**Tableof Contents**

** **

** **

** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

----

 

**FORM 10-Q**

 
| **x**                                            | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                       |
| **FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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**

 

----

 

**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

 

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

 

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

 

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

 

As of July 30, 2008, there were 36,579,874shares of the registrant’s common stock outstanding.

 

 

 

----

**Table of Contents**

** **

**RIGELPHARMACEUTICALS, INC.**QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

** **

**INDEX**

** **
| ** **       | ** **                                                                                                    | **Page** |
|------------------|---------------------------------------------------------------------------------------------------------------|----------|
| **PART I**  | **FINANCIAL INFORMATION**                                                                                     | 3        |
| **Item 1.**      | Condensed Financial Statements                                                                                | 3        |
|             | Condensed  Balance Sheets — June 30, 2008 (Unaudited) and December 31, 2007                    | 3        |
|             | Condensed  Statements of Operations (Unaudited) —three and six months ended  June 30, 2008 and 2007 | 4        |
|             | Condensed  Statements of Cash Flows (Unaudited) — six months ended June 30, 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       |
| **Item 4T.**     | Controls and  Procedures                                                                                      | 21       |
| **PART II** | **OTHER INFORMATION**                                                                                         | **21**   |
| **Item 1A.**     | Risk Factors                                                                                                  | 21       |
| **Item 4.**      | Submission  of Matters to a Vote of Security Holders                                                          | 31       |
| **Item  6.**     | Exhibits                                                                                                      | 31       |
|             |                                                                                                          |     |
| **Signatures**   | ** **                                                                                                    | **33**   |

 

2

----

Table of Contents

** **

**PART I  FINANCIAL INFORMATION**

 

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

 

**RIGELPHARMACEUTICALS, INC.**

**CONDENSED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                                              | ** ** | **June 30** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2008**         | ** ** | **2007 (1)**     | ** ** |
| ** **                                                                                                                                                                              | ** ** | **(unaudited)**  | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                              |       |             |       |                  |       |
| Current assets:                                                                                                                                                                         |       |             |       |                  |       |
| Cash and cash equivalents                                                                                                                                                               |       | $                | 49,057     |                  | $          | 44,503 |   |
| Available-for-sale securities                                                                                                                                                           |       | 135,944          |       | 63,793                |       |
| Prepaid expenses and other current assets                                                                                                                                               |       | 4,573            |       | 2,834                 |       |
| Total current assets                                                                                                                                                                    |       | 189,574          |       | 111,130               |       |
|                                                                                                                                                                                    |       |             |       |                  |       |
| Property and equipment, net                                                                                                                                                             |       | 3,081            |       | 2,560                 |       |
| Other assets                                                                                                                                                                            |       | 2,024            |       | 2,099                 |       |
|                                                                                                                                                                                    |       | $                | 194,679    |                  | $          | 115,789 |   |
|                                                                                                                                                                                    |       |             |       |                  |       |
| **Liabilities and stockholders’ equity**                                                                                                                                           |       |             |       |                  |       |
| Current liabilities:                                                                                                                                                                    |       |             |       |                  |       |
| Accounts payable                                                                                                                                                                        |       | $                | 3,020      |                  | $          | 4,320 |   |
| Accrued compensation                                                                                                                                                                    |       | 3,472            |       | 8,133                 |       |
| Other accrued liabilities                                                                                                                                                               |       | 6,947            |       | 2,031                 |       |
| Short-term portion of deferred rent                                                                                                                                                     |       | 1,905            |       | 638                   |       |
| Short term portion of capital lease obligations                                                                                                                                         |       | 1,020            |       | 990                   |       |
| Total current liabilities                                                                                                                                                               |       | 16,364           |       | 16,112                |       |
|                                                                                                                                                                                    |       |             |       |                  |       |
| Long-term portion of capital lease obligations                                                                                                                                          |       | 989              |       | 784                   |       |
| Long-term portion of deferred rent                                                                                                                                                      |       | 14,917           |       | 16,486                |       |
| Other long-term liabilities                                                                                                                                                             |       | 202              |       | 225                   |       |
|                                                                                                                                                                                    |       |             |       |                  |       |
| Commitments and contingencies                                                                                                                                                           |       |             |       |                  |       |
|                                                                                                                                                                                    |       |             |       |                  |       |
| Stockholders’ equity:                                                                                                                                                              |       |             |       |                  |       |
| Common stock, $0.001 par value; 100,000,000 shares authorized; 36,569,353  and31,381,774  shares issued and outstanding on June 30, 2008 and December 31,  2007, respectively |       | 37               |       | 31                    |       |
| Additional paid-in capital                                                                                                                                                              |       | 592,870          |       | 451,384               |       |
| Accumulated other comprehensive income                                                                                                                                                  |       | 22               |       | 198                   |       |
| Accumulated deficit                                                                                                                                                                     |       | (430,722         | )          | (369,431              | )          |
| Total stockholders’ equity                                                                                                                                                         |       | 162,207          |       | 82,182                |       |
|                                                                                                                                                                                    |       | $                | 194,679    |                  | $          | 115,789 |   |

 

----

(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

----

Table of Contents

 

**RIGEL PHARMACEUTICALS, INC.**

**CONDENSED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                                                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Contract revenues                                                                     |       | $                                                   | —     |                                              | $          | 1,956 |   | $ | — |   | $ | 4,600 |   |
| Costs and expenses:                                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Research and development                                                              |       | 28,416                                              |       | 17,189                                            |       | 50,036 |   | 33,032 |   |
| General and administrative                                                            |       | 6,861                                               |       | 5,373                                             |       | 13,986 |   | 10,412 |   |
|                                                                                  |       | 35,277                                              |       | 22,562                                            |       | 64,022 |   | 43,444 |   |
|                                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Loss from operations                                                                  |       | (35,277                                             | )          | (20,606                                           | )          | (64,022 | ) | (38,844 | ) |
| Interest income                                                                       |       | 1,289                                               |       | 1,419                                             |       | 2,819 |   | 2,634 |   |
| Interest expense                                                                      |       | (41                                                 | )          | (58                                               | )          | (88 | ) | (116 | ) |
| Net loss                                                                              |       | $                                                   | (34,029    | )                                                 | (19,245    | ) | $ | (61,291 | ) | (36,326 | ) |
| Net loss per share, basic and diluted                                                 |       | $                                                   | (0.93      | )                                                 | $          | (0.68 | ) | $ | (1.73 | ) | $ | (1.36 | ) |
| Weighted average shares used in computingnet loss per common share, basic and diluted |       | 36,505                                              |       | 28,355                                            |       | 35,461 |   | 26,779 |   |

 

See accompanying notes.

 

4

----

Table ofContents

 

**RIGEL PHARMACEUTICALS, INC.**

**STATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended  June 30** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                     | ** ** | **2007** | ** ** |
| **Operating activities**                                                     |       |                                         |       |   |   |
| Net loss                                                                     |       | $                                            | (61,291    | ) | $ | (36,326 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |       |                                         |       |   |   |
| Depreciation and amortization                                                |       | 710                                          |       | 674 |   |
| Stock-based compensation expense                                             |       | 11,765                                       |       | 6,327 |   |
| Changes in assets and liabilities:                                           |       |                                         |       |   |   |
| Prepaid expenses and other current assets                                    |       | (1,739                                       | )          | 953 |   |
| Other assets                                                                 |       | 75                                           |       | 76 |   |
| Accounts payable                                                             |       | (1,300                                       | )          | 409 |   |
| Accrued compensation                                                         |       | (4,661                                       | )          | (960 | ) |
| Other accrued liabilities                                                    |       | 4,916                                        |       | (141 | ) |
| Deferred revenue                                                             |       | —                                       |       | (3,066 | ) |
| Deferred rent and other long-term liabilities                                |       | (325                                         | )          | 1,800 |   |
| Net cash used in operating activities                                        |       | (51,850                                      | )          | (30,254 | ) |
| **Investing activities**                                                     |       |                                         |       |   |   |
| Purchases of available-for-sale securities                                   |       | (139,539                                     | )          | (60,015 | ) |
| Maturities of available-for-sale securities                                  |       | 67,212                                       |       | 56,770 |   |
| Capital expenditures                                                         |       | (1,231                                       | )          | (645 | ) |
| Net cash used in investing activities                                        |       | (73,558                                      | )          | (3,890 | ) |
| **Financing activities**                                                     |       |                                         |       |   |   |
| Proceeds from capital lease financings                                       |       | 829                                          |       | 640 |   |
| Payments on capital lease obligations                                        |       | (594                                         | )          | (794 | ) |
| Net proceeds from issuances of common stock                                  |       | 129,727                                      |       | 52,994 |   |
| Net cash provided by financing activities                                    |       | 129,962                                      |       | 52,840 |   |
| Net increase in cash and cash equivalents                                    |       | 4,554                                        |       | 18,696 |   |
| Cash and cash equivalents at beginning of period                             |       | 44,503                                       |       | 47,727 |   |
| Cash and cash equivalents at end of period                                   |       | $                                            | 49,057     |   | $ | 66,423 |   |

 

See accompanying notes.

 

5

----

**Table of Contents**

** **

**Rigel Pharmaceuticals, Inc.**

**Notes to Condensed Financial Statements**

**(unaudited)**

** **

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

 

**1.****        ****Natureof Operations**

 

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

 

**2.****        ****Basisof 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 completefinancial statements are not included herein, these unaudited interim condensedfinancial statements and the notes accompanying them should be read inconjunction with our audited financial statements and the notes theretoincluded in our Annual Report on Form 10-K for the year ended December 31,2007.

 

The preparation of financial statements inconformity with U.S. generally accepted accounting principles requires managementto make estimates and assumptions that affect the amounts reported in thefinancial 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 intoduring fiscal years beginning after December 15, 2007, including interimperiods within those fiscal years. We adopted EITF 07-3 in the first quarter of2008.  There was no material impact onour financial statements upon adoption.

 

In September 2006, the FASB issued Statement of FinancialAccounting Standards, or SFAS No. 157, “Fair Value Measurements.” Thisstandard defines fair value, establishes a framework for measuring fair valueunder generally accepted accounting principles, and expands disclosures aboutfair value measurements. SFAS No.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 No. 157 fornon-financial assets and non-financial liabilities that are not recognized ordisclosed at fair value on a recurring basis until fiscal years beginning afterNovember 15, 2008.  We adoptedSFAS No. 157 with regard to all financial assets and liabilities inour financial statements in the first quarter of 2008 and have elected to delaythe adoption of SFAS No. 157 for non-financial assets and non-financialliabilities until the first quarter of 2009. For further discussion of SFAS No. 157, see Note 8 to the CondensedFinancial Statements.

 

6

----

Table of Contents

 

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.” SFAS No. 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value. Entities that elect the fair value option will reportunrealized gains and losses in earnings at each subsequent reporting date. Thefair value option may be elected on an instrument-by-instrument basis, with fewexceptions. SFAS No. 159 also establishes presentation and disclosurerequirements to facilitate comparisons between companies that choose differentmeasurement attributes for similar assets and liabilities. SFAS No. 159is effective for fiscal years beginning after November 15, 2007. Weelected not to adopt the fair value option of SFAS No. 159 at this time.

 

**4.****        ****Basicand Diluted Net Loss Per Share**

 

Basic and diluted net loss per share were computedby dividing the net loss for the period by the weighted average number ofshares of common stock outstanding during the period. The calculation ofdiluted net loss per share excluded shares of potential common stock,consisting of stock options and warrants, because their effect would have beenanti-dilutive.

 

**5.****        ****StockAward Plans**

 

Total stock-based compensation expense related toall of our share-based awards that we recognized for the three and six monthsended June 30, 2008 and 2007 was comprised as follows (in thousands):

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                             | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                             | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Research and development               |       | $                                | 3,102      |                           | $          | 1,718 |   | $ | 6,194 |   | $ | 2,918 |   |
| General and administrative             |       | 2,817                            |       | 1,987                          |       | 5,571 |   | 3,409 |   |
| Total stock-based compensation expense |       | $                                | 5,919      |                           | $          | 3,705 |   | $ | 11,765 |   | $ | 6,327 |   |

 

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. We also considered other factors, such as implied volatility, our currentclinical trials and other company activities that may affect the volatility ofour stock in the future, but determined that at this time historical volatilityis more indicative of our expected future stock performance.

 

·                  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 succeedingperiods.

 

7

----

Table ofContents

 

·                  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.

 

The following table summarizes the weighted-averageassumptions relating to options granted pursuant to our equity incentive plansfor the three and six months ended June 30, 2008 and 2007:

 
| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **               | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Risk-free interest rate  |       | 3.2                              | %          | 4.8                            | %          | 2.8 | % | 4.7 | % |
| Expected term (in years) |       | 4.5                              |       | 4.7                            |       | 4.6 |   | 4.1 |   |
| Dividend yield           |       | 0.0                              | %          | 0.0                            | %          | 0.0 | % | 0.0 | % |
| Expected volatility      |       | 91.3                             | %          | 81.6                           | %          | 93.1 | % | 79.5 | % |

 

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 1,447,765 shares ofcommon stock during the six months ended June 30, 2008, with a grant-dateweighted average fair value of $18.15 per share. We granted options to purchase989,317 shares of common stock during the six months ended June 30, 2007,with a grant-date weighted average fair value of $7.02 per share.  As of June 30, 2008, there was approximately$20.5 million of total unrecognized stock-based compensation cost, net ofestimated forfeitures, related to unvested options granted under our stockoption plans. At June 30, 2008, 4,535,491 shares of common stock wereavailable for future grant under our equity incentive 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 under which 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 offering period. This featureis called a “reset.” We had a “reset” on July 1, 2008 because the fairmarket value of our stock on June 30, 2008 was lower than the fair marketvalue of our stock on January 2, 2008, the first day of the offeringperiod.  Participants are automaticallyenrolled in the new offering.

 

Expected volatilities for our ESPP are based on thehistorical volatility of our stock. Expected term represents the weightedaverage of the purchase periods within the offering period. The risk-freeinterest rate for periods within the expected term is based on U.S. Treasuryconstant maturity rates. Stock-basedcompensation expense related 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 June 30,2008, there were approximately 1,472,085 shares reserved for future issuanceunder the ESPP. The following table summarizes the weighted-averageassumptions related to our ESPP for the six months ended June 30, 2008 and 2007:

 

| ** **               | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **June 30,**              | ** ** |
| ** **               | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| Risk-free interest rate  |       | 2.1                            | %          | 5.1 | % |
| Expected term (in years) |       | 1.2                            |       | 0.7 |   |
| Dividend yield           |       | 0.0                            | %          | 0.0 | % |
| Expected volatility      |       | 99.0                           | %          | 43.5 | % |

 

8

----

Table ofContents

 

**6.****        ****RevenueRecognition**

 

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 in connection with research and developmentcollaboration agreements, including technology access fees, are deferred andrecognized on a straight-line basis over the relevant periods of continuinginvolvement, generally the research term. When a research term is notspecified, we estimate the time it will take us to complete our deliverablesunder the contract and recognize the upfront fee using the straight-line methodover that time period. We review our estimates every quarter forreasonableness.

 

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 the headcountdedicated to the project for the quarter. When the research portion of thecollaboration ended in May 2007, we recognized the full amount of thedeferred revenue related to the contract because we had no further obligations.It is our policy to recognize revenue based on our level of effort expended,and that revenue recognized will not exceed amounts billable under thearrangement.

 

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-SaleSecurities**

 

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

 
| ** **                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Checking account                           |       | $                 | 529        |                  | $          | 425 |   |
| Money market funds                         |       | 5,562             |       | 15,051                |       |
| Government-sponsored enterprise securities |       | 114,056           |       | 38,262                |       |
| Corporate bonds and commercial paper       |       | 64,854            |       | 54,558                |       |
|                                       |       | $                 | 185,001    |                  | $          | 108,296 |   |
| Reported as:                               |       |              |       |                  |       |
| Cash and cash equivalents                  |       | $                 | 49,057     |                  | $          | 44,503 |   |
| Available-for-sale securities              |       | 135,944           |       | 63,793                |       |
|                                       |       | $                 | 185,001    |                  | $          | 108,296 |   |

 

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

 
| ** **                                 | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|--------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                                 | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **          | ** ** |
| **June 30, 2008**                | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| Government-sponsored enterprise securities |       | $             | 114,132    |           | $          | 25             |       | $                   | (101       | ) | $ | 114,056 |   |
| Corporate bonds and commercial paper       |       | 64,756        |       | 109            |       | (11            | )          | 64,854              |       |
|                                       |       |          |       |           |       |           |       |                |       |
| Total                                      |       | $             | 178,888    |           | $          | 134            |       | $                   | (112       | ) | $ | 178,910 |   |

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

 

*Available-for-sale Securities. *At June 30, 2008, the above available-for-salesecurities had a weighted average maturity of approximately 174 days.

 

9

----

Table ofContents

 

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

 

In September 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, clarifies thedefinition of “fair value” within that framework, and expands disclosures aboutthe use of fair value measurements.  Weadopted SFAS 157 in the first quarter of 2008 with regard to all financialassets and liabilities in our financial statements going forward, and,consistent with FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157,”we have elected to delay the adoption of SFAS 157 for non-financial assets andliabilities until the first quarter of 2009. See below for a furtherdiscussion. The adoption of SFAS 157 had no material impact on our financialstatements.

 

Fair value is defined as the price at which an assetcould be exchanged or a liability transferred (an exit price) in an orderlytransaction between knowledgeable, willing parties in the principal or mostadvantageous market for the asset or liability. Where available, fair value isbased on observable market prices or parameters or derived from such prices orparameters. Where observable prices or inputs are not available, valuationmodels are applied.

 

Financial assets recorded at fair value in theCondensed Financial Statements are categorized based upon the level of judgmentassociated with the inputs used to measure their fair value. Hierarchicallevels, defined by SFAS 157 and directly related to the amount of subjectivityassociated with the inputs to fair valuation of these assets and liabilities,are as follows:

 

Level 1 — Inputs areunadjusted, quoted prices in active markets for identical assets at thereporting date.  Active markets are thosein which transactions for the asset or liability occur in sufficient frequencyand volume to provide pricing information on an ongoing basis.

 

The fair valued assets wehold that are generally included in this category are money market securitieswhere fair value is based on publicly quoted prices.

 

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

 

The fair valued assets wehold that are generally included in this category are government sponsoredenterprise securities, U.S. Treasury securities, corporate bonds and commercialpaper where fair value is based on valuation methodologies such as models usingobservable market inputs, such as benchmark yields, reported trades,broker/dealer quotes, bids, offers and other reference data.

 

Level 3 — Unobservableinputs that are supported by little or no market activity and that aresignificant to the fair value of the assets or liabilities and which reflectmanagement’s best estimate of what market participants would use in pricing theasset or liability at the reporting date. Consideration is given to the riskinherent in the valuation technique and the risk inherent in the inputs to themodel.

 

We carry no investmentsclassified as Level 3.

 

10

----

Tableof Contents

 

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

 

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

 
| ** **                                 | ** ** | **Assets at Fair Value as of June 30, 2008** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **June 30, 2008**                | ** ** | **Level 1**                                                                     | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Money market funds                         |       | $                                                                                    | 5,562      |   | $ | — |   | $ | — |   | $ | 5,562 |   |
| Government-sponsored enterprise securities |       | —                                                                               |       | 114,056 |   | — |   | 114,056 |   |
| Corporate bonds and commercial paper       |       | —                                                                               |       | 64,854 |   | — |   | 64,854 |   |
|                                       |       |                                                                                 |       |   |   |   |   |   |   |
| Total                                      |       | $                                                                                    | 5,562      |   | $ | 178,910 |   | $ | — |   | $ | 184,472 |   |

 

**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. During the six months ended June 30,2008, we drew down approximately $829,000, which is included in our capitallease obligation on our balance sheet. Approximately $671,000 remainedavailable under the equipment lease line as of June 30, 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

----

Tableof Contents

 

**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 June 30,2008, and the related condensed statements of operations for the three andsix-month periods ended June 30, 2008 and 2007, and the condensedstatements of cash flows for the six-month periods ended June 30, 2008 and2007. These financial statements are the responsibility of the Company’smanagement.

 

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

 

Based on our review, weare not aware of any material modifications that should be made to thecondensed interim financial statements referred to above for them to be inconformity with U.S. generally accepted accounting principles.

 

We have previously audited,in accordance with the standards of the Public Company Accounting OversightBoard (United States), the balance sheet of Rigel Pharmaceuticals, Inc. asof 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 financialstatements.  In our opinion, theinformation set forth in the accompanying condensed balance sheet as of December 31,2007, is fairly stated, in all material respects, in relation to the balancesheet from which it has been derived.

 
|                   |   | /s/  Ernst & Young LLP |
|------------------------|--------|---------------------------------|
| Palo Alto,  California |   |                            |
| August 1,  2008   |   |                            |

 

12

----

Table of Contents

 

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

 

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

 

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

 

**Overview**

 

Weare a clinical-stage drug development company that discovers and developsnovel, small-molecule drugs for the treatment of inflammatory/autoimmunediseases and cancer, as well as viral and metabolic diseases. Our goal is tofile one new investigational new drug, or IND, application in a significantindication each year.  We have achievedthis goal every year since 2002. Our pioneering research focuses onintracellular signaling pathways and related targets that are critical todisease mechanisms. Our productivity has resulted in strategic collaborationswith large pharmaceutical partners to develop and market our productcandidates. We have product development programs in inflammatory/autoimmunediseases such as rheumatoid arthritis, thrombocytopenia and asthma, as well asin cancer.

 

 Wehave multiple product candidates in development as follows:

 

·                  *R788(fostamatinib disodium)—Product Candidate for Rheumatoid Arthritis (RA). *R788is our lead product candidate. It has a novel mechanism of action, inhibitingIgG receptor signaling in macrophages and B-cells.

 

In December 2007, we announced the results of a Phase 2 clinicaltrial of R788 in RA patients simultaneously receiving methotrexate, which foundthat doses of 100 mg bid and 150 mg bid produced statistically significantimprovement in RA symptoms. The most common clinically meaningful adverseevents noted in the clinical trial included dose-related neutropenia, mild elevationsof liver function tests and gastrointestinal side effects. Dose reduction (toone-half the assigned dose by taking the drug once per day) was pre-specifiedin the protocol and contingent on neutrophil counts and/or liver functiontests.  Notably, a vast majority of thepatients who had their doses reduced successfully completed the clinical trialwith minimal safety issues.

 

In June 2008, we announced the commencement of two concurrentPhase 2b clinical trials of R788 in RA patients at a number of clinicalresearch centers throughout the United States, Latin America, and Europe toevaluate the efficacy of R788 compared to placebo in distinct RA patientgroups.  The first new Phase 2b clinicaltrial (TASKi 2) is evaluating RA patients receiving 100 mg of R788 PO bid(orally, twice daily) or 150 mg of R788 PO qd (orally, once daily), comparedwith those receiving placebo in a multi-center, randomized, double blind,placebo controlled, parallel dose study of R788 in patients who have failed torespond to methotrexate. The second Phase 2b clinical trial (TASKi 3) isevaluating a group of RA patients receiving 100 mg of R788 PO bid compared witha group receiving placebo in a multi-center, randomized, double blind, placebocontrolled, parallel dose study of R788 in patients who have failed at leastone marketed biologic agent. The class of biologic agents generally includesanti-tumor necrosis factor injectables commonly used to treat RA, but couldinclude other therapies as well. The primary 

 

13

----

Tableof Contents

 

objectives of both TASKi 2 and TASKi 3 are to measure the efficacy ofR788 as determined by ACR20 scores (American College of Rheumatology responderrates showing a minimum of 20% improvement in RA symptoms and pain) at 6 monthsand 3 months, respectively. Secondary objectives will include comparing higherACR response rates (ACR 50 and ACR 70) and DAS28 (Disease Activity Scoreincluding a 28-joint inspection) rates, in addition to evaluating varioussafety measures. TASKi 3 will also include measurement of changes in bonemorphology using MRI scans.  Results ofthe clinical trials are expected to be available in late 2009.

 

·                  *R788—ProductCandidate for Immune Thombocytopenic Purpura (ITP). *Plateletdestruction from ITP is mediated by IgG signaling, and R788 is a potentinhibitor of IgG signaling. In preclinical studies, R788 was shown to improvethrombocytopenia in an ITP mouse model. We recently completed an exploratoryPhase 2 clinical trial of R788 to evaluate its safety and initial efficacyin chronic ITP patients. In this clinical trial, R788 was orally administeredin varying doses for 30 or more days and demonstrated that it can improveplatelet counts in highly refractory patients. We anticipate expanding theoriginal clinical trial to include more clinical research centers and patientsof a less refractory nature.

 

·                  *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 June 2008, we reported preliminary results of a Phase 2 clinical trialof R788 in patients with relapsed or refractory B-cell non-Hodgkin’s lymphomas(NHL).  We reported favorable responsesfor patients suffering from small lymphocytic lymphoma/chronic lymphocyticleukemia (SLL/CLL) or from diffuse large B-cell lymphoma (DLBCL), particularlyin view of the advanced and refractory stage of the disease in the treatedpatients.

 

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

 

·                  *R348—ProductCandidate 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 autoimmunediseases. We completed the first Phase 1 clinical trial and expect to begin enrollingpatients in a subsequent Phase 1 clinical trial, in which a two-week dosingregimen and a three-week dosing regimen will be administered using a specifieddose.

 

·                  *R763—ProductCandidate 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 evaluateR763/AS703569 for the treatment of patients with refractory solid tumors. In February 2007,Merck Serono began an additional Phase 1 clinical trial evaluatingR763/AS703569 on patients with hematological malignancies. In July 2007,Merck Serono initiated its third Phase 1 clinical trial, designed todetermine the maximum tolerated dose, safety and dosing regimen ofR763/AS703569 in combination with gemcitabine, a commonly prescribedchemotherapeutic agent administered by intravenous infusion. The clinical trialis evaluating two different treatment regimens in which R763/AS703569 is given insequence with gemcitabine over 21-day cycles. As many as 72 patients withadvanced malignancies, including pancreatic, ovarian, breast, non-small celllung and colorectal, will be evaluated.

 

·                  *R343—ProductCandidate for Asthma. *In the first quarter of 2005, we announced acollaborative research and license agreement with Pfizer for the development ofinhaled products for the treatment of allergic asthma and other respiratorydiseases, such as chronic obstructive pulmonary disease. The collaboration initiallyfocused on our preclinical small molecule compounds, which inhibit IgE receptorsignaling in respiratory tract mast cells by blocking Syk, a novel drug targetfor respiratory diseases. Mast cells play important roles in both early andlate phase allergic reactions, and Syk inhibitors could prevent both phases.

 

The collaboration is nowcentered on the development of R343. Pfizer has completed thePhase 1 clinical trial of an inhaled formulation of R343.  We expect that Pfizer will begin a Phase 1ballergen challenge trial at the beginning of 2009.

 

14

----

Tableof Contents

 

**Corporate Collaborations**

 

We conduct research and development programs independently and inconnection with our corporate collaborations. We currently have collaborationswith six major pharmaceutical/biotechnology companies. These collaborationsinclude a collaboration 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 Pharmaceuticals Co., Ltd., or Daiichi, relating to oncology;and a collaboration with Merck & Co., Inc., or Merck, alsorelating to oncology, a collaboration with Merck Serono, relating to our aurorakinase inhibitor program. None of these collaborations currently provides uswith regular research reimbursement. In all of these collaborations, if certainconditions are met, we are entitled to receive future milestone payments androyalties. We can not guarantee that these conditions will be met or thatresearch and development efforts will be successful. As a result, we may notreceive any further milestone payments or royalties under these agreements.

 

**Equity Financings**

 

During the first quarter of 2008, wecompleted an underwritten public offering in which we sold 5,000,000 shares ofour common stock at a price to the public of $27.00 per share. We received netproceeds of approximately $127.5 million after deducting underwritingdiscounts and commissions and offering expenses.

 

**Recent Accounting Pronouncements**

 

On December 12, 2007, the FinancialAccounting Standards Board, or FASB, ratified the consensus reached by theEmerging Issues Task Force, or EITF, on EITF Issue No. 07-1. “Accountingfor Collaborative Arrangements,” or EITF 07-1. EITF 07-1 definescollaborative arrangements and establishes reporting requirements fortransactions between participants in a collaborative arrangement and betweenparticipants in the arrangement and third parties. EITF 07-1 is effectivefor financial statements issued for fiscal years beginning after December 15,2008. We are currently evaluating the impact of adopting EITF 07-1 on ourfinancial statements and cannot estimate the impact of adoption at this time.

 

On June 27, 2007, the FASB ratified theconsensus reached by the EITF on EITF Issue No. 07-3, “Accounting forAdvance Payments for Goods or Services to Be Used in Future Research andDevelopment Activities,” or EITF 07-3. EITF 07-3 requires companiesto defer and capitalize prepaid, nonrefundable research and developmentpayments to third parties, and amortize them over the period that the researchand development activities are performed or the services are provided, subjectto an assessment of recoverability. EITF 07-3 is effective for newcontracts entered into during fiscal years beginning after December 15,2007, including interim periods within those fiscal years. We adopted EITF 07-3in the first quarter of 2008.  There wasno material impact on our financial statements upon adoption.

 

In September 2006, the FASB issuedStatement of Financial Accounting Standards, or SFAS No. 157, “Fair ValueMeasurements.” This standard defines fair value, establishes a framework formeasuring fair value under generally accepted accounting principles, andexpands disclosures about fair value measurements. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007, except that under FASB Staff Position 157-2, “Effective Date of FASBStatement No. 157,” companies are allowed to delay the effective date ofSFAS No. 157 for non-financial assets and non-financial liabilitiesthat are not recognized or disclosed at fair value on a recurring basis untilfiscal years beginning after November 15, 2008.  We adopted SFAS No. 157 with regardto all financial assets and liabilities in our financial statements in thefirst quarter of 2008  and have electedto delay the adoption of SFAS No. 157 for non-financial assets andnon-financial liabilities until the first quarter of 2009.  For further discussion of SFAS No. 157,see Note 8 to the Condensed Financial Statements.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities—includingan amendment of FASB Statement No. 115.” SFAS No. 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value. Entities that elect the fair value option will reportunrealized gains and losses in earnings at each subsequent reporting date. Thefair value option may be elected on an instrument-by-instrument basis, with fewexceptions. SFAS No. 159 also establishes presentation and disclosurerequirements to facilitate comparisons between companies that choose differentmeasurement attributes for similar assets and liabilities. SFAS No. 159is effective for fiscal years beginning after November 15, 2007. Weelected not to adopt the fair value option of SFAS No. 159 at this time.

 

15

----

Tableof Contents

 

**Critical Accounting Policies and the Use of Estimates**

 

Our discussion and analysis of our financialcondition and results of operations is based upon our condensed financialstatements, which have been prepared in accordance with U.S generally acceptedaccounting principles for interim financial information. The preparation ofthese condensed financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. We evaluateour estimates, including those related to terms of the research collaborations(i.e. amortization of upfront fees and certain milestone payments),investments, stock compensation, impairment issues, the estimated useful lifeof assets and contingencies, on an on-going basis. We base our estimates onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. We believe that there wereno significant changes in our critical accounting policies during the quarterended June 30, 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 collaborationarrangements. Our revenue arrangements with multiple elements are evaluatedunder Emerging Issues Task Force No. 00-21, *“Revenue Arrangements with Multiple Deliverables,”* and aredivided into separate units of accounting if certain criteria are met,including whether the delivered element has stand-alone value to the customerand whether there is objective and reliable evidence of the fair value of anyundelivered items. The consideration we receive is allocated among the separateunits based on their respective fair values, and the applicable revenuerecognition criteria are applied to each of the separate units. Advancepayments received in excess of amounts earned are classified as deferredrevenue until earned.

 

Non-refundable, up-front payments received 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.

 

Revenue related to collaborative researchwith our corporate collaborators is recognized as research services areperformed over the related development 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. When the research portion of thecollaboration ended in May 2007, we recognized the full amount of thedeferred revenue related to the contract because we had no further obligationsunder the Merck collaboration. It is our policy to recognize revenue based onour level of effort expended, and that revenue recognized will not exceedamounts billable under the arrangement.

 

Revenues associated with at-risk milestonespursuant to collaborative agreements are recognized based upon the achievementof the milestones as set forth in the applicable agreement.

 

***Stock-based Compensation***

 

The determination of the fair value of share-basedpayment awards on the date of grant using the Black-Scholes option-pricingmodel is affected by our stock price as well as assumptions regarding a numberof complex and subjective variables. These variables include, but are notlimited to, volatility, expected term, risk-free interest rate and dividends.We estimate volatility using our historical share price performance over theexpected life of the option up to the point where we have historical marketdata. For expected term, among other things, we take into consideration ourhistorical data of options exercised, cancelled and expired. The risk-free rateis based on the U.S. Treasury constant maturity rate. We have not paid and donot expect to pay dividends. In order to calculate share-based expense, we alsoestimate the forfeiture rate using our historical experience with options thatcancel before they vest.

 

16

----

Table of Contents

 

If these factors change and we employ differentassumptions in the application of SFAS 123(R) in future periods, thecompensation expense that we record under SFAS 123(R) may differsignificantly from what we have recorded in the current period. Therefore, webelieve it is important to be aware of the high degree of subjectivity involvedwhen using option pricing models to estimate share-based compensation underSFAS 123(R).

 

**Resultsof Operations**

** **

**Three and Six Months Ended June 30, 2008 and 2007**

 

**Revenues**

 
| ** **              | ** ** | **Three months ended** | ** ** | ** ** | ** ** | **Six months ended** | ** ** | ** ** | ** ** |
|-------------------------|------------|----------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **              | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **June 30,**              | ** ** | ** ** | ** ** |
| ** **              | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Aggregate Change**      | ** ** | **2008**   | ** ** | **2007** | ** ** | **Aggregate Change** | ** ** |
| *** ***            |       | **(in thousands)**          |       |
| ***Contract revenues*** |       | $                                | —     |       | $          | 1,956                          |       | $          | (1,956     | ) | $ | — |   | $ | 4,600 |   | $ | (4,600 | ) |
|                         |            |                                  |            |            |            |                                |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Contract revenues by collaborator were:

 
| ** **   | ** ** | **Three months ended** | ** ** | ** ** | ** ** | **Six months ended** | ** ** | ** ** | ** ** |
|--------------|------------|----------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **   | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **June 30,**              | ** ** | ** ** | ** ** |
| ** **   | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Aggregate Change**      | ** ** | **2008**   | ** ** | **2007** | ** ** | **Aggregate Change** | ** ** |
| *** *** |       | **(in thousands)**          |       |
| ***Merck***  |       | $                                | —     |       | $          | 1,956                          |       | $          | (1,956     | ) | $ | — |   | $ | 3,841 |   | $ | (3,841 | ) |
| ***Pfizer*** |       | —                           |       | —     |       | —                         |       | —     |       | 759 |   | (759 | ) |
| ***Total***  |       | $                                | —     |       | $          | 1,956                          |       | $          | (1,956     | ) | $ | — |   | $ | 4,600 |   | $ | (4,600 | ) |

 

There were no contract revenues reported during thethree and six months ended June 30, 2008. Contract revenues fromcollaborations for the three months ended June 30, 2007 includedapproximately $0.5 million in full time equivalents, or FTE, revenue andapproximately $1.0 million from deferred FTE revenue due to the endingof the research phase of the Merck collaboration in May 2007.  Contractrevenues for the six months ended June 30, 2007 consisted of approximately$2.5 million in FTE revenue from Merck, approximately $1.3 million inamortization of license and milestone payments from Merck and approximately$0.8 million amortization of license payments from Pfizer. We had no deferredrevenue as of June 30, 2008. Our potential revenues for the remainder of2008 may include milestone payments from our current collaborations andrevenues from any potential new collaboration arrangement we may enter into infuture periods.

 

**Research and Development Expenses**

 
| ** **                                                                                 | ** ** | **Three months ended** | ** ** | ** ** | ** ** | **Six months ended** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **                                                                                 | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **June 30,**              | ** ** | ** ** | ** ** |
| ** **                                                                                 | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Aggregate Change**      | ** ** | **2008**   | ** ** | **2007** | ** ** | **Aggregate Change** | ** ** |
| ** **                                                                                 | ** ** | **(in thousands)**          | ** ** | ** ** | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ***Research and development expenses***                                                    |       | $                                | 28,416     |       | $          | 17,189                         |       | $          | 11,227     |   | $ | 50,036 |   | $ | 33,032 |   | $ | 17,004 |   |
| ***Stock-based compensation expense******included  in research and development expenses*** |       | 3,102                            |       | 1,718      |       | 1,384                          |       | 6,194      |       | 2,918 |   | 3,276 |   |
|                                                                                            |            |                                  |            |            |            |                                |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

The increase in research and development expensesfor the three and six months ended June 30, 2008, as compared to the sameperiods in 2007, was primarily due to an increase in clinical costs andstock-based compensation expense, as discussed under “Stock-Based Compensation”below.  The increase in clinical costswas attributable to increased costs associated with initiating and running our twoPhase 2b clinical trials of R788 in RA patients at clinical research centersthroughout the United States, Latin America, and Europe, and manufacturing R788 material to be usedin those clinical trials.  We expect ourresearch and development expenses to increase for the remainder of 2008 as wecontinue with these two Phase 2b clinical trials of R788 in RA, initiate ourPhase 2 trial of R788 in lupus and continue to manufacture R788 material to beused in these trials.

 

17

----

Table of Contents

 

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

 

**General and Administrative Expenses**

 
| ** **                                                                                   | ** ** | **Three months ended** | ** ** | ** ** | ** ** | **Six months ended** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **                                                                                   | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **June 30,**              | ** ** | ** ** | ** ** |
| ** **                                                                                   | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Aggregate Change**      | ** ** | **2008**   | ** ** | **2007** | ** ** | **Aggregate Change** | ** ** |
| *** ***                                                                                 |       | **(in thousands)**          |       |
| ***General and administrative expenses***                                                    |       | $                                | 6,861      |       | $          | 5,373                          |       | $          | 1,488      |   | $ | 13,986 |   | $ | 10,412 |   | $ | 3,574 |   |
| ***Stock-based compensation expense******included  in general and administrative expenses*** |       | $                                | 2,817      |       | $          | 1,987                          |       | $          | 830        |   | $ | 5,571 |   | $ | 3,409 |   | $ | 2,162 |   |

 

The increase in general and administrative expensesfor the three and six months ended June 30, 2008, as compared to the sameperiods in 2007, was primarily attributable to an increase in stock-based compensationexpense, as discussed under “Stock-Based Compensation” below, and increasedlegal costs associated with patent filings.

 

**Stock-Based Compensation**

 
| ** **                                     | ** ** | **Three months ended** | ** ** | ** ** | ** ** | **Six months ended** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **June 30,**              | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Aggregate Change**      | ** ** | **2008**   | ** ** | **2007** | ** ** | **Aggregate Change** | ** ** |
| ** **                                     |       | **(in thousands)**          |       |
| **Stock-based compensation****expense  from:** |       |                             |       |       |       |                           |       |       |       |   |   |   |   |
| ***Officer, director and employee options***   |       | $                                | 5,847      |       | $          | 3,656                          |       | $          | 2,191      |   | $ | 11,580 |   | $ | 6,272 |   | $ | 5,308 |   |
| ***Consultant options***                       |       | 72                               |       | 49         |       | 23                             |       | 185        |       | 55 |   | 130 |   |
| *** ***                                   |       |                             |       |       |       |                           |       |       |       |   |   |   |   |
| ***Total***                                    |       | $                                | 5,919      |       | $          | 3,705                          |       | $          | 2,214      |   | $ | 11,765 |   | $ | 6,327 |   | $ | 5,438 |   |

 

The increase in stock-based compensation expense forthe three and six months ended June 30, 2008, as compared to the sameperiods in 2007, was due to an increased valuation of options granted in January 2008attributable to our increased stock price and volatility, as well as anincreased number of shares subject to options granted in the six months ended June 30,2008 as compared to the same period in 2007.

 

**Interest Income**

 
| ** **            | ** ** | **Three months ended** | ** ** | ** ** | ** ** | **Six months ended** | ** ** | ** ** | ** ** |
|-----------------------|------------|----------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **            | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **June 30,**              | ** ** | ** ** | ** ** |
| ** **            | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Aggregate Change**      | ** ** | **2008**   | ** ** | **2007** | ** ** | **Aggregate Change** | ** ** |
| ** **            | ** ** | **(in thousands)**          | ** ** |
| ***Interest income*** |       | $                                | 1,289      |       | $          | 1,419                          |       | $          | (130       | ) | $ | 2,819 |   | $ | 2,634 |   | $ | 185 |   |
|                       |            |                                  |            |            |            |                                |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Interest income results from our interest-bearingcash and investment balances. The decrease in interest income for the threemonths ended June 30, 2008, as compared to the same period in 2007, wasdue to lower interest rates in 2008.  Theincrease of interest income for the six months ended June 30, 2008, ascompared to the same period in 2007, was due to an increase in our cashresulting from our public offering completed in February 2008, offset bythe impact of lower interest rates.

 

18

----

Table of Contents

 

**Interest Expense**

** **
| ** **             | ** ** | **Three months ended** | ** ** | ** ** | ** ** | **Six months ended** | ** ** | ** ** | ** ** |
|------------------------|------------|----------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **             | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **June 30,**              | ** ** | ** ** | ** ** |
| ** **             | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Aggregate Change**      | ** ** | **2008**   | ** ** | **2007** | ** ** | **Aggregate Change** | ** ** |
| ** **             | ** ** | **(in thousands)**          | ** ** |
| ***Interest expense*** |       | $                                | 41         |       | $          | 58                             |       | $          | (17        | ) | $ | 88 |   | $ | 116 |   | $ | (28 | ) |
|                        |            |                                  |            |            |            |                                |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Interest expense results from our capital leaseobligations associated with fixed asset acquisitions. The decrease in interestexpense for the three and six months ended June 30, 2008, as compared tothe same periods in 2007, was due to the decrease in capital lease obligationsoutstanding during those periods.

 

**Liquidity and Capital Resources**

 

***Cash Requirements***

 

We have financed our operations from inceptionprimarily through sales of equity securities, contract payments under ourcollaboration agreements and equipment financing arrangements. We have consumedsubstantial amounts of capital to date, and our operating expenditures areexpected to increase over the next several years.

 

We believe that our existing capital resources willbe sufficient to support our current operating plan through at least the next12 months. In the foreseeable future, our operations will requiresignificant 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 future collaborations.We do not know whether additional financing will be available when needed, orthat, if available, we will obtain financing on terms favorable to ourstockholders or us.

 

To the extent we raise additional capital by issuingequity securities, our stockholders may experience substantial dilution. To theextent that we raise additional funds through collaboration and licensingarrangements, we may be required to relinquish some of our rights to ourtechnologies or product candidates, or grant licenses on terms that are notfavorable to us.

 

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

 

·                  the progress and success of clinical trials andpreclinical activities (including studies and manufacture of materials) of ourproduct candidates conducted by us or our collaborative partners or licensees;

 

·                  our ability to establish new collaborations;

 

·                  the progress of research programs carried out by us;

 

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

 

·                  our ability to meet the milestones identified in ourcollaborative agreements that trigger payments;

 

·                  the progress of the research and development effortsof our collaborative partners;

 

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

 

·                  our ability to manage our growth;

 

·                  competing technological and market developments;

 

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

 

19

----

Table of Contents

 

·                  the costs and timing of regulatory approvals andfilings by us and our collaborators; and

 

·                  expenses associated with unforeseen litigation.

 

Insufficient funds may require us to delay, scaleback or eliminate some or all of our research or development programs, to loserights under existing licenses or to relinquish greater or all rights toproduct candidates at an earlier stage of development or on less favorableterms than we would otherwise choose or may adversely affect our ability tooperate as a going concern. As of June 30, 2008, we had approximately$185.0 million in cash, cash equivalents and available-for-sale securities, as comparedto approximately $108.3 million as of December 31, 2007, an increaseof approximately $76.7 million. The increase was primarily attributable tonet proceeds of approximately $127.5 million from our public offering in thefirst quarter of 2008, offset by operating spending for the six months ended June 30,2008. For the six months ended June 30, 2008 and 2007, we maintained aninvestment portfolio primarily in money market funds, government-sponsoredenterprise securities, corporate bonds and commercial paper. Cash in excess ofimmediate requirements is invested with regard to liquidity and capitalpreservation. Wherever possible, we seek to minimize the potential effects ofconcentration and degrees of risk.

 

**Contractual Obligations**

 

As of June 30, 2008, we had the followingcontractual commitments (by fiscal year):

 
| ** **                    | ** ** | **Total**               | ** ** | **less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|-------------------------------|------------|-------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **(in thousands)** | ** ** |
| Capital Lease obligations (1) |       | $                       | 2,201      |                            | $          | 587                |       | $                  | 1,455      |                             | $          | 159 |   | $ | — |   |
| Facilities lease              |       | 143,183                 |       | 5,826                           |       | 31,042             |       | 30,192             |       | 76,123                           |       |
|                          |       |                    |       |                            |       |               |       |               |       |                             |       |
| Total                         |       | $                       | 145,384    |                            | $          | 6,413              |       | $                  | 32,497     |                             | $          | 30,351 |   | $ | 76,123 |   |

 

----

(1)             As of June 30, 2008, we hadapproximately $2.2 million in capital lease obligations (including theinterest portion) associated with our equipment. All existing capital leaseagreements as of June 30, 2008 are secured by the equipment financed,bearing interest at rates between 5.8% and 10.85% and are due in monthlyinstallments through 2011.

 

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

 

During the six months ended June 30,2008, there were no material changes to our market risk disclosures as setforth in Part II, Item 7A, “Quantitative and Qualitative Disclosures AboutMarket Risk,” of our Annual Report on Form 10-K for the year ended December 31,2007.

 

**Item 4.    Controls and Procedures**

 

*Evaluation of Disclosure Controlsand Procedures.*Basedon our management’s evaluation (with the participation of our chief executiveofficer and chief financial officer), our chief executive officer and chieffinancial officer have concluded that our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended), were effective as of June 30,2008.

 

*Changes in Internal Controls.*There were no changes in our internalcontrols over financial reporting during the quarter ended June 30, 2008that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

*Limitations on the Effectivenessof Controls.*Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the controls aremet. Because of the inherent limitations in all control systems, no evaluationof controls can provide absolute assurance that all control issues, if any,within a company have been detected. Accordingly, our disclosure controls andprocedures are designed to provide reasonable, not absolute, assurance that theobjectives of our disclosure control system are met and, as set forth above,our chief executive officer and chief financial officer have concluded, basedon their evaluation as of the end of the period covered by this quarterlyreport on Form 10-Q, that our disclosure controls and procedures weresufficiently effective to provide reasonable assurance that the objectives ofour disclosure control system were met.

 

20

----

Table of Contents

 

**Item 4T.Controls and Procedures**

 

Not applicable.

 

**PART II. OTHER INFORMATION**

 

**Item 1A. Risk Factors**

** **

*In evaluating our business, you shouldcarefully consider the following risks, as well as the other informationcontained in this Quarterly Report on Form 10-Q. If any of the followingrisks actually occurs, our business, financial condition and operating resultscould be harmed. The risks and uncertainties described below are not the onlyones facing us. Additional risks and uncertainties not presently known to us,or that we currently see as immaterial, may also harm our business. We havemarked with an asterisk (*) those risk factors below that reflect a substantivechange 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 ofcapital to date, and our operating expenditures are expected to increase overthe next several years as we expand our research and development activities. Webelieve that our existing capital resources will be sufficient to support ourcurrent operating plan through at least the next 12 months. In theforeseeable future, our operations will require significant additional funding,in large part due to our research and development expenses, future preclinicaland clinical-testing costs, and the absence of any revenues from product sales.The amount of future funds needed will depend largely on the timing andstructure of potential future collaborations. We do not know whether additionalfinancing will be available when needed, or that, if available, we will obtainfinancing on terms favorable to our stockholders or us.

 

To the extent we raise additional capital byissuing equity securities, our stockholders could at that time experiencesubstantial dilution. To the extent that we raise additional funds throughcollaboration and licensing arrangements, we may be required to relinquish somerights to our technologies or product candidates, or grant licenses on termsthat are not favorable to us.

 

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

** **

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

 

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

 

·                  ourability to establish new collaborations;

 

·                  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;

 

·                  the costs and timing of obtaining, enforcing anddefending our patent and intellectual property rights;

 

21

----

Table of Contents

 

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

 

·                  expensesassociated with unforeseen litigation.

 

Insufficient funds may require us to delay,scale back or eliminate some or all of our research and development programs,to lose rights under existing licenses or to relinquish greater or all rightsto product candidates at an earlier stage of development or on less favorableterms than we would otherwise choose or may adversely affect our ability tooperate as a going concern.

 

**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 researchand development expenditures required to identify and validate new productcandidates and pursue our development efforts, we have not been profitable andhave incurred operating 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 $34.0million and $61.3 million for the three and six months ended June 30,2008, $74.3 million in 2007 and $37.6 million in 2006. Currently, ourrevenues are generated solely from research milestone payments pursuant to ourcollaboration agreements and licenses and are insufficient to generateprofitable operations. As of June 30, 2008, we had an accumulated deficitof approximately $430.7 million. We expect to incur losses for at least thenext several years and expect that these losses could increase as we expand ourresearch and development activities and incur significant clinical and testingcosts.

 

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

** **

At the present time, the majority of ouroperations are in various stages of drug identification and development. Wecurrently have four product compounds in the clinical testing stage: one withindications for RA, ITP and B-cell lymphoma, which is proprietary to ourcompany; one in safety testing and intended for psoriasis, RA, and other immunologicalindications, which is proprietary to our company; one with six indications foroncology, which is subject to a collaboration agreement with Merck Serono; andone in safety testing and intended for allergic asthma, which is subject to acollaboration agreement with Pfizer. In our industry, it is statisticallyunlikely that the limited number of compounds that we have identified aspotential product candidates will actually lead to successful productdevelopment efforts, and we do not expect any drugs resulting from our researchto be commercially available 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 recently completed P2a clinical trial for R788in rheumatoid arthritis, the most common side effects includeddose related neutropenia, elevated liver enzymes andgastrointestinal.  In larger future clinical trials, we may uncoveradditional side effects and/or higher frequency of side effects thanthose observed in completed clinical trials. If approved by the U.S.Food and Drug Administration, or 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 notnecessarily predict clinical or commercial success, and larger later-stageclinical trials may fail to confirm the results observed in the preliminarystudies. Our lead product candidate is in early development, having recentlycompleted initial Phase 2 clinical trials in two indications. We areconducting additional Phase 2 trials, with larger numbers of patients,before proceeding into Phase 3 trials with R788 for RA. Furthermore, ourPhase 2 clinical trial for ITP was conducted in highly refractorypatients, 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 theaccumulated preclinical evidence (pharmacokinetic, pharmacodynamic, safetyand/or other factors) or early clinical results will be observed in laterclinical trials, we can make no assurances regarding the likely results fromour future clinical trials or the impact of those results on our business.

 

22

----

Table of Contents

 

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

** **

Commercialization of our product candidatesdepends upon successful completion of preclinical studies and clinical trials.Preclinical testing and clinical development are long, expensive and uncertainprocesses. We do not know whether we, or any of our collaborative partners,will be permitted to undertake clinical trials of potential products beyond thetrials already concluded and the trials currently in process. It will take us,or our collaborative partners several years to complete any such testing, andfailure can occur at any stage of testing. Interim results of trials do notnecessarily predict final results, and acceptable results in early trials maynot be repeated in later trials. A number of companies in the pharmaceuticalindustry, including biotechnology companies, have suffered significant setbacksin advanced clinical trials, even after achieving promising results in earliertrials. Moreover, we or our collaborative partners or regulators may decide todiscontinue development of any or all of these projects at any time forcommercial, scientific or other reasons.

 

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

** **

Significant delays in clinical testing couldmaterially impact our product development costs and timing. We do not knowwhether planned clinical trials will begin on time, will need to be halted orrevamped or will be completed on schedule, or at all. Clinical trials can bedelayed for a variety of reasons, including delays in obtaining regulatoryapproval to commence a study, delays from scale up, delays in reachingagreement on acceptable clinical study agreement terms with prospectiveclinical sites, delays in obtaining institutional review board approval toconduct a study at a prospective clinical site or delays in recruiting subjectsto participate in a study.

 

In addition, we typically rely on third-partyclinical investigators to conduct our clinical trials and other third-partyorganizations to oversee the operations of such trials and to perform datacollection and analysis. As a result, we may face additional delaying factorsoutside our control if these parties do not perform their obligations in atimely fashion. While we have not yet experienced delays that have materiallyimpacted our clinical trials or product development costs, delays of this sortcould occur for the reasons identified above or other reasons. If we havedelays in testing or approvals, our product development costs will increase.For example, we may need to make additional payments to third-partyinvestigators and organizations to retain their services or we may need to payrecruitment incentives. If the delays are significant, our financial resultsand the commercial prospects for our product candidates will be harmed, and ourability to become profitable will be delayed.

 

**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 manufacturingcapabilities or experience necessary to produce our product candidate R788. Werely on a single manufacturer for the R788 product clinical trials. We willrely on manufacturers 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 dependenceupon these third-party manufacturers may adversely affect our ability todevelop and commercialize product candidates on a timely and competitive basis.These manufacturers may not be able to produce material on a timely basis ormanufacture material at the quality level or in the quantity required to meetour development timelines and applicable regulatory requirements. We may not beable to maintain or renew our existing third-party manufacturing arrangements,or enter into new arrangements, on acceptable terms, or at all. Our third-partymanufacturers could terminate or decline to renew our manufacturingarrangements based on their own business priorities, at a time that is costlyor inconvenient for us. If we are unable to contract for the production ofmaterials in sufficient quantity and of sufficient quality on acceptable terms,our planned clinical trials may be significantly delayed. Manufacturing delayscould postpone the filing of our investigational new drug, or IND, applicationsand/or the initiation of clinical trials that we have currently planned.

 

Our third-party manufacturers may not be ableto comply with the GMP regulations, other applicable FDA regulatoryrequirements or similar regulations applicable outside of the United States.Additionally, if we are required to enter into new supply arrangements, we maynot be able to obtain approval from the FDA of any alternate supplier in a 

 

23

----

Tableof Contents

 

timely manner,or at all, which could delay or prevent the clinical development andcommercialization of any related product candidates. Failure of our third-partymanufacturers or us to obtain approval from the FDA or to comply with applicableregulations could result in sanctions being imposed on us, including fines,civil penalties, delays in or failure to grant marketing approval of ourproduct candidates, injunctions, delays, suspension or withdrawal of approvals,license revocation, seizures or recalls of products and compounds, operatingrestrictions and criminal prosecutions, any of which could significantly andadversely affect our business.

 

**Because 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 nearterm depends on our ability to enter into additional collaborative agreementswith third parties and to maintain the agreements we currently have in place.Our ability to enter into new collaborations and the revenue, if any, that maybe recognized under these collaborations is highly uncertain. If we are unableto enter into new collaborations, our business prospects could be harmed, whichcould have an immediate adverse effect on the trading price of our stock.

 

To date, most of our revenues have beenrelated to the research phase of each of our collaborative agreements. Suchrevenues are for specified periods, and the impact of such revenues on ourresults of operations is partially offset by corresponding research costs.Following the completion of the research phase of each collaborative agreement,additional revenues may come only from milestone payments and royalties, whichmay not be paid, if at all, until some time well into the future. The risk isheightened due to the fact that unsuccessful research efforts may preclude usfrom receiving any milestone payments under these agreements. Our receipt ofrevenues from collaborative arrangements is also significantly affected by thetiming of efforts expended by us and our collaborators and the timing of leadcompound identification. In late 2001, we recorded the first revenue fromachievement of milestones in both the Pfizer and Johnson & Johnsoncollaborations. In addition, we have subsequently received milestone paymentsfrom Novartis, Daiichi, Merck, Merck Serono and Pfizer. Under many agreements,however, milestone payments may not be earned until the collaborator hasadvanced product candidates into clinical testing, which may never occur or maynot occur until some time well into the future. If we are not able to generaterevenue under our collaborations when and in accordance with our expectationsor the expectations of industry analysts, this failure could harm our businessand have an immediate adverse effect on the trading price of our stock.

 

Our business requires us to generatemeaningful revenue from royalties and licensing agreements. To date, we havenot received any revenue from royalties for the commercial sale of drugs, andwe do not know when we will receive any such revenue, if at all. Likewise, wehave not licensed any lead compounds or drug development candidates to thirdparties, and we do not know whether any such license will be entered into onacceptable terms in the future, 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 andsustainability of multiple collaborative arrangements and license agreementswith third parties in the future. We rely on these arrangements for not onlyfinancial resources, but also for expertise that we expect to need in thefuture relating to clinical trials, manufacturing, sales and marketing, and forlicenses to technology rights. To date, we have entered into several sucharrangements with corporate collaborators; however, we do not know if suchthird parties will dedicate sufficient resources or if any development orcommercialization efforts by third parties will be successful. Should acollaborative partner fail to develop or commercialize a compound or product towhich it has rights from us for any reason including corporate restructuring,such failure might delay ongoing research and development efforts at Rigel,because we might not receive any future milestone payments, and we would notreceive any royalties associated with such compound or product. In addition,the continuation of some of our partnered drug discovery and developmentprograms may be dependent on the periodic renewal of our corporatecollaborations.

 

The research phase of our collaboration withJohnson & Johnson ended in 2003, and the research phases conducted atour facilities under our broad collaboration with Novartis ended in 2004. Theresearch phase of our corporate collaboration agreement with Daiichi ended in2005. In 2004, we signed a new corporate collaboration with Merck, and theresearch phase of this collaboration ended in May 2007. In 2005, we signedadditional collaborations with Pfizer and Merck Serono. Each of ourcollaborations could be terminated by the other party at any time, and we maynot be able to renew these collaborations on acceptable terms, if at all, ornegotiate additional corporate collaborations on acceptable terms, if at all.If these collaborations terminate or are not renewed, any resultant loss ofrevenues from these collaborations or loss of the expertise of ourcollaborative partners could adversely affect our business.

 

24

----

Tableof Contents

 

Conflicts also might arise with collaborativepartners concerning proprietary rights to particular compounds. While ourexisting collaborative agreements typically provide that we retain milestonepayments and royalty rights with respect to drugs developed from certainderivative compounds, any such payments or royalty rights may be at reducedrates, and disputes may arise over the application of derivative paymentprovisions to such drugs, and we may not be successful in such disputes.

 

We are also a party to various licenseagreements that give us rights to use specified technologies in our researchand development processes. The agreements pursuant to which we have in-licensedtechnology permit our licensors to terminate the agreements under certaincircumstances. If we are not able to continue to license these and futuretechnologies on commercially reasonable terms, our product development andresearch may be delayed.

 

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

 

If conflicts arise between us and ourcorporate collaborators or scientific advisors, the other party may act in itsself-interest and not in the interest of our stockholders. Some of ourcorporate collaborators are conducting multiple product development effortswithin each disease area that is the subject of the collaboration with us ormay be acquired or merged with a company having a competing program. In some ofour collaborations, we have agreed not to conduct, independently or with anythird party, any research that is competitive with the research conducted underour collaborations. Our collaborators, however, may develop, either alone orwith others, products in related fields that are competitive with the productsor potential products that are the subject of these collaborations. Competingproducts, either developed by our collaborators or to which our collaboratorshave rights, may result in their withdrawal of support for our productcandidates.

 

If any of our corporate collaborators were tobreach or terminate its agreement with us or otherwise fail to conduct thecollaborative activities successfully and in a timely manner, the preclinicalor clinical development or commercialization of the affected product candidatesor research programs could be delayed or terminated. We generally do notcontrol the amount and timing of resources that our corporate collaboratorsdevote to our programs or potential products. We do not know whether current orfuture collaborative partners, if any, might pursue alternative technologies ordevelop alternative products either on their own or in collaboration withothers, including our competitors, as a means for developing treatments for thediseases targeted by collaborative arrangements with us.

 

**Our success is dependent on intellectual property rights held by thirdparties and us, and our interest in such rights is complex and uncertain.**

 

Our success will depend to a large part onour own, our licensees’ and our licensors’ ability to obtain and defend patentsfor each party’s respective technologies and the compounds and other products,if any, resulting from the application of such technologies. We have over 200pending patent applications and over 100 issued patents in the United Statesthat are owned or exclusively licensed in our field as well as pendingcorresponding foreign patent applications. In the future, our patent positionmight be highly uncertain and involve complex legal and factual questions. Forexample, we may be involved in interferences before the United States Patentand Trademark Office. Interferences are complex and expensive legal proceedingsand there is no assurance we will be successful in such proceedings. Aninterference could result in our losing our patent rights and/or our freedom tooperate and/or require us to pay significant royalties. Additional uncertaintymay result because no consistent policy regarding the breadth of legal claimsallowed in biotechnology patents has emerged to date. Accordingly, we cannotpredict the breadth of claims allowed in our or other companies’ patents.

 

Because the degree of future protection forour proprietary rights is uncertain, we cannot ensure that:

 

·                  we were the first to make the inventions covered byeach of our pending patent applications;

 

·                  we were the first to file patent applications forthese inventions;

 

·                  others will not independently develop similar oralternative technologies or duplicate any of our technologies;

 

·                  any of our pending patent applications will resultin issued patents;

 

·                  any patents issued to us or our collaborators willprovide a basis for commercially-viable products or will provide us with anycompetitive advantages or will not be challenged by third parties;

 

·                  we will develop additional proprietary technologiesthat are patentable; or

 

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

 

25

----

Table of Contents

 

We rely on trade secrets to protect technologywhere we believe patent protection is not appropriate or obtainable; however,trade secrets are difficult to protect. While we require employees,collaborators and consultants to enter into confidentiality agreements, we maynot be able to adequately protect our trade secrets or other proprietaryinformation in the event of any unauthorized use or disclosure or the lawfuldevelopment by others of such information.

 

We are a party to certain in-licenseagreements that are important to our business, and we generally do not controlthe prosecution of in-licensed technology. Accordingly, we are unable toexercise the same degree of control over this intellectual property as weexercise over our internally-developed technology. Moreover, some of our academicinstitution licensors, research collaborators and scientific advisors haverights to publish data and information in which we have rights. If we cannotmaintain the confidentiality of our technology and other confidentialinformation in connection with our collaborations, then our ability to receivepatent protection or protect our proprietary information will be impaired. Inaddition, some of the technology we have licensed relies on patented inventionsdeveloped using U.S. government resources. The U.S. government retains certainrights, as defined by law, in such patents, and may choose to exercise suchrights. Certain of our in-licenses may be terminated if we fail to meetspecified obligations. If we fail to meet such obligations and any of our licensorsexercise their termination rights, we could lose our rights under thoseagreements. If we lose any of our rights, it may adversely affect the way weconduct our business. In addition, because certain of our licenses aresublicenses, the actions of our licensors may affect our rights under thoselicenses.

 

**If a dispute arises regarding the infringement or misappropriation ofthe proprietary rights of others, such dispute could be costly and result indelays in our research and development activities and partnering.**

 

Our success will also depend, in part, on ourability to operate without infringing or misappropriating the proprietaryrights of others. There are many issued patents and patent applications filedby third parties relating to products or processes that are similar oridentical to our licensors or ours, and others may be filed in the future.There can be no assurance that our activities, or those of our licensors, willnot infringe patents owned by others. We believe that there may be significantlitigation in the industry regarding patent and other intellectual propertyrights, and we do not know if our collaborators or we would be successful inany such litigation. Any legal action against our collaborators or us claimingdamages or seeking to enjoin commercial activities relating to the affectedproducts, our methods or processes could:

 

·                  require our collaborators or us to obtain a licenseto continue to use, manufacture or market the affected products, methods orprocesses, which may not be available on commercially reasonable terms, if atall;

 

·                  prevent us from using the subject matter claimed inthe patents held by others;

 

·                  subject us to potential liability for damages;

 

·                  consume a substantial portion of our managerial andfinancial resources; and

 

·                  result in litigation or administrative proceedingsthat may be costly, whether we win or lose.

 

**If we are unable to obtain regulatory approval to market products inthe United States and foreign jurisdictions, we will not be permitted to commercializeproducts from our research and development.**

 

Due, in part, to the early stage of ourproduct candidate research and development process, we cannot predict whetherregulatory clearance will be obtained for any product that we, or our collaborativepartners, hope to develop. Satisfaction of regulatory requirements typicallytakes many years, is dependent upon the type complexity and novelty of theproduct and requires the expenditure of substantial resources. Of particularsignificance to us are the requirements relating to research and developmentand testing.

 

Before commencing clinical trials in humansin the United States, we, or our collaborative partners, will need to submitand receive approval from the FDA of an IND. Clinical trials are subject tooversight by institutional review boards and the FDA and:

 

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

 

26

----

Table of Contents

 

·                  must meet requirements for institutional reviewboard oversight;

 

·                  must meet requirements for informed consent;

 

·                  are subject to continuing FDA oversight;

 

·                  may require large numbers of test subjects; and

 

·                  may be suspended by us, our collaborators or the FDAat any time if it is believed that the subjects participating in these trialsare being exposed to unacceptable health risks or if the FDA finds deficienciesin the IND or the conduct of these trials.

 

While we have stated that we intend to fileadditional INDs, this is only a statement of intent, and we may not be able todo so because we may not be able to identify potential product candidates. Inaddition, the FDA may not approve any IND in a timely manner, or at all.

 

Before receiving FDA approval to market aproduct, we must demonstrate that the product is safe and effective in thepatient population and the indication that will be treated. Data obtained frompreclinical and clinical activities are susceptible to varying interpretationsthat could delay, limit or prevent regulatory approvals. In addition, delays orrejections may be encountered based upon additional government regulation fromfuture legislation or administrative action or changes in FDA policy during theperiod of product development, clinical trials and FDA regulatory review.Failure to comply with applicable FDA or other applicable regulatoryrequirements may result in criminal prosecution, civil penalties, recall orseizure of products, total or partial suspension of production or injunction,as well as other regulatory action against our potential products or us.Additionally, we have limited experience in conducting and managing theclinical trials necessary to obtain regulatory approval.

 

If regulatory approval of a product isgranted, this approval will be limited to those indications or disease statesand conditions for which the product is demonstrated through clinical trials tobe safe and efficacious. We cannot ensure that any compound developed by us,alone or with others, will prove to be safe and efficacious in clinical trialsand will meet all of the applicable regulatory requirements needed to receivemarketing approval.

 

Outside the United States, our ability, orthat of our collaborative partners, to market a product is contingent uponreceiving a marketing authorization from the appropriate regulatoryauthorities. This foreign regulatory approval process typically includes all ofthe risks associated with FDA approval described above and may also includeadditional risks.

 

**If our competitors develop technologies that are more effective thanours, our commercial opportunity will be reduced or eliminated.**

 

The biotechnology and pharmaceutical industriesare intensely competitive and subject to rapid and significant technologicalchange. Many of the drugs that we are attempting to discover will be competingwith existing therapies. In addition, a number of companies are pursuing thedevelopment of pharmaceuticals that target the same diseases and conditionsthat we are targeting. We face competition from pharmaceutical andbiotechnology companies both in the United States and abroad.

 

Our competitors may utilize discoverytechnologies and techniques or partner with collaborators in order to developproducts more rapidly or successfully than we, or our collaborators, are ableto do. Many of our competitors, particularly large pharmaceutical companies,have substantially greater financial, technical and human resources than we do.In addition, academic institutions, government agencies and other public andprivate organizations conducting research may seek patent protection withrespect to potentially competitive products or technologies and may establish exclusivecollaborative or licensing relationships with our competitors.

 

We believe that our ability to compete isdependent, in part, upon our ability to create, maintain and licensescientifically-advanced technology and upon our and our collaborators’ abilityto develop and commercialize pharmaceutical products based on this technology,as well as our ability to attract and retain qualified personnel, obtain patentprotection or otherwise develop proprietary technology or processes and securesufficient capital resources for the expected substantial time period betweentechnological conception and commercial sales of products based upon ourtechnology. The failure by any of our collaborators or us in any of those areasmay prevent the successful commercialization of our potential drug targets.

 

27

----

Tableof Contents

 

Our competitors might develop technologiesand drugs that are more effective or less costly than any that are beingdeveloped by us or that would render our technology and potential drugsobsolete and noncompetitive. In addition, our competitors may succeed inobtaining the approval of the FDA or other regulatory agencies for productcandidates more rapidly. Companies that complete clinical trials, obtainrequired regulatory agency approvals and commence commercial sale of theirdrugs before their competitors may achieve a significant competitive advantage,including certain patent and FDA marketing exclusivity rights that would delayor prevent our ability to market certain products. Any drugs resulting from ourresearch and development efforts, or from our joint efforts with our existingor future collaborative partners, might not be able to compete successfullywith competitors’ existing or future products or obtain regulatory approval inthe United States or elsewhere.

 

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

 

The drugs we hope to develop may be rejectedby the marketplace due to many factors, including cost. Our ability tocommercially exploit a drug may be limited due to the continuing efforts ofgovernment and third-party payors to contain or reduce the costs of health carethrough various means. For example, in some foreign markets, pricing andprofitability of prescription pharmaceuticals are subject to governmentcontrol. In the United States, we expect that there will continue to be anumber of federal and state proposals to implement similar government control.In addition, increasing emphasis on managed care in the United States willlikely continue to put pressure on the pricing of pharmaceutical products. Costcontrol initiatives could decrease the price that any of our collaboratorswould receive for any products in the future. Further, cost control initiativescould adversely affect our collaborators’ ability to commercialize our productsand our ability to realize royalties from this commercialization.

 

Our ability to commercialize pharmaceuticalproducts with collaborators may depend, in part, on the extent to whichreimbursement for the products will be available from:

 

·                  government and health administration authorities;

 

·                  private health insurers; and

 

·                  other third-party payors.

 

Significant uncertainty exists as to thereimbursement status of newly-approved healthcare products. Third-party payors,including Medicare, are challenging the prices charged for medical products andservices. Government and other third-party payors increasingly are attemptingto contain healthcare costs by limiting both coverage and the level ofreimbursement for new drugs and by refusing, in some cases, to provide coveragefor uses of approved products for disease indications for which the FDA has notgranted labeling approval. Third-party insurance coverage may not be availableto patients for any products we discover and develop, alone or withcollaborators. If government and other third-party payors do not provideadequate coverage and reimbursement levels for our products, the marketacceptance of these products may be reduced.

 

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

 

The testing and marketing of medical productsentail an inherent risk of product liability. If we cannot successfully defendourselves against product liability claims, we may incur substantialliabilities or be required to limit commercialization of our products althoughwe are not currently aware of any specific causes for concern with respect toclinical liability claims. We carry product liability insurance that is limitedin scope and amount and may not be adequate to fully protect us against productliability claims. Our inability to obtain sufficient product liabilityinsurance at an acceptable cost to protect against potential product liabilityclaims could prevent or inhibit the commercialization of pharmaceuticalproducts we develop, alone or with corporate collaborators. We, or ourcorporate collaborators, might not be able to obtain insurance at a reasonablecost, if at all. While under various circumstances we are entitled to beindemnified against losses by our corporate collaborators, indemnification maynot be available or adequate should any claim arise.

 

**Our research and development efforts will be seriously jeopardized, ifwe are unable to attract and retain key employees and relationships.***

 

As a small company with only 179 employees asof June 30, 2008, our success depends on the continued contributions ofour principal management and scientific personnel and on our ability to developand maintain important 

 

28

----

Tableof Contents

 

relationshipswith leading academic institutions, scientists and companies in the face ofintense competition for such personnel. In particular, our research programsdepend on our ability to attract and retain highly skilled chemists, otherscientists, and development, regulatory and clinical personnel. If we lose theservices of any of our personnel, our research and development efforts could beseriously and adversely affected. Our employees can terminate their employmentwith us at any time.

 

**We depend on various scientific consultants and advisors for the successand continuation of our research and development efforts.**

 

We work extensively with various scientificconsultants and advisors. The potential success of our drug discovery anddevelopment programs depends, in part, on continued collaborations with certainof these consultants and advisors. We, and various members of our managementand research staff, rely on certain of these consultants and advisors forexpertise in our research, regulatory and clinical efforts. Our scientificadvisors are not our employees and may have commitments to, or consulting oradvisory contracts with, other entities that may limit their availability tous. We do not know if we will be able to maintain such consulting agreements orthat such scientific advisors will not enter into consulting arrangements,exclusive or otherwise, with competing pharmaceutical or biotechnologycompanies, any of which would have a detrimental impact on our researchobjectives and could have a material adverse effect on our business, financialcondition and results of operations.

 

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

** **

Our research and development activitiesinvolve the controlled use of potentially harmful biological materials as wellas hazardous materials, chemicals and various radioactive compounds. We cannotcompletely eliminate the risk of accidental contamination or injury from theuse, storage, handling or disposal of these materials. In the event of contaminationor injury, we could be held liable for damages that result, and such liabilitycould exceed our resources. We are also subject to federal, state and locallaws and regulations governing the use, storage, handling and disposal of thesematerials and specified waste products. The cost of compliance with, or anypotential violation of, these laws and regulations could be significant.

 

**Our facilities are located near known earthquake fault zones, and theoccurrence of an earthquake or other catastrophic disaster could cause damageto our facilities and equipment, which could require us to cease or curtailoperations.**

 

Our facilities are located in the SanFrancisco Bay Area near known earthquake fault zones and are vulnerable tosignificant damage from earthquakes. We are also vulnerable to damage fromother types of disasters, including fires, floods, power loss, communicationsfailures and similar events. If any disaster were to occur, our ability tooperate our business at our facilities would be seriously, or potentiallycompletely, impaired, and our research could be lost or destroyed. In addition,the unique nature of our research activities and of much of our equipment couldmake it difficult for us to recover from a disaster. The insurance we maintainmay not be adequate to cover our losses resulting from disasters or otherbusiness interruptions.

 

**Future interest income and value of our investments may be impacted byfurther declines in interest rates and broader effect of the recent disruptionof credit markets.**

 

While we are conservative in our investmentpolicies and invest only in fixed income securities, the interest paid on thistype of investment and the value of certain securities may decline in thefuture as credit markets adjust to the mortgage crisis.

 

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

 

The market prices for our securities andthose of other biotechnology companies have been highly volatile and maycontinue to be highly volatile in the future. The following factors, inaddition to other risk factors described in this section, may have asignificant impact on the market price of our common stock:

 

·                  the progress and success of clinical trials andpreclinical activities (i.e., studies, manufacture of materials) of ourproduct candidates conducted by us or our collaborative partners or licensees;

 

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

 

29

----

Table of Contents

 

·                  selling by large stockholders;

 

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

 

·                  developments concerning proprietary rights,including patents;

 

·                  developments concerning our collaborations;

 

·                  publicity regarding actual or potential medicalresults relating to products under development by our competitors or us;

 

·                  regulatory developments in the United States andforeign countries;

 

·                  litigation;

 

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

 

·                  period-to-period fluctuations in financial results.

 

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

 

Because we may need to raise additionalcapital in the future to continue to expand our business and our research anddevelopment activities, among other things, we may conduct additional equityofferings. If we or our stockholders sell substantial amounts of our commonstock (including shares issued upon the exercise of options and warrants) inthe public market, the market price of our common stock could fall. A declinein the market price of our common stock could make it more difficult for us tosell equity or equity-related securities in the future at a time and price thatwe deem appropriate.

 

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

 

Provisions of our amended and restatedcertificate of incorporation and bylaws, as well as provisions of Delaware law,could make it more difficult for a third party to acquire us, even if doing sowould benefit our stockholders. These provisions:

 

·                  establish that members of the board of directors maybe removed only for cause upon the affirmative vote of stockholders owning amajority of our capital stock;

 

·                  authorize the issuance of “blank check” preferredstock that could be issued by our board of directors to increase the number ofoutstanding shares and thwart a takeover attempt;

 

·                  limit who may call a special meeting ofstockholders;

 

·                  prohibit stockholder action by written consent,thereby requiring all stockholder actions to be taken at a meeting of ourstockholders;

 

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

 

·                  provide for a board of directors with staggeredterms; and

 

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

 

In addition, Section 203 of the DelawareGeneral Corporation Law, which imposes certain restrictions relating totransactions with major stockholders, may discourage, delay or prevent a thirdparty from acquiring us.

 

30

----

Table of Contents

 

**Item 4:*  *Submission of Matters to a Vote of Security Holders**

 

We held our 2008 Annual Meeting ofStockholders on May 29, 2008.  Thefollowing is a brief description of each matter voted upon at the 2008 AnnualMeeting of Stockholders, as well as the number of votes cast for or againsteach matter and the number of abstentions and broker non-votes with respect toeach matter.  Each of the three directorsproposed by us for re-election was elected by the following vote to serve untilthe 2011 Annual Meeting of Stockholders or until their respective successorshave been elected and qualified:

 
| **Director Name**   | ** ** | **Shares Voted For** | ** ** | **Shares Voted Against** | ** ** |
|--------------------------|------------|--------------------------------|------------|------------------------------------|------------|
| Walter H. Moos, Ph.D     |       | 27,948,167                     |       | 5,685,233                          |       |
| Hollings C. Renton       |       | 28,939,035                     |       | 4,694,365                          |       |
| Stephen A. Sherwin, M.D. |       | 28,892,005                     |       | 4,741,395                          |       |

 

The stockholders approved amendments to our2000 Equity Incentive Plan (the “2000 Plan”) to (i) increase the number ofshares authorized for issuance under the 2000 plan by 3,350,000 shares ofcommon stock and (ii) provide that the number of shares available forissuance under the 2000 plan shall be reduced by one share for each share ofcommon stock subject to a stock option or stock appreciation right with astrike price of at least 100% of the fair market value of the underlying commonstock on the grant date and by one and one-half (1.5) shares for each share ofcommon stock subject to any other type of award issued pursuant to the 2000plan : Shares voted for: 21,576,947; Shares voted against: 6,538,910; Sharesabstaining: 778; and Broker Non-Votes: 5,516,765.

 

The stockholders approved an amendment to our2000 Non-Employee Directors’ Stock Plan (the “Directors Plan”) to increase thenumber of shares authorized for issuance under the Directors plan by 100,000shares of common stock: Shares voted for: 20,867,408; Shares voted against:7,247,498; Shares abstaining: 1,729; and Broker Non-Votes: 5,516,765.

 

The stockholders ratified theselection by the Audit Committee of our Board of Directors of Ernst &Young LLP as our independent registered public accounting firm for thefiscal year ending December 31, 2008: Shares voted for: 33,242,213; Shares voted against: 386,480; and Sharesabstaining: 4,707.

 

**ContinuingDirectors**

 

Our directorswhose terms of office continued after the 2008 Annual Meeting of Stockholderswere: (1) James M. Gower, Gary A. Lyons and Donald G. Payan, M.D., whosecurrent terms expire at the 2009 Annual Meeting of the Stockholders, and (2)Jean Deleage, Ph.D., Bradford S. Goodwin and Peter S. Ringrose, Ph.D., whosecurrent terms expire at the 2010 Annual Meeting of the Stockholders

 

**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)                       |
|                 |       |                                                                                                     |
| 10.21                |       | 2000 Equity Incentive Plan, as  amended. (8)                                                             |
|                 |       |                                                                                                     |
| 10.26                |       | 2000 Non-Employee Directors’ Stock Option Plan, as amended.                                         |

 

31

----

Table of Contents

 
| 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). |

 

----

| (1)    |   | Filed as an exhibit to Rigel’s Current Report on Form 8-K filed  on June 24, 2003 and incorporated herein by reference.                                            |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                              |
| (2)    |   | Filed as an exhibit to Rigel’s Current Report on Form 8-K filed  on February 2, 2007 and incorporated herein by reference.                                         |
|   |   |                                                                                                                                                                              |
| (3)    |   | Filed as an exhibit to Rigel’s Registration Statement on  Form S-1 (No. 333-45864), as amended, and incorporated herein by  reference.                             |
|   |   |                                                                                                                                                                              |
| (4)    |   | Filed as an exhibit to Rigel’s Quarterly Report on Form 10-Q for  the quarter ended March 31, 2002 and incorporated herein by reference.                           |
|   |   |                                                                                                                                                                              |
| (5)    |   | Filed as an exhibit to Rigel’s Annual Report on Form 10-K, as  amended, for the fiscal year ended December 31, 2002 and incorporated  herein by reference.         |
|   |   |                                                                                                                                                                              |
| (6)    |   | Filed as an exhibit to Rigel’s Current Report on Form 8-K  (No. 000-29889) dated June 24, 2003, and incorporated herein by  reference.                        |
|   |   |                                                                                                                                                                              |
| (7)    |   | Filed as an exhibit to Rigel’s Quarterly Report on Form 10-Q for  the quarter ended September 30, 2006 (No. 000-29889) and  incorporated herein by reference. |
|   |   |                                                                                                                                                                              |
| (8)    |   | Filed as an exhibit to Rigel’s Current Report on Form 8-K filed  on May 30, 2008 and incorporated herein by reference.                                             |

 

32

----

Table of Contents

 

**SIGNATURES**

** **

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

 
|       | RIGEL  PHARMACEUTICALS, INC.  |
|------------|-------------------------------|
|       |                          |   |
|       | By:                           | /s/  JAMES M. GOWER |
|       |                          | James  M. Gower |
|       |                          | Chief  Executive Officer |
|       |                          | (Principal  Executive Officer) |
|       |                          |   |
|       | Date:  August 5, 2008    |
|       |                          |   |
|       | By:                           | /s/  RYAN D. MAYNARD |
|       |                          | Ryan  D. Maynard |
|       |                          | Vice  President and Chief Financial Officer |
|       |                          | (Principal  Financial and Accounting Officer) |
|       |                          |   |
| ** ** | **Date: August 5, 2008** |

 

33

----

Table of Contents

 

**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)                                                                                                                |
|                 |       |                                                                                                                                                                                              |
| 10.21                |       | 2000 Equity Incentive Plan, as  amended. (8)                                                                                                                                                      |
|                 |       |                                                                                                                                                                                              |
| 10.26                |       | 2000 Non-Employee Directors’ Stock Option Plan, as amended.                                                                                                                                  |
|                 |       |                                                                                                                                                                                              |
| 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). |

 

----

| (1)    |   | Filed as an exhibit to Rigel’s Current Report on Form 8-K filed  on June 24, 2003 and incorporated herein by reference.                                            |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                              |
| (3)    |   | Filed as an exhibit to Rigel’s Current Report on Form 8-K filed  on February 2, 2007 and incorporated herein by reference.                                         |
|   |   |                                                                                                                                                                              |
| (3)    |   | Filed as an exhibit to Rigel’s Registration Statement on  Form S-1 (No. 333-45864), as amended, and incorporated herein by  reference.                             |
|   |   |                                                                                                                                                                              |
| (4)    |   | Filed as an exhibit to Rigel’s Quarterly Report on Form 10-Q for  the quarter ended March 31, 2002 and incorporated herein by reference.                           |
|   |   |                                                                                                                                                                              |
| (5)    |   | Filed as an exhibit to Rigel’s Annual Report on Form 10-K, as  amended, for the fiscal year ended December 31, 2002 and incorporated  herein by reference.         |
|   |   |                                                                                                                                                                              |
| (6)    |   | Filed as an exhibit to Rigel’s Current Report on Form 8-K  (No. 000-29889) dated June 24, 2003, and incorporated herein by  reference.                        |
|   |   |                                                                                                                                                                              |
| (7)    |   | Filed as an exhibit to Rigel’s Quarterly Report on Form 10-Q for  the quarter ended September 30, 2006 (No. 000-29889) and  incorporated herein by reference. |
|   |   |                                                                                                                                                                              |
| (8)    |   | Filed as an exhibit to Rigel’s Current Report on Form 8-K filed  on May 30, 2008 and incorporated herein by reference                                              |

 

----