**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

----

**FORM 10-Q**

**x**                              QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**FORTHE QUARTERLY PERIOD ENDED MARCH 31, 2007**

**OR**

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

**FOR THE TRANSITION PERIOD FROM          TO**

**CommissionFile Number 0-29889**

----

**Rigel Pharmaceuticals, Inc.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                      |   | **94-3248524**                        |
|-------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or   organization) |   | (I.R.S. Employer  Identification No.) |
|                                                              |   |                                  |
| **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)        |   |                                  |

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  x  No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act) (Check one):
| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

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

As ofMay 8, 2007, there were 30,205,360 shares of the registrant’s common stockoutstanding.

 

----

**RIGELPHARMACEUTICALS, INC.**QUARTERLY REPORT ONFORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007

**INDEX**
| ** **       | ** ** | ** **                                                                                             | ** ** | **Page** | ** ** |
|------------------|------------|--------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART I**  | ** ** | **FINANCIAL INFORMATION**                                                                              | ** ** | 3        | ** ** |
| **Item 1.**      |       | Condensed Financial Statements  (Unaudited)                                                            |       | 3        |       |
|             |       | Condensed Balance  Sheets — March 31, 2007 (Unaudited) and December 31, 2006                 |       | 3        |       |
|             |       | Condensed Statements  of Operations (Unaudited) — three months ended March 31, 2007 and 2006      |       | 4        |       |
|             |       | Condensed Statements  of Cash Flows (Unaudited) — three months ended March 31, 2007 and 2006 |       | 5        |       |
|             |       | Notes to  Condensed Notes to 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                                            |       | 19       |       |
| **Item 4.**      |       | Controls and  Procedures                                                                               |       | 20       |       |
| **PART II** | ** ** | **OTHER INFORMATION**                                                                                  | ** ** | 20       | ** ** |
| **Item 1A.**     |       | Risk Factors                                                                                           |       | 20       |       |
| **Item  6.**     |       | Exhibits                                                                                               |       | 29       |       |
|             |       |                                                                                                   |       |     |       |
| **Signatures**   |       | 30                                                                                                     |       |

 

 

2

----

**PART I  FINANCIAL INFORMATION**

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

**RIGELPHARMACEUTICALS, INC.CONDENSED**BALANCESHEETS (in thousands, except share amounts)
| ** **                                                                                                                                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                           | ** ** | **2007**           | ** ** | **2006(1)**           | ** ** |
| ** **                                                                                                                                                                           | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                           | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                      |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                           |       | $                  | 43,166     |                  | $          | 47,727 |   |
| Available-for-sale  securities                                                                                                                                                       |       | 45,433             |       | 56,744                |       |
| Accounts  receivable                                                                                                                                                                 |       | 1,104              |       | 1,104                 |       |
| Other  receivables                                                                                                                                                                   |       | 296                |       | 286                   |       |
| Prepaid expenses  and other current assets                                                                                                                                           |       | 2,140              |       | 2,153                 |       |
| Total current  assets                                                                                                                                                                |       | 92,139             |       | 108,014               |       |
|                                                                                                                                                                                 |       |               |       |                  |       |
| Property and equipment,  net                                                                                                                                                         |       | 3,094              |       | 2,975                 |       |
| Other assets                                                                                                                                                                         |       | 2,214              |       | 2,251                 |       |
|                                                                                                                                                                                 |       | $                  | 97,447     |                  | $          | 113,240 |   |
|                                                                                                                                                                                 |       |               |       |                  |       |
| **Liabilities and stockholders’  equity**                                                                                                                                       | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                                                                 |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                     |       | $                  | 1,743      |                  | $          | 1,957 |   |
| Accrued  compensation                                                                                                                                                                |       | 1,628              |       | 3,060                 |       |
| Other accrued  liabilities                                                                                                                                                           |       | 2,810              |       | 1,886                 |       |
| Deferred revenue                                                                                                                                                                     |       | 1,471              |       | 3,066                 |       |
| Capital lease  obligations                                                                                                                                                           |       | 1,208              |       | 1,269                 |       |
| Total current  liabilities                                                                                                                                                           |       | 8,860              |       | 11,238                |       |
|                                                                                                                                                                                 |       |               |       |                  |       |
| Long-term portion of  capital lease obligations                                                                                                                                      |       | 1,108              |       | 1,082                 |       |
| Long-term portion of deferred  rent                                                                                                                                                  |       | 14,303             |       | 13,328                |       |
| Other long-term  liabilities                                                                                                                                                         |       | 351                |       | 363                   |       |
|                                                                                                                                                                                 |       |               |       |                  |       |
| Commitments                                                                                                                                                                          |       |               |       |                  |       |
|                                                                                                                                                                                 |       |               |       |                  |       |
| Stockholders’ equity:                                                                                                                                                           |       |               |       |                  |       |
| Common stock,  $0.001 par value; 100,000,000 shares authorized; 25,188,190 and 25,180,687  shares issued and outstanding on March 31, 2007 and December 31, 2006,  respectively |       | 25                 |       | 25                    |       |
| Additional  paid-in capital                                                                                                                                                          |       | 385,028            |       | 382,350               |       |
| Accumulated  other comprehensive income                                                                                                                                              |       | 12                 |       | 13                    |       |
| Accumulated  deficit                                                                                                                                                                 |       | (312,240           | )          | (295,159              | )          |
| Total stockholders’  equity                                                                                                                                                     |       | 72,825             |       | 87,229                |       |
|                                                                                                                                                                                 |       | $                  | 97,447     |                  | $          | 113,240 |   |

----

(1)             Thebalance sheet at December 31, 2006 has been derived from the auditedfinancial statements at that date included in Rigel’s Annual Report onForm 10-K for the year ended December 31, 2006.

See accompanying notes.

3

----

**RIGELPHARMACEUTICALS, INC.CONDENSED**STATEMENTS OFOPERATIONS(in thousands, except per share amounts)(unaudited)
| ** **                                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Contract revenues                                                                |       | $                                                    | 2,644      |   | $ | 9,897 |   |
| Costs and expenses:                                                              |       |                                                 |       |   |   |
| Research and  development                                                        |       | 15,843                                               |       | 14,711 |   |
| General and  administrative                                                      |       | 5,039                                                |       | 5,003 |   |
|                                                                             |       | 20,882                                               |       | 19,714 |   |
|                                                                             |       |                                                 |       |   |   |
| Loss from operations                                                             |       | (18,238                                              | )          | (9,817 | ) |
| Interest income                                                                  |       | 1,215                                                |       | 1,413 |   |
| Interest expense                                                                 |       | (58                                                  | )          | (65 | ) |
| Net loss                                                                         |       | $                                                    | (17,081    | ) | (8,469 | ) |
| Net loss per share,  basic and diluted                                           |       | $                                                    | (0.68      | ) | $ | (0.34 | ) |
| Weighted average shares used in computing net loss per share, basic  and diluted |       | 25,184                                               |       | 24,816 |   |

 

See accompanying notes.

4

----

**RIGELPHARMACEUTICALS, INC.CONDENSED**STATEMENTS OFCASH FLOWS(in thousands)(unaudited)

 
| ** **                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| **Operating activities**                                                | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                 | (17,081    | ) | $ | (8,469 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                              |       |   |   |
| Depreciation and  amortization                                               |       | 336                               |       | 334 |   |
| Stock-based  compensation expense                                            |       | 2,622                             |       | 3,561 |   |
| Changes in  assets and liabilities:                                          |       |                              |       |   |   |
| Accounts  receivable                                                         |       | —                            |       | (580 | ) |
| Other  receivables                                                           |       | (10                               | )          | (134 | ) |
| Prepaid expenses  and other current assets                                   |       | 13                                |       | 82 |   |
| Other assets                                                                 |       | 37                                |       | 25 |   |
| Accounts payable                                                             |       | (214                              | )          | 40 |   |
| Accrued  compensation                                                        |       | (1,432                            | )          | (739 | ) |
| Other accrued  liabilities                                                   |       | 924                               |       | (1,000 | ) |
| Deferred revenue                                                             |       | (1,595                            | )          | (3,346 | ) |
| Deferred rent  and other long-term liabilities                               |       | 963                               |       | 81 |   |
| Net cash used in  operating activities                                       |       | (15,437                           | )          | (10,145 | ) |
| **Investing  activities**                                                    |       |                              |       |   |   |
| Purchases of  available-for-sale securities                                  |       | (17,959                           | )          | (11,154 | ) |
| Maturities of  available-for-sale securities                                 |       | 29,269                            |       | 9,450 |   |
| Capital  expenditures                                                        |       | (455                              | )          | (354 | ) |
| Net cash provided  by (used in) investing activities                         |       | 10,855                            |       | (2,058 | ) |
| **Financing  activities**                                                    |       |                              |       |   |   |
| Proceeds from  capital lease financings                                      |       | 399                               |       | 882 |   |
| Payments on  capital lease obligations                                       |       | (434                              | )          | (316 | ) |
| Net proceeds  from issuances of common stock                                 |       | 56                                |       | 144 |   |
| Net cash provided  by financing activities                                   |       | 21                                |       | 710 |   |
| Net decrease in cash  and cash equivalents                                   |       | (4,561                            | )          | (11,493 | ) |
| Cash and cash  equivalents at beginning of period                            |       | 47,727                            |       | 76,779 |   |
| Cash and cash equivalents at end of period                                   |       | $                                 | 43,166     |   | $ | 65,286 |   |

 

See accompanying notes.

5

----

**RigelPharmaceuticals, Inc.Notes to Condensed Financial Statements(unaudited)**

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

**1. Natureof Operations**

We were incorporated in the state of Delaware onJune 14, 1996. We are engaged in the discovery and development of novel,small-molecule drugs for the treatment of inflammatory/autoimmune diseases,cancer and viral diseases.

**2. Basisof Presentation**

Our accompanying unaudited condensed financialstatements have been prepared in accordance with U.S. generally accepted accountingprinciples for interim financial information and pursuant to the instructionsto Form 10-Q and Article 10 of Regulation S-X. Accordingly,they do not include all of the information and notes required by generallyaccepted accounting principles for complete financial statements. Theseunaudited condensed financial statements include all normal and recurringadjustments that we believe are necessary to fairly state our financialposition and the results of our operations and cash flows. Interim-periodresults are not necessarily indicative of results of operations or cash flowsfor a full-year. The balance sheet at December 31, 2006 has been derivedfrom audited financial statements at that date, but does not include alldisclosures required by U.S. generally accepted accounting principles forcomplete financial statements.  Becauseall of the disclosure required by U.S. generally accepted accounting principlesfor complete financial statements are not included herein, these unauditedinterim condensed financial statements and the notes accompanying them shouldbe read in conjunction with our audited financial statements and the notesthereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2006.

The preparation of financial statements in conformitywith U.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from theseestimates.

Comprehensive net loss did not differ materially fromthe net loss as reported.

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

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

**4. StockAward Plans**

We have two stockoption plans, the 2000 Equity Incentive Plan and 2000 Non-Employee DirectorsStock Option Plan, which provide for granting to our officers, directors andall other employees and consultants options to purchase shares of our commonstock. Under the plans, we may issue non-qualified options or incentive stockoptions. We also have an employee stock purchase plan, or ESPP, where eligibleemployees can purchase shares of our common stock at a price per share equal tothe lesser of 85% of the fair market value on the first day of the offeringperiod or 85% of the fair market value on the purchase date. The benefitsprovided under these plans are share-based payments subject to the provisionsof Statement of Financial Accounting Standards, or SFAS, No. 123(R), “Share-BasedPayment (Revised 2004),” or SFAS 123(R), and guidance under the Securities andExchange Commission’s Staff Accounting Bulletin 107, or SAB 107.

Total stock-based compensation expense related to allof our share-based awards that we recognized for the three months ended March31, 2007 and 2006 is comprised as follows (in thousands, except per shareamounts):

|                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Research and  development                   |       | $                                                | 1,200      |   | $ | 1,921 |   |
| General and  administrative                 |       | 1,422                                            |       | 1,640 |   |
| Stock-based  compensation expense           |       | $                                                | 2,622      |   | $ | 3,561 |   |
|                                        |       |                                             |       |   |   |
| Stock-based  compensation expense per share |       |                                             |       |   |   |
| Basic and diluted                           |       | $                                                | 0.10       |   | $ | 0.14 |   |

 

6

----

We recorded approximately $2.6 million in stock-basedcompensation expense for the three months ended March 31, 2007, consisting ofapproximately $2.6 million in stock-based awards granted to officers, directorsand all other employees from our stock option plans and ESPP and approximately$6,000 from options granted to consultants. Pursuant to SFAS 123(R), we are required to estimate the amount ofexpected forfeitures when calculating compensation costs, instead of accountingfor forfeitures as incurred. Our annual weighted average forfeiture rateincreased to 6.9% as of March 31, 2007, as compared to 4.7% as of  March 31, 2006 primarily due to theresignation of a former Chief Financial Officer of the company.  We will record actual forfeitures as theyoccur, and we will review our forfeiture rates each quarter and revise ourestimates accordingly.

For the three months ended March 31, 2007, we recordedstock-based compensation expense of approximately $6,000, which reflects thefair value and periodic fair value remeasurement of outstanding consultantoptions under Emerging Issues Task Force No. 96-18, “Accounting for EquityInstruments that are Issued to Other Than Employees for Acquiring, or inConjunction with Selling Goods or Services,” or EITF 96-18.   This valuation is based upon the currentmarket value of our common stock and other assumptions, including the expectedfuture volatility of our stock price, risk-free interest rate and expected term.For options granted to our consultants in 2006, we amortized stock-basedcompensation using a straight-line attribution method consistent with themethod used for employees and with the attribution election we made uponadoption of SFAS 123(R). We recorded stock-based compensation expense ofapproximately $277,000 for the three months ended March 31, 2006. We expect tocontinue to see fluctuations in the future as a portion of these options areremeasured based on changes in the current market price of our common stock.

Under SFAS 123(R), the fair value of each option awardis estimated on the date of grant using the Black-Scholes option pricing model.We have segregated option awards into three homogenous groups, officers anddirectors, all other employees and consultants, for purposes of determiningfair values of options.

We determinedweighted-average valuation assumptions separately for each of these groups asfollows:

·                  Volatility-  We estimated volatility using thehistorical share price performance over the expected life of the option up tothe point where we have historical market data. As our publicly listed optionsare not actively traded, implied volatility was not representative of ourcurrent volatility. We also considered other factors, such as 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.

·                  Expectedterm - We worked with various data points to determine the most applicableexpected term for each option group. The data points included: (1) for optionsexercised, expected term of the options from option grant date to exercisedate; (2) for options cancelled, term of options from grant date to cancellationdate, excluding unvested option forfeitures; (3) for options which remainoutstanding, term of options from grant date to the end of the reportingperiod; and (4) for options outstanding at the balance sheet date, thecontractual remaining life of the options. The analysis of the above datapoints gave us a range of expected terms to consider, however, we alsoconsidered the vesting schedules of the options granted and factors surroundingexercise behavior of our groups, our current market price and company activitythat may affect our market price. In addition, we also considered the vestingschedules of the options, the optionee type (i.e., officers and directors, allother employees and consultants) and other factors that may affect the expectedterm of the option. For options granted to consultants, we use the contractualterm of the option, which is generally ten years, for the initial valuation ofthe option and the remaining contractual term of the option for the succeedingyears.

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

7

----

·                  Forfeiturerate - We estimated the forfeiture rate using our historical experience withpre-vesting options. Our annual weighted-average forfeiture rate wasapproximately 6.9% as of March 31, 2007, as compared to 4.7% as of March 31,2006.  We review our forfeiture rateseach quarter and make changes as factors affecting our forfeiture ratecalculations and assumptions change.

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

The following table summarizes the weighted-averageassumptions relating to our employee options for the three  months ended March 31, 2007 and 2006, aspermitted under SFAS 123(R):

|                           | ** ** | **Stock Option Plans  Three Months Ended  March 31,** | ** ** |
|---------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                | ** ** | **2007**                                                                       | ** ** | **2006** | ** ** |
| Risk-free  interest rate  |       | 4.7                                                                            | %          | 4.6 | % |
| Expected life  (in years) |       | 4.0                                                                            |       | 4.5 |   |
| Dividend yield            |       | 0.0                                                                            | %          | 0.0 | % |
| Expected volatility       |       | 79.3                                                                           | %          | 99.5 | % |

 

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. At March 31, 2007, options to purchase 600,755shares of common stock were available for grant under our stock option plans.

***EmployeeStock Purchase Plan***

The fair value of awards granted under our ESPP isestimated on the date of grant using the Black-Scholes option pricing model,which uses the weighted-average assumptions set forth in the table below. OurESPP provides for a twenty-four month offering period comprised of foursix-month purchase periods with a look-back option. A look-back option is aprovision in our ESPP where eligible employees can purchase shares of ourcommon stock at a price per share equal to the lesser of 85% of the fair marketvalue on the first day of the offering period or 85% of the fair market valueon the purchase date. The plan also includes a feature that provides for a newoffering period to begin when the fair market value of our common stock duringan offering falls below the fair market value of our common stock on the firstday of such offering period. Participants are automatically enrolled in the new offering period.Expected volatilities are based on historical volatility of our stock. Expectedterm represents the purchase periods within our offering period. The risk-freerate for periods within the contractual life of the option is based on U.S.Treasury constant maturity rates. Stock-basedcompensation expense relating to our ESPP is recognized according to the FASBTechnical Bulletin No. 97-1, “Accounting under Statement 123 for CertainEmployee Stock Purchase Plans with a Look-back Option,” or FTB 97-1. As of March31, 2007, there were approximately67,600 shares in reserve for future issuance under the ESPP. Thefollowing table summarizes the weighted-average assumptions relating to ourESPP for the three months ended March 31, 2007 and 2006:

|                           | ** ** | **Employee Stock Purchase Plan  Three Months Ended  March 31,** | ** ** |
|---------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                | ** ** | **2007**                                                                                      | ** ** | **2006** | ** ** |
| Risk-free  interest rate  |       | 5.1                                                                                           | %          | 4.6 | % |
| Expected life  (in years) |       | 0.7                                                                                           |       | 1.2 |   |
| Dividend yield            |       | 0.0                                                                                           | %          | 0.0 | % |
| Expected volatility       |       | 43.5                                                                                          | %          | 110.0 | % |

*** ***

8

----

***Stock-based Compensation Award Activity***

The following tablesummarizes activity under our equity incentive and stock option plans as ofMarch 31, 2007 (in thousands, except per share amounts):
| ** **                                     | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | ** **                                 | ** ** | ***(Years)***                                        | ** ** | ** **                      | ** ** |
| Outstanding at  December 31, 2006              |       | 4,405,211  |       | $                                          | 14.50      |                                                 |       |                            |       |   |
| Granted                                        |       | 887,087    |       | $                                          | 11.60      |                                                 |       |                            |       |   |
| Exercised                                      |       | (7,503     | )          | $                                          | 7.38       |                                                 |       |                            |       |   |
| Forfeited/Expired/Cancelled                    |       | (11,636    | )          | $                                          | 15.82      |                                                 |       |                            |       |   |
| Outstanding at  March 31, 2007                 |       | 5,273,159  |       | $                                          | 14.02      |                                                 | 7.99       |                            | $          | 6,169,711 |   |
| Vested and  expected to vest at March 31, 2007 |       | 5,126,473  |       | $                                          | 14.42      |                                                 |       |                            |       |   |
| Exercisable at March  31, 2007                 |       | 3,156,478  |       | $                                          | 13.38      |                                                 | 7.36       |                            | $          | 5,272,725 |   |

 

The aggregate intrinsic value is calculated as thedifference between the exercise price of the underlying awards and the quotedprice of our common stock for the options to acquire 2.4 million shares thatwere in-the-money at March 31, 2007. During the three months ended March 31,2007 and 2006, the aggregate intrinsic value of options exercised under ourstock option plans was approximately $29,000 and $53,000, respectively,determined as of the date of option exercise. As of March 31, 2007, there wasapproximately $12.4 million of total unrecognized compensation cost, net offorfeitures, related to unvested share-based compensation arrangements grantedunder our stock option plans and $254,000 of total unamortized compensationcost related to our ESPP. These costs are expected to be recognized over aweighted-average period of 1.60 years. In addition, we had approximately 2.0million shares of unvested stock options at March 31, 2007. Future optiongrants and their valuation will increase our compensation cost in the future asthe options are granted, valued and expensed ratably according to their vestingperiods. The weighted average grant-date fair values of options granted in thethree months ended March 31, 2007 and 2006 were $7.10 and $5.61, respectively.

**5.Revenue Recognition**

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

Non-refundable, up-front payments received inconnection with research and development collaboration agreements, includingtechnology access fees, are deferred and recognized on a straight-line basisover the relevant periods of continuing involvement, generally the researchterm.  When a research term is 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 estimatesevery quarter for reasonableness.

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 

9

----

termof the respective agreements. For the Merck collaboration, we are recognizing apro-rata portion of the invoiced amounts for funding of our research scientistsbased on the headcount dedicated to the project. It is our policy to recognizerevenue based on our level of effort expended, and that revenue recognized willnot exceed amounts billable under the arrangement.

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

Royalties will be recognized as earned in accordancewith the contract terms when the third party results are reliably measurableand collectibility is reasonably assured.

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

Cash, cash equivalentsand available-for-sale securities consist of the following (in thousands):
| ** **                     | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Checking account               |       | $                        | 236        |                        | $          | 332 |   |
| Money market  funds            |       | 7,858                    |       | 4,441                       |       |
| Federal agency  securities     |       | 6,000                    |       | 13,463                      |       |
| Corporate bonds  and notes     |       | 74,505                   |       | 86,235                      |       |
|                           |       | $                        | 88,599     |                        | $          | 104,471 |   |
| Reported as:                   |       |                     |       |                        |       |
| Cash and cash  equivalents     |       | $                        | 43,166     |                        | $          | 47,727 |   |
| Available-for-sale  securities |       | 45,433                   |       | 56,744                      |       |
|                           |       | $                        | 88,599     |                        | $          | 104,471 |   |

 

Available-for-salesecurities consist of the following (in thousands):
| **March 31, 2007** | ** ** | ** ** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------|------------|------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| Federal agency  securities   |       | $          | 6,000      |                | $          | 1                            |       | $                             | (1         | )                   | $          | 6,000 |   |
| Corporate bonds  and note    |       | 39,421     |       | 13                  |       | (1                           | )          | 39,433                        |       |
| Total                        |       | $          | 45,421     |                | $          | 14                           |       | $                             | (2         | )                   | $          | 45,433 |   |

 
| **December 31, 2006** | ** ** | ** ** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|---------------------------------|------------|------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| Federal agency  securities      |       | $          | 9,497      |                | $          | —                       |       | $                             | (8         | )                   | $          | 9,489 |   |
| Corporate bonds  and note       |       | 47,232     |       | 21                  |       | —                       |       | 47,253                        |       |
| Total                           |       | $          | 56,729     |                | $          | 21                           |       | $                             | (8         | )                   | $          | 56,742 |   |

 

At March 31, 2007, the above debt securities had aweighted average maturity of approximately 96 days.  All federal agency securities and corporatebonds had a maturity less than 360 days.

10

----

The following table shows the gross unrealized lossesand fair values of our investments in individual securities that are in anunrealized loss position, aggregated by investment category (in thousands):

| March 31, 2007   | ** ** | ** ** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
|----------------------------|------------|------------|------------|---------------------|------------|------------------------|------------|
| Federal agency  securities |       | $          | 3,000      |                | $          | (1                     | )          |
| Corporate bonds  and notes |       | 2,005      |       | (1                  | )          |
| Total                      |       | $          | 5,005      |                | $          | (2                     | )          |

 

| December 31, 2006 | ** ** | ** ** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
|-----------------------------|------------|------------|------------|---------------------|------------|------------------------|------------|
| Federal agency  securities  |       | $          | 9,474      |                | $          | (8                     | )          |
| Corporate bonds  and notes  |       | —     |       | —              |       |
| Total                       |       | $          | 9,474      |                | $          | (8                     | )          |

 

At March 31, 2007 and December 31, 2006, we had noinvestment that had been in a continuous unrealized loss position for more thantwelve months.

As of March 31, 2007, a total of 3 individualsecurities were in an unrealized loss position for twelve months or less anddeemed to be temporary. As of December 31, 2006, 5 individual securitieswere in an unrealized loss position for less than twelve months and deemed tobe temporary.

*InvestmentGrade Debt Securities.**  *Ourinvestments in investment grade debt securities consist primarily ofinvestments in federal agency securities and corporate bonds and notes. Theunrealized losses on our investments in investment grade debt securities werecaused by interest rate increases. Due to the fact that the decline in marketvalue is attributable to changes in interest rates and not credit quality, andbecause the severity and duration of the unrealized losses were notsignificant, we considered these unrealized losses to be temporary atMarch 31, 2007.

**7. Income Taxes**

We adopted SFASInterpretation 48, *Accounting forUncertainty in Income Taxes,*or “FIN 48,” on January 1, 2007. We did not recognize any adjustment to the liability for uncertain taxpositions nor did we have any unrecognized tax benefits and therefore did notrecord any adjustment to the beginning balance of retained earnings on thebalance sheet.

We file income taxreturns in the U.S. federal jurisdiction and in California, and the tax returnsfiled for the years 2002 through 2006 have not been examined and have notexpired by the statute of limitations.

Our policy is thatwe recognize interest and penalties accrued on any unrecognized tax benefits asa component of income tax expense. As of the date of adoption of FIN 48, we didnot have any accrued interest or penalties associated with any unrecognized taxbenefits.

**8. Equipment Lease Line**

In June 2006, we obtained approval to extend ourequipment lease line to create a new total borrowing limit of $1.5 million.  We have the ability to draw down on this linethrough June 2007. The repayment period will be for three years beginningon the first draw down, with the interest rate on the line fixed at eachdrawdown. Each line has a bargain purchase buyout provision of $101. During thethree months ended March 31, 2007, we drew down approximately $399,000, whichis included in our capital lease obligation on our balance sheet. Approximately$686,000 remained available under the equipment lease line as of March 31, 2007.

**9.Subsequent Event**

*Equity Financing*

On May 8, 2007, wecompleted a public offering in which we sold 5,000,000 shares of common stockat a price of $9.75 per share. We received net proceeds of approximately $45.5million after deducting commissions, underwriting discounts and offering costs.

11

----

**Report ofIndependent Registered Public Accounting Firm**

The Board of DirectorsRigel Pharmaceuticals, Inc.

We have reviewed the accompanying condensed balancesheet of Rigel Pharmaceuticals, Inc. as of March 31, 2007, the related condensed statements of operationsfor the three-month periods ended March 31, 2007 and 2006, and the condensed statements of cash flows for thethree-month periods ended March 31, 2007 and 2006. These interim financial statements are the responsibility ofthe Company’s management.

We conducted our review in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Areview of interim financial information consists principally of applyinganalytical procedures and making inquiries of persons responsible for financialand accounting matters. It is substantially less in scope than an auditconducted in accordance with the standards of the Public Company AccountingOversight Board, the objective of which is the expression of an opinionregarding the financial statements taken as a whole. Accordingly, we do notexpress such an opinion.

Based on our review, we are not aware of anymaterial modifications that should be made to the condensed interim financialstatements referred to above for them to be in conformity with U.S. generallyaccepted accounting principles.

We have previously audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), thebalance sheet of Rigel Pharmaceuticals, Inc. as of December 31, 2006,and the related statements of operations, shareholders’ equity, and cash flowsfor the year then ended (not presented herein), and in our report datedMarch 6, 2007, we expressed an unqualified opinion on those financialstatements and included an explanatoryparagraph referencing Rigel Pharmaceuticals, Inc.’s change in method ofaccounting for share-based compensation in 2006 and Note 1 to the financialstatements. In our opinion, the information set forth in theaccompanying balance sheet as of December 31, 2006, is fairly stated, inall material respects, in relation to the balance sheet from which it has beenderived.
|                       |   | /s/ Ernst & Young LLP |
|-----------------------|--------|--------------------------------|
| Palo Alto, California |   |                           |
| May 9, 2007           |   |                           |

 

 

12

----

**Item2.****    Management’s Discussion and Analysisof Financial Condition and Results of Operations**

*This discussion and analysis should be read in conjunction with ourfinancial statements and accompanying notes included in this report and theaudited financial statements and accompanying notes included in our AnnualReport on Form 10-K for the year ended December 31, 2006. Operatingresults for the three months ended March 31, 2007 are not necessarilyindicative of results that may occur in future periods.*

*We usually use words such as “may,”“will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”“predict,” “future,” “intend,” “potential” or “continue” or the negative ofthese terms or similar expressions to identify these forward-lookingstatements. These statements appear throughout this quarterly report onForm 10-Q and are statements regarding our current intent, belief orexpectation, primarily with respect to our operations and related industrydevelopments. Examples of these statements include, but are not limited to,statements regarding the following: our business and scientific strategies; theprogress of our product development programs, including clinical testing; ourcorporate collaborations, including revenues that may be received from thesecollaborations; our drug discovery technologies; our research and developmentexpenses; protection of our intellectual property; sufficiency of our cashresources; and our operations and legal risks. You should not place unduereliance on these forward-looking statements. Our actual results could differmaterially from those anticipated in these forward-looking statements for manyreasons, including as a result of the risks and uncertainties discussed in the “RiskFactors” in Item 1A of Part II of this quarterly report on Form 10-Q. Anyforward-looking statement speaks only as of the date on which it is made, andwe undertake no obligation to update any forward-looking statement to reflectevents or circumstances after the date on which the statement is made or toreflect the occurrence of unanticipated events. New factors emerge from time totime, and it is not possible for us to predict which factors will arise. Inaddition, we cannot assess the impact of each factor on our business or the extentto which any factor, or combination of factors, may cause actual results todiffer materially from those contained in any forward-looking statements.*

**Overview**

We are a clinical-stage drug development company thatdiscovers and develops novel, small-molecule drugs for the treatment ofinflammatory/autoimmune diseases, cancer and viral diseases. Our goal is tofile one new investigative new drug (IND) application in a significantindication each year. We have achieved this goal each year beginning in 2002.Our pioneering research focuses on intracellular signaling pathways and relatedtargets that are critical to disease mechanisms. Our productivity has resultedin strategic collaborations with large pharmaceutical partners to develop andmarket our product candidates. We have internal product development programs ininflammatory and/or autoimmune diseases such as rheumatoid arthritis,thrombocytopenia, and cancer, as well as partnered product development programsrelating to asthma and cancer*.*

Rigel has the following product candidates indevelopment as follows:

·                  *R788—Product Candidate for Rheumatoid Arthritis (RA). *R788 is our lead product candidate. It has anovel mechanism of action-blocking IgG receptor signaling in macrophages andB-cells. Previously, we studied R788 in a Phase 1 single center, double-blind,randomized, placebo-controlled clinical trial evaluating the safety andpharmacokinetics of escalating single and multiple doses of R788. We alsocompleted a clinical trial of R788 to evaluate its safety and pharmacokineticsin combination with methotrexate, a commonly prescribed treatment for RA.Results of this clinical trial suggested that there is not an adverseinteraction between R788 and methotrexate. In September 2006, weinitiated a 90-day Phase 2, multicenter, ascending dose, randomized,double-blind, placebo-controlled, dose ranging clinical trial to evaluate up tothree doses of R788 in RA patients who were taking methotrexate.  We have completed the first dose group in theclinical trial and are currently enrolling patients in the second dose group.  To date, R788 appears to be well tolerated bythe first dose group.  We expect toreceive top-line results from the clinical trial in the second half of 2007.

·                  *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 initiated an exploratory Phase 2clinical trial of R788 in January 2007 to evaluate its safety and efficacy inchronic ITP patients.  In this clinicaltrial, R788 was orally administered in varying doses for 30 or more days.  We have observed encouraging preliminary drugactivity in raising platelet counts in a number of the patients studied todate.  Based on these initial results, wehave submitted an amended protocol to the Food and Drug Administration, or FDA,to expand this trial to allow for a greater range of dose regimens and tocontinue to treat those patients that are responding beyond 90 days.  We expect to receive top-line results from thisclinical trial by the end of 2007.

13

----

·                  *R788**—*ProductCandidate for B-Cell Lymphoma.* *Research has shownthat overactivity of the signaling enzyme spleen tyrosine kinase, or Syk, is anessential mechanism in several types of B-cell lymphoma survival and that R788inhibits the growth of B-cell lymphoma driven by Syk overactivity.  We filed an IND for this indication inDecember 2006 and in April 2007, began enrolling patients in a multicenter,open label Phase 1/2 clinical trial to evaluate the safety and efficacy of R788for the treatment of patients with B-cell lymphoma.  The clinical trial is expected to enroll atotal of approximately 60 patients at 10 major treatment centers in the UnitedStates and will focus on certain types of B-cell lymphomas.  Depending on enrollment, we expect to receiveinterim results from the clinical trial in the second half of 2007, with top-lineresults in 2008.

·                  *R763—Product Candidate for Oncology.*  We have identified R763 as alead compound in our aurora kinase inhibition program targeting cancer cellproliferation.* *R763 isa potent, highly-selective, small-molecule inhibitor of aurora kinase. InOctober 2005, we signed a licensing agreement with Merck Serono thatgranted to Merck Serono an exclusive license to develop and commercializeinhibitors in our aurora kinase program, including R763.  Under the agreement, we were responsible forfiling an IND for R763, which we filed with the FDA in December 2005, and wereallowed to proceed under the IND in January 2006.  Merck Serono is responsible for the furtherdevelopment and commercialization of R763. In September 2006, Merck Serono initiated a Phase 1 multicenter clinicaltrial to evaluate R763 for the treatment of patients with refractory solidtumors.  In February 2007, Merck Seronobegan an additional Phase 1 clinical trial evaluating R763 on patients withhematological malignancies.  We expectinterim results from both clinical trials in the second half of 2007.

In the first quarter of 2005, weannounced that we entered into a collaborative research and license agreementwith Pfizer for the development of inhaled products for the treatment ofallergic asthma and other respiratory diseases, such as chronic obstructivepulmonary disease, or COPD. The collaboration is focused on our preclinicalsmall molecule compounds, which inhibit IgE receptor signaling in respiratorytract mast cells by blocking the signaling enzyme Syk, a novel drug target forrespiratory diseases. Mast cells play important roles in both early and latephase allergic reactions, and Syk inhibitors could prevent both phases.  In May 2006, Pfizer nominated R343 tocommence advanced preclinical development in allergic asthma.  We expect R343 to be delivered using Pfizer’sdry powder inhaler and to enter the clinic by the end of 2007.

In October 2006,we announced that we selected R348, an orally-available, potent and selectiveinhibitor of Janus Kinase 3, or JAK3, to enter preclinical studies tosupport an IND application planned for 2007. We plan to initiate a Phase 1 clinical trial of R348 by the end of2007.  We are also studying Axlinhibition in oncology.  In addition tothe aforementioned product candidates, we have ongoing research programsinvolving back-up candidates for the product candidates set forth above anddrug discovery efforts in our immunology/inflammation, virology and oncologyprograms.

**Corporate Collaborations**

We carry on research and development programs inconnection with our corporate collaborations. As of March 31, 2007, we hadcollaborations with the following six major pharmaceutical/biotech companies:one with Janssen Pharmaceutica N.V., a division of Johnson & Johnson,relating to oncology therapeutics and diagnostics; two with Pfizer Inc.,one initiated in 1999 in immunology and the other in 2005, relating to intrapulmonaryasthma and allergy therapeutics; one with Novartis Pharma AG with respect tofour different programs relating to immunology, oncology and chronicbronchitis; one with Daiichi Pharmaceuticals Co., Ltd. relating tooncology; one with Merck, also relating to oncology; and one with Merck Seronorelating to oncology. All of these collaborations, other than the recent Pfizerand the Merck Serono collaborations, have a research phase during which wereceive or received funding based on the level of headcount allocated to theprogram. In all of these collaborations, if certain conditions are met, we areentitled to receive future milestone payments and royalties. We cannotguarantee that these conditions will be met or that research and developmentefforts will be successful. As a result, we may not receive any furthermilestone payments or royalties under these agreements. Only the Merck programrelating to oncology currently provides for regular research reimbursementpayments, which is slated to end in May 2007.

14

----

We are exploring new opportunities with existing andpotential collaborators. Our earliest partnerships focused on the early stagesof drug discovery, specifically on target discovery and validation. Ourcollaborations with Daiichi and recently with Merck are both later stage,focusing on drug discovery and development. Our 2005 collaboration with Pfizercovers a compound that Pfizer selected for advanced preclinical development inMay 2006, while our 2005 collaboration with Merck Serono covers a compoundthat began clinical trials in September 2006. We currently anticipate thatin order to support our current research programs, we will need to self-fundour own research programs, which involves an increased rate of spending onlater stages of development prior to partnering with collaborative partners.Therefore, it is expected that future collaborations may have an expanded focusand could include high throughput screening, combinatorial and medicinalchemistry, preclinical evaluations and/or clinical development of compounds wehave discovered. In addition, we believe these future collaborations could bestructured to consist of upfront payments, the purchase of our common stock,milestone payments upon meeting certain conditions, research or development reimbursementpayments and/or royalties upon commercialization of products resulting from thecollaboration.

***Equity Financing***

On May 8, 2007, we completed a public offering inwhich we sold 5,000,000 shares of common stock at a price of $9.75 per share. Wereceived net proceeds of approximately $45.5 million after deductingcommissions, underwriting discounts and offering costs.

**CriticalAccounting Policies and the Use of Estimates**

Our discussion and analysis of our financial conditionand results of operations is based upon our financial statements, which havebeen prepared in accordance with U.S generally accepted accounting principles.The preparation of these 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. Weevaluate our estimates, including those related to terms of the researchcollaborations (i.e., amortization of upfront fees and certain milestonepayments), investments, stock compensation, impairment issues, the estimateduseful life of assets and contingencies, on an on-going basis. Our estimatesare based on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates under different assumptions or conditions.  There have been no significant changes in ourcritical accounting policies during the period ended March 31, 2007 as comparedto those previously disclosed in our Annual Report on Form 10-K forthe year ended December 31, 2006.

***Revenue Recognition***

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

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

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 are recognizing a pro-rata portionof the invoiced amounts for funding of our research scientists based on theheadcount dedicated to the project. It is our policy to recognize revenue basedon our level of effort expended and that revenue recognized will not exceedamounts billable under the arrangement.

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

Royalties will be recognized as earned in accordancewith the contract terms when the third party results are reliably measurableand collectibility is reasonably assured.

15

----

***Stock-based Compensation***

The determination of the fair value of share-basedpayment awards on the date of grant using an option-pricing model is affectedby our stock price as well as assumptions regarding a number of complex andsubjective variables. These variables include, but are not limited tovolatility, expected term, risk-free interest rate, forfeiture rate anddividends.  We estimate volatility usingour historical share price performance over the expected life of the option upto the point where we have historical market data.  For expected term, we use various data pointsincluding expected term of the options based on options exercised, cancellationdate of the options and the period the options remain outstanding.  The risk-free rate is based on the U.S.Treasury constant maturity rate, and we estimate the forfeiture rate using ourhistorical experience with options that cancel before they vest.  We have not paid and do not expect to paydividends.

If factors change and we employ different assumptionsin the application of SFAS 123(R) in future periods, the compensation expensethat we record under SFAS 123(R) may differ significantly from what we haverecorded in the current period. Therefore, we believe it is important to beaware of the high degree of subjectivity involved when using option pricingmodels to estimate share-based compensation under SFAS 123(R).

**Resultsof Operations**

**ThreeMonths Ended March 31, 2007 and 2006**

**Revenues**

|                          | ** ** | **Three months ended** | ** ** | ** **                | ** ** |
|--------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **               | ** ** | **March 31,**          | ** ** | **Aggregate Change** | ** ** |
| ** **               | ** ** | **2007**               | ** ** | **2006**                  | ** ** | **2007 from 2006** | ** ** |
| ** **               | ** ** | **(in thousands)**     | ** ** |
| ***Contract  revenues*** |       | $                      | 2,644      |                      | $          | 9,897 |   | $ | (7,253 | ) |
|                          |            |                        |            |                           |            |  |  |  |  |  |

 

Revenues by collaboratorwere:

|                     | ** ** | **Three months ended** | ** ** | ** **                | ** ** |
|---------------------|------------|------------------------|------------|---------------------------|------------|
| ** **          | ** ** | **March 31,**          | ** ** | **Aggregate Change** | ** ** |
| ** **          | ** ** | **2007**               | ** ** | **2006**                  | ** ** | **2007 from 2006** | ** ** |
| ** **          | ** ** | **(in thousands)**     | ** ** |
| ***Merck***         |       | $                      | 1,885      |                      | $          | 1,813 |   | 72 |   |
| ***Pfizer***        |       | 759                    |       | 1,250                     |       | (491 | ) |
| ***Merck  Serono*** |       | —                 |       | 6,834                     |       | $ | (6,834 | ) |
| ***Total***         |       | $                      | 2,644      |                      | $          | 9,897 |   | $ | (7,253 | ) |

 

Contract revenues from collaborations for the threemonths ended March 31, 2007 and 2006 consisted primarily of research supportand amortization of upfront fees and milestone payments from the continuationof our current collaborations.  Revenuein the three months ended March 31, 2006 included the amortization of the MerckSerono upfront payment of $3.3 million, the Merck Serono milestone payment of$3.5 million and the amortization of the Pfizer upfront payment of $1.2million, thus the decrease in contract revenues for the three months endedMarch 31, 2007 as compared to the similar period in 2006.  The Merck Serono upfront payment was fullyamortized in 2006, and the Pfizer upfront fee was fully amortized in February2007. We have deferred approximately $1.0 million of research reimbursementrevenue from Merck in order to account for the headcount effort expended by usfor the time period invoiced, which covers the period from the initiation ofthe collaboration through March 31, 2007. We expect this amount will berecognized as revenue no later than at the end of the research phase of thecollaboration, which is scheduled to be in May 2007. Other than the Merckrevenue noted above, potential revenues for the remainder of 2007 may includecertain milestone payments from Pfizer and Merck Serono and any newcollaborations.

16

----

**Researchand Development Expenses**

|                                                                                       | ** ** | **Three months ended** | ** ** | ** **                | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                                                            | ** ** | **March 31,**          | ** ** | **Aggregate Change** | ** ** |
| ** **                                                                            | ** ** | **2007**               | ** ** | **2006**                  | ** ** | **2007 from 2006** | ** ** |
|                                                                                  | ** ** | **(in thousands)**     | ** ** |
| ***Research  and development expenses***                                              |       | $                      | 15,843     |                      | $          | 14,711 |   | $ | 1,132 |   |
| ***Stock-based compensation expense included in research and development  expenses*** |       | 1,200                  |       | 1,921                     |       | (721 | ) |
|                                                                                       |            |                        |            |                           |            |  |  |  |  |  |

 

The increase in research and development expenses forthe three months ended March 31, 2007, as compared to the same period in 2006,was primarily attributable to an increase in preclinical and clinical costsoffset by a decrease in stock-based compensation expense as discussed under “Stock-basedCompensation” below. The increase in preclinical and clinical costs in thethree months ended March 31, 2007, as compared to the same period in 2006, wasprimarily due to the increased costs relating to running the Phase 2 clinicaltrials of R788 in the different indications. We expect that our research and development expenses will increasethrough the remainder of 2007 as we continue our Phase 2 clinical trials ofR788 for RA, ITP and Lymphoma and continue to work on programs for otherindications.

The scope and magnitude offuture research and development expenses are difficult to predict at this timegiven the number of studies that we will need to conduct for any of ourpotential products, as well as our limited capital resources. In general,biopharmaceutical development involves a series of steps—beginning withidentification of a potential target and including, among others, proof ofconcept in animals and Phase 1, 2 and 3 clinical studies in humans.  Each of these steps is typically moreexpensive than the previous step. Success in development, therefore, results inincreasing expenditures. Our research and development expenditures currentlyinclude costs for scientific personnel, supplies, equipment, consultants,sponsored research, allocated facility costs, costs related to preclinical andclinical trials, and stock-based compensation.

**Generaland Administrative Expenses**

|                                                                                         | ** ** | **Three months ended** | ** ** | ** **                | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                                                              | ** ** | **March 31,**          | ** ** | **Aggregate Change** | ** ** |
| ** **                                                                              | ** ** | **2007**               | ** ** | **2006**                  | ** ** | **2007 from 2006** | ** ** |
| ** **                                                                              | ** ** | **(in thousands)**     | ** ** |
| ***General  and administrative expenses***                                              |       | $                      | 5,039      |                      | $          | 5,003 |   | $ | 36 |   |
| ***Stock-based compensation expense included in general and  administrative expenses*** |       | 1,422                  |       | 1,640                     |       | (218 | ) |
|                                                                                         |            |                        |            |                           |            |  |  |  |  |  |

 

The increase in general and administrative expensesfor the three months ended March 31, 2007, as compared to the same period in2006, is primarily attributable to increased costs relating to legal expenseassociated with patent filings offset by a decrease in stock-based compensationexpense under “Stock-based Compensation below”.

**Stock-basedCompensation**

|                                               | ** ** | **Three  months ended** | ** ** | ** **                | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                    | ** ** | **March  31,**          | ** ** | **Aggregate Change** | ** ** |
| ** **                                    | ** ** | **2007**                | ** ** | **2006**                  | ** ** | **2007 from 2006** | ** ** |
| ** **                                    | ** ** | **(in thousands)**      | ** ** |
| ***Stock-based  compensation expense from:*** |       |                    |       |                      |       |   |   |
| ***Officer,  director and employee options*** |       | $                       | 2,616      |                      | $          | 3,284 |   | $ | (668 | ) |
| ***Consultant  options***                     |       | 6                       |       | 277                       |       | (271 | ) |
| ***Other  employee options***                 |       | —                  |       | —                    |       | — |   |
| ***Total***                                   |       | $                       | 2,622      |                      | $          | 3,561 |   | $ | (939 | ) |

 

17

----

The decrease in stock-based compensation expense inthe three months ended March 31, 2007 as compared to the same period in 2006was primarily due to options that fully vested in the period and theresignation of a former Chief Financial Officer of the company.  We expect stock-based compensation tofluctuate as options are granted and vest during the period.

**InterestIncome**
|                       | ** ** | **Three  months ended** | ** ** | ** **                | ** ** |
|-----------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **            | ** ** | **March  31,**          | ** ** | **Aggregate Change** | ** ** |
| ** **            | ** ** | **2007**                | ** ** | **2006**                  | ** ** | **2007 from 2006** | ** ** |
| ** **            | ** ** | **(in thousands)**      | ** ** |
| ***Interest income*** |       | $                       | 1,215      |                      | $          | 1,413 |   | $ | (198 | ) |
|                       |            |                         |            |                           |            |  |  |  |  |  |

 

Interest income resultsfrom our interest-bearing cash and investment balances. The decrease in thethree months ended March 31, 2007, as compared to the same period in 2006, isattributable to a decrease in our overall investment balances as we use thecash for our operations.

**Liquidity and CapitalResources**

**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 thatour existing capital resources and anticipated proceeds from current collaborationswill be sufficient to support our current operating plan through at least thenext 12 months. Our operations will require significant additionalfunding, in large part due to our research and development expenses, futurepreclinical and clinical testing costs and the absence of any meaningfulrevenues from product sales for the foreseeable future. The amount of futurefunds needed will depend largely on the timing and structure of potentialfuture collaborations. We do not know whether additional financing will beavailable when needed, or that, if available, we will obtain financing on termsfavorable to our stockholders or us.

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

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

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

·              ourability to establish new collaborations and to maintain our existingcollaboration relationships;

·              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;

18

----

·              theprogress of the research and development efforts of our collaborative partnersor licensees;

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

·              ourability to manage our growth;

·              competingtechnological and market developments;

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

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

·              expensesassociated with unforeseen litigation.

Insufficient funds may requireus to delay, scale back or eliminate some or all of our research or developmentprograms, to lose rights under existing licenses or to relinquish greater orall rights to product candidates at an earlier stage of development or on lessfavorable terms than we would otherwise choose or may adversely affect ourability to operate as a going concern.  As of March 31, 2007, wehad approximately $88.6 million in cash, cash equivalents andavailable-for-sale securities, as compared to $104.5 million as ofDecember 31, 2006, a decrease of approximately $15.9 million. Thedecrease was attributable to operating spending in the period. For the threemonths ended March 31, 2007 and 2006, we maintained an investment portfolioprimarily in money market funds, federal agency securities and corporate bondsand notes. Cash in excess of immediate requirements is invested with regard toliquidity and capital preservation. Wherever possible, we seek to minimize thepotential effects of concentration and degrees of risk.

**ContractualObligations**

As of March 31, 2007, wehad the following contractual commitments (by fiscal year) associated with debtand lease obligations:
| ** **                                | ** ** | **Total**          | ** ** | **2007** | ** ** | **2008-2010** | ** ** | **2011-2013** | ** ** | **2014-2018** | ** ** |
|-------------------------------------------|------------|--------------------|------------|----------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                | ** ** | **(in thousands)** | ** ** |
| Debt obligations (1)                      |       | $                  | 2,573      |     | $          | 1,049         |       | $             | 1,524      |          | $          | — |   | $ | — |   |
| Facilities lease, net  of sublease (2)(3) |       | 157,557            |       | 6,255    |       | 44,987        |       | 44,001        |       | 62,314        |       |
| Total                                     |       | $                  | 160,130    |     | $          | 7,304         |       | $             | 46,511     |          | $          | 44,001 |   | $ | 62,314 |   |

----

(1)             Asof March 31, 2007, we had approximately $2.3 million in debt obligationsassociated with our equipment additions. All existing debt agreements as ofMarch 31, 2007 are secured by the equipment financed, bear interest at ratesbetween 8.8% and 12.2% and are due in monthly installments through 2010.

(2)             DuringMay 2004, we initiated a sublease of approximately 15,000 square feet ofour premises to a tenant for a period of two years. This sublease was amendedin September 2005 to extend the term for an additional year. The facilitieslease obligations above are reflective of the sublease income stream of$110,000.

(3)             Thesepayments reflect the terms of the recent amendment to our lease.

**Item3.****    Quantitative and QualitativeDisclosures About Market Risk**

The primary objective of our investment activities isto preserve principal while at the same time maximizing the income we receivefrom our investments without significantly increasing risk. Some of thesecurities in which we invest may have market risk. This means that a change inprevailing interest rates may cause the fair value amount of the investment tofluctuate. For example, if we hold a security that was issued with a fixedinterest rate at the then-prevailing rate and the prevailing interest ratelater rises, the market value amount of our investment will decline. Tominimize this risk in the future, we intend to maintain our portfolio of cashequivalents and available-for-sale securities in a variety of securities,including 

19

----

moneymarket funds and government and non-government debt securities. For the threemonths ended March 31, 2007 and 2006, we maintained an investment portfolioprimarily in money market funds, federal agency securities and corporate bondsand notes. Due to the short-term nature of the majority of these investments,we believe we do not have a material exposure to interest rate risk arisingfrom our investments. Therefore, no quantitative tabular disclosure isprovided.

We operate primarily in the United States, and allfunding activities with our collaborators to date have been made in U.S.dollars. Accordingly, we have had minimal exposure to foreign currency ratefluctuations.

**Item4.****    Controlsand Procedures**

*Evaluation of Disclosure Controls and 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 March 31,2007.

*Changes in Internal Controls.*Therewere no changes in our internal controls over financial reporting during thequarter ended March 31, 2007 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

*Limitations on theEffectiveness of 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.

**PART II.OTHER INFORMATION**

**Item 1A. RiskFactors**

*In evaluating ourbusiness, you should carefully consider the following risks, as well as theother information contained in our Quarterly Report on Form 10-Q. Ifany of the following risks actually occurs, our business could be harmed. Therisks and uncertainties described below are not the only ones facing us.Additional risks and uncertainties not presently known to us, or that wecurrently see as immaterial, may also harm our business.*

*We have markedwith an asterisk(*) those risk factors below that reflect material changes fromthe risk factors included in our Annual Report on Form 10-K filedwith the Securities and Exchange Commission on March 8, 2007.*

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

We have consumed substantial amounts of capital todate, and operating expenditures are expected to increase over the next severalyears as we expand our research and development activities. We believe that ourexisting capital resources and anticipated proceeds from current collaborationswill be sufficient to support our current operating plan through at least thenext 12 months. Our operations will require significant additional fundingin large part due to our research and development expenses, future preclinicaland clinical-testing costs, and the absence of any meaningful revenues for theforeseeable future. The amount of future funds needed will depend largely onthe timing and structure of potential future collaborations. We do not knowwhether additional financing will be available when needed, or that, ifavailable, we will obtain financing on terms favorable to our stockholders orus. As of March 31, 2007 and December 31, 2006, our cash, cashequivalents and available-for-sale securities were $88.6 million and$104.5 million, respectively.

To the extent we raise additional capital by issuingequity securities, our stockholders could at that time experience substantialdilution. To the extent that we raise additional funds through collaborationand licensing arrangements, we may be required to relinquish some rights to ourtechnologies or product candidates, or grant licenses on terms that are notfavorable to us.

20

----

**Our future fundingrequirements will depend on many uncertain factors.**

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

·       theprogress and success of clinical trials and preclinical activities (including studiesand manufacture of materials) of our product candidates conducted by us or ourcollaborative partners or licensees;

·       ourability to establish new collaborations and to maintain our existingcollaboration partnerships;

·       theprogress of research programs carried out by us;

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

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

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

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

·       ourability to manage our growth;

·       competingtechnological and market developments;

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

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

·       expensesassociated with unforeseen litigation.

Insufficient funds may require us to delay, scale backor 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.

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

Due in large part to the significant research anddevelopment 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 the timing of potential profitability arehighly uncertain, and we may never achieve profitable operations. We incurrednet losses of approximately $17.1 million for the three months ended March 31,2007, $37.6 million in 2006 and $45.3 million in 2005. Currently, ourrevenues are generated solely from research payments pursuant to ourcollaboration agreements and licenses and are insufficient to generateprofitable operations. As of March 31, 2007, we had an accumulated deficit ofapproximately $312.2 million. We expect to incur losses for at least the nextseveral years and expect that these losses could increase as we expand ourresearch and development activities and incur significant clinical and testingcosts.

**Thereis a high risk that drug discovery and development efforts might notsuccessfully generate good product candidates.**

At the present time, the majority of our operationsare in various stages of drug identification and development. We currently havetwo product compounds in the clinical testing stage: one with indications forRA, ITP and B-Cell Lymphoma, which is proprietary to our company, and the otherwith two indications for oncology, which is subject to a collaborationagreement with Merck Serono. In our industry, it is statistically unlikely thatthe limited number of compounds that we have identified as potential productcandidates will actually lead to successful product development efforts, and wedo not expect any drugs resulting from our research to be commerciallyavailable for several years, if at all. Our compounds in clinical 

21

----

trials and our futureleads for potential drug compounds are subject to the risks and failuresinherent in the development of pharmaceutical products. These risks include,but are not limited to, the inherent difficulty in selecting the right drug anddrug target and avoiding unwanted side effects as well as unanticipatedproblems relating to product development, testing, regulatory compliance,manufacturing, competition and costs and expenses that may exceed current estimates.The results of preliminary studies do not necessarily predict clinical orcommercial success, and larger later-stage clinical trials may fail to confirmthe results observed in the preliminary studies. With respect to our owncompounds in development, we have established anticipated timelines withrespect to the initiation or completion of clinical studies based on existingknowledge of the compound. However, we cannot provide assurance that we willmeet any of these timelines for clinical development.

Because of the uncertainty of whether the accumulatedpreclinical evidence (pharmacokinetic, pharmacodynamic, safety and/or otherfactors) or early clinical results will be observed in later clinical trials,we can make no assurances regarding the likely results from our future clinicaltrials or the impact of those results on our business.

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

Commercialization of our product candidates dependsupon 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, willbe permitted to undertake clinical trials of potential products beyond thetrials already concluded and the trials currently in process. It will take usor 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-party clinicalinvestigators 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 tomanufacture compounds for development and rely on third parties to manufactureour product candidates, and we may be unable to obtain required material in atimely manner, at an acceptable cost or at a quality level required to receiveregulatory approval.***

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

22

----

Our current and anticipated future dependence uponthese third-party manufacturers may adversely affect our ability to develop andcommercialize product candidates on a timely and competitive basis. Thesemanufacturers 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 IND applications and/or the initiation ofclinical trials that we have currently planned.

Our third-party manufacturers may not be able tocomply with the GMP regulations, other applicable FDA regulatory requirementsor similar regulations applicable outside of the United States. Additionally,if we are required to enter into new supply arrangements, we may not be able toobtain approval from the FDA of any alternate supplier in a timely manner, orat all, which could delay or prevent the clinical development andcommercialization of any related product candidates. Failure of our third-partymanufacturers or us to obtain approval from the FDA or to comply withapplicable regulations could result in sanctions being imposed on us, includingfines, civil penalties, delays in or failure to grant marketing approval of ourproduct candidates, injunctions, delays, suspension or withdrawal of approvals,license revocation, seizures or recalls of products and compounds, operating restrictionsand criminal prosecutions, any of which could significantly and adverselyaffect our business.

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

Our ability to generate revenue in the near termdepends on our ability to enter into additional collaborative agreements withthird parties and to maintain the agreements we currently have in place. Ourability to enter into new collaborations and the revenue, if any, that may berecognized under these collaborations is highly uncertain. If we are unable toenter 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 been related to theresearch phase of each of our collaborative agreements. Such revenues are forspecified periods, and the impact of such revenues on our results of operationsis partially offset by corresponding research costs. Following the completionof the research phase of each collaborative agreement, additional revenues maycome only from milestone payments and royalties, which may not be paid, if atall, until some time well into the future. The risk is heightened due to thefact that unsuccessful research efforts may preclude us from receiving anymilestone payments under these agreements. Our receipt of revenues fromcollaborative arrangements is also significantly affected by the timing ofefforts expended by us and our collaborators and the timing of lead compoundidentification. In late 2001, we recorded the first revenue from achievement ofmilestones in both the Pfizer and Johnson & Johnson collaborations. Inaddition, we have subsequently received milestone payments from Novartis,Daiichi, Merck, Merck Serono and Pfizer. Under many agreements, however,milestone payments may not be earned until the collaborator has advancedproduct candidates into clinical testing, which may never occur or may notoccur 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 generate meaningfulrevenue from royalties and licensing agreements. To date, we have not receivedany revenue from royalties for the commercial sale of drugs, and we do not knowwhen we will receive any such revenue, if at all. Likewise, we have notlicensed any lead compounds or drug development candidates to third parties,and we do not know whether any such license will be entered into on acceptableterms in the future, if at all.

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

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.

23

----

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.The research phase of our corporate collaboration agreement with Daiichi endedin 2005. In 2004, we signed a new corporate collaboration with Merck, and theresearch collaboration will end in May 2007. In 2005, we signed additionalcollaborations with Pfizer and Merck Serono. Each of our collaborations couldbe terminated by the other party at any time, and we may not be able to renewthese collaborations on acceptable terms, if at all, or negotiate additionalcorporate collaborations on acceptable terms, if at all. If thesecollaborations terminate or are not renewed, any resultant loss of revenuesfrom these collaborations or loss of the expertise of our collaborativepartners could adversely affect our business.

Conflicts also might arise with collaborative partnersconcerning proprietary rights to particular compounds. While our existingcollaborative agreements typically provide that we retain milestone paymentsand royalty rights with respect to drugs developed from certain derivativecompounds, any such payments or royalty rights may be at reduced rates, anddisputes may arise over the application of derivative payment provisions tosuch drugs, and we may not be successful in such disputes.

We are also a party to various license agreements thatgive us rights to use specified technologies in our research and developmentprocesses. The agreements pursuant to which we have in-licensed technologypermit our licensors to terminate the agreements under certain circumstances.If we are not able to continue to license these and future technologies oncommercially reasonable terms, our product development and research may bedelayed.

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

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

If any of our corporate collaborators were to breachor 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 not controlthe amount and timing of resources that our corporate collaborators devote toour programs or potential products. We do not know whether current or futurecollaborative 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.

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

Our success will depend to a large part on our own,our licensees’ and our licensors’ ability to obtain and defend patents for eachparty’s respective technologies and the compounds and other products, if any,resulting from the application of such technologies. We have over 160 pendingpatent applications and over 80 issued patents in the United States that areowned or exclusively licensed in our field as well as pending correspondingforeign patent applications. In the future, our patent position might be highlyuncertain and involve complex legal and factual questions. For example, we maybe involved in interferences before the United States Patent and TrademarkOffice. Interferences are complex and expensive legal proceedings and there isno assurance we will be successful in such proceedings. An interference couldresult in our losing our patent rights and/or our freedom to operate and/orrequire us to pay significant royalties. Additional uncertainty may resultbecause no consistent policy regarding the breadth of legal claims allowed inbiotechnology patents has emerged to date. Accordingly, we cannot predict thebreadth of claims allowed in our or other companies’ patents.

24

----

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

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

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

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

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

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

·       wewill develop additional proprietary technologies that are patentable; or

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

We rely on trade secrets to protect technology wherewe believe patent protection is not appropriate or obtainable; however, tradesecrets are difficult to protect. While we require employees, collaborators andconsultants to enter into confidentiality agreements, we may not be able toadequately protect our trade secrets or other proprietary information in theevent of any unauthorized use or disclosure or the lawful development by othersof such information.

We are a party to certain in-license agreements thatare important to our business, and we generally do not control the prosecutionof in-licensed technology. Accordingly, we are unable to exercise the samedegree of control over this intellectual property as we exercise over ourinternally-developed technology. Moreover, some of our academic institutionlicensors, research collaborators and scientific advisors have rights topublish data and information in which we have rights. If we cannot maintain theconfidentiality of our technology and other confidential information inconnection with our collaborations, then our ability to receive patentprotection 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 ourlicensors exercise their termination rights, we could lose our rights underthose agreements. If we lose any of our rights, it may adversely affect the waywe conduct our business. In addition, because certain of our licenses aresublicenses, the actions of our licensors may affect our rights under thoselicenses.

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

Our success will also depend, in part, on our abilityto operate without infringing or misappropriating the proprietary rights ofothers. There are many issued patents and patent applications filed by thirdparties relating to products or processes that are similar or identical to oursor our licensors, and others may be filed in the future. There can be noassurance that our activities, or those of our licensors, will not infringepatents owned by others. We believe that there may be significant litigation inthe industry regarding patent and other intellectual property rights, and we donot know if we or our collaborators would be successful in any such litigation.Any legal action against our collaborators or us claiming damages or seeking toenjoin commercial activities relating to the affected products, our methods orprocesses could:

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

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

·       subjectus to potential liability for damages;

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

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

25

----

**Ifwe are unable to obtain regulatory approval to market products in the UnitedStates and foreign jurisdictions, we might not be permitted to commercializeproducts from our research and development.**

Due, in part, to the early stage of our productcandidate research and development process, we cannot predict whetherregulatory clearance will be obtained for any product that we, or ourcollaborative partners, hope to develop. Satisfaction of regulatoryrequirements typically takes many years, is dependent upon the type complexityand novelty of the product and requires the expenditure of substantialresources. Of particular significance to us are the requirements relating toresearch and development and testing.

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

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

·       mustmeet requirements for institutional review board oversight;

·       mustmeet requirements for informed consent;

·       aresubject to continuing FDA oversight;

·       mayrequire large numbers of test subjects; and

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

While we have stated that we intend to file additionalINDs, this is only a statement of intent, and we may not be able to do sobecause 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 a product, wemust demonstrate that the product is safe and effective in the patientpopulation 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 is granted, thisapproval will be limited to those indications or disease states and conditionsfor which the product is demonstrated through clinical trials to be safe andefficacious. We cannot ensure that any compound developed by us, alone or withothers, will prove to be safe and efficacious in clinical trials and will meetall of the applicable regulatory requirements needed to receive marketingapproval.

Outside the United States, our ability, or that of ourcollaborative partners, to market a product is contingent upon receiving amarketing authorization from the appropriate regulatory authorities. Thisforeign regulatory approval process typically includes all of the risksassociated with FDA approval described above and may also include additional risks.

26

----

**Ifour competitors develop technologies that are more effective than ours, ourcommercial opportunity will be reduced or eliminated.**

The biotechnology and pharmaceutical industries areintensely 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 discovery technologies andtechniques or partner with collaborators in order to develop products morerapidly or successfully than we, or our collaborators, are able to do. Many ofour competitors, particularly large pharmaceutical companies, havesubstantially greater financial, technical and human resources than we do. Inaddition, academic institutions, government agencies and other public andprivate organizations conducting research may seek patent protection withrespect to potentially competitive products or technologies and may establishexclusive collaborative or licensing relationships with our competitors.

We believe that our ability to compete is dependent,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 us or any of our collaborators in any of those areasmay prevent the successful commercialization of our potential drug targets.

Our competitors might develop technologies and drugsthat are more effective or less costly than any that are being developed by usor that would render our technology and potential drugs obsolete andnoncompetitive. In addition, our competitors may succeed in obtaining theapproval of the FDA or other regulatory agencies for product candidates morerapidly. Companies that complete clinical trials, obtain required regulatoryagency approvals and commence commercial sale of their drugs before theircompetitors may achieve a significant competitive advantage, including certainpatent and FDA marketing exclusivity rights that would delay or prevent ourability to market certain products. Any drugs resulting from our research anddevelopment efforts, or from our joint efforts with our existing or futurecollaborative partners, might not be able to compete successfully withcompetitors’ existing or future products or obtain regulatory approval in theUnited States or elsewhere.

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

The drugs we hope to develop may be rejected by themarketplace due to many factors, including cost. Our ability to commerciallyexploit a drug may be limited due to the continuing efforts of government andthird-party payors to contain or reduce the costs of health care throughvarious means. For example, in some foreign markets, pricing and profitabilityof prescription pharmaceuticals are subject to government control. In theUnited States, we expect that there will continue to be a number of federal andstate proposals to implement similar government control. In addition,increasing emphasis on managed care in the United States will likely continueto put pressure on the pricing of pharmaceutical products. Cost controlinitiatives could decrease the price that any of our collaborators wouldreceive for any products in the future. Further, cost control initiatives couldadversely affect our collaborators’ ability to commercialize our products andour ability to realize royalties from this commercialization.

Our ability to commercialize pharmaceutical productswith collaborators may depend, in part, on the extent to which reimbursementfor the products will be available from:

·       governmentand health administration authorities;

·       privatehealth insurers; and

·       otherthird-party payors.

Significant uncertainty exists as to the reimbursementstatus of newly-approved healthcare products. Third-party payors, includingMedicare, are challenging the prices charged for medical products and services.Government and other third-party payors increasingly are attempting to containhealthcare costs by limiting both coverage and the level of reimbursement fornew drugs and by refusing, in some cases, to provide coverage for uses ofapproved products for disease indications for which the FDA has not grantedlabeling approval. Third-party insurance coverage may not be available to patientsfor any products we discover and develop, alone or with collaborators. Ifgovernment and other third-party payors do not provide adequate coverage andreimbursement levels for our products, the market acceptance of these productsmay be reduced.

27

----

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

The testing and marketing of medical products entailan 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 to clinicalliability claims. We currently do not have product liability insurance, and ourinability to obtain sufficient product liability insurance at an acceptablecost to protect against potential product liability claims could prevent orinhibit the commercialization of pharmaceutical products we develop, alone orwith corporate collaborators. We, or our corporate collaborators, might not beable to obtain insurance at a reasonable cost, if at all. While under variouscircumstances we are entitled to be indemnified against losses by our corporatecollaborators, indemnification may not be available or adequate should anyclaim arise.

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

As a small company with only 151 employees as ofMarch 31, 2007, our success depends on the continued contributions of ourprincipal management and scientific personnel and on our ability to develop andmaintain important relationships with leading academic institutions, scientistsand companies in the face of intense competition for such personnel. Inparticular, our research programs depend on our ability to attract and retainhighly skilled chemists, other scientists, and development, regulatory andclinical personnel. If we lose the services of any of our personnel, ourresearch and development efforts could be seriously and adversely affected. Ouremployees can terminate their employment with us at any time.

**Wedepend on various scientific consultants and advisors for the success andcontinuation 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 activities involve thecontrolled use of potentially harmful biological materials as well as hazardousmaterials, chemicals and various radioactive compounds. We cannot completelyeliminate the risk of accidental contamination or injury from the use, storage,handling or disposal of these materials. In the event of contamination orinjury, 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.

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

Our facilities are located in the San Francisco BayArea near known earthquake fault zones and are vulnerable to significant damagefrom earthquakes. We are also vulnerable to damage from other types ofdisasters, including fires, floods, power loss, communications failures andsimilar events. If any disaster were to occur, our ability to operate ourbusiness at our facilities would be seriously, or potentially completely,impaired, and our research could be lost or destroyed. In addition, the uniquenature of our research activities and of much of our equipment could make itdifficult for us to recover from a disaster. The insurance we maintain may notbe adequate to cover our losses resulting from disasters or other businessinterruptions.

28

----

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

The market prices for our securities and those ofother biotechnology companies have been highly volatile and may continue to behighly volatile in the future. The following factors, in addition to other riskfactors described in this section, may have a significant impact on the marketprice of our common stock:

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

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

·       sellingby large stockholders;

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

·       developmentsconcerning proprietary rights, including patents;

·       developmentsconcerning our collaborations;

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

·       regulatorydevelopments in the United States and foreign countries;

·       litigation;

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

·       period-to-periodfluctuations in financial results.

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

Provisions of our amended and restated certificate ofincorporation and bylaws, as well as provisions of Delaware law, could make itmore difficult for a third party to acquire us, even if doing so would benefitour stockholders. These provisions:

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

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

·       limitwho may call a special meeting of stockholders;

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

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

·       providefor a board of directors with staggered terms; and

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

In addition, Section 203 of the Delaware GeneralCorporation Law, which imposes certain restrictions relating to transactionswith major stockholders, may discourage, delay or prevent a third party fromacquiring us.

**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.

29

----

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.
|        |   | RIGEL PHARMACEUTICALS, INC. |
|--------|--------|-----------------------------|
|   |   |                        |   |   |
|   |   |                        |   |   |
|   |   | By:                         |   | /s/ JAMES M. GOWER |
|   |   |                        |   | James M. Gower |
|   |   |                        |   | Chief Executive Officer |
|   |   |                        |   |   |
|   |   |                        |   |   |
|   |   | Date: May 10, 2007          |
|   |   |                        |   |   |
|   |   |                        |   |   |
|   |   | By:                         |   | /s/ RYAN D. MAYNARD |
|   |   |                        |   | Ryan D. Maynard |
|   |   |                        |   | Vice President and Chief Financial Officer |
|   |   |                        |   | (Principal Financial and Accounting Officer) |
|   |   |                        |   |   |
|   |   |                        |   |   |
|   |   | Date: May 10, 2007          |

 

30

----

**INDEX TO EXHIBITS**
| Exhibit  Number | ** ** | **Description of Document** |
|-----------------|------------|---------------------------------------|
|            | 3.1        |                                  |   | Amended and Restated  Certificate of Incorporation.(1) |
|            | 3.2        |                                  |   | Amended and Restated  Bylaws.(2) |
|            | 10.30      |                                  |   | Form of Indemnity  Agreement + |
|            | 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)             Filedas an exhibit to Rigel’s Current Report on Form 8-K on June 24, 2003and incorporated herein by reference.

(2)             Filedas an exhibit to Rigel’s Current Report on Form 8-K on February 2, 2007 andincorporated herein by reference.

+                    Managementcontract or compensation plan

31

----