**Tableof Contents**

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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

** **

**(Mark One)**

 
| **x**                                                                                                                                 | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|---------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                            | ** **                                                                                              |
| **FOR THE QUARTERLY PERIOD ENDED MARCH 31,  2010**                                                                               |
| ** **                                                                                                                            |
| **OR**                                                                                                                                |
| ** **                                                                                                                            | ** **                                                                                              |
| **o**                                                                                                                                 | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                            | ** **                                                                                              |
| **FOR THE TRANSITION PERIOD  FROM        TO        ** |

 

**Commission File Number 0-29889**

 

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**Rigel Pharmaceuticals, Inc.**

(Exact name of registrant as specified in itscharter)

 

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

 
| **1180  Veterans Blvd.  South San Francisco, CA** | ** ** | **94080**  |
|---------------------------------------------------|------------|------------|
| (Address of  principal executive offices)         |       | (Zip Code) |

 

**(650) 624-1100**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding12 months (or for such shorter period that the registrant was required tosubmit and post such files). Yes o  No o

 

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

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

 

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

 

As of April 28,2010, there were 51,970,449 shares of the registrant’s Common Stockoutstanding.

 

 

 

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**Table of Contents**

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**RIGEL PHARMACEUTICALS, INC.QUARTERLY REPORT ON FORM 10-QFOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010**

** **

**INDEX**

** **
| ** **       | ** ** | ** **                                                                                            | **Page** |
|------------------|------------|-------------------------------------------------------------------------------------------------------|----------|
| **PART I**  | ** ** | **FINANCIAL INFORMATION**                                                                             | 3        |
| **Item 1.**      |       | Condensed  Financial Statements                                                                       | 3        |
|             |       | Condensed  Balance Sheets — March 31, 2010 (Unaudited) and December 31, 2009           | 3        |
|             |       | Condensed Statements of Operations (Unaudited) —three  months ended March 31, 2010 and 2009 | 4        |
|             |       | Condensed Statements of Cash Flows (Unaudited) —three  months ended March 31, 2010 and 2009 | 5        |
|             |       | Notes to Condensed Financial Statements (Unaudited)                                                   | 6        |
|             |       | Report of Independent Registered Public Accounting  Firm                                              | 13       |
| **Item 2.**      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations           | 14       |
| **Item 3.**      |       | Quantitative  and Qualitative Disclosures About Market Risk                                           | 27       |
| **Item 4.**      |       | Controls and  Procedures                                                                              | 27       |
| **PART II** | ** ** | **OTHER INFORMATION**                                                                                 | 27       |
| **Item 1.**      |       | Legal Proceedings                                                                                     | 27       |
| **Item 1A.**     |       | Risk Factors                                                                                          | 28       |
| **Item 6.**      |       | Exhibits                                                                                              | 39       |
|             |       |                                                                                                  |     |
| **Signatures**   |       |                                                                                                  | 40       |

 

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**PART I.FINANCIAL INFORMATION**

 

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

 

**RIGELPHARMACEUTICALS, INC.**

**CONDENSED BALANCE SHEETS**

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

** **
| ** **                                                                                                                                                                                  | ** ** | **March 31,  2010** | ** ** | **December 31,  2009 (1)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | **(unaudited)**          | ** ** | ** **                      | ** ** |
| **Assets**                                                                                                                                                                                  | ** ** |                     |       |                            |       |
| Current assets:                                                                                                                                                                             |       |                     |       |                            |       |
| Cash and cash equivalents                                                                                                                                                                   |       | $                        | 15,389     |                            | $          | 14,717 |   |
| Available-for-sale securities                                                                                                                                                               |       | 94,160                   |       | 118,601                         |       |
| Accounts receivable                                                                                                                                                                         |       | 100,000                  |       | —                          |       |
| Prepaid expenses and other current assets                                                                                                                                                   |       | 2,745                    |       | 2,650                           |       |
| Total current assets                                                                                                                                                                        |       | 212,294                  |       | 135,968                         |       |
| Property and equipment, net                                                                                                                                                                 |       | 2,426                    |       | 2,291                           |       |
| Other assets                                                                                                                                                                                |       | 2,425                    |       | 2,485                           |       |
|                                                                                                                                                                                        |       | $                        | 217,145    |                            | $          | 140,744 |   |
|                                                                                                                                                                                        |       |                     |       |                            |       |
| **Liabilities and stockholders’  equity**                                                                                                                                              |       |                     |       |                            |       |
| Current liabilities:                                                                                                                                                                        |       |                     |       |                            |       |
| Accounts payable                                                                                                                                                                            |       | $                        | 3,701      |                            | $          | 3,154 |   |
| Accrued compensation                                                                                                                                                                        |       | 1,807                    |       | 6,840                           |       |
| Other accrued liabilities                                                                                                                                                                   |       | 8,187                    |       | 6,718                           |       |
| Deferred rent                                                                                                                                                                               |       | 3,727                    |       | —                          |       |
| Deferred revenue                                                                                                                                                                            |       | 96,739                   |       | —                          |       |
| Capital lease obligations                                                                                                                                                                   |       | 990                      |       | 1,061                           |       |
| Total current liabilities                                                                                                                                                                   |       | 115,151                  |       | 17,773                          |       |
|                                                                                                                                                                                        |       |                     |       |                            |       |
| Long-term portion of capital lease obligations                                                                                                                                              |       | 633                      |       | 883                             |       |
| Long-term portion of deferred rent                                                                                                                                                          |       | 8,424                    |       | 12,064                          |       |
| Other long-term liabilities                                                                                                                                                                 |       | 152                      |       | 157                             |       |
|                                                                                                                                                                                        |       |                     |       |                            |       |
| Commitments and contingencies                                                                                                                                                               |       |                     |       |                            |       |
|                                                                                                                                                                                        |       |                     |       |                            |       |
| Stockholders’ equity:                                                                                                                                                                  |       |                     |       |                            |       |
| Preferred stock, $0.001 par value; 10,000,000  shares authorized; none issued and outstanding as of March 31, 2010 and  December 31, 2009                                         |       | —                   |       | —                          |       |
| Common stock, $0.001 par value; 100,000,000 shares  authorized; 51,969,119 and 51,956,140 shares issued and outstanding as of March 31,  2010 and December 31, 2009, respectively |       | 52                       |       | 52                              |       |
| Additional paid-in capital                                                                                                                                                                  |       | 728,402                  |       | 723,151                         |       |
| Accumulated other comprehensive loss                                                                                                                                                        |       | (12                      | )          | (12                             | )          |
| Accumulated deficit                                                                                                                                                                         |       | (635,657                 | )          | (613,324                        | )          |
| Total stockholders’ equity                                                                                                                                                             |       | 92,785                   |       | 109,867                         |       |
|                                                                                                                                                                                        |       | $                        | 217,145    |                            | $          | 140,744 |   |

 

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(1)  Thebalance sheet at December 31, 2009 has been derived from the auditedfinancial statements at that date included in Rigel’s Annual Report on Form 10-Kfor the year ended December 31, 2009.

 

See AccompanyingNotes.

 

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**RIGELPHARMACEUTICALS, INC.**

**CONDENSED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------|------------|
|                                                                             | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| Contract  revenues                                                               |       | $                                     | 3,261      |   | $ | — |   |
| Costs  and expenses:                                                             |       |                                  |       |   |   |
| Research  and development                                                        |       | 17,425                                |       | 24,538 |   |
| General  and administrative                                                      |       | 8,186                                 |       | 4,603 |   |
| Restructuring  charges                                                           |       | —                                |       | 1,141 |   |
| Total  costs and expenses                                                        |       | 25,611                                |       | 30,282 |   |
|                                                                             |       |                                  |       |   |   |
| Loss  from operations                                                            |       | (22,350                               | )          | (30,282 | ) |
| Interest  income                                                                 |       | 47                                    |       | 347 |   |
| Interest  expense                                                                |       | (30                                   | )          | (53 | ) |
| Loss  before income taxes                                                        |       | (22,333                               | )          | (29,988 | ) |
| Income  tax benefit                                                              |       | —                                |       | 66 |   |
| Net  loss                                                                        |       | $                                     | (22,333    | ) | $ | (29,922 | ) |
|                                                                             |       |                                  |       |   |   |
| Net  loss per share, basic and diluted                                           |       | $                                     | (0.43      | ) | $ | (0.82 | ) |
|                                                                             |       |                                  |       |   |   |
| Weighted  average shares used in computing net loss per share, basic and diluted |       | 51,964                                |       | 36,699 |   |

 

See AccompanyingNotes.

 

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**RIGELPHARMACEUTICALS, INC.**

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(unaudited)**

 
| ** **                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                   | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Operating activities**                                                     |       |                                   |       |   |   |
| Net  loss                                                                    |       | $                                      | (22,333    | ) | $ | (29,922 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                   |       |   |   |
| Depreciation  and amortization                                               |       | 305                                    |       | 320 |   |
| Stock-based  compensation expense                                            |       | 5,167                                  |       | 2,266 |   |
| Changes  in assets and liabilities:                                          |       |                                   |       |   |   |
| Accounts  receivable                                                         |       | (100,000                               | )          | — |   |
| Prepaid  expenses and other current assets                                   |       | (95                                    | )          | 423 |   |
| Other  assets                                                                |       | 60                                     |       | 50 |   |
| Accounts  payable                                                            |       | 547                                    |       | 806 |   |
| Accrued  compensation                                                        |       | (5,033                                 | )          | 26 |   |
| Other  accrued liabilities                                                   |       | 1,469                                  |       | (2,629 | ) |
| Deferred  revenue                                                            |       | 96,739                                 |       | — |   |
| Deferred  rent and other long-term liabilities                               |       | 82                                     |       | (402 | ) |
| Net  cash used in operating activities                                       |       | (23,092                                | )          | (29,062 | ) |
|                                                                         |       |                                   |       |   |   |
| **Investing activities**                                                     |       |                                   |       |   |   |
| Purchases  of available-for-sale securities                                  |       | (12,825                                | )          | (27,034 | ) |
| Maturities  and sale of available-for-sale securities                        |       | 37,266                                 |       | 47,169 |   |
| Capital  expenditures                                                        |       | (440                                   | )          | (11 | ) |
| Net  cash provided by investing activities                                   |       | 24,001                                 |       | 20,124 |   |
|                                                                         |       |                                   |       |   |   |
| **Financing activities**                                                     |       |                                   |       |   |   |
| Payments  on capital lease obligations                                       |       | (321                                   | )          | (436 | ) |
| Net  proceeds from issuances of common stock                                 |       | 84                                     |       | 98 |   |
| Net  cash used in financing activities                                       |       | (237                                   | )          | (338 | ) |
|                                                                         |       |                                   |       |   |   |
| Net  increase (decrease) in cash and cash equivalents                        |       | 672                                    |       | (9,276 | ) |
|                                                                         |       |                                   |       |   |   |
| Cash  and cash equivalents at beginning of period                            |       | 14,717                                 |       | 46,005 |   |
|                                                                         |       |                                   |       |   |   |
| Cash  and cash equivalents at end of period                                  |       | $                                      | 15,389     |   | $ | 36,729 |   |
|                                                                         |       |                                   |       |   |   |
| **Supplemental disclosure of cash flow information**                         |       |                                   |       |   |   |
| Interest  paid                                                               |       | $                                      | 28         |   | $ | 55 |   |
|                                                                         |       |                                   |       |   |   |
| **Schedule of non cash transactions**                                        |       |                                   |       |   |   |
| Issuance  of warrant with lease amendment                                    |       | $                                      | —     |   | $ | 616 |   |

 

See Accompanying Notes.

 

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**RigelPharmaceuticals, Inc.**

**Notes toCondensed Financial Statements**

**(unaudited)**

** **

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

 

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

 

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

 

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

 

Our accompanying unaudited condensed financial statementshave been prepared in accordance with U.S. generally accepted accountingprinciples, or GAAP, for interim financial information and pursuant to theinstructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and notes required byU.S. GAAP for complete financial statements. These unaudited condensedfinancial statements include all normal and recurring adjustments that webelieve are necessary to fairly state our financial position and the results ofour operations and cash flows. Interim-period results are not necessarilyindicative of results of operations or cash flows for a full-year. The balancesheet at December 31, 2009 has been derived from audited financialstatements at that date, but does not include all disclosures required by U.S.GAAP for complete financial statements. Because all of the disclosures requiredby U.S. GAAP for complete financial statements are not included herein, theseinterim unaudited condensed financial statements and the notes accompanyingthem should be read in conjunction with our audited financial statements andthe notes thereto included in our Annual Report on Form 10-K for the yearended December 31, 2009.

 

The preparation of financialstatements in conformity with U.S. GAAP requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes. We base our estimates on historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances. Actual results could differ from these estimates.

 

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

 

In October 2009, the Financial Accounting Standards Board (FASB)issued Accounting Standards Update, or ASU, No. 2009-13 (formerly EmergingIssues Task Force, or EITF, No. 08-1) on Accounting Standards Codification(ASC) 605 for revenue recognition related to multiple-deliverable revenuearrangements. ASU No. 2009-13 provides amendments to the existing criteriafor separating consideration in multiple-deliverable arrangements. Theamendments establish a selling price hierarchy for determining the sellingprice of a deliverable, eliminate the residual method of allocation ofarrangement consideration to all deliverables and require the use of therelative selling price method in allocation of arrangement consideration to alldeliverables, require the determination of the best estimate of a selling pricein a consistent manner, and significantly expand the disclosures related to themultiple-deliverable revenue arrangements. The amendments will be effective infiscal years beginning on or after June 15, 2010, and early adoption ispermitted. We are currently evaluating the impact on our financial statementsof adopting these amendments to ASC 605 and cannot estimate the impact ofadoption at this time.

 

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

 

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

 

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

 

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

 
| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Research  and development               |       | $                                      | 3,083      |   | $ | 1,425 |   |
| General  and administrative             |       | 2,084                                  |       | 719 |   |
| Restructuring  charges                  |       | —                                 |       | 122 |   |
| Total  stock-based compensation expense |       | $                                      | 5,167      |   | $ | 2,266 |   |

 

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In February 2009, we announced that we cut ourresearch programs in virology and oncology as well as terminated certainrelated development and administrative staff, which resulted in the dismissalof 36 employees, or approximately 20% of our workforce. This measure wasintended to maintain our emphasis on our active preclinical and clinicalprograms, while conserving our resources. As part of a package we offered theterminated employees, we extended the date the terminated employees had toexercise their vested options to December 31, 2009 rather than90 days from the termination date as is typically required under ourequity incentive plan. We recorded $122,000 of non-cash stock-basedcompensation expense related to this modification in the first quarter of 2009.

 

The fair value of each option award is estimated on the date of grantusing the Black-Scholes option pricing model. We have segregated option awardsinto three homogenous groups for purposes of determining fair values ofoptions: officers and directors, all other employees, and consultants.

 

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

 

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

 

·                  Expected term—For optionsgranted to consultants, we use the contractual term of the option, which istypically ten years, for the initial valuation of the option and the remainingcontractual term of the option for succeeding periods. We worked with varioushistorical data to determine the applicable expected term for each of the otheroption groups. This data included: (1) for exercised options, the term ofthe options from option grant date to exercise date; (2) for cancelledoptions, the term of the options from option grant date to cancellation date,excluding unvested option forfeitures; and (3) for options that remainedoutstanding at the balance sheet date, the term of the options from optiongrant date to the end of the reporting period and the estimated remaining termof the options. The consideration and calculation of the above data gave usreasonable estimates of the expected term for each employee group. We alsoconsidered the vesting schedules of the options granted and factors surroundingexercise behavior of the option groups, our current market price and companyactivity that may affect our market price. In addition, we considered theoptionee type (i.e., officers and directors or all other employees) andother factors that may affect the expected term of the option.

 

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

 

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

 

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

 

Thefollowing table summarizes the weighted-average assumptions relating to optionsgranted pursuant to our equity incentive plans for the three months ended March 31,2010 and 2009:

 
| ** **                | ** ** | **Equity Incentive Plans  Three Months Ended  March 31,** | ** ** |
|---------------------------|------------|----------------------------------------------------------------|------------|
| ** **                | ** ** | **2010**                                                       | ** ** | **2009** | ** ** |
| Risk-free  interest rate  |       | 2.4                                                            | %          | 1.8 | % |
| Expected  term (in years) |       | 5.3                                                            |       | 4.4 |   |
| Dividend  yield           |       | 0.0                                                            | %          | 0.0 | % |
| Expected  volatility      |       | 90.1                                                           | %          | 98.4 | % |

 

Options are priced at the market price of our commonstock on the date immediately preceding the date of grant, become exercisableat varying dates and generally expire ten years from the date of grant. Wegranted options to purchase 1,227,200 shares of common stock during the threemonths ended March 31, 2010, with a grant-date weighted average fair valueof $6.89 per share. We granted options to purchase 1,982,473  shares of common stock during the three monthsended March 31, 2009, with a grant-date weighted average fair value of $4.60 pershare.  As of March 31, 2010, therewas approximately $11.9 million of total unrecognized stock-based compensationcost, net of estimated forfeitures, related to unvested options granted underour equity incentive plans. At March 31, 2010, 1,585,341 shares of commonstock were available for future grant under our equity incentive plans andoptions to purchase 12,979 shares were exercised during the three months ended March 31,2010.

 

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

 

The fair value of awards grantedunder our ESPP is estimated on the date of grant using the Black-Scholes optionpricing model, which uses weighted-average assumptions. Our ESPP provides for atwenty-four month offering period comprised of four six-month purchase periodswith a look-back option. A look-back option is a provision in our ESPP underwhich eligible employees can purchase shares of our common stock at a price pershare equal to the lesser of 85% of the fair market value on the first day ofthe offering period or 85% of the fair market value on the purchase date. Our ESPP alsoincludes a feature that provides for a new offering period to begin when thefair market value of our common stock on any purchase date during an offeringperiod falls below the fair market value of our common stock on the first dayof such offering period. This feature is called a “reset.” Participants areautomatically enrolled in the new offering period. We had a “reset” on January 2,2009 because the fair market value of our stock on December 31, 2008 waslower than the fair market value of our stock on July 1, 2008, the firstday of the offering period. We applied modification accounting in accordancewith ASC Topic No. 718, *Stock Compensation*, todetermine the incremental fair value associated with this ESPP “reset” andrecognized the related stock-based compensation expense according to the FASBASC Subtopic No. 718-50, *Employee Share PurchasePlan*.  The total incrementalfair value for this ESPP “reset” was $1,443,848, and is being recognized overthe new twenty-four month offering period.

 

As of March 31,2010, there were approximately 1,213,893 shares reserved for future issuanceunder the ESPP. The following table summarizes the weighted-average assumptionsrelated to our ESPP for the three months ended March 31, 2010 and 2009.Expected volatilities for our ESPP are based on the historical volatility ofour stock. Expected term represents the weighted average of the purchaseperiods within the offering period. The risk-free interest rate for periodswithin the expected term is based on U.S. Treasury constant maturity rates.

 
| ** **                | ** ** | **Employee Stock Purchase Plan  Three Months Ended  March 31,** | ** ** |
|---------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                | ** ** | **2010**                                                             | ** ** | **2009** | ** ** |
| Risk-free  interest rate  |       | 0.3                                                                  | %          | 1.1 | % |
| Expected  term (in years) |       | 0.7                                                                  |       | 1.3 |   |
| Dividend  yield           |       | 0.0                                                                  | %          | 0.0 | % |
| Expected  volatility      |       | 82.6                                                                 | %          | 112.0 | % |

 

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

 

We present revenue from our collaboration arrangements under FASB ASC808, *Collaboration Arrangements*. Ourrevenue arrangements with multiple elements are evaluated under FASBASC 605-25, *Multiple-ElementArrangements*, 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 any undelivered items. The consideration wereceive is allocated among the separate units based on their respective fairvalues, and the applicable revenue recognition criteria are applied to each ofthe separate units. Advance payments received in excess of amounts earned areclassified as deferred revenue until earned.

 

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

 

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

 

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Revenues associated with substantive, at-riskmilestones pursuant to collaborative agreements are recognized upon achievementof the milestones.

 

###### ***7.***              Research andDevelopment Accruals

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

We have various contracts with third parties relatedto our research and development activities. Costs that are incurred but notbilled to us as of the end of the period are accrued. We make estimates of theamounts incurred in each period based on the information available to us andour knowledge of the nature of the contractual activities generating suchcosts. Clinical trial contract expenses are accrued based on units of activityreported by third parties. Expenses related to other research and developmentcontracts, such as research contracts, toxicology study contracts andmanufacturing contracts are estimated to be incurred generally on astraight-line basis over the duration of the contracts. Raw materials and studymaterials purchased by third parties are expensed at the time of purchase.

 

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

 

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

 
| ** **                                  | ** ** | **March 31,****2010** | ** ** | **December 31,****2009** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| Checking  account                           |       | $                          | 258        |                          | $          | 158 |   |
| Money  market funds                         |       | 7,170                      |       | 8,859                         |       |
| U.  S. treasury bills                       |       | 34,773                     |       | 44,483                        |       |
| Government-sponsored  enterprise securities |       | 39,273                     |       | 39,167                        |       |
| Corporate  bonds and commercial paper       |       | 28,075                     |       | 40,651                        |       |
|                                        |       | $                          | 109,549    |                          | $          | 133,318 |   |
|                                        |       |                       |       |                          |       |
| Reported  as:                               |       |                       |       |                          |       |
| Cash  and cash equivalents                  |       | $                          | 15,389     |                          | $          | 14,717 |   |
| Available-for-sale  securities              |       | 94,160                     |       | 118,601                       |       |
|                                        |       | $                          | 109,549    |                          | $          | 133,318 |   |

 

Cashequivalents and available-for-sale securities include the following securitieswith unrealized gains and losses (in thousands):

 
| **March 31, 2010**                     | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
| U.  S. treasury bills                       |       | $                   | 34,765     |                         | $          | 8                             |       | $              | —     |   | $ | 34,773 |   |
| Government-sponsored  enterprise securities |       | 39,282              |       | 3                            |       | (12                           | )          | 39,273         |       |
| Corporate  bonds and commercial paper       |       | 28,086              |       | 4                            |       | (15                           | )          | 28,075         |       |
| Total                                       |       | $                   | 102,133    |                         | $          | 15                            |       | $              | (27        | ) | $ | 102,121 |   |

 
| **December 31, 2009**                  | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
| U.  S. treasury bills                       |       | $                   | 44,489     |                         | $          | 3                             |       | $              | (9         | ) | $ | 44,483 |   |
| Government-sponsored  enterprise securities |       | 39,184              |       | 7                            |       | (24                           | )          | 39,167         |       |
| Corporate  bonds and commercial paper       |       | 40,640              |       | 12                           |       | (1                            | )          | 40,651         |       |
| Total                                       |       | $                   | 124,313    |                         | $          | 22                            |       | $              | (34        | ) | $ | 124,301 |   |

 

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As of March 31,2010, the contractual maturities of our cash equivalents and available-for-salesecurities were (in thousands):

 
| ** **                                  | ** ** | **Years to Maturity** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **Within One  Year**  | ** ** | **After One Year  Through  Five Years** | ** ** |
| Money  market funds                         |       | $                     | 7,170      |   | $ | — |   |
| U.  S. treasury bills                       |       | 34,773                |       | — |   |
| Government-sponsored  enterprise securities |       | 39,273                |       | — |   |
| Corporate  bonds and commercial paper       |       | 28,075                |       | — |   |
|                                        |       | $                     | 109,291    |   | $ | — |   |

 

As of March 31,2010, our cash equivalents and available-for-sale securitieshad a weighted average time to maturity of approximately 116 days. We view ouravailable-for-sale portfolio as available for use in current operations.  We have the ability to hold all investmentsas of March 31, 2010 to maturity. At March 31, 2010 and December 31, 2009, wehad no investments that had been in a continuous unrealized loss position formore than twelve months.  As of March 31,2010, a total of 17 individual securities were in an unrealized loss positionfor twelve months or less and the losses were deemed to be temporary.

 

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

 
| **March 31, 2010**                     | ** ** | **Fair Value** | ** ** | **Gross Unrealized  Losses** | ** ** |
|---------------------------------------------|------------|----------------|------------|------------------------------|------------|
| Government-sponsored  enterprise securities |       | $              | 19,439     |                         | $          | (12 | ) |
| Corporate  bonds and commercial paper       |       | 7,830          |       | (15                          | )          |
| Total                                       |       | $              | 27,269     |                         | $          | (27 | ) |

 

**9.****             ****Fair Value**

 

Under FASB ASC 820, *Fair ValueMeasurements and Disclosures*, fair value is defined as the price atwhich an asset could be exchanged or a liability transferred in a transactionbetween knowledgeable, willing parties in the principal or most advantageousmarket for the asset or liability. Where available, fair value is based onobservable market prices or parameters or derived from such prices orparameters. Where observable prices or parameters are not available, valuationmodels are applied.

 

Assets and liabilities recorded at fair value in our financialstatements are categorized based upon the level of judgment associated with theinputs used to measure their fair value. Hierarchical levels directly relatedto the amount of subjectivity associated with the inputs to fair valuation ofthese assets and liabilities, are as follows:

 

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

 

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

 

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

 

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

 

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

 

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***FairValue on a Recurring Basis***

 

Financial assets measured atfair value on a recurring basis are categorized in the tables below based uponthe lowest level of significant input to the valuations (in thousands):

 
| ** **                                  | ** ** | **Assets at Fair Value as of March 31, 2010** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                  | ** ** | **Level 1**                                        | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Money  market funds                         |       | $                                                  | 7,170      |   | $ | — |   | $ | — |   | $ | 7,170 |   |
| U.  S. treasury bills                       |       | —                                             |       | 34,773 |   | — |   | 34,773 |   |
| Government-sponsored  enterprise securities |       | —                                             |       | 39,273 |   | — |   | 39,273 |   |
| Corporate  bonds and commercial paper       |       | —                                             |       | 28,075 |   | — |   | 28,075 |   |
| Total                                       |       | $                                                  | 7,170      |   | $ | 102,121 |   | $ | — |   | $ | 109,291 |   |

 
| ** **                                  | ** ** | **Assets at Fair Value as of December 31, 2009** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                  | ** ** | **Level 1**                                           | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Money  market funds                         |       | $                                                     | 8,859      |   | $ | — |   | $ | — |   | $ | 8,859 |   |
| U.  S. treasury bills                       |       | —                                                |       | 44,483 |   | — |   | 44,483 |   |
| Government-sponsored  enterprise securities |       | —                                                |       | 39,167 |   | — |   | 39,167 |   |
| Corporate  bonds and commercial paper       |       | —                                                |       | 40,651 |   | — |   | 40,651 |   |
| Total                                       |       | $                                                     | 8,859      |   | $ | 124,301 |   | $ | — |   | $ | 133,160 |   |

 

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

 

On March 31, 2009, weissued a new warrant granting our landlord the right to purchase 200,000 sharesof common stock, and cancelled an existing warrant to purchase 100,000 sharesof common stock, in connection with the amendment of our build-to-suit leaseagreement. We used the Black-Scholes option-pricing model and calculated anincremental fair market value of $616,000 related to the new warrant. The newwarrant was categorized as level 3 under FASB ASC 820 due to theunobservable inputs we used in the Black Scholes option-pricing model.

 

Thefollowing table summarizes the assumptions used relating to the valuation ofthe new warrant:

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

 

**10.****      ****AstraZenecaCollaboration**

 

In February 2010, we entered into an exclusive worldwide licenseagreement with AstraZeneca AB (AZ) for the global development andcommercialization of our oral Syk inhibitors for the treatment of humandiseases other than those primarily involving respiratory or pulmonarydysfunction. The agreement includes a license of rights to R788, our late-stageinvestigational product candidate for the treatment of RA and otherindications. After a limited transition period, AZ will be responsible forconducting and funding all development, regulatory filings, manufacturing andglobal commercialization of products containing oral Syk inhibitors. We areresponsible for conducting, at our expense, an on-going open label extensionstudy in R788 during the limited transition period.

 

The agreement became effective on March 26, 2010 and, inconnection with the effectiveness of the agreement, we received an upfrontpayment of $100.0 million in April 2010 from AZ.  We are recognizing the upfront paymentratably over the transition period from the effective date until all deliverablesare completed, which we estimate to be September 25, 2010.  As of March 31,2010, $3.3 million of the upfront payment has been recognized as revenue and$96.7 million has been deferred.  AZ isrequired to pay us up to an additional $345.0 million if specifieddevelopment, regulatory and launch milestones are achieved for R788. We willalso be eligible to receive up to an additional $800.0 million ifspecified sales performance milestones are achieved for R788, as well assignificant stepped double-digit royalties on net worldwide sales of R788.

 

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

 

OnMarch 31, 2009, we amended our build-to-suit lease agreement with ourlandlord, HCP BTC, LLC (formerly known as Slough BTC, LLC), to defercertain rental obligations in the aggregate amount of $6.9 million for aperiod of up to seventeen months. Under the terms of this amendment, we wereobligated to repay the deferred rental amounts, including interest accruing at12% during the deferral period, based on a timeline that could vary dependingupon the occurrence of certain financing or collaborative transactions. Wereevaluated the lease amendment under FASB ASC 840 and determined that theamended lease still qualified as an operating lease. In addition, the amendmentto the lease agreement also provided for the cancellation of an existingwarrant granting HCP Estates USA Inc. (an affiliate of our landlord) theright to purchase 100,000 shares of common stock and the issuance of a newwarrant granting our landlord the right to purchase 200,000 shares of commonstock. The exercise price per share of the new warrant is $6.61, which is theaverage closing price of our common stock for the three business days immediatelypreceding the execution of the amendment to the lease agreement. The newwarrant remains exercisable for 7 years from the date of issuance. Weapplied modification accounting and calculated an incremental fair market valueof the new warrant of $616,000. This amount has been deferred in other assetsand is being amortized into rent expense over the remaining term of the lease.On September 22, 2009, we completed an underwritten public offering andreceived net proceeds of approximately $101.5 million after deductingunderwriting discounts and commissions and offering expenses. As a result ofthis financing, we paid our landlord $3.7 million, or  50% of the deferred rental amounts, plusinterest at 12%, in November 2009. In February 2010, we entered into a worldwide license agreementwith AZ in which we received an upfront payment of $100.0 million in April 2010.  As a result of this additional cash received,we paid our landlord $3.9 million, or 50% of the remaining deferred rentalamounts, plus interest at 12%, in April 2010.

 

**12.****      ****Contingencies**

 

On February 6, 2009, a purported securities class action lawsuitwas commenced in the United States District Court for the Northern District ofCalifornia, naming as defendants us and certain of our officers, directors andunderwriters for our February 2008 stock offering. An additional purportedsecurities class action lawsuit containing similar allegations was subsequentlyfiled in the United States District Court for the Northern District ofCalifornia on February 20, 2009. By order of the Court dated March 19,2009, the two lawsuits were consolidated into a single action. On June 9,2009, the Court issued an order naming the Inter-Local Pension Fund GCC/IBT aslead plaintiff and Coughlin Stoia as lead counsel. The lead plaintiff filed aconsolidated complaint on July 24, 2009. We filed a motion to dismiss on September 8,2009. On December 21, 2009, the Court granted our motion and dismissed theconsolidated complaint with leave to amend. Plaintiff filed its consolidatedamended complaint on January 27, 2010. The lawsuit alleges violations ofthe Securities Act of 1933 and the Securities Exchange Act of 1934 inconnection with allegedly false and misleading statements made by us related tothe results of the Phase 2a clinical trial of our product candidate R788.The plaintiffs seek damages, including rescission or rescissory damages forpurchasers in the stock offering, an award of their costs and injunctive and/orequitable relief for purchasers of our common stock during the period between December 13,2007 and February 9, 2009, including purchasers in the stock offering. Wefiled a motion to dismiss the consolidated amended complaint on February 16,2010. Briefing on the motion to dismiss is complete and we are awaiting aruling on that motion from the Court. It is possible that additional suits willbe filed with respect to these same matters and also naming us and/or ourofficers and directors as defendants. If any such additional suits are filed inthe same court, we believe that they would be consolidated into theconsolidated action.

 

Thislawsuit and any other related lawsuits are subject to inherent uncertaintiesand the actual costs to be incurred relating to the lawsuit will depend uponmany unknown factors. The outcome of the litigation is necessarily uncertainand we could be forced to expend significant resources in the defense of thissuit, and we may not prevail. We are not currently able to estimate thepossible cost to us from this matter, and we cannot ascertain how long it maytake to resolve this matter. We have not established any reserve for anypotential liability relating to this lawsuit. We believe that we havemeritorious defenses and intend to defend this lawsuit vigorously.

 

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**Report of Independent Registered Public Accounting Firm**

 

The Board of Directors

Rigel Pharmaceuticals, Inc.

 

We have reviewed the condensed balance sheet of RigelPharmaceuticals, Inc. as of March 31, 2010, and the related condensedstatements of operations and cash flows for the three-month periods ended March 31,2010 and 2009. These financial statements are the responsibility of the Company’smanagement.

 

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

 

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

 

We have previously audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), thebalance sheet of Rigel Pharmaceuticals, Inc. as of December 31, 2009,and the related statements of operations, stockholders’ equity, and cash flowsfor the year then ended (not presented herein) and in our report dated  March 2, 2010, we expressed anunqualified opinion on those financial statements.  In our opinion, the information set forth inthe accompanying condensed balance sheet as of December 31, 2009, isfairly stated, in all material respects, in relation to the balance sheet fromwhich it has been derived.

 
|                  | /s/ Ernst & Young LLP |
|-----------------------|--------------------------------|
| Palo Alto, California |                           |
| May 4,  2010     |                           |

 

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**Item 2.    Management’s Discussion and Analysis ofFinancial Condition and Results of Operations              **

 

*This discussion and analysis should be readin conjunction with our financial statements and the accompanying notesincluded in this report and the audited financial statements and accompanyingnotes included in our Annual Report on Form 10-K for the year ended December 31,2009. Operating results for the three months ended March 31, 2010 are notnecessarily indicative of results that may occur in future periods.*

 

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

 

**Overview**

 

We are a clinical-stage drug development company that discovers anddevelops novel, small-molecule drugs for the treatment ofinflammatory/autoimmune, muscle and metabolic diseases. Our pioneering researchfocuses on intracellular signaling pathways and related targets that arecritical to disease mechanisms. Our productivity has resulted in strategiccollaborations with large pharmaceutical partners to develop and market ourproduct candidates.  We have productdevelopment programs in inflammatory/autoimmune diseases, including R788, anoral Syk inhibitor that is expected to enter Phase 3 clinical trials forrheumatoid arthritis, or RA, in 2010 and R343 in asthma. R788 is our leadproduct candidate. In February 2010, we entered into an exclusiveworldwide license agreement with AstraZeneca AB (AZ) for the global developmentand commercialization of our oral Syk inhibitors for the treatment of humandiseases other than those primarily involving respiratory or pulmonarydysfunction. The agreement includes a license of rights to R788, our late-stageinvestigational product candidate for the treatment of RA and otherindications. We completed a comprehensive Phase 2 clinical trial of R788,which is at the most advanced stage of development of the oral Syk inhibitorsbeing evaluated for an RA indication. Inhibiting Syk is thought to block the intracellularsignaling of various immune cells implicated in the destruction of bone andcartilage, which is characteristic of RA. After a limited transition period, AZwill be responsible for conducting and funding all development, regulatoryfilings, manufacturing and global commercialization of products containing oralSyk inhibitors. The agreement became effective on March 26, 2010 and, inconnection with the effectiveness of the agreement, we received an upfrontpayment of $100.0 million in April 2010 from AZ. AZ is required to pay usup to an additional $345.0 million if specified development, regulatoryand launch milestones are achieved for R788. We will also be eligible toreceive up to an additional $800.0 million if specified sales performancemilestones are achieved for R788, as well as significant stepped double-digitroyalties on net sales worldwide of R788. We believe that our existing capitalresources will be sufficient to support our current and projected fundingrequirements through at least the next twelve months.

 

We have not beenprofitable and have incurred operating losses since we were incorporated in June 1996.We incurred net losses of approximately $22.3 million for the three monthsended March 31, 2010, and $111.5  million and $132.3  millionfor the years ended December 31, 2009 and 2008, respectively. As of March 31,2010, we had an accumulated deficit of approximately $635.7 million. Untilwe are able to generate sufficient amounts of product revenues and royaltyrevenues, we expect to finance future cash needs through collaboration andlicensing arrangements or public and/or private equity or debt offerings, aswell as through interest income earned on the investment of our cash balancesand short-term investments.

 

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

##### ** **

Ourproduct development portfolio features multiple novel small molecule drugcandidates whose specialized mechanisms of action are intended to providetherapeutic benefit for a range of inflammatory/autoimmune diseases, as well asfor certain cancers and metabolic diseases.

 

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**Partnered Clinical Programs**

 

***R788***

 

In February 2010, we entered into an exclusive worldwide licenseagreement with AZ for the global development and commercialization of our oralSyk inhibitors for the treatment of human diseases other than those primarilyinvolving respiratory or pulmonary dysfunction. The agreement includes alicense of rights to fostamatinib disodium, or R788, our late-stageinvestigational product candidate for the treatment of RA and otherindications. We completed a comprehensive Phase 2 clinical trial of R788,which is at the most advanced stage of development of the oral Syk inhibitorsbeing evaluated for an RA indication. Inhibiting Syk is thought to block theintracellular signaling of various immune cells implicated in the destructionof bone and cartilage, which is characteristic of RA. For further discussion onthe collaboration, see “AstraZeneca” under “Corporate Collaborations” below.

 

The agreement became effective on March 26, 2010 and, inconnection with the effectiveness of the agreement, we received an upfrontpayment of $100.0 million in April 2010 from AZ. AZ is required to pay usup to an additional $345.0 million if specified development, regulatoryand launch milestones are achieved for R788. We will also be eligible toreceive up to an additional $800.0 million if specified sales performancemilestones are achieved for R788, as well as significant stepped double-digitroyalties on net sales worldwide of R788. After a limited transition period, AZwill be responsible for conducting and funding all development, regulatoryfilings, manufacturing and global commercialization of products containing oralSyk inhibitors. We are responsible for conducting, at our expense, the on-goingopen label extension study in R788 during the limited transition period.

 

Under the agreement, AZ is expected to design a global Phase 3clinical trial of R788 for the treatment of RA, anticipated to begin in thesecond half of 2010, with the goal of filing new drug applications with theU.S. Food and Drug Administration (FDA) and the European Medicines Agency (EMEA)in 2013. Under the terms of the agreement, AZ also received exclusive rights toour portfolio of oral Syk inhibitors, including for indications for R788 otherthan RA.

 

**RheumatoidArthritis**

 

*Disease background.*  RA is a systemic autoimmune inflammatory diseasethat causes damage to the joints and other organs, affecting approximately 1 in100 people. It is a major cause of disability and is also associated withreduced life expectancy, especially if it is not adequately treated. Despitecurrent treatment options, many patients still experience significant diseaseactivity, including continued joint destruction leading to pain and disability,so new treatment options are needed.

 

The current treatment options for RA have significant potential sideeffects and other shortfalls, including gastrointestinal complications andkidney damage. RA patients receive multiple drugs depending on the extent andaggressiveness of their disease. Most RA patients eventually require some formof disease modifying anti-rheumatic drug (DMARD). This category of drugsincludes methotrexate, and/or a variety of intravenously- deliveredimmunomodulatory agents (tumor necrosis factor, or TNF, inhibitors andco-stimulation inhibitors).

 

*Orally-available Syk inhibitor program.*  R788 is an orally bio-available Sykinhibitor. It is being developed as a next-generation oral RA therapy in adultswho have failed to respond adequately to a traditional DMARD, such asmethotrexate, where a TNF biologic add-on treatment would currently be considered.It has a novel mechanism of action for the treatment of RA, inhibiting receptorsignaling of immunoglobulin G, or IgG, in various immune cells, includingmacrophages and B-cells. RA is an autoimmune disease characterized by chronicinflammation that affects multiple tissues, but typically produces its mostpronounced symptoms in the joints. We believe the development of R788 mayresult in a safe oral DMARD that can be used early in the course of thedisease, preventing its progression prior to major bone and cartilagedestruction.

 

*TASKi2*

 

In July 2009, we announced that R788 produced significant clinicalimprovement in RA patients in the *TASKi2*Phase 2b clinical trial in which 457 RA patients were treated for up tosix months. *TASKi2* was a multi-center, randomized, double blind, placebo controlled, parallel dose clinicaltrial involving RA patients in the U.S., Latin America and Europe who hadfailed to respond to methotrexate alone. Patients received either 100 mg ofR788 b.i.d. (twice a day), 150 mg q.d. (once a day) or placebo.

 

Efficacy assessments for each participant were based on the AmericanCollege of Rheumatology (ACR) criteria, which denotes at least 20% (ACR 20), atleast 50% (ACR 50), or at least 70% (ACR 70) improvement, in addition to improvementdenoted in the Disease Activity Score (DAS28), from each patient’s baselineassessment at the end of the six month treatment period. The groups treatedwith 100 mg of R788 b.i.d. and 150 mg q.d. reported higher response rates thanthe placebo group in all aforementioned criteria levels. The efficacy resultsfor the two dosing groups were comparable, although the response rates for the100 mg b.i.d. group was uniformly greater.

 

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Consistent with the previous Phase 2a clinical trial *(TASKi1)*, the onset of effect of R788occurred within one week after the initiation of therapy and was maintained.The most frequent adverse events were expected based on *TASKi1* and appear to be manageable. Themost common clinically meaningful drug-related adverse events noted in *TASKi2* were diarrhea and hypertension.Dose reduction options were pre-specified in the trial protocol and, in caseswhere doses were reduced, patients generally completed the clinical trial withminimal safety issues. The mean increase in blood pressure from baseline at sixmonths, using a last observation carry forward methodology, was less than 0.5mmHg for the 150 mg q.d. dose group and approximately 1 mmHg for the 100mgb.i.d. dose group. In patients that had a history of high blood pressure, anelevated blood pressure level at screening or baseline, or were on bloodpressure medication, approximately 29% and 39% of these patients in the 150 mgq.d. dose and the 100 mg b.i.d. dose groups, respectively, had blood pressuremedication adjusted or initiated during the course of the study, compared with12% of these patients from the placebo group. In patients that did not have ahistory of high blood pressure, were not on blood pressure medication or didnot have an elevated blood pressure level at screening or baseline,approximately 4% and 9% of these patients from the 150 mg q.d. dose and the 100mg b.i.d. dose groups, respectively, had blood pressure medication initiatedduring the course of the study, compared with 3% of these patients from theplacebo group. For those patients who had their dose of blood pressuremedications adjusted or initiated, their blood pressure was successfullyreduced and was generally well controlled throughout the remainder of thetrial. The blood pressure medications were standard doses of common bloodpressure medication such as angiotensin-converting enzyme (ACE) inhibitors or diuretics.

 

The most common adverse events in the trial overall were related toinfections, though these were generally evenly distributed among the placeboand R788 groups.

 

*TASKi3*

 

In July 2009, we also announced results for the *TASKi3* Phase 2b clinical trialinvolving 219 RA patients who had failed to respond to at least one biologictreatment. In the *TASKi3* clinicaltrial, patients received either 100 mg of R788 b.i.d. or placebo b.i.d. for upto three months. The group treated with R788 did not report significantlyhigher ACR 20, ACR 50, ACR 70 and DAS28 response rates than the placebo groupat three months, and therefore, the trial failed to meet its efficacyendpoints. The objective components (C-Reactive Protein and ErythrocyteSedimentation Rate) of these ACR scores did show a statistically significantdifference; however, the subjective reported response rate components did notas compared to placebo. Although the ACR scores for the R788 group were withinthe expected range in this patient population, the reported placebo responserates were considerably higher than seen in any other previous study of RAbiologic failure patients and rose unaccountably between week six (at whichpoint the reported response rates between R788 and placebo were significantlydifferent) and month three (when such reported response rates were no longersignificantly different).

 

*TASKi3* was the first clinicaltrial for R788 in which anatomical changes in the patients’ wrists and handswere evaluated using Magnetic Resonance Imaging and scored using the RAMRIS(Rheumatoid Arthritis Magnetic Resonance Imaging Scoring) system. Those resultsshowed improvements in the treated group versus the placebo group in theSynovitis and Osteitis scores, while the Erosion scores, known to be theslowest to change, showed no significant effect at three months.

 

Similar to *TASKi2*, themost common clinically meaningful drug-related adverse events noted in *TASKi3* were diarrhea and hypertension.Dose reduction options were pre-specified in the trial protocol and, in caseswhere doses were reduced, patients generally completed the clinical trial withminimal safety issues. The mean increase in blood pressure from baseline atthree months, using a last observation carry forward methodology, was 3.2 - 3.6mmHg for the R788 group. In *TASKi3*,patients that had a history of high blood pressure, had an elevated bloodpressure level at screening or baseline, or were on blood pressure medication,approximately 26% of these patients had blood pressure medication adjusted orinitiated during the course of the study, compared with 14% of these patientsfrom the placebo group. In patients that did not have a history of high bloodpressure, were not on blood pressure medication or did not have an elevatedblood pressure level at screening or baseline, approximately 5% of thesepatients had blood pressure medication initiated during the course of thestudy, compared with 3% of these patients from the placebo group. For thosepatients who had their dose of blood pressure medications adjusted orinitiated, their blood pressure was successfully reduced and was generally wellcontrolled throughout the remainder of the trial. The blood pressuremedications were standard doses of common blood pressure medications such asACE inhibitors or diuretics.

 

The most common adverse events in the trial overall were related toinfections, though these were generally evenly distributed among the placeboand R788 groups.

 

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*QTc Study*

 

In February 2009, we announced favorable results in a QTc studyfor R788, which was conducted to evaluate the cardiac safety of R788. Thedouble-blind, double-dummy, randomized, positive and placebo controlledparallel study of the effects of R788 on QT/QTc intervals in healthy subjectsshowed that R788 does not elicit a QT/QTc signal. Under a protocol pre-reviewedby the FDA, a total of 208 healthy volunteers were divided into four dosagegroups and were given either placebo, a standard dose of 100 mg b.i.d. of R788,a super dose of 300 mg b.i.d. of R788, or moxifloxacin (known to elevate QT/QTcintervals in normal healthy adults). All participants were dosed for four daysand were evaluated for changes from the time-matched baseline QT/QTc intervalsusing extractions from continuous Holter monitors. There were no significanteffects on the QT/QTc intervals of participants in either the 100 mg b.i.d. orthe 300 mg b.i.d. R788 dosage groups. As expected, the study found thatparticipants in the moxifloxacin group experienced QT/QTc elevations.

 

**OtherIndications**

 

In addition to RA, R788 is currently being administered to patients forother immune indications and oncology. Under our collaboration with AZ, AZ hassole responsibility for all development decisions for all indications under itslicense except for one of the oncology studies, a solid tumor study announcedin June 2009, which is funded, designed and implemented by NCI. Anydecisions regarding this study are the responsibility of NCI.

 

***R343—Asthma***

 

*Disease background.*  Allergic asthma is a chronic inflammatorydisorder of the airways. Asthma affects the lower respiratory tract and ismarked by episodic flare-ups, or attacks, that can be life threatening. In somepatients, allergens, such as pollen, trigger the production of immunoglobulin Eantibodies, or IgE antibodies, which then bind to mast cells and cause anintracellular signal that results in the release of various chemical mediators.When this process occurs repeatedly over time, it creates persistentinflammation of the airway passages, resulting in the chronic congestion andairway obstruction associated with allergic rhinitis and asthma, respectively.

 

*Inhaled Syk inhibitor program.*  R343 is a potent Syk inhibitor that blocksIgE receptor signaling. Allergic asthma is a potentially life-threateningchronic inflammatory disorder of the airways which, in some patients, ismediated by allergen-induced IgE antibodies that trigger intracellularsignaling in mast cells via IgE receptors. Mast cells play important roles inboth early and late phase allergic reactions, and Syk inhibitors couldpotentially prevent both phases.

 

In the first quarter of 2005, we announced a collaborative research andlicense agreement with Pfizer, Inc., or Pfizer, for the development ofinhaled products for the treatment of allergic asthma and other respiratorydiseases, such as chronic obstructive pulmonary disease. The collaboration wasfocused on our pre-clinical small molecule compounds which inhibit Syk. Thecollaboration is now centered on the development of R343. Pfizer has completedthe Phase 1a clinical trial of an inhaled formulation of R343, whichcommenced in December 2007, resulting in a milestone payment of$5.0 million to us. Pfizer initiated a Phase 1b allergen challengeclinical trial in the second quarter of 2009. We expect that Pfizer willinitiate a Phase 2 clinical trial in late 2010 or early 2011.

 

***R763—Oncology***

 

We identified R763 as a lead compound in our aurora kinaseinhibition program targeting cancer cell proliferation. R763 is a potent,highly-selective, small-molecule inhibitor of aurora kinase. In October 2005,we signed a licensing agreement with Merck Serono S.A., or Merck Serono,that gave Merck Serono an exclusive license to develop and commercializeinhibitors in our aurora kinase program, including R763 (which they referred toas R763/AS703569).  In February 2010, Merck Serono informed us thatthey expect to wind down the various clinical trials and plan to return theprogram back to us.  As a result, our collaboration with Merck Serono isno longer active. Once the program is returned, we plan to evaluate thepreclinical and clinical data and make a decision on the program’s disposition.

 

**Research/Preclinical Programs**

 

We are conductingproprietary research in three broad disease areas: inflammation/immunology,metabolism and muscle wasting. Within each disease area, our researchers areinvestigating mechanisms of action as well as screening compounds againstpotential novel targets and optimizing those leads that appear to have thegreatest potential.

 

We are in theprocess of selecting lead candidates for two of our more advanced preclinicalprograms, both of which grew out of significant research in the area ofimmunology/inflammation. We are currently performing late lead profiling of afew advanced candidates in our oral JAK3 inhibitor program and expect to haveone of these ready for clinical studies by the end of 2010. This program isfocused on the treatment of transplant rejection, but could also extend toindications including RA and psoriasis. Additionally, we expect to select acompound for preclinical development by the end of 2010 from our protein kinaseC, or PKC, theta program initially focusing on multiple sclerosis and graft vs.host disorders.

 

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In the area ofmetabolism, we are investigating adiponectin mimetics for the treatment oftype 2 diabetes mellitus and other potential indications. Type 2diabetes is the most common form of diabetes, affecting more than23 million people in the United States. In this disease, the body eitherproduces low amounts of insulin or does not respond to the insulin it makes.Insulin is a hormone that helps the body regulate metabolism by causing cellsto take up glucose from the blood. Adiponectin is a less-well characterizedhormone, which has insulin-sensitizing and anti-diabetic properties. We haveidentified several classes of compounds with adiponectin mimetic activity andare currently performing structure-activity relationship studies, as well asmechanism of action studies on these classes of compounds. We expect tonominate a lead development candidate in 2011.

 

In the muscle atrophy program, we are focusing onseveral signaling pathways important for muscle homeostasis. Muscle atrophy, orthe loss of muscle mass, is associated with several disease states andexcessive loss of muscle in the context of illness can contribute significantlyto both morbidity and mortality rates. Many conditions that have associatedmuscle loss, including cancer, chronic heart failure, chronic kidney disease,mechanical ventilation and aging (sarcopenia) have significant patientpopulations that may benefit from therapeutics that counter such muscle loss.One of our core programs in this area is focused on myostatin signaling. Myostatinis a cytokine that signals via the type II activin receptors (ACVR2A andACVR2B) and has been shown to inhibit muscle growth. We are currentlyperforming structure activity relationship studies on several hit moleculesfrom initial ACVR2A/2B screens, and are developing new screens and models forthis program. We expect to nominate a lead development candidate in 2011.

 

**Corporate Collaborations**

 

We conduct research and development programs independently and inconnection with our corporate collaborators. We currently have the followingactive collaborations with three major pharmaceutical/biotechnology companies:AstraZeneca AB, relating to R788 for the treatment of RA and other indications,Pfizer, Inc., relating to intrapulmonary asthma and allergy therapeuticsand associated with the clinical compound R343, and DaiichiPharmaceuticals Co., Ltd., relating to oncology. None of thesecollaborations currently provide us with regular research reimbursement. In allof these collaborations, if certain conditions are met, we are entitled toreceive future milestone payments and royalties. We cannot guarantee that theseconditions will be met or that research and development efforts will besuccessful. As a result, we may not receive any further milestone payments orroyalties under these agreements.

 

In February 2010, Merck Serono informed us that they expect towind down the various clinical trials associated with our aurora kinaseinhibitor program licensed to them in October 2005 and plan to return theprogram back to us. As a result, our collaboration with Merck Serono is nolonger active. Once the program is returned, we plan to evaluate thepreclinical and clinical data and make a decision on the program’s disposition.

 

***AstraZeneca***

 

In February 2010, we entered into an exclusive worldwide licenseagreement with AZ for the global development and commercialization of our oralSyk inhibitors for the treatment of human diseases other than those primarilyinvolving respiratory or pulmonary dysfunction. The agreement includes alicense of rights to R788, our late-stage investigational product candidate forthe treatment of RA and other indications. After a limited transition period,AZ will be responsible for conducting and funding all development, regulatory filings,manufacturing and global commercialization of products containing oral Sykinhibitors. We are responsible for conducting, at our expense, the on-goingopen label extension study in R788 during the limited transition period.

 

The agreement became effective on March 26, 2010 and, inconnection with the effectiveness of the agreement, we received an upfrontpayment of $100.0 million in April 2010 from AZ. AZ is required to pay usup to an additional $345.0 million if specified development, regulatory andlaunch milestones are achieved for R788. We will also be eligible to receive upto an additional $800.0 million if specified sales performance milestonesare achieved for R788, as well as significant stepped double-digit royalties onnet sales worldwide of R788. AZ remains obligated to pay us various milestonesand royalties in the future if certain conditions are met.

 

Either party may terminate the agreement if the other party materiallybreaches the agreement and such breach remains uncured within sixty days fromthe date of notice, or in the event of insolvency of the other party. We mayalso terminate the agreement in its entirety if AZ challenges the validity,enforceability or scope of any of our patents licensed to AZ by us under theagreement. AZ may also terminate the agreement either without cause upon onehundred eighty-days’ written notice, or in the event of any change of controlof Rigel upon thirty days’ written notice. If neither party terminates theagreement, then the agreement will remain in effect until the cessation of allcommercial sales of all products subject to the agreement, including R788.

 

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***Pfizer***

 

In January 2005, we entered into a research collaboration withPfizer that has a license component. The collaboration is for the developmentof inhaled products for the treatment of allergic asthma and other respiratorydiseases such as chronic obstructive pulmonary disease. The collaboration wasprimarily focused on our preclinical small molecule compounds, which inhibitIgE receptor signaling in respiratory tract mast cells by blocking thesignaling enzyme Syk kinase. A goal of the collaboration was for Pfizer tonominate a licensed compound to commence advanced preclinical development.Pfizer is responsible for the manufacture of all preclinical and clinicalmaterials for each compound/product and all costs associated with developmentand commercialization. We did not have any further obligations to Pfizer afterthe research phase of the collaboration ended in February 2007.

 

In connection with this collaboration, Pfizer paid us upfront fees of$10.0 million and purchased $5.0 million of our common stock at apremium in 2005. We have earned and will earn milestone payments in connectionwith certain clinical events, should they occur, as well as royalties fromsales of the resulting products upon marketing approval. Under the terms of thecollaboration agreement, the aggregate of potential milestone amounts payableto us is $175.0 million and mid-single-digit to low double-digit royaltieson sales. In May 2006, we achieved the first milestone upon selection ofthe licensed compound and received a $5.0 million milestone payment whenPfizer nominated R343 to commence advanced preclinical development in allergicasthma. In December 2007, we received the second milestone payment of$5.0 million when Pfizer initiated a Phase 1 clinical trial on R343. Nomilestone payments were received in either 2008 or 2009 as no furthermilestones were achieved. We expect Pfizer to initiate a Phase 2 clinicaltrial in 2010 as a result of which we will be entitled to receive a milestonepayment of $5.0 million. Pfizer remains obligated to pay us variousmilestones and royalties in the future if certain conditions are achieved.

 

Pfizer may terminate the collaboration agreement for any reason uponprior written notice to us, or for cause if we materially breach the agreementand such breach remains uncured, or if we become insolvent. We may terminatethe collaboration agreement for cause if Pfizer fails to meet certain diligenceefforts, materially breaches the agreement and such breach remains uncured, orbecomes insolvent. If neither party exercises its option to terminate thecollaboration agreement, then the agreement automatically terminates on thelater of: 1) the last valid claim to expire covering a licensed productand 2) after a specified period from the launch of a licensed product.

 

***Daiichi***

 

In August 2002, we signed an agreement for a collaboration withDaiichi to pursue research related to a specific target from a novel class ofdrug targets called ligases that control cancer cell proliferation throughprotein degradation. Daiichi paid us $0.9 million at the time we enteredinto the agreement. Under the terms of the collaboration agreement, theaggregate of potential milestone amounts payable to us is $33.9 millionand low to mid-single-digit royalties on sales. We have earned to datemilestone payments totaling $5.7 million and may earn milestone paymentsin connection with certain clinical events. The research phase of thisthree-year collaboration expired in August 2005. In addition, we areentitled to receive royalties on any commercialized products to emerge from thecollaboration at low to mid-single-digit royalties on sales. Under the terms ofthe agreement, we retain the rights to co-develop and co-promote certainproducts resulting from this collaboration in North America, while Daiichiretains co-development and promotion rights in the remainder of the world. In December 2009,we received a milestone payment of $750,000 for the first designation of arational design lead compound. Daiichi may become obligated to pay us certainother milestone payments, and we are also entitled to receive royalties on anycommercialized products to emerge from the collaboration.

 

Either party may terminate the collaboration agreement if the otherparty materially breaches the agreement and such breach remains uncured, orafter a specified period from the end of a designated research period if noproduct is commercialized (unless the parties agree to extend thecollaboration). The collaboration agreement can also be terminated by mutualwritten consent of the parties. If neither party exercises its option toterminate the collaboration agreement, then the agreement automaticallyterminates on the later of: 1) the expiration of the last patent with aclaim that covers the composition of matter of a product (or manufacture or useof a product under certain circumstances) and 2) after a specified periodfrom the initial commercialization of a licensed product.

 

**Research and Development Expenses**

 

Our research and development expenditures include costs related topreclinical and clinical trials, scientific personnel, supplies, equipment,consultants, sponsored research, stock-based compensation, and allocatedfacility costs.

 

We do not track fully burdened research and development costsseparately for each of our drug candidates. We review our research anddevelopment expenses by focusing on three categories: research; development;and other. Our research team is focused on creating a portfolio of productcandidates that can be developed into small molecule therapeutics in our ownproprietary programs or with potential collaborative partners and utilizes ourrobust discovery engine to rapidly discover and validate new product candidatesin our focused range of therapeutic indications. “Research” expenses relateprimarily to personnel expenses, lab supplies, fees to third party researchconsultants, and compounds. Our development group leads the implementation ofour clinical and regulatory strategies and prioritizes disease indications inwhich our compounds may be studied in clinical trials. “Development” expensesrelate primarily to clinical trials, personnel expenses, lab supplies, and feesto third party research consultants. “Other” expenses primarily includeallocated stock-based compensation expense relating to personnel in researchand development groups and allocated facilities costs.

 

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In addition to reviewing the three categories of research anddevelopment expenses described in the preceding paragraph, we principallyconsider qualitative factors in making decisions regarding our research anddevelopment programs, which include enrollment in clinical trials and theresults thereof, the clinical and commercial potential for our drug candidatesand competitive dynamics. We also make our research and development decisionsin the context of our overall business strategy, which includes the evaluationof potential collaborations for the development of our drug candidates.

 

The following table presents our total research and developmentexpenses by category.

 
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|
| ** **               | ** ** | **March 31,**     | ** ** |
| **Expense  Categories:** | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Research                 |       | $                      | 4,427      |   | $ | 4,460 |   |
| Development              |       | 5,712                  |       | 14,574 |   |
| Other                    |       | 7,286                  |       | 5,504 |   |
|                     |       |                   |       |   |   |
|                     |       | $                      | 17,425     |   | $ | 24,538 |   |

 

“Other” expenses mainly represent allocated stock-based compensationexpenses of approximately $3.1 million and $1.4 million for the three monthsended March 31, 2010 and 2009, respectively, and allocated facilities costs of approximately $4.2million and $4.1 million for the three months ended March 31, 2010 and2009, respectively.  For the period from January 1,2007 to March 31, 2010, accumulated research and development costs bycategory are $70.7 million, $133.3 million, and $84.2 million, for  research, development, and other,respectively.

 

For the three months ended March 31, 2010, a major portion of ourresearch and development expenses was associated with our extension trials inRA patients. For the three months ended March 31, 2009, a major portion ofour research and development expenses was associated with our two Phase 2bclinical trials (*TASKi2* and *TASKi3*),as well as the related extension trials in RA patients. The expenses for theseprograms are included in “Development” expenses in the table above.

 

Regarding a timeline for the next clinical stage related to R788 in RA,we licensed the rights to R788 to AZ in February 2010. Phase 2 clinicaltrials of R788 in RA were completed in 2009. We expect AZ to initiate a Phase 3clinical trial in RA in 2010. AZ will be responsible for conducting and fundingall development, regulatory filings, manufacturing and global commercializationof products containing oral Syk inhibitors.

 

The scope and magnitude of future research and development expenses aredifficult to predict given the number of clinical trials that we will need toconduct for any of our potential products, as well as our limited capitalresources. Preclinical testing and clinical development are long, expensive anduncertain processes. In general, biopharmaceutical development involves aseries of steps, beginning with identification of a potential target andincluding, among others, proof of concept in animals and Phase 1, 2 and 3clinical trials in humans. Each of these steps is typically more expensive thanthe previous step. Success in early stages of development often results inincreasing expenditures for a given product candidate. Significant delays inclinical testing could materially impact our product development costs andtiming of completion of the clinical trials. We do not know whether plannedclinical trials will begin on time, will need to be halted or revamped or willbe completed on schedule, or at all. Clinical trials can be delayed for avariety of reasons, including delays in obtaining regulatory approval tocommence a trial, delays from scale up, delays in reaching agreement onacceptable clinical trial agreement terms with prospective clinical sites,delays in obtaining institutional review board approval to conduct a trial at aprospective clinical site or delays in recruiting subjects to participate in astudy.

 

We currently do not have reliable estimates of total costs for a particulardrug candidate to reach the market. Our potential products are subject to alengthy and uncertain regulatory process that may involve unanticipatedadditional clinical trials and may not result in receipt of the necessaryregulatory approvals. Failure to receive the necessary regulatory approvalswould prevent us from commercializing the product candidates affected. Inaddition, clinical trials of our potential products may fail to demonstratesafety and efficacy, which could prevent or significantly delay regulatoryapproval. We do not have a reasonable basis to determine when or if materialnet cash inflows from the commercialization and sale of our drug candidateswill occur. Commercialization of our product candidates depends upon successfulcompletion of extensive preclinical studies and clinical trials to demonstratetheir safety and efficacy for humans. We do not know whether we, or any of ourcurrent or potential future collaborative partners, will undertake clinicaltrials of potential products beyond the trials already concluded and the trialscurrently in process. It will take us, or our current or potential futurecollaborative partners, several years to complete any such testing, and failurecan occur at any stage of testing. Interim results of trials do not necessarilypredict final results, and acceptable results in early trials may not berepeated in later trials. Moreover, we or our current or potential futurecollaborative partners may decide to discontinue development of any project atany time for regulatory, commercial, scientific or other reasons. To date, wehave not commercialized any of our drug candidates, and we may never do so.

 

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For a discussion of the risks and uncertainties associated with thetiming and costs of completing the development of the Company’s drugcandidates, see “Item 1A. Risk Factors,” including in particular the followingrisks:

 

·                  “If our corporatecollaborations or license agreements are unsuccessful, our research anddevelopment efforts could be delayed.”

 

·                  “If conflicts arise betweenour collaborators or advisors and us, any of them may act in their self-interest,which may be adverse to our stockholders’ interests.”

 

·                  “We might not be able tocommercialize our product candidates successfully if problems arise in theclinical testing and approval process.”

 

·                  “There is a high risk thatdrug discovery and development efforts might not successfully generate goodproduct candidates.”

 

·                  “Our future fundingrequirements will depend on many uncertain factors.”

 

·                  “Because we expect to bedependent upon collaborative and license agreements, we might not meet our strategicobjectives.”

 

·                  “Delays in clinical testingcould result in increased costs to us.”

 

For further discussion onresearch and development activities, see “Research and Development Expenses”under “Results of Operations” below.

 

**Recent Accounting Pronouncements**

 

In October 2009, the Financial AccountingStandards Board (FASB) issued Accounting Standards Update, or ASU, No. 2009-13(formerly Emerging Issues Task Force, or EITF, No. 08-1) on AccountingStandards Codification (ASC) Topic No. 605 for revenue recognition relatedto multiple-deliverable revenue arrangements. ASU No. 2009-13 provides amendments to the existing criteria forseparating consideration in multiple-deliverable arrangements.  The amendments establish a selling pricehierarchy for determining the selling price of a deliverable, eliminate theresidual method of allocation of arrangement consideration to all deliverablesand require the use of the relative selling price method in the allocation ofarrangement consideration to all deliverables, require the determination of thebest estimate of a selling price in a consistent manner, and significantlyexpand the disclosures related to the multiple-deliverable revenuearrangements. The amendments will be effective in fiscal years beginning on orafter June 15, 2010, and early adoption is permitted. We are currently evaluatingthe impact on our financial statements of adopting these amendments to ASCTopic No. 605 and cannot estimate the impact of adoption at this time.

 

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**Critical Accounting Policies and the Use ofEstimates**

 

Our discussion and analysis of our financialcondition and results of operations is based upon our financial statements,which have been prepared in accordance with U.S. generally accepted accountingprinciples (GAAP). The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. We evaluate our estimates, including those related to terms ofour research collaborations (i.e. revenue recognition of upfront fees andcertain milestone payments), investments, stock-based compensation, impairmentissues, the estimated useful life of assets and contingencies, on an on-goingbasis. We base our estimates on historical experience and on various otherassumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions. We believe the following critical accounting policies affect ourmore significant judgments and estimates used in the preparation of ourfinancial statements:

 

***Revenue Recognition***

 

We present revenue from ourcollaboration arrangements under FASB ASC, 808, *Collaboration Arrangements*. Our revenue arrangements withmultiple elements are evaluated under FASB ASC 605-25, *Multiple-Element Arrangements*, and aredivided into separate units of accounting if certain criteria are met,including whether the delivered element has stand-alone value to the customerand whether there is objective and reliable evidence of the fair value of anyundelivered items. The consideration we receive is allocated among the separateunits based on their respective fair values, and the applicable revenuerecognition criteria are applied to each of the separate units. Advancepayments received in excess of amounts earned are classified as deferredrevenue until earned.

 

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

 

Revenues related to collaborativeresearch with our corporate collaborators are recognized as research servicesare performed over the related development periods for each agreement. Underthese agreements, we are required to perform research and developmentactivities as specified in each respective agreement. The payments received arenot refundable and are generally based on a contractual cost per full-timeequivalent employee working on the project. Our research and developmentexpenses under the collaborative research agreements approximate the revenuerecognized under such agreements over the term of the respective agreements. Itis our policy to recognize revenue based on our level of effort expended,however, revenue recognized will not exceed amounts billable under the agreement.

 

Revenues associated with substantive, at-riskmilestones pursuant to collaborative agreements are recognized upon achievementof the milestones.

 

***Stock-based Compensation***

 

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

 

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

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

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

 

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**Results of Operations**

** **

**Three Months Ended March 31,2010 and 2009**

 

**Revenues**

 
| ** **              | ** ** | **Three  Months Ended** | ** ** | ** ** | ** ** |
|-------------------------|------------|-------------------------|------------|------------|------------|
| ** **              | ** ** | **March 31,**      | ** ** | ** ** | ** ** |
| ** **              | ** ** | **2010**                | ** ** | **2009**   | ** ** | **Aggregate  Change** | ** ** |
| ** **              | ** ** | **(in  thousands)**     | ** ** |
| ***Contract revenues*** |       | $                       | 3,261      |       | $          | — |   | $ | 3,261 |   |
|                         |            |                         |            |            |            |  |  |  |  |  |

 

Contract revenue from collaborations for the threemonths ended March 31, 2010 consisted of $3.3 million of amortization ofthe $100.0 million upfront payment pursuant to our worldwide license agreementwith AZ that was effective as of March 26, 2010. Therewere no revenues reported during the three months ended March 31, 2009. Asof March 31, 2010, we had deferred revenue of approximately $96.7 millionrepresenting the remaining unamortized amount of the upfront payment fromAZ.  We expect this deferredamount will be recognized as revenue over the transition period until alldeliverables to AZ are completed, which we estimate to be September 25,2010. Our potential future revenues in 2010 may include certain milestonepayments from our current collaboration partners and upfront payments from newcollaboration partners we enter into agreements with in the future.

 

**Research and Development Expense**

 
| ** **                                                                            | ** ** | **Three  Months Ended** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                            | ** ** | **March 31,**      | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **2010**                | ** ** | **2009**   | ** ** | **Aggregate  Change** | ** ** |
| ** **                                                                            | ** ** | **(in  thousands)**     | ** ** |
| ***Research and  development expenses***                                              |       | $                       | 17,425     |       | $          | 24,538 |   | $ | (7,113 | ) |
| ***Stock-based  compensation expense included in research and development expenses*** |       | 3,083                   |       | 1,425      |       | 1,658 |   |
|                                                                                       |            |                         |            |            |            |  |  |  |  |  |

 

The decrease in research and development expense forthe three months ended March 31, 2010, compared to the same period in2009, was primarily due to the completion of our two Phase 2b clinicaltrials (*TASKi2* and *TASKi3*), partially offset by the increase in stock-basedcompensation expense as discussed under “Stock-Based Compensation Expense”below.

 

**General and Administrative Expense**

 
| ** **                                                                              | ** ** | **Three  Months Ended** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                              | ** ** | **March 31,**      | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **2010**                | ** ** | **2009**   | ** ** | **Aggregate  Change** | ** ** |
| ** **                                                                              | ** ** | **(in  thousands)**     | ** ** |
| ***General and  administrative expenses***                                              |       | $                       | 8,186      |       | $          | 4,603 |   | $ | 3,583 |   |
| ***Stock-based  compensation expense included in general and administrative expenses*** |       | 2,084                   |       | 719        |       | 1,365 |   |
|                                                                                         |            |                         |            |            |            |  |  |  |  |  |

 

The increase in general and administrative expensefor the three months ended March 31, 2010, as compared to the same periodin 2009, was primarily due to certain one-time investment banking fees associatedwith the closing of our transaction with AZ and increased stock-basedcompensation expense as discussed under  “Stock-BasedCompensation Expense” below.

 

**Restructuring Charges**

 
| ** **                                                                | ** ** | **Three  Months Ended** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                | ** ** | **March 31,**      | ** ** | ** ** | ** ** |
| ** **                                                                | ** ** | **2010**                | ** ** | **2009**   | ** ** | **Aggregate  Change** | ** ** |
| ** **                                                                | ** ** | **(in thousands)**      | ** ** |
| ***Restructuring  Charges***                                              |       | $                       | —     |       | $          | 1,141 |   | $ | (1,141 | ) |
| ***Stock-based  compensation expense included in restructuring charges*** |       | —                  |       | 122        |       | (122 | ) |
|                                                                           |            |                         |            |            |            |  |  |  |  |  |

 

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In February 2009, we announced that we cut ourresearch programs in virology and oncology as well as terminated certainrelated development and administrative staff, which resulted in the dismissalof 36 employees, or approximately 20% of our workforce. This measure wasintended to maintain our emphasis on our active preclinical and clinicalprograms, while conserving our resources. As a result of the restructuringimplemented in the first quarter of 2009, we recorded restructuring charges of$1.1 million, including $1.0 million of workforce reduction costs(which had been paid as of December 31, 2009) and $122,000 of non-cashstock-based compensation expense incurred in connection with the extension of thedate the terminated employees had to exercise their vested options. Theterminated employees were given until December 31, 2009 to exercise theiroutstanding vested options rather than 90 days from the termination dateas is typically required under our equity incentive plan.

 

**Stock-Based Compensation Expense**

 
| ** **                                    | ** ** | **Three  Months Ended** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                    | ** ** | **March 31,**      | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **2010**                | ** ** | **2009**   | ** ** | **Aggregate  Change** | ** ** |
| ** **                                    | ** ** | **(in  thousands)**     | ** ** |
| **Stock-based compensation expense  from:**   |       |                    |       |       |       |   |   |
| ***Officer, director  and employee options*** |       | $                       | 5,136      |       | $          | 2,266 |   | $ | 2,870 |   |
| ***Consultant  options***                     |       | 31                      |       | —     |       | 31 |   |
| ***Total***                                   |       | $                       | 5,167      |       | $          | 2,266 |   | $ | 2,901 |   |

 

Theincrease in stock-based compensation expense for the three months ended March 31,2010, as compared to the same period in 2009, wasprimarily due to an additional full quarter ofstock-based compensation expense amortization in the first quarter of 2010related to options granted in late March of 2009, which were fullyamortized as of the end of the first quarter of 2010, as well as a full quarterof amortization in the first quarter of 2010 related to options granted inearly January 2010.

 

**Interest Income**

 
| ** **            | ** ** | **Three  Months Ended** | ** ** | ** ** | ** ** |
|-----------------------|------------|-------------------------|------------|------------|------------|
| ** **            | ** ** | **March 31,**      | ** ** | ** ** | ** ** |
| ** **            | ** ** | **2010**                | ** ** | **2009**   | ** ** | **Aggregate  Change** | ** ** |
| ** **            | ** ** | **(in  thousands)**     | ** ** |
| ***Interest income*** |       | $                       | 47         |       | $          | 347 |   | $ | (300 | ) |
|                       |            |                         |            |            |            |  |  |  |  |  |

 

Interest income results from our interest-bearingcash and investment balances. The decrease in interest income for the threemonths ended March 31, 2010, as compared to the same period in 2009, wasdue to lower average cash balances and lower interest rates earned on ourinvestments in the first quarter of 2010.

 

**Interest Expense**

 
| ** **             | ** ** | **Three  Months Ended** | ** ** | ** ** | ** ** |
|------------------------|------------|-------------------------|------------|------------|------------|
| ** **             | ** ** | **March 31,**      | ** ** | ** ** | ** ** |
| ** **             | ** ** | **2010**                | ** ** | **2009**   | ** ** | **Aggregate  Change** | ** ** |
| ** **             | ** ** | **(in thousands)** | ** ** |
| ***Interest expense*** |       | $                       | 30         |       | $          | 53 |   | $ | (23 | ) |
|                        |            |                         |            |            |            |  |  |  |  |  |

 

Interest expense primarily results from our capitallease obligations associated with fixed asset acquisitions. The decrease ininterest expense for the three months ended March 31, 2010, as compared tothe same period in 2009, was primarily due to the lower average outstandingbalance of capital lease obligations in the first quarter of 2010, as comparedto the same period in 2009.

 

##### **Income tax benefit**

 
| ** **                | ** ** | **Three  Months Ended** | ** ** | ** ** | ** ** |
|---------------------------|------------|-------------------------|------------|------------|------------|
| ** **                | ** ** | **March 31,**      | ** ** | ** ** | ** ** |
| ** **                | ** ** | **2010**                | ** ** | **2009**   | ** ** | **Aggregate  Change** | ** ** |
| ** **                | ** ** | **(in  thousands)**     | ** ** |
| ***Income tax  benefit*** |       | $                       | —     |       | $          | 66 |   | $ | (66 | ) |
|                           |            |                         |            |            |            |  |  |  |  |  |

 

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Income tax benefit in 2009 resulted from our federalrefundable credit in accordance with the provisions of the American Recoveryand Reinvestment Act of 2009.

 

**Liquidity and Capital Resources**

 

**Cash Requirements**

 

We have financed ouroperations from inception primarily through sales of equity securities,contract payments under our collaboration agreements and equipment financingarrangements. We have consumed substantial amounts of capital to date as wecontinue our research and development activities, including preclinical studiesand clinical trials. In February 2010, we entered into an exclusiveworldwide license agreement with AZ for the global development andcommercialization of our oral Syk inhibitors for the treatment of humandiseases other than those primarily involving respiratory or pulmonarydysfunction. After a limited transition period, AZ will be responsible forconducting and funding all development, regulatory filings, manufacturing andglobal commercialization of products containing oral Syk inhibitors. Theagreement became effective on March 26, 2010 and, in connection with theeffectiveness of the agreement, we received an upfront payment of $100.0million in April 2010 from AZ. AZ is required to pay us up to anadditional $345.0 million if specified development, regulatory and launchmilestones are achieved for R788. We will also be eligible to receive up to anadditional $800.0 million if specified sales performance milestones areachieved for R788, as well as significant stepped double-digit royalties on netsales worldwide of R788.

 

As of March 31, 2010,we had approximately $109.6 million in cash, cash equivalents andavailable-for-sale securities, as compared to approximately $133.3 millionas of December 31, 2009, a decrease of approximately $23.7 million.The decrease was primarily attributable to operating expenses for the threemonths ended March 31, 2010. We believe that our existing capitalresources will be sufficient to support our current and projected fundingrequirements through at least the next twelve months. We have based thisestimate on assumptions that may prove to be wrong, and we could utilize ouravailable capital resources sooner than we currently expect. Because of thenumerous risks and uncertainties associated with the development of our productcandidates and other research and development activities, including risks anduncertainties that could impact the rate of progress of our developmentactivities, we are unable to estimate with certainty the amounts of increasedcapital outlays and operating expenditures associated with our current andanticipated clinical trials and other research and development activities.

 

Our operations will requiresignificant additional funding for the foreseeable future. Until we are able togenerate sufficient amounts of product revenues and royalty revenues, we expectto finance future cash needs through public and/or private equity offerings,debt financings or collaboration and licensing arrangements, as well as throughinterest income earned on the investment of our cash balances and short-terminvestments. To the extent we raise additional capital by issuing equitysecurities, our stockholders could at that time experience substantialdilution. Any debt financing that we are able to obtain may involve operatingcovenants that restrict our business. To the extent that we raise additionalfunds through collaboration and licensing arrangements, we may be required torelinquish some of our rights to our technologies or product candidates, orgrant licenses on terms that are not favorable to us.

 

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

 

·                  the progress and success ofclinical trials and preclinical activities (including studies and manufactureof materials) of our product candidates conducted by our collaborative partnersor licensees or us;

 

·                  our ability to meet themilestones identified in our collaborative agreements that trigger payments tous from our collaboration partners;

 

·                  the progress of researchprograms carried out by us;

 

·                  any changes in the breadthof our research and development programs;

 

·                  the progress of the researchand development efforts of our collaborative partners;

 

·                  our ability to acquire orlicense other technologies or compounds that we seek to pursue;

 

·                  our ability to manage ourgrowth;

 

·                  competing technological andmarket developments;

 

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·                  the costs and timing ofobtaining, enforcing and defending our patent and intellectual property rights;

 

·                  the costs and timing ofregulatory approvals and filings by us and our collaborators; and

 

·                  expenses associated with thepending and potential additional related purported securities class actionlawsuits, as well as any unforeseen litigation.

 

Insufficient funds may require us to delay, scaleback or eliminate some or all of our research or development programs, to loserights under existing licenses or to relinquish greater or all rights toproduct candidates at an earlier stage of development or on less favorableterms than we would otherwise choose or may adversely affect our ability tooperate as a going concern. For the three months ended March 31, 2010 and2009, we maintained an investment portfolio primarily in money market funds,U.S. treasury bills, government-sponsored enterprise securities, and corporatebonds and commercial paper. Cash in excess of immediate requirements isinvested with regard to liquidity and capital preservation. Wherever possible,we seek to minimize the potential effects of concentration and degrees of risk.

 

**Cash Flows from Operating, Investing and FinancingActivities**

** **
| ** **                                           | ** ** | **Three  Months Ended** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | **March 31,**      | ** ** |
| ** **                                           | ** ** | **2010**                | ** ** | **2009** | ** ** |
| Net cash provided by (used in):                      |       |                    |       |   |   |
| Net cash used in operating activities                |       | $                       | (23,092    | ) | $ | (29,062 | ) |
| Net cash provided by investing activities            |       | 24,001                  |       | 20,124 |   |
| Net cash used in financing activities                |       | (237                    | )          | (338 | ) |
| Net increase (decrease) in cash and cash equivalents |       | $                       | 672        |   | $ | (9,276 | ) |

 

Net cash used in operating activities wasapproximately $23.1 million for the three months ended March 31,2010, compared to  approximately$29.1 million for the three months ended March 31, 2009. The decreasein net cash used in operating activities was primarily due to the decrease incash payments related to our research and development programs. The timing ofcash requirements may vary from period to period depending on our research anddevelopment activities, including our planned preclinical and clinical trials,and future requirements to establish commercial capabilities for any productsthat we may develop.

 

Net cash provided by investing activities wasapproximately $24.0 million for the three months ended March 31,2010, compared to approximately $20.1 million for the three months ended March 31,2009.  Net cash provided by investingactivities in 2010 was primarily due to maturities of available-for-salesecurities of approximately $37.3 million, partially offset by purchases ofavailable-for-sale securities of approximately $12.8 million.  Net cash provided by investing activities in2009 was primarily due to maturities of available-for-sale securities ofapproximately $47.2 million, partially offset by purchases ofavailable-for-sale securities of approximately $27.0 million. Capital expenditures were approximately$440,000 for the three months ended March 31, 2010, compared toapproximately $11,000 for the same period in 2009.

 

Net cash used in financing activities wasapproximately $237,000 for the three months ended March 31, 2010, comparedto approximately $338,000  for the same period in 2009. Net cash used infinancing activities in 2010 was primarily due to payments for capital leasefinancing of approximately $321,000, partially offset by the proceeds from theexercise of outstanding options of approximately $84,000.  Net cash used in financing activities in 2009was primarily due to payments for capital lease financing of approximately$436,000, partially offset by the proceeds from the exercise of outstandingoptions of approximately $98,000.

 

**Off-Balance Sheet Arrangements**

 

As of March 31, 2010, we had no off-balancesheet arrangements (as defined in Item 303(a)(4)(ii) ofRegulation S-K under the Securities Exchange Act of 1934, as amended) thatcreate potential material risks for us and that are not recognized on ourbalance sheets.

 

**Contractual Obligations**

 

As of March 31, 2010, we hadthe following contractual commitments:

 
| ** **                        | ** ** | ** **          | ** **  | **Payment  Due By Period** | ** ** |
|-----------------------------------|------------|---------------------|-------------|----------------------------|------------|
| ** **                        | ** ** | ** **          | ** **  | **Less than**              | ** ** | **1 - 3** | ** ** | **3 - 5** | ** ** | **More than** | ** ** |
| ** **                        | ** ** | **Total**           | ** **  | **1 Year**                 | ** ** | **Years** | ** ** | **Years** | ** ** | **5 years** | ** ** |
| ** **                        | ** ** | **(in  thousands)** | ** **  |
| **Capital Lease obligations (1)** | ** ** | **$**               | **1,699**   |                       | $          | 1,052 |   | $ | 647 |   | $ | — |   | $ | — |   |
| **Facilities lease (2)**          | ** ** | **115,104**         |        | 16,111                     |       | 26,289 |   | 28,437 |   | 44,267 |   |
| **Total**                         | ** ** | **$**               | **116,803** |                       | $          | 17,163 |   | $ | 26,936 |   | $ | 28,437 |   | $ | 44,267 |   |

 

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(1)                                  As of March 31,2010, we had approximately $1.7 million in capital lease obligations (includingthe interest portion) associated with our equipment. All existing capital leaseagreements as of March 31, 2010 are secured by the equipment financed,bear interest at rates between 4.99% and 10.36% and are due in monthlyinstallments through 2012.

 

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(2)                                  On March 31,2009, we amended our build-to-suit lease agreement to defer certain rentalobligations in the aggregate amount of $6.9 million, for a period of up toseventeen months. Under the terms of this amendment, we were obligated to repaythe deferred amounts, including interest accruing at 12% during the deferralperiod, based on a timeline that could vary depending upon the occurrence ofcertain financing or collaborative transactions. In September 2009, wecompleted an underwritten public offering and received net proceeds ofapproximately $101.5 million after deducting underwriting discounts andcommissions and offering expenses. As a result of the above financing, we paidour landlord $3.7 million, or 50% of the deferred rental amounts, plusinterest at 12% in November 2009. In February 2010, we entered into aworldwide license agreement with AZ pursuant to which we received an upfrontpayment of $100.0 million in April 2010.  As a result of this additional cash received,we paid our landlord $3.9 million, or 50% of the remaining deferred rentalamounts, plus interest at 12%, in April 2010.

 

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

 

During thethree months ended March 31, 2010, there were no material changes to ourmarket risk disclosures as set forth in Part II, Item 7A, “Quantitativeand Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-Kfor the year ended December 31, 2009.

 

**Item 4.    Controlsand Procedures**

 

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

 

*Changes in Internal Controls.*Therewere no changes in our internal control over financial reporting that occurredduring the quarter ended March 31, 2010 that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

 

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

 

**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

On February 6, 2009, apurported securities class action lawsuit was commenced in the United StatesDistrict Court for the Northern District of California, naming as defendants usand certain of our officers, directors and underwriters for our February 2008stock offering. An additional purported securities class action lawsuitcontaining similar allegations was subsequently filed in the United StatesDistrict Court for the Northern District of California on February 20,2009. By order of the Court dated March 19, 2009, the two lawsuits wereconsolidated into a single action. On June 9, 2009, the Court issued anorder naming the Inter-Local Pension Fund GCC/IBT as lead plaintiff andCoughlin Stoia as lead counsel. The lead plaintiff filed a consolidatedcomplaint on July 24, 2009. We filed a motion to dismiss on September 8,2009. On December 21, 2009, the Court granted our motion and dismissed theconsolidated complaint with leave to amend. Plaintiff filed its consolidatedamended complaint on January 27, 2010. The lawsuit alleges violations ofthe Securities Act of 1933 and the Securities Exchange Act of 1934 inconnection with allegedly false and misleading statements made by us related tothe results of the Phase 2a clinical trial of our product candidate R788.The plaintiffs seek damages, including rescission or rescissory damages forpurchasers in the stock offering, an award of their costs and injunctive and/orequitable relief for purchasers of our common stock during the period between December 13,2007 and February 9, 2009, including purchasers in the stock offering. Wefiled a motion to dismiss the consolidated amended complaint on February 16,2010. Briefing on the motion to dismiss is complete and we are awaiting aruling on that motion from the Court. It is possible that additional suits willbe filed with respect to these same matters and also naming us and/or ourofficers and directors as defendants. If any such additional suits are filed inthe same court, we believe that they would be consolidated into theconsolidated action.

 

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Webelieve that we have meritorious defenses and intend to defend the lawsuitvigorously. This lawsuit and any other related lawsuits are subject to inherentuncertainties, and the actual costs to be incurred relating to the lawsuit willdepend upon many unknown factors. The outcome of the litigation is necessarilyuncertain, and we could be forced to expend significant resources in thedefense of this lawsuit, and we may not prevail.

 

**Item 1A.    Risk Factors**

 

*In evaluating our business, youshould carefully consider the following risks, as well as the other informationcontained in this Quarterly Report on Form 10-Q. These risk factors couldcause our actual results to differ materially from those contained inforward-looking statements we have made in this Quarterly Report on Form 10-Qand those we may make from time to time. If any of the following risks actuallyoccurs, our business, financial condition and operating results could beharmed. The risks and uncertainties described below are not the only onesfacing us. Additional risks and uncertainties not presently known to us, orthat we currently see as immaterial, may also harm our business. We have markedwith an asterisk (*) those risk factors below that reflect a substantive changefrom the risk factors included in our Annual Report on Form 10-K filedwith the Securities and Exchange Commission on March 2, 2010.*

 

***If our corporate collaborations orlicense agreements are unsuccessful, our research and development efforts couldbe delayed.****

 

Our strategy depends upon the formation and sustainability of multiplecollaborative arrangements and license agreements with third parties now and inthe future. We rely on these arrangements for not only financial resources, butalso for expertise we need now and in the future relating to clinical trials,manufacturing, sales and marketing, and for licenses to technology rights. Todate, we have entered into several such arrangements with corporatecollaborators; however, we do not know if these collaborations or additionalthird parties with which we collaborate, if any, will dedicate sufficientresources or if any development or commercialization efforts by third parties willbe successful. Should a collaborative partner fail to develop or commercializea compound or product to which it has rights from us for any reason, includingcorporate restructuring, such failure might delay our ongoing research anddevelopment efforts, because we might not receive any future milestonepayments, and we would not receive any royalties associated with such compoundor product. In addition, the continuation of some of our partnered drugdiscovery and development programs may be dependent on the periodic renewal ofour corporate collaborations.

 

The research phase of our collaboration with Johnson & Johnsonended in 2003, and the research phases conducted at our facilities under ourbroad collaboration with Novartis ended in 2004. The research phase of ourcollaboration agreement with Daiichi ended in 2005. In 2004, we signed a newcollaboration agreement with Merck, and the research phase of thiscollaboration ended in May 2007. In 2005, we signed a new collaborationagreement with Pfizer, and the research phase of this collaboration ended in February 2007.Our collaboration agreement with Merck Serono, which, as of February 2010,is no longer active, did not include a research phase. Our collaborationagreement with AZ, entered into in 2010, also does not include a researchphase, although we are responsible for conducting, at our expense, an on-goingopen label extension study in R788 during the limited transition period. Eachof our collaborations could be terminated by the other party at any time, andwe may not be able to renew these collaborations on acceptable terms, if atall, or negotiate additional corporate collaborations on acceptable terms, ifat all. If these collaborations terminate or are not renewed, any resultantloss of revenues from these collaborations or loss of the resources andexpertise of our collaborative partners could adversely affect our business.

 

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

 

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

 

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

 

If conflicts arise between us and our corporate collaborators orscientific advisors, the other party may act in its self-interest and not inthe interest of our stockholders. Some of our corporate collaborators areconducting multiple product development efforts within each disease area thatis the subject of the collaboration with us or may be acquired or merged with acompany having a competing program. In some of our collaborations, we haveagreed not to conduct, independently or with any third party, any research thatis competitive with the research conducted under our collaborations. 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 breach or terminate itsagreement with us or otherwise fail to conduct the collaborative activitiessuccessfully and in a timely manner, the preclinical or clinical development orcommercialization of the affected product candidates or research programs couldbe delayed or terminated. We generally do not control the amount and timing ofresources that our corporate collaborators devote to our programs or potentialproducts. We do not know whether current or future collaborative partners, ifany, might pursue alternative technologies or develop alternative productseither on their own or in collaboration with others, including our competitors,as a means for developing treatments for the diseases targeted by collaborativearrangements with us.

 

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

 

We cannot predict whether regulatory clearance will be obtained for anyproduct that we, or our collaborative partners, hope to develop. Satisfactionof regulatory requirements typically takes many years, is dependent upon thetype, complexity and novelty of the product and requires the expenditure ofsubstantial resources. Of particular significance to us are the requirementsrelating to research and development and testing.

 

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

 

·                  must be conducted inconformance with the FDA’s good clinical practices and other applicableregulations;

 

·                  must meet requirements forinstitutional review board oversight;

 

·                  must meet requirements forinformed consent;

 

·                  are subject to continuingFDA oversight;

 

·                  may require large numbers oftest subjects; and

 

·                  may be suspended by us, ourcollaborators or the FDA at any time if it is believed that the subjectsparticipating in these trials are being exposed to unacceptable health risks orif the FDA finds deficiencies in the IND or the conduct of these trials.

 

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

 

Before receiving FDA approval to market a product, we must demonstratewith substantial clinical evidence that the product is safe and effective inthe patient population and the indication that will be treated. Data obtainedfrom preclinical and clinical activities are susceptible to varyinginterpretations that could delay, limit or prevent regulatory approvals. Inaddition, delays or rejections may be encountered based upon additionalgovernment regulation from future legislation or administrative action orchanges in FDA policy during the period of product development, clinical trialsand FDA regulatory review. Failure to comply with applicable FDA or otherapplicable regulatory requirements may result in criminal prosecution, civilpenalties, recall or seizure of products, total or partial suspension ofproduction or injunction, adverse publicity, as well as other regulatory actionagainst our potential products or us. Additionally, we have limited experiencein conducting and managing the clinical trials necessary to obtain regulatoryapproval.

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

 

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

 

***We might not be able tocommercialize our product candidates successfully if problems arise in theclinical testing and approval process.***

 

Commercialization of our product candidates depends upon successfulcompletion of extensive preclinical studies and clinical trials to demonstratetheir safety and efficacy for humans. Preclinical testing and clinicaldevelopment are long, expensive and uncertain processes.

 

In connection with clinical trials of our product candidates, we facethe risks that:

 

·                  the product candidate maynot prove to be effective;

 

·                  we may discover that aproduct candidate may cause harmful side effects;

 

·                  the results may notreplicate the results of earlier, smaller trials;

 

·                  we or the FDA or similarforeign regulatory authorities may suspend the trials;

 

·                  the results may not bestatistically significant;

 

·                  patient recruitment may beslower than expected;

 

·                  patients may drop out of thetrials; and

 

·                  regulatory requirements maychange.

 

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 us,or our collaborative partners several years to complete any such testing, andfailure can occur at any stage of testing. Interim results of trials do notnecessarily predict final results, and acceptable results in early trials maynot be repeated in later trials. A number of companies in the pharmaceuticalindustry, including biotechnology companies, have suffered significant setbacksin advanced clinical trials, even after achieving promising results in earliertrials. Moreover, we or our collaborative partners or regulators may decide todiscontinue development of any or all of these projects at any time forcommercial, scientific or other reasons.

 

***There is a high risk that drugdiscovery and development efforts might not successfully generate good productcandidates.***

 

At the present time, the majority of our operations are in variousstages of drug identification and development. We currently have two productcompounds in the clinical testing stage: one with indications for RA, ITP,B-cell lymphoma and T-cell lymphoma, as well as for certain solid tumors thatis being implemented by the NCI, all of which indications are subject to acollaboration agreement with AZ; and one in Phase 1b testing and intendedfor allergic asthma, which is subject to a collaboration agreement with Pfizer, Inc.,or Pfizer. In our industry, it is statistically unlikely that the limitednumber of compounds that we have identified as potential product candidateswill actually lead to successful product development efforts, and we do notexpect any drugs resulting from our research to be commercially available forseveral years, if at all.

 

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Our compounds in clinical trials and our future leads for potential drugcompounds are subject to the risks and failures inherent in the development ofpharmaceutical products. These risks include, but are not limited to, theinherent difficulty in selecting the right drug and drug target and avoidingunwanted side effects, as well as unanticipated problems relating to productdevelopment, testing, obtaining regulatory approvals, maintaining regulatorycompliance, manufacturing, competition and costs and expenses that may exceedcurrent estimates. For example, in our recently completed two Phase 2bclinical trials for R788 in RA, *TASKi2*and *TASKi3*, the most commonclinically meaningful drug-related adverse events noted were diarrhea andhypertension. In both our *TASKi2*and *TASKi3* Phase 2b clinicaltrials, a meaningfully higher percentage of patients in the R788 treatmentgroups had blood pressure medication adjusted or initiated during the course ofthe clinical trials as compared to the placebo group. In larger future clinicaltrials, we may discover additional side effects and/or higher frequency of sideeffects than those observed in completed clinical trials. If approved by theFDA, the side effect profile of R788 may also result in a narrowly approvedindication for use of the product, especially in light of other drugs currentlyavailable to treat RA, dependent on the safety profile of R788 relative tothose drugs.

 

The results of preliminary and mid-stage studies do not necessarilypredict clinical or commercial success, and larger later-stage clinical trialsmay fail to confirm the results observed in the previous studies. Similarly, aclinical trial may show that a product candidate is safe and effective forcertain patient populations in a particular indication, but other clinicaltrials may fail to confirm those results in a subset of that population or in adifferent patient population, which may limit the potential market for thatproduct candidate. For example, R788 produced significant clinical improvementin RA patients who had failed to respond to methotrexate alone in our *TASKi2* Phase 2b clinical trial, butour *TASKi3* Phase 2b clinicaltrial failed to meet its efficacy endpoints in RA patients who had failed torespond to at least one biologic treatment. In addition, if we were to repeateither of the *TASKi2* and *TASKi3* Phase 2b clinical trials, anysuch additional trials may not confirm the results observed in the originaltrials. If our partner, AZ, is able to initiate a Phase 3 clinical trialevaluating R788 in RA patients, the Phase 3 clinical trial may not showR788 to be safe and effective for the treatment of RA patients. Finally, withrespect to our own compounds in development, we have established anticipatedtimelines with respect to the initiation 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 accumulated preclinicalevidence (pharmacokinetic, pharmacodynamic, safety and/or other factors) or earlyclinical results will be observed in later clinical trials, we can make noassurances regarding the likely results from our future clinical trials or theimpact of those results on our business.

 

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

 

Our success will depend to a large part on our own, our licensees’ andour licensors’ ability to obtain and defend patents for each party’s respectivetechnologies and the compounds and other products, if any, resulting from theapplication of such technologies. We have over 90 pending patent applications and over 160 issued patents in the UnitedStates as well as numerous pending corresponding foreign patent applications.In the future, our patent position might be highly uncertain and involvecomplex legal and factual questions. For example, we may be involved ininterferences before the United States Patent and Trademark Office.Interferences are complex and expensive legal proceedings and there is noassurance we will be successful in any 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.

 

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

 

·                  we were the first to makethe inventions covered by each of our pending patent applications;

 

·                  we were the first to filepatent applications for these inventions;

 

·                  others will notindependently develop similar or alternative technologies or duplicate any ofour technologies;

 

·                  any of our pending patentapplications will result in issued patents;

 

·                  any patents issued to us orour collaborators will provide a basis for commercially-viable products or willprovide us with any competitive advantages or will not be challenged by thirdparties;

 

·                  we will develop additionalproprietary technologies that are patentable; or

 

·                  the patents of others willnot have a negative effect on our ability to do business.

 

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

 

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We are a party to certain in-license agreements that are important toour business, and we generally do not control the prosecution of in-licensedtechnology. Accordingly, we are unable to exercise the same degree of controlover this intellectual property as we exercise over our internally-developedtechnology. Moreover, some of our academic institution licensors, research collaboratorsand scientific advisors have rights to publish data and information in which wehave rights. If we cannot maintain the confidentiality of our technology andother confidential information in connection with our collaborations, ourability to receive patent protection or protect our proprietary information mayotherwise be impaired. In addition, some of the technology we have licensedrelies on patented inventions developed using U.S. government resources. TheU.S. government retains certain rights, as defined by law, in such patents, andmay choose to exercise such rights. Certain of our in-licenses may beterminated if we fail to meet specified obligations. If we fail to meet suchobligations and any of our licensors exercise their termination rights, wecould lose our rights under those agreements. If we lose any of our rights, itmay adversely affect the way we conduct our business. In addition, becausecertain of our licenses are sublicenses, the actions of our licensors mayaffect our rights under those licenses.

 

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

 

Our success will depend, in part, on our ability to operate withoutinfringing or misappropriating the proprietary rights of others. There are manyissued patents and patent applications filed by third parties relating toproducts or processes that are similar or identical to our licensors or ours,and others may be filed in the future. There can be no assurance that ouractivities, or those of our licensors, will not infringe patents owned byothers. We believe that there may be significant litigation in the industryregarding patent and other intellectual property rights, and we do not know ifour collaborators or we would be successful in any such litigation. Any legalaction against our collaborators or us claiming damages or seeking to enjoincommercial activities relating to the affected products, our methods orprocesses could:

 

·                  require our collaborators orus to obtain a license to continue to use, manufacture or market the affectedproducts, methods or processes, which may not be available on commerciallyreasonable terms, if at all;

 

·                  prevent us from using thesubject matter claimed in the patents held by others;

 

·                  subject us to potentialliability for damages;

 

·                  consume a substantialportion of our managerial and financial resources; and

 

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

 

***We will need additional capital inthe future to sufficiently fund our operations and research.****

 

We have consumed substantial amounts of capital to date as we continueour research and development activities, including preclinical studies andclinical trials. In February 2010, we entered into an exclusive worldwidelicense agreement with AZ for the global development and commercialization ofour oral Syk inhibitors for the treatment of human diseases other than thoseprimarily involving respiratory or pulmonary dysfunction. The agreementincludes a license of rights to fostamatinib disodium, or R788, our late-stageinvestigational product candidate for the treatment of RA and other indications.The agreement became effective on March 26, 2010 and, in connection withthe effectiveness of the agreement, we received an upfront payment of $100.0million in April 2010 from AZ. AZ is required to pay us up to anadditional $345.0 million if specified development, regulatory and launchmilestones are achieved for R788. We will also be eligible to receive up to anadditional $800.0 million if specified sales performance milestones areachieved for R788, as well as significant stepped double-digit royalties on netsales worldwide of R788. We believe that our existing capital resources and theanticipated proceeds from our current collaborations  will be sufficient to support our current andprojected funding requirements through at least the next 12 months. We mayneed additional funds in the future and the amount of future funds needed willdepend largely on the timing and structure of potential future collaborations.Unless and until we are able to generate a sufficient amount of product revenue,we expect to finance future cash needs through public and/or private offeringsof equity securities, debt financings or collaboration and licensingarrangements, as well as through interest income earned on the investment ofour cash balances and short-term investments. With the exception of milestoneand royalty payments that we may receive under our existing collaborations, wedo not currently have any commitments for future funding. We do not knowwhether additional financing will be available when needed, or that, ifavailable, we will obtain financing on reasonable terms.

 

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

 

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***Our future funding requirements willdepend on many uncertain factors.****

 

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

 

·                  the progress and success ofclinical trials and preclinical activities (including studies and manufactureof materials) of our product candidates conducted by our collaborative partnersor licensees or us;

 

·                  our ability to meet themilestones identified in our collaborative agreements that trigger payments tous from our collaboration partners;

 

·                  the progress of researchprograms carried out by us;

 

·                  any changes in the breadthof our research and development programs;

 

·                  the progress of the researchand development efforts of our collaborative partners;

 

·                  our ability to acquire orlicense other technologies or compounds that we seek to pursue;

 

·                  our ability to manage ourgrowth;

 

·                  competing technological andmarket developments;

 

·                  the costs and timing ofobtaining, enforcing and defending our patent and intellectual property rights;

 

·                  the costs and timing ofregulatory approvals and filings by us and our collaborators; and

 

·                  expenses associated with thepending and potential additional related purported securities class actionlawsuits, as well as any unforeseen litigation.

 

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

 

***Our success as a company isuncertain due to our history of operating losses and the uncertainty of futureprofitability.****

 

Due in large part to the significant research and development expendituresrequired to identify and validate new product candidates and pursue ourdevelopment efforts, we have not been profitable and have incurred operatinglosses each year since we were incorporated in June 1996. We incurred netlosses of approximately $22.3 million for the three months ended March 31,2010,  and  $111.5 million and $132.3 millionfor the years ended December 31, 2009 and 2008, respectively. Currently,our only potential source of revenues is upfront payments, research anddevelopment milestone and royalty payments pursuant to our collaborationarrangements. As of March 31, 2010, we had an accumulated deficit ofapproximately $635.7 million. The extent of our future losses and thetiming of potential profitability are highly uncertain.

 

***Our ability to use net operatinglosses to offset future taxable income may be subject to certain limitations.***

 

In general, under Section 382 of the Internal Revenue Code, acorporation that undergoes an “ownership change” is subject to limitations onits ability to utilize its pre-change net operating losses to offset futuretaxable income. Our existing net operating losses and credits may be subject tolimitations arising from previous and future ownership changes under Section 382of the Internal Revenue Code. To the extent we cannot completely utilize netoperating loss carryforwards or tax credits in our financial statements tooffset future taxable income, our tax expense may increase in future periods.

 

***Because we expect to be dependentupon collaborative and license agreements, we might not meet our strategicobjectives.****

 

Our ability to generate revenue in the near term depends on the timingof recognition of certain upfront payments, achievement of certain milestonetriggering events with our existing collaboration agreements and our ability toenter into additional collaborative agreements with third parties. Our abilityto enter into new collaborations and the revenue, if any, that may berecognized under these collaborations is highly uncertain. If we are unable toenter into one or more new collaborations, our business prospects could beharmed, which could have an immediate adverse effect on our ability to continueto develop our compounds and on the trading price of our stock. Our ability toenter into a collaboration may be dependent on many factors, such as theresults of our clinical trials, competitive factors and the fit of one of ourprograms with another company’s risk tolerance, including toward regulatoryissues, patent portfolio, clinical pipeline, the stage of the available data,particularly if it is early, overall corporate goals and financial position.

 

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To date, a portion of our revenues have been related to the research ortransition 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 or transition phase of each collaborative agreement, additionalrevenues may come only from milestone payments and royalties, which may not bepaid, if at all, until certain conditions are met. This risk is heightened dueto the fact that unsuccessful research efforts may preclude us from receivingany milestone 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. We have received milestone payments from our collaborationswith Janssen Pharmaceutica N.V., a division of Johnson & Johnson,Novartis Pharma AG, or Novartis, Daiichi Pharmaceuticals Co., Ltd.,or Daiichi, Merck & Co., Inc., or Merck, Merck Serono andPfizer. We received an upfront payment of $100.0 million in April 2010from AZ. Under many agreements, however, milestone payments may not be earned untilthe collaborator has advanced product candidates into clinical testing, whichmay never occur or may not occur until some time well into the future. If weare not able to generate revenue under our collaborations when and inaccordance with our expectations or the expectations of industry analysts, thisfailure could harm our business and have an immediate adverse effect on thetrading price of our common stock.

 

Our business requires us to generate meaningful revenue from royaltiesand licensing agreements. To date, we have not received any revenue fromroyalties for the commercial sale of drugs, and we do not know when we willreceive any such revenue, if at all.

 

***Delays in clinical testing couldresult in increased costs to us.***

 

Significant delays in clinical testing could materially impact ourproduct development costs and timing. We do not know whether planned clinicaltrials will begin on time, will need to be halted or redesigned or will becompleted on schedule, or at all. In addition, clinical trials can be delayedfor a variety of reasons, including delays in obtaining regulatory approval tocommence a study, delays from scaling up of a study, 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 clinical investigators toconduct our clinical trials and other third-party organizations to oversee theoperations of such trials and to perform data collection and analysis. Theclinical investigators are not our employees, and we cannot control the amountor timing of resources that they devote to our programs. Failure of the third-party organizations to meet their obligations could adversely affect clinicaldevelopment of our products. As a result, we may face additional delayingfactors outside our control if these parties do not perform their obligationsin a timely fashion. While we have not yet experienced delays that havematerially impacted our clinical trials or product development costs, delays ofthis sort could occur for the reasons identified above or other reasons. If wehave delays in testing or obtaining regulatory approvals, our productdevelopment costs will increase. For example, we may need to make additionalpayments to third-party investigators and organizations to retain theirservices or we may need to pay recruitment incentives. If the delays aresignificant, our financial results and the commercial prospects for our productcandidates will be harmed, and our ability to become profitable will bedelayed. Moreover, these third-party investigators and organizations may alsohave relationships with other commercial entities, some of which may competewith us. If these third-party investigators and organizations assist ourcompetitors at our expense, it could harm our competitive position.

 

***We have been named a defendant in apurported securities class action lawsuit. This, and potential similar orrelated litigation, could result in substantial damages and may divertmanagement’s time and attention from our business.****

 

On February 6, 2009, a purported securities class action lawsuitwas commenced in the United States District Court for the Northern District ofCalifornia, naming as defendants us, certain of our officers and directors, andthe underwriters for our February 2008 stock offering. An additionalpurported securities class action lawsuit containing similar allegations wassubsequently filed in the United States District Court for the NorthernDistrict of California on February 20, 2009. By order of the Court dated March 19,2009, the two lawsuits were consolidated into a single action. On June 9,2009, the Court issued an order naming the Inter-Local Pension Fund GCC/IBT aslead plaintiff. The lead plaintiff filed a consolidated complaint on July 24,2009. We filed a motion to dismiss on September 8, 2009. On December 21,2009, the Court granted our motion and dismissed the consolidated complaintwith leave to amend. Plaintiff filed its consolidated amended complaint on January 27,2010. The lawsuit alleges violations of the Securities Act of 1933 and theSecurities Exchange Act of 1934 in connection with allegedly false andmisleading statements made by us related to the results of the Phase 2aclinical trial of our product candidate R788. The plaintiff seeks damages,including rescission or rescissory damages for purchasers in the stockoffering, an award of their costs and injunctive and/or equitable relief forpurchasers of our common stock during the period between December 13, 2007and February 3, 2009, including purchasers in the February 2008 stockoffering. We filed a motion to dismiss the consolidated amended complaint on February 16,2010. Briefing on the motion to dismiss is complete and we are awaiting aruling on that motion from the Court. It is possible that additional suits willbe filed with respect to these same matters and also naming us and/or ourofficers and directors as defendants. If any such additional suits are filed inthe same court, we believe that they would be consolidated into theconsolidated action.

 

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We believe that we have meritorious defenses and intend to defend thelawsuit vigorously. This lawsuit and any other related lawsuits are subject to inherentuncertainties, and the actual costs to be incurred relating to the lawsuit willdepend upon many unknown factors. The outcome of the litigation is necessarilyuncertain, and we could be forced to expend significant resources in thedefense of this suit, and we may not prevail. Monitoring and defending againstlegal actions is time-consuming for our management and detracts from ourability to fully focus our internal resources on our business activities. Inaddition, we may incur substantial legal fees and costs in connection with thelitigation. We are not currently able to estimate the possible cost to us fromthis matter, and we cannot be certain how long it may take to resolve thismatter or the possible amount of any damages that we may be required to pay. Wehave not established any reserves for any potential liability relating to thislawsuit. It is possible that we could, in the future, incur judgments or enterinto settlements of claims for monetary damages. A decision adverse to ourinterests on this action could result in the payment of substantial damages, orpossibly fines, and could have a material adverse effect on our cash flow,results of operations and financial position. In addition, the uncertainty ofthe currently pending litigation could lead to increased volatility in ourstock price.

 

***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 the manufacturing capabilities or experiencenecessary to produce our product candidates for clinical testing. For eachclinical trial of our unpartnered product candidates, we rely on a solemanufacturer for the active pharmaceutical ingredients, as well as variousmanufacturers to manufacture starting components, excipients and formulateddrug products. We rely on manufacturers to produce and deliver all of thematerials required for our clinical trials, and many of our preclinicalefforts, on a timely basis and to comply with applicable regulatoryrequirements, including the FDA’s current Good Manufacturing Practices, orcGMP. In addition, we rely on our suppliers to deliver sufficient quantities ofmaterials produced under cGMP conditions to enable us to conduct plannedpreclinical studies and clinical trials.

 

Our current and anticipated future dependence upon these third-partymanufacturers may adversely affect our ability to develop and commercializeproduct candidates on a timely and competitive basis. These manufacturers maynot be able to produce material on a timely basis or manufacture material atthe quality level or in the quantity required to meet our development timelinesand applicable regulatory requirements and may also experience a shortage inqualified personnel. We may not be able to maintain or renew our existingthird- party manufacturing arrangements, or enter into new arrangements, onacceptable terms, or at all. Our third-party manufacturers could terminate ordecline to renew our manufacturing arrangements based on their own businesspriorities, at a time that is costly or inconvenient for us. If we are unableto contract for the production of materials in sufficient quantity and ofsufficient quality on acceptable terms, our planned clinical trials may besignificantly delayed. Manufacturing delays could postpone the filing of ourinvestigational new drug, or IND, applications and/or the initiation ofclinical trials that we have currently planned.

 

Drug manufacturers are subject to ongoing periodic unannouncedinspection by the FDA, the Drug Enforcement Administration, and other federaland state agencies to ensure strict compliance with cGMP and other governmentregulations and corresponding foreign standards. We do not have control overthird-party manufacturers’ compliance with these regulations and standards andthey may not be able to comply. Switching manufacturers may be difficultbecause the number of potential manufacturers is limited. It may be difficultor impossible for us to find a replacement manufacturer quickly on acceptableterms, or at all. Additionally, if we are required to enter into new supplyarrangements, we may not be able to obtain approval from the FDA of anyalternate supplier in a timely manner, or at all, which could delay or preventthe clinical development and commercialization of any related productcandidates. Failure of our third- party manufacturers or us to comply withapplicable regulations could result in sanctions being imposed on us, includingfines, civil penalties, delays in or failure to grant marketing approval of ourproduct candidates, injunctions, delays, suspension or withdrawal of approvals,license revocation, seizures or recalls of products and compounds, operatingrestrictions and criminal prosecutions, any of which could significantly andadversely affect our business.

 

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

 

The biotechnology and pharmaceutical industries are intenselycompetitive and subject to rapid and significant technological change. Many ofthe drugs that we are attempting to discover will be competing with existingtherapies. In addition, a number of companies are pursuing the development ofpharmaceuticals that target the same diseases and conditions that we aretargeting. We face, and will continue to face, intense competition frompharmaceutical and biotechnology companies, as well as from academic andresearch institutions and government agencies, both in the United States andabroad. Some of these competitors are pursuing the development ofpharmaceuticals that target the same diseases and conditions as our researchprograms. Our major competitors include fully integrated pharmaceuticalcompanies that have extensive drug discovery efforts and are developing novelsmall molecule pharmaceuticals. We also face significant competition fromorganizations that are pursuing the same or similar technologies, including thediscovery of targets that are useful in compound screening, as the technologiesused by us in our drug discovery efforts.

 

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Competition may also arise from:

 

·                  new or better methods oftarget identification or validation;

 

·                  other drug developmenttechnologies and methods of preventing or reducing the incidence of disease;

 

·                  new small molecules; or

 

·                  other classes of therapeuticagents.

 

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

 

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

 

Many of our competitors, either alone or together with theircollaborative partners, have significantly greater experience than we do in:

 

·                  identifying and validatingtargets;

 

·                  screening compounds againsttargets; and

 

·                  undertaking preclinicaltesting and clinical trials.

 

Accordingly, our competitors may succeed in obtaining patentprotection, identifying or validating new targets or discovering new drugcompounds before we do.

 

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

 

We face and will continue to face intense competition from othercompanies for collaborative arrangements with pharmaceutical and biotechnologycompanies, for establishing relationships with academic and researchinstitutions and for licenses to additional technologies. These competitors,either alone or with their collaborative partners, may succeed in developingtechnologies or products that are more effective than ours.

 

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***Our ability to generate revenueswill be diminished if our collaborative partners fail to obtain acceptableprices or an adequate level of reimbursement for products from third-partypayors or government agencies.***

 

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

 

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

 

·                  government and healthadministration authorities;

 

·                  private health insurers; and

 

·                  other third-party payors.

 

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

 

***If product liability lawsuits aresuccessfully brought against us, we may incur substantial liabilities and maybe required to limit commercialization of our products.***

 

The testing and marketing of medical products entail an inherent riskof product liability. If we cannot successfully defend ourselves against productliability claims, we may incur substantial liabilities or be required to limitcommercialization of our products. We carry product liability insurance that islimited in scope and amount and may not be adequate to fully protect us againstproduct liability claims. Our inability to obtain sufficient product liabilityinsurance at an acceptable cost to protect against potential product liabilityclaims could prevent or inhibit the commercialization of pharmaceuticalproducts we develop, alone or with corporate collaborators. We, or ourcorporate collaborators, might not be able to obtain insurance at a reasonablecost, if at all. While under various circumstances we are entitled to beindemnified against losses by our corporate collaborators, indemnification maynot be available or adequate should any claim arise.

 

***Our research and development effortswill be seriously jeopardized, if we are unable to attract and retain keyemployees and relationships.***

 

As a small company, our success depends on the continued contributionsof our principal management and scientific personnel and on our ability todevelop and maintain important relationships with leading academicinstitutions, scientists and companies in the face of intense competition forsuch personnel. In particular, our research programs depend on our ability toattract and retain highly skilled chemists, other scientists, and development,regulatory and clinical personnel. If we lose the services of any of our keypersonnel, our research and development efforts could be seriously andadversely affected. Our employees can terminate their employment with us at anytime.

 

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

 

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

 

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

 

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

 

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

 

Our facilities are located in the San Francisco Bay Area near knownearthquake fault zones and are vulnerable to significant damage fromearthquakes. We are also vulnerable to damage from other types of disasters,including fires, floods, power loss, communications failures and similarevents. If any disaster were to occur, our ability to operate our business atour facilities would be seriously, or potentially completely, impaired, and ourresearch could be lost or destroyed. In addition, the unique nature of ourresearch activities and of much of our equipment could make it difficult for usto recover from a disaster. The insurance we maintain may not be adequate tocover our losses resulting from disasters or other business interruptions.

 

***Future interest income and value ofour investments may be impacted by further declines in interest rates and thebroader effects of the recent turmoil in the global credit markets.***

 

Recently, the credit markets and the financial services industry havebeen experiencing a period of unprecedented turmoil and upheaval. As a resultof this turmoil, the interest paid on certain of our investments may decreaseand the value of certain securities we hold may decline in the future, whichcould negatively affect our financial condition, cash flows and reportedearnings.

 

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

 

The market prices for our common stock and the securities of otherbiotechnology companies have been highly volatile and may continue to be highlyvolatile 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:

 

·                  the progress and success ofclinical trials and preclinical activities (including studies and manufactureof materials) of our product candidates conducted by us or our collaborativepartners or licensees;

 

·                  the receipt or failure toreceive the additional funding necessary to conduct our business;

 

·                  selling by largestockholders;

 

·                  presentations of detailedclinical trial data at medical and scientific conferences and investorperception thereof;

 

·                  announcements oftechnological innovations or new commercial products by our competitors or us;

 

·                  developments concerningproprietary rights, including patents;

 

·                  developments concerning ourcollaborations;

 

·                  publicity regarding actualor potential medical results relating to products under development by ourcompetitors or us;

 

·                  regulatory developments inthe United States and foreign countries;

 

·                  litigation;

 

·                  economic and other externalfactors or other disaster or crisis; and

 

·                  period-to-periodfluctuations in financial results.

 

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

 

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

 

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

 

Provisions of our amended and restated certificate of incorporation andbylaws, as well as provisions of Delaware law, could make it more difficult fora third party to acquire us, even if doing so would benefit our stockholders.These provisions:

 

·                  establish that members ofthe board of directors may be removed only for cause upon the affirmative voteof stockholders owning a majority of our capital stock;

 

·                  authorize the issuance of “blankcheck” preferred stock that could be issued by our board of directors toincrease the number of outstanding shares and thwart a takeover attempt;

 

·                  limit who may call a specialmeeting of stockholders;

 

·                  prohibit stockholder actionby written consent, thereby requiring all stockholder actions to be taken at ameeting of our stockholders;

 

·                  establish advance noticerequirements for nominations for election to the board of directors or forproposing matters that can be acted upon at stockholder meetings;

 

·                  provide for a board ofdirectors with staggered terms; and

 

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

 

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

 

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

 

Theexhibits listed on the accompanying index to exhibits are filed or incorporatedby reference (as stated therein) as part of this Quarterly Report on Form 10-Q.

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                            |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                       |
| 3.1                 |       | Amended and Restated Certificate of Incorporation. (1)                                                                                                                                           |
|                |       |                                                                                                                                                                                             |
| 3.2                 |       | Amended and Restated Bylaws. (2)                                                                                                                                                                 |
|                |       |                                                                                                                                                                                             |
| 4.1                 |       | Form of warrant to purchase shares of common stock.  (3)                                                                                                                                    |
|                |       |                                                                                                                                                                                             |
| 4.2                 |       | Specimen Common Stock Certificate. (4)                                                                                                                                                           |
|                |       |                                                                                                                                                                                             |
| 4.3                 |       | Warrant issued to HCP BTC, LLC for the purchase of shares  of common stock. (5)                                                                                                                  |
|                |       |                                                                                                                                                                                             |
| 10.22               | *          | 2000 Non-Employee Directors’ Stock Option Plan, as  amended.                                                                                                                                |
|                |       |                                                                                                                                                                                             |
| 10.25               | *          | 2000 Employee Stock Purchase Plan, as amended.                                                                                                                                                   |
|                |       |                                                                                                                                                                                             |
| 10.29               | +          | License and Collaboration Agreement between the Company  and AstraZeneca AB, dated February 15, 2010.                                                                                       |
|                |       |                                                                                                                                                                                             |
| 15.1                |       | Letter regarding unaudited interim financial information.                                                                                                                                        |
|                |       |                                                                                                                                                                                             |
| 31.1                |       | Certification required by Rule 13a-14(a) or  Rule 15d-14(a) of the Exchange Act.                                                                                             |
|                |       |                                                                                                                                                                                             |
| 31.2                |       | Certification required by Rule 13a-14(a) or  Rule 15d-14(a) of the Exchange Act.                                                                                             |
|                |       |                                                                                                                                                                                             |
| 32.1                |       | Certification required by Rule 13a-14(b) or  Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter  63 of Title 18 of the United States Code (18 U.S.C. 1350). |

 

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| (1)    |   | Filed as an exhibit to Rigel’s Current Report on  Form 8-K filed on June 24, 2003 and incorporated herein by  reference.                                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                     |
| (2)    |   | Filed as an exhibit to Rigel’s  Current Report on Form 8-K filed on February 2, 2007 and  incorporated herein by reference.                               |
|   |   |                                                                                                                                                                     |
| (3)    |   | Filed as an exhibit to Rigel’s  Registration Statement on Form S-1 (No. 333-45864), as amended, and  incorporated herein by reference.                    |
|   |   |                                                                                                                                                                     |
| (4)    |   | Filed as an exhibit to Rigel’s  Current Report on Form 8-K (No. 000-29889) filed on June 24,  2003, and incorporated herein by reference.            |
|   |   |                                                                                                                                                                     |
| (5)    |   | Filed as an exhibit to Rigel’s Quarterly  Report on Form 10-Q (No. 000-29889) filed on May 5, 2009, and  incorporated herein by reference.           |
|   |   |                                                                                                                                                                     |
| *      |   | Represents a management contract  or compensatory plan or arrangement.                                                                                                   |
|   |   |                                                                                                                                                                     |
| +      |   | Confidential treatment will be  requested as to specific portions, which portions are omitted and will be  filed separately with the Securities and Exchange Commission. |

 

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**SIGNATURES**

** **

Pursuant to the requirements of the Securities Exchange Actof 1934, as amended, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.

 
|   | RIGEL PHARMACEUTICALS, INC. |
|--------|-----------------------------|
|   |                        |   |
|   | By:                         | /s/ JAMES M. GOWER |
|   |                        | James M. Gower |
|   |                        | Chief Executive Officer |
|   |                        | (Principal Executive Officer) |
|   |                        |   |
|   | Date: May 4, 2010      |
|   |                        |   |
|   | By:                         | /s/ RYAN D. MAYNARD |
|   |                        | Ryan D. Maynard |
|   |                        | Vice President and Chief Financial Officer |
|   |                        | (Principal Financial and Accounting Officer) |
|   |                        |   |
|   | Date: May 4, 2010      |

 

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**INDEX TOEXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                            |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                       |
| 3.1                 |       | Amended and Restated Certificate of Incorporation. (1)                                                                                                                                           |
|                |       |                                                                                                                                                                                             |
| 3.2                 |       | Amended and Restated Bylaws. (2)                                                                                                                                                                 |
|                |       |                                                                                                                                                                                             |
| 4.1                 |       | Form of warrant to purchase shares of common stock.  (3)                                                                                                                                    |
|                |       |                                                                                                                                                                                             |
| 4.2                 |       | Specimen Common Stock Certificate. (4)                                                                                                                                                           |
|                |       |                                                                                                                                                                                             |
| 4.3                 |       | Warrant issued to HCP BTC, LLC for the purchase of shares  of common stock. (5)                                                                                                                  |
|                |       |                                                                                                                                                                                             |
| 10.22               | *          | 2000 Non-Employee Directors’ Stock Option Plan, as  amended.                                                                                                                                |
|                |       |                                                                                                                                                                                             |
| 10.25               | *          | 2000 Employee Stock Purchase Plan, as amended.                                                                                                                                                   |
|                |       |                                                                                                                                                                                             |
| 10.29               | +          | License and Collaboration Agreement between the Company  and AstraZeneca AB, dated February 15, 2010.                                                                                       |
|                |       |                                                                                                                                                                                             |
| 15.1                |       | Letter regarding unaudited interim financial information.                                                                                                                                        |
|                |       |                                                                                                                                                                                             |
| 31.1                |       | Certification required by Rule 13a-14(a) or  Rule 15d-14(a) of the Exchange Act.                                                                                             |
|                |       |                                                                                                                                                                                             |
| 31.2                |       | Certification required by Rule 13a-14(a) or  Rule 15d-14(a) of the Exchange Act.                                                                                             |
|                |       |                                                                                                                                                                                             |
| 32.1                |       | Certification required by Rule 13a-14(b) or  Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter  63 of Title 18 of the United States Code (18 U.S.C. 1350). |

 

----

| (1)    |   | Filed as an exhibit to Rigel’s Current Report on  Form 8-K filed on June 24, 2003 and incorporated herein by  reference.                                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                     |
| (2)    |   | Filed as an exhibit to Rigel’s  Current Report on Form 8-K filed on February 2, 2007 and  incorporated herein by reference.                               |
|   |   |                                                                                                                                                                     |
| (3)    |   | Filed as an exhibit to Rigel’s  Registration Statement on Form S-1 (No. 333-45864), as amended, and  incorporated herein by reference.                    |
|   |   |                                                                                                                                                                     |
| (4)    |   | Filed as an exhibit to Rigel’s  Current Report on Form 8-K (No. 000-29889) filed on June 24,  2003, and incorporated herein by reference.            |
|   |   |                                                                                                                                                                     |
| (5)    |   | Filed as an exhibit to Rigel’s  Quarterly Report on Form 10-Q (No. 000-29889) filed on May 5,  2009, and incorporated herein by reference.           |
|   |   |                                                                                                                                                                     |
| *      |   | Represents a management contract  or compensatory plan or arrangement.                                                                                                   |
|   |   |                                                                                                                                                                     |
| +      |   | Confidential treatment will be  requested as to specific portions, which portions are omitted and will be  filed separately with the Securities and Exchange Commission. |

 

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