on acceptable terms, if at all, or negotiate additionalcorporate collaborations on acceptable terms, if at all. If thesecollaborations terminate or are not renewed, any resultant loss of revenuesfrom these collaborations or loss of the expertise of our collaborativepartners could adversely affect our business.

 

Conflicts also might arise with collaborative partners concerningproprietary rights to particular compounds. While our existing collaborativeagreements typically provide that we retain milestone payments and royaltyrights with respect to drugs developed from certain derivative compounds, anysuch payments or royalty rights may be at reduced rates, and disputes may ariseover the application of derivative payment provisions to such drugs, and we maynot be successful in such disputes.

 

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

 

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**Ifconflicts arise between our collaborators or advisors and us, any of them mayact in their self-interest, which may be adverse to our stockholders’interests.**

 

If conflicts arise between us and our corporate collaborators orscientific advisors, the other party may act in its self-interest and not inthe interest of our stockholders. Some of our corporate collaborators areconducting multiple product development efforts within each disease area thatis the subject of the collaboration with us or may be acquired or merged with acompany having a competing program. In some of our collaborations, we haveagreed not to conduct, independently or with any third party, any research thatis competitive with the research conducted under our collaborations. Our collaborators,however, may develop, either alone or with others, products in related fieldsthat are competitive with the products or potential products that are thesubject of these collaborations. Competing products, either developed by ourcollaborators or to which our collaborators have rights, may result in theirwithdrawal of support for our product candidates.

 

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

 

**Oursuccess is dependent on intellectual property rights held by third parties andus, and our interest in such rights is complex and uncertain.**

** **

Our success will depend to a large part on our own, our licensees’ andour licensors’ ability to obtain and defend patents for each party’s respectivetechnologies and the compounds and other products, if any, resulting from theapplication of such technologies. We have over 200 pending patent applicationsand over 100 issued patents in the United States that are owned or exclusivelylicensed in our field as well as pending corresponding foreign patentapplications. In the future, our patent position might be highly uncertain andinvolve complex legal and factual questions. For example, we may be involved ininterferences before the United States Patent and Trademark Office.Interferences are complex and expensive legal proceedings and there is noassurance we will be successful in such proceedings. An interference couldresult in our losing our patent rights and/or our freedom to operate and/orrequire us to pay significant royalties. Additional uncertainty may result becauseno consistent policy regarding the breadth of legal claims allowed inbiotechnology patents has emerged to date. Accordingly, we cannot predict thebreadth of claims allowed in our or other companies’ patents.

 

Because the degree of future protection for our proprietary rights isuncertain, we cannot ensure that:

** **

·                  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;

 

·                  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 trade secrets to protect technology where we believe patentprotection is not appropriate or obtainable; however, trade secrets aredifficult to protect. While we require employees, collaborators and consultantsto enter into confidentiality agreements, we may not be able to adequately protectour trade secrets or other proprietary information in the event of anyunauthorized use or disclosure or the lawful development by others of suchinformation.

 

We are a party to certain in-license agreements that are important toour business, and we generally do not control the prosecution of in-licensedtechnology. Accordingly, we are unable to exercise the same degree of controlover this intellectual property as we exercise over our internally-developedtechnology. Moreover, some of our academic institution

 

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licensors,research collaborators and scientific advisors have rights to publish data andinformation in which we have rights. If we cannot maintain the confidentialityof our technology and other confidential information in connection with ourcollaborations, then our ability to receive patent protection or protect ourproprietary information will be impaired. In addition, some of the technologywe have licensed relies on patented inventions developed using U.S. governmentresources. The U.S. government retains certain rights, as defined by law, insuch patents, and may choose to exercise such rights. Certain of ourin-licenses may be terminated if we fail to meet specified obligations. If we failto meet such obligations and any of our licensors exercise their terminationrights, we could lose our rights under those agreements. If we lose any of ourrights, it may adversely affect the way we conduct our business. In addition,because certain of our licenses are sublicenses, the actions of our licensorsmay affect our rights under those licenses.

 

**If adispute arises regarding the infringement or misappropriation of theproprietary rights of others, such dispute could be costly and result in delaysin our research and development activities and partnering.**

** **

Our success will also depend, in part, on our ability to operatewithout infringing or misappropriating the proprietary rights of others. Thereare many issued patents and patent applications filed by third parties relatingto products or processes that are similar or identical to our licensors orours, and others may be filed in the future. There can be no assurance that ouractivities, or those of our licensors, will not infringe patents owned byothers. We believe that there may be significant litigation in the industryregarding patent and other intellectual property rights, and we do not know ifour collaborators or we would be successful in any such litigation. Any legalaction against our collaborators or us claiming damages or seeking to enjoincommercial activities relating to the affected products, our methods orprocesses 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 weare unable to obtain regulatory approval to market products in the UnitedStates and foreign jurisdictions, we will not be permitted to commercializeproducts from our research and development.**

** **

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

 

Before commencing clinical trials in humans in the United States, we,or our collaborative partners, will need to submit and receive approval fromthe FDA of an IND. Clinical trials are subject to oversight by institutionalreview boards and the FDA and:

 

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

 

·                  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.

 

26

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While we have stated that we intend to file additional INDs, this isonly a statement of intent, and we may not be able to do so because we may notbe able to identify potential product candidates. In addition, the FDA may notapprove any IND in a timely manner, or at all.

 

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

 

If regulatory approval of a product is granted, this approval will belimited to those indications or disease states and conditions for which theproduct is demonstrated through clinical trials to be safe and efficacious. Wecannot ensure that any compound developed by us, alone or with others, willprove to be safe and efficacious in clinical trials and will meet all of theapplicable regulatory requirements needed to receive marketing approval.

 

Outside the United States, our ability, or that of our collaborativepartners, to market a product is contingent upon receiving a marketingauthorization from the appropriate regulatory authorities. This foreignregulatory approval process typically includes all of the risks associated withFDA approval described above and may also include additional risks.

 

**If ourcompetitors develop technologies that are more effective than ours, our commercialopportunity will be reduced or eliminated.**

** **

The biotechnology and pharmaceutical industries are intenselycompetitive and subject to rapid and significant technological change. Many ofthe drugs that we are attempting to discover will be competing with existingtherapies. In addition, a number of companies are pursuing the development ofpharmaceuticals that target the same diseases and conditions that we aretargeting. We face competition from pharmaceutical and biotechnology companiesboth in the United States and abroad.

 

Our competitors may utilize discovery technologies and techniques orpartner with collaborators in order to develop products more rapidly orsuccessfully than we, or our collaborators, are able to do. Many of ourcompetitors, particularly large pharmaceutical companies, have substantiallygreater financial, technical and human resources than we do. In addition,academic institutions, government agencies and other public and privateorganizations conducting research may seek patent protection with respect topotentially competitive products or technologies and may establish exclusivecollaborative or licensing relationships with our competitors.

 

We believe that our ability to compete is dependent, in part, upon ourability to create, maintain and license scientifically-advanced technology andupon our and our collaborators’ ability to develop and commercializepharmaceutical products based on this technology, as well as our ability toattract and retain qualified personnel, obtain patent protection or otherwisedevelop proprietary technology or processes and secure sufficient capitalresources for the expected substantial time period between technologicalconception and commercial sales of products based upon our technology. Thefailure by any of our collaborators or us in any of those areas may prevent thesuccessful commercialization of our potential drug targets.

 

Our competitors might develop technologies and drugs that are moreeffective or less costly than any that are being developed by us or that wouldrender our technology and potential drugs obsolete and noncompetitive. Inaddition, our competitors may succeed in obtaining the approval of the FDA orother regulatory agencies for product candidates more rapidly. Companies that completeclinical trials, obtain required regulatory agency approvals and commencecommercial sale of their drugs before their competitors may achieve asignificant competitive advantage, including certain patent and FDA marketingexclusivity rights that would delay or prevent our ability to market certainproducts. Any drugs resulting from our research and development efforts, orfrom our joint efforts with our existing or future collaborative partners,might not be able to compete successfully with competitors’ existing or futureproducts or obtain regulatory approval in the United States or elsewhere.

 

27

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**Ourability to generate revenues will be diminished if our collaborative partnersfail to obtain acceptable prices or an adequate level of reimbursement forproducts from third-party payors or government agencies.**

** **

The drugs we hope to develop may be rejected by the marketplace due tomany factors, including cost. Our ability to commercially exploit a drug may belimited due to the continuing efforts of government and third-party payors tocontain or reduce the costs of health care through various means. For example,in some foreign markets, pricing and profitability of prescriptionpharmaceuticals are subject to government control. In the United States, weexpect that there will continue to be a number of federal and state proposalsto implement similar government control. In addition, increasing emphasis onmanaged care in the United States will likely continue to put pressure on thepricing of pharmaceutical products. Cost control initiatives could decrease theprice that any of our collaborators would receive for any products in thefuture. Further, cost control initiatives could adversely affect our collaborators’ability to commercialize our products and our ability to realize royalties fromthis commercialization.

 

Our ability to commercialize pharmaceutical products with collaboratorsmay depend, in part, on the extent to which reimbursement for the products willbe available from:

 

·                  governmentand health administration authorities;

 

·                  privatehealth insurers; and

 

·                  otherthird-party payors.

 

Significant uncertainty exists as to the reimbursement status ofnewly-approved healthcare products. Third-party payors, including Medicare, arechallenging the prices charged for medical products and services. Governmentand other third-party payors increasingly are attempting to contain healthcarecosts by limiting both coverage and the level of reimbursement for new drugsand by refusing, in some cases, to provide coverage for uses of approvedproducts for disease indications for which the FDA has not granted labelingapproval. Third-party insurance coverage may not be available to patients forany products we discover and develop, alone or with collaborators. Ifgovernment and other third-party payors do not provide adequate coverage andreimbursement levels for our products, the market acceptance of these productsmay be reduced.

 

**Ifproduct liability lawsuits are successfully brought against us, we may incursubstantial liabilities and may be required to limit commercialization of ourproducts.**

** **

The testing and marketing of medical products entail an inherent riskof product liability. If we cannot successfully defend ourselves againstproduct liability claims, we may incur substantial liabilities or be requiredto limit commercialization of our products although we are not currently awareof any specific causes for concern with respect to clinical liability claims.We currently do not have product liability insurance, and our inability toobtain sufficient product liability insurance at an acceptable cost to protectagainst potential product liability claims could prevent or inhibit thecommercialization of pharmaceutical products we develop, alone or withcorporate collaborators. We, or our corporate collaborators, might not be ableto obtain insurance at a reasonable cost, if at all. While under variouscircumstances we are entitled to be indemnified against losses by our corporatecollaborators, indemnification may not be available or adequate should anyclaim arise.

 

**Ourresearch and development efforts will be seriously jeopardized, if we areunable to attract and retain key employees and relationships.**

** **

As a small company with only 168 employees as of March 31, 2008,our success depends on the continued contributions of our principal managementand scientific personnel and on our ability to develop and maintain importantrelationships with leading academic institutions, scientists and companies inthe face of intense competition for such personnel. In particular, our researchprograms depend on our ability to attract and retain highly skilled chemists,other scientists, and development, regulatory and clinical personnel. If welose the services of any of our 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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**Wedepend on various scientific consultants and advisors for the success andcontinuation of our research and development efforts.**

** **

We work extensively with various scientific consultants and advisors.The potential success of our drug discovery and development programs depends,in part, on continued collaborations with certain of these consultants andadvisors. We, and various members of our management and research staff, rely oncertain of these consultants and advisors for expertise in our research, regulatoryand clinical efforts. Our scientific advisors are not our employees and mayhave commitments to, or consulting or advisory contracts with, other entitiesthat may limit their availability to us. We do not know if we will be able tomaintain such consulting agreements or that such scientific advisors will notenter into consulting arrangements, exclusive or otherwise, with competingpharmaceutical or biotechnology companies, any of which would have adetrimental impact on our research objectives and could have a material adverseeffect on our business, financial condition and results of operations.

 

**If weuse biological and hazardous materials in a manner that causes injury orviolates laws, we may be liable for damages.**

** **

Our research and development activities involve the controlled use ofpotentially harmful biological materials as well as hazardous materials,chemicals and various radioactive compounds. We cannot completely eliminate therisk of accidental contamination or injury from the use, storage, handling ordisposal of these materials. In the event of contamination or injury, we couldbe held liable for damages that result, and such liability could exceed ourresources. We are also subject to federal, state and local laws and regulationsgoverning the use, storage, handling and disposal of these materials andspecified waste products. The cost of compliance with, or any potentialviolation of, these laws and regulations could be significant.

 

**Ourfacilities are located near known earthquake fault zones, and the occurrence ofan earthquake or other catastrophic disaster could cause damage to ourfacilities and equipment, which could require us to cease or curtailoperations.**

** **

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

 

**Futureinterest income and value of our investments may be impacted by further declinesin interest rates and broader effect of the recent disruption of creditmarkets.**

** **

While we are conservative in our investment policies and invest only infixed income securities, the interest paid on this type of investment and thevalue of certain securities may decline in the future as credit markets adjustto the mortgage crisis.

 

**Ourstock price may be volatile, and our stockholders’ investment in our stockcould decline in value.**

** **

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

 

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

 

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

 

·                  sellingby large stockholders;

 

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

 

·                  developmentsconcerning proprietary rights, including patents;

 

29

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·                  developmentsconcerning our collaborations;

 

·                  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.

 

**Futureequity issuances or a sale of a substantial number of shares of our commonstock may cause the price of our common stock to decline.**

** **

Because we may need to raise additional capital in the future tocontinue to expand our business and our research and development activities,among other things, we may conduct additional equity offerings. If we or ourstockholders sell substantial amounts of our common stock (including sharesissued upon the exercise of options and warrants) in the public market, themarket price of our common stock could fall. A decline in the market price ofour common stock could make it more difficult for us to sell equity orequity-related securities in the future at a time and price that we deemappropriate.

 

**Anti-takeoverprovisions in our charter documents and under Delaware law may make anacquisition of us, which may be beneficial to our stockholders, more difficult.**

** **

Provisions of our amended and restated certificate of incorporation andbylaws, as well as provisions of Delaware law, could make it more difficult fora third party to acquire 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 203 of the Delaware General Corporation Law,which imposes certain restrictions relating to transactions with majorstockholders, may discourage, delay or prevent a third party from acquiring us.

 

30

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

 

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

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                             |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                              |
| 3.1                 |       | Amended and Restated Certificate of Incorporation.  (1)                                                                                                                                           |
|                |       |                                                                                                                                                                                              |
| 3.2                 |       | Amended and Restated Bylaws. (2)                                                                                                                                                                  |
|                |       |                                                                                                                                                                                              |
| 4.1                 |       | Form of warrant to purchase shares of common  stock. (3)                                                                                                                                     |
|                |       |                                                                                                                                                                                              |
| 4.2                 |       | 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)                                                                                                                |
|                |       |                                                                                                                                                                                              |
| 10.24               |       | 2007 Bonus Payouts for Named Executive Officers (8)                                                                                                                                               |
|                |       |                                                                                                                                                                                              |
| 10.25               |       | 2008 Cash Incentive Plan. (9)                                                                                                                                                                     |
|                |       |                                                                                                                                                                                              |
| 10.26               |       | 2000 Non-Employee Directors’ Stock Option Plan, as  amended. (10)                                                                                                                            |
|                |       |                                                                                                                                                                                              |
| 10.27               |       | 2008 Compensation Information for Executive  Officers.                                                                                                                                            |
|                |       |                                                                                                                                                                                              |
| 15.1                |       | Letter re: 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-Kfiled on June 24, 2003 and incorporated herein by reference.

 

(2)          Filed as anexhibit 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 RegistrationStatement on Form S-1 (No. 333-45864), as amended, and incorporatedherein by reference.

 

(4)          Filed as an exhibit to Rigel’s Quarterly Report on Form 10-Qfor 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 incorporatedherein 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 byreference.

 

(7)          Filed as anexhibit to Rigel’s Quarterly Report on Form 10-Q for the quarter ended September 30,2006 (No. 000-29889) and incorporated herein by reference.

 

(8)          Filed as an exhibit to Rigel’s CurrentReport on Form 8-K filed on February 14, 2008 and incorporated hereinby reference.

 

(9)          Filed as an exhibit to Rigel’s Current Report on Form 8-Kfiled on February 26, 2008 and incorporated herein by reference.

 

(10)    Filed as an exhibit to Rigel’s Annual Report on Form 10-Kfiled on March 7, 2008 and incorporated herein by reference.

 

31

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**SIGNATURES**

** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | RIGEL PHARMACEUTICALS, INC. |
|--------|-----------------------------|
|   |                        |   |
|   | By:                         | /s/ JAMES M. GOWER |
|   |                        | James M. Gower |
|   |                        | Chief Executive Officer |
|   |                        | (Principal Executive Officer) |
|   |                        |   |
|   | Date: May 6, 2008      |
|   |                        |   |
|   | By:                         | /s/ RYAN D. MAYNARD |
|   |                        | Ryan D. Maynard |
|   |                        | Vice President and Chief Financial Officer |
|   |                        | (Principal Financial and Accounting Officer) |
|   |                        |   |
|   | Date: May 6, 2008      |

 

32

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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)                                                                                                                |
|                |       |                                                                                                                                                                                              |
| 10.24               |       | 2007 Bonus Payouts for Named Executive Officers (8)                                                                                                                                               |
|                |       |                                                                                                                                                                                              |
| 10.25               |       | 2008 Cash Incentive Plan. (9)                                                                                                                                                                     |
|                |       |                                                                                                                                                                                              |
| 10.26               |       | 2000 Non-Employee Directors’ Stock Option Plan, as  amended. (10)                                                                                                                            |
|                |       |                                                                                                                                                                                              |
| 10.27               |       | 2008 Compensation Information for Executive  Officers.                                                                                                                                            |
|                |       |                                                                                                                                                                                              |
| 15.1                |       | Letter re: 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-Kfiled on June 24, 2003 and incorporated herein by reference.

 

(3)          Filed as anexhibit 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 RegistrationStatement on Form S-1 (No. 333-45864), as amended, and incorporatedherein by reference.

 

(4)          Filed as an exhibit to Rigel’s Quarterly Report on Form 10-Qfor 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 incorporatedherein 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 byreference.

 

(7)          Filed as anexhibit to Rigel’s Quarterly Report on Form 10-Q for the quarter ended September 30,2006 (No. 000-29889) and incorporated herein by reference.

 

(8)          Filed as an exhibit to Rigel’s CurrentReport on Form 8-K filed on February 14, 2008 and incorporated hereinby reference.

 

(9)          Filed as an exhibit to Rigel’s Current Report on Form 8-Kfiled on February 26, 2008 and incorporated herein by reference.

 

(10)    Filed as an exhibit to Rigel’s Annual Report on Form 10-Kfiled on March 7, 2008 and incorporated herein by reference.

 

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