**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

----

 

**FORM 10-Q**

 
| **x**                                                                                                                                                                                             | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                        |       | ** **                                                                                              |
| **FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007**                                                                                                                                             |
| **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**                                                                                                                                                                |

 

----

 

**RigelPharmaceuticals, Inc.**

(Exact name of registrant asspecified in its charter)

 
| **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 theregistrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  x  No  o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act) (Check one):

 
| Large accelerated filer  o |   | Accelerated  filer  x |   | Non-accelerated  filer  o |
|--------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

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

 

As of November 1, 2007, there were 31,043,111shares of the registrant’s common stock outstanding.

 

** **

**RIGELPHARMACEUTICALS, INC.**QUARTERLY REPORT ONFORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

** **

**INDEX**

** **
|                  | ** ** | ** **                                                                                                      | ** ** | **Page** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**  | ** ** | **FINANCIAL INFORMATION**                                                                                       | ** ** | 3        |
| **Item 1.**      |       | Condensed Financial  Statements                                                                                 |       | 3        |
|             |       | Condensed Balance Sheets — September  30, 2007 (Unaudited) and December 31, 2006                      |       | 3        |
|             |       | Condensed Statements of  Operations (Unaudited) — three and nine months ended September 30, 2007 and  2006 |       | 4        |
|             |       | Condensed Statements of Cash  Flows (Unaudited) — nine months ended September 30, 2007 and 2006            |       | 5        |
|             |       | Notes to Condensed Financial  Statements (Unaudited)                                                            |       | 6        |
|             |       | Report of  Independent Registered Public Accounting Firm                                                        |       | 11       |
| **Item 2.**      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                     |       | 12       |
| **Item 3.**      |       | Quantitative  and Qualitative Disclosures About Market Risk                                                     |       | 19       |
| **Item 4.**      |       | Controls and Procedures                                                                                         |       | 19       |
| **PART II** | ** ** | **OTHER INFORMATION**                                                                                           | ** ** | 19       |
| **Item 1A.**     |       | Risk Factors                                                                                                    |       | 19       |
| **Item 6.**      |       | Exhibits                                                                                                        |       | 29       |
|             |       |                                                                                                            |       |     |
| **Signatures**   |       |                                                                                                            |       | 30       |

 

----

 

**PART I FINANCIAL INFORMATION**

** **

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

 

**RIGEL PHARMACEUTICALS, INC.CONDENSED**BALANCESHEETS(in thousands, except share and per share amounts)

** **
| ** **                                                                                                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2007**               | ** ** | **2006(1)**           | ** ** |
| ** **                                                                                                                                                                              | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                              |       |                   |       |                  |       |
| Current assets:                                                                                                                                                                         |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                               |       | $                      | 38,769     |                  | $          | 47,727 |   |
| Available-for-sale securities                                                                                                                                                           |       | 73,731                 |       | 56,744                |       |
| Accounts receivable                                                                                                                                                                     |       | —                 |       | 1,104                 |       |
| Other receivables                                                                                                                                                                       |       | 294                    |       | 286                   |       |
| Prepaid expenses and other current assets                                                                                                                                               |       | 1,923                  |       | 2,153                 |       |
| Total current assets                                                                                                                                                                    |       | 114,717                |       | 108,014               |       |
|                                                                                                                                                                                    |       |                   |       |                  |       |
| Property and equipment, net                                                                                                                                                             |       | 2,830                  |       | 2,975                 |       |
| Other assets                                                                                                                                                                            |       | 2,137                  |       | 2,251                 |       |
|                                                                                                                                                                                    |       | $                      | 119,684    |                  | $          | 113,240 |   |
|                                                                                                                                                                                    |       |                   |       |                  |       |
| Liabilities and stockholders’ equity                                                                                                                                               |       |                   |       |                  |       |
| Current liabilities:                                                                                                                                                                    |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                        |       | $                      | 2,512      |                  | $          | 1,957 |   |
| Accrued compensation                                                                                                                                                                    |       | 2,805                  |       | 3,060                 |       |
| Other accrued liabilities                                                                                                                                                               |       | 1,791                  |       | 1,886                 |       |
| Deferred revenue                                                                                                                                                                        |       | —                 |       | 3,066                 |       |
| Capital lease obligations                                                                                                                                                               |       | 1,019                  |       | 1,269                 |       |
| Total current liabilities                                                                                                                                                               |       | 8,127                  |       | 11,238                |       |
|                                                                                                                                                                                    |       |                   |       |                  |       |
| Long-term portion of capital lease  obligations                                                                                                                                         |       | 818                    |       | 1,082                 |       |
| Long-term portion of deferred rent                                                                                                                                                      |       | 16,183                 |       | 13,328                |       |
| Other long-term liabilities                                                                                                                                                             |       | 237                    |       | 363                   |       |
|                                                                                                                                                                                    |       |                   |       |                  |       |
| Commitments                                                                                                                                                                             |       |                   |       |                  |       |
|                                                                                                                                                                                    |       |                   |       |                  |       |
| Stockholders’ equity:                                                                                                                                                              |       |                   |       |                  |       |
| Common stock, $0.001 par value; 100,000,000  shares authorized; 31,038,431 and 25,180,687 shares issued and outstanding on  September 30, 2007 and December 31, 2006, respectively |       | 31                     |       | 25                    |       |
| Additional paid-in capital                                                                                                                                                              |       | 444,602                |       | 382,350               |       |
| Accumulated other comprehensive income                                                                                                                                                  |       | 115                    |       | 13                    |       |
| Accumulated deficit                                                                                                                                                                     |       | (350,429               | )          | (295,159              | )          |
| Total stockholders’ equity                                                                                                                                                         |       | 94,319                 |       | 87,229                |       |
|                                                                                                                                                                                    |       | $                      | 119,684    |                  | $          | 113,240 |   |

 

----

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

 

See accompanying notes.

 

3

----

 

**RIGEL PHARMACEUTICALS, INC.CONDENSED**STATEMENTS OFOPERATIONS(in thousands, except per share amounts)(unaudited)

** **
| ** **                                                                              | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Contract revenues                                                                       |       | $                                                        | —     |                                                    | $          | 6,127 |   | $ | 4,600 |   | $ | 30,345 |   |
| Costs and expenses:                                                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Research and development                                                                |       | 15,372                                                   |       | 14,050                                                  |       | 48,404 |   | 41,966 |   |
| General and administrative                                                              |       | 5,054                                                    |       | 4,804                                                   |       | 15,466 |   | 14,532 |   |
|                                                                                    |       | 20,426                                                   |       | 18,854                                                  |       | 63,870 |   | 56,498 |   |
|                                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Loss from operations                                                                    |       | (20,426                                                  | )          | (12,727                                                 | )          | (59,270 | ) | (26,153 | ) |
| Interest income                                                                         |       | 1,538                                                    |       | 1,447                                                   |       | 4,172 |   | 4,287 |   |
| Interest expense                                                                        |       | (56                                                      | )          | (102                                                    | )          | (172 | ) | (315 | ) |
| Net loss                                                                                |       | $                                                        | (18,944    | )                                                       | $          | (11,382 | ) | $ | (55,270 | ) | $ | (22,181 | ) |
| Net loss per share, basic and diluted                                                   |       | $                                                        | (0.61      | )                                                       | $          | (0.46 | ) | $ | (1.96 | ) | $ | (0.89 | ) |
| Weighted average shares used in computing net  loss per common share, basic and diluted |       | 31,030                                                   |       | 24,987                                                  |       | 28,211 |   | 24,882 |   |

 

See accompanying notes.

 

4

----

 

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

** **
| ** **                                                                   | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **September 30,**          | ** ** |
| ** **                                                                   | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| **Operating activities**                                                     |       |                            |       |   |   |
| Net loss                                                                     |       | $                               | (55,270    | ) | $ | (22,181 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                |       | 1,009                           |       | 989 |   |
| Stock-based compensation expense                                             |       | 9,121                           |       | 10,137 |   |
| Changes in assets and liabilities:                                           |       |                            |       |   |   |
| Accounts receivable                                                          |       | 1,104                           |       | — |   |
| Other receivables                                                            |       | (8                              | )          | 75 |   |
| Prepaid expenses and other current assets                                    |       | 230                             |       | 415 |   |
| Other assets                                                                 |       | 114                             |       | 127 |   |
| Accounts payable                                                             |       | 555                             |       | (1,045 | ) |
| Accrued compensation                                                         |       | (255                            | )          | (417 | ) |
| Other accrued liabilities                                                    |       | (95                             | )          | (1,233 | ) |
| Deferred revenue                                                             |       | (3,066                          | )          | (13,195 | ) |
| Deferred rent and other long-term  liabilities                               |       | 2,729                           |       | 1,379 |   |
| Net cash used in operating activities                                        |       | (43,832                         | )          | (24,949 | ) |
| **Investing activities**                                                     |       |                            |       |   |   |
| Purchases of available-for-sale securities                                   |       | (100,125                        | )          | (53,526 | ) |
| Maturities of available-for-sale securities                                  |       | 83,240                          |       | 55,448 |   |
| Capital expenditures                                                         |       | (864                            | )          | (695 | ) |
| Net cash provided by (used in) investing activities                          |       | (17,749                         | )          | 1,227 |   |
| **Financing activities**                                                     |       |                            |       |   |   |
| Proceeds from capital lease financings                                       |       | 640                             |       | 1,350 |   |
| Payments on capital lease obligations                                        |       | (1,154                          | )          | (976 | ) |
| Net proceeds from issuances of common stock                                  |       | 53,137                          |       | 1,990 |   |
| Net cash provided by financing activities                                    |       | 52,623                          |       | 2,364 |   |
|                                                                         |       |                            |       |   |   |
| Net decrease in cash and cash equivalents                                    |       | (8,958                          | )          | (21,358 | ) |
| Cash and cash equivalents at beginning of  period                            |       | 47,727                          |       | 76,779 |   |
| Cash and cash equivalents at end of period                                   |       | $                               | 38,769     |   | $ | 55,421 |   |

 

See accompanying notes.

 

5

----

 

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

** **

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

 

**1. Nature of Operations**

 

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

 

**2. Basis of Presentation**

 

Our accompanyingunaudited condensed financial statements have been prepared in accordance withU.S. generally accepted accounting principles for interim financialinformation and pursuant to the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of theinformation and notes required by generally accepted accounting principles forcomplete financial statements. These unaudited condensed financial statementsinclude all normal and recurring adjustments that we believe are necessary tofairly state our financial position and the results of our operations and cashflows. Interim-period results are not necessarily indicative of results ofoperations or cash flows for a full-year. The balance sheet atDecember 31, 2006 has been derived from audited financial statements atthat date, but does not include all disclosures required by U.S. generallyaccepted accounting principles for complete financial statements. Because allof the disclosure required by U.S. generally accepted accounting principles forcomplete financial statements are not included herein, these unaudited interimcondensed financial statements and the notes accompanying them should be readin conjunction with our audited financial statements and the notes theretoincluded in our Annual Report on Form 10-K for the year endedDecember 31, 2006.

 

The preparation of financial statements in conformity with U.S.generally accepted accounting principles 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.

 

Comprehensive net loss did not differ materially from the net loss asreported.

 

**3.Recent** Accounting Pronouncements

** **

On June 27, 2007, the Financial Accounting Standards Board (“FASB”)ratified the consensus reached by the Emerging Issues Task Force (“EITF”) onEITF Issue No. 07-3, **“***Accounting for AdvancePayments for Goods or Services to Be Used in Future Research and DevelopmentActivities**”*** (“EITF 07-3”). EITF 07-3 requirescompanies to defer and capitalize prepaid, nonrefundable research and developmentpayments to third parties, and amortize them over the period that the researchand development activities are performed or the services are provided, subjectto an assessment of recoverability. EITF 07-3 is effective for new contractsentered into during fiscal years beginning after December 15, 2007, includinginterim periods within those fiscal years. We are currently evaluating theimpact of adopting EITF 07-3 on our financial statements and can not estimatethe impact of adoption at this time.

 

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

 

Basic and diluted net loss per share were computed by dividing the netloss for the period by the weighted average number of shares of common stockoutstanding during the period. The calculation of diluted net loss per shareexcluded shares of potential common stock, consisting of stock options andwarrants, because their effect would have been anti-dilutive.

 

**5. Stock Award Plans**

 

Total stock-based compensation expense related to all of ourshare-based awards that we recognized for the three and nine months endedSeptember 30, 2007 and 2006 is comprised as follows (in thousands):

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                             | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Research and development               |       | $                                | 1,294      |                            | $          | 1,734 |   | $ | 4,212 |   | $ | 5,198 |   |
| General and administrative             |       | 1,500                            |       | 1,715                           |       | 4,909 |   | 4,939 |   |
| Total stock-based compensation expense |       | $                                | 2,794      |                            | $          | 3,449 |   | $ | 9,121 |   | $ | 10,137 |   |

 

6

----

 

Under SFAS 123(R), the fair value of each option award is estimated onthe date of grant using the Black-Scholes option pricing model. We havesegregated option awards into three homogenous groups, officers and directors,all other employees, and consultants, for purposes of determining fair valuesof options.

 

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

 

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

 

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

 

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

 

•                  Forfeiturerate - We estimated the forfeiture rate using our historical experience withpre-vesting options. Our weighted-average forfeiture rate was approximately7.2% as of September 30, 2007, as compared to 7.7% as of September 30, 2006. Wereview our forfeiture rates each quarter and make changes as factors affectingour forfeiture rate calculations and assumptions change.

 

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

 

The following table summarizes the weighted-average assumptionsrelating to our employee options for the three and nine months ended September30, 2007 and 2006:

 
| ** **               | ** ** | **Stock Option Plans** | ** ** | **Stock Option Plans** | ** ** |
|--------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
| ** **               | ** ** | **September 30,**           | ** ** | **September 30,**           | ** ** |
| ** **               | ** ** | **2007**                         | ** ** | **2006**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Risk-free interest rate  |       | 4.5                              | %          | 4.8                              | %          | 4.7 | % | 4.7 | % |
| Expected life (in years) |       | 4.0                              |       | 4.0                              |       | 4.1 |   | 4.4 |   |
| Dividend yield           |       | 0.0                              | %          | 0.0                              | %          | 0.0 | % | 0.0 | % |
| Expected volatility      |       | 71.1                             | %          | 90.0                             | %          | 79.2 | % | 95.7 | % |

 

Option exercise prices are set at not less than the closing price ofour common stock on the trading day immediately preceding the date of grant,become exercisable at varying dates and generally expire ten years from thedate of grant. At September 30, 2007, options to purchase 2,519,714 shares ofcommon stock were available for future grant under our stock option plans.

 

7

----

 

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

 

The fair value of awards granted under our ESPP is estimated on thedate of grant using the Black-Scholes option pricing model, which uses theweighted-average assumptions set forth in the table below. Our ESPP providesfor a twenty-four month offering period comprised of four six-month purchaseperiods with a look-back option. A look-back option is a provision in our ESPPwhere 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. Theplan also includes a feature that provides for a new offering period to beginwhen the fair market value of our common stock on any purchase date during anoffering periodfalls below the fair market value of our common stock on the first day of suchoffering period.  Participants are automatically enrolled in the newoffering. Expected volatilities are based on historical volatility ofour stock. Expected term represents the purchase periods within our offeringperiod. The risk-free rate for periods within the expected life is based onU.S. Treasury constant maturity rates. Stock-basedcompensation expense relating to our ESPP is recognized according to the FASBTechnical Bulletin No. 97-1, “Accounting under Statement 123 for CertainEmployee Stock Purchase Plans with a Look-back Option,” or FTB 97-1. As ofSeptember 30, 2007, there wereapproximately 6,600 shares in reserve for future issuance under the ESPP. Thefollowing table summarizes the weighted-average assumptions relating to ourESPP for the nine months ended September 30, 2007 and 2006:

 
| ** **               | ** ** | **Employee Stock Purchase Plan** | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|
| ** **               | ** ** | **Nine Months Ended**                 | ** ** |
| ** **               | ** ** | **September 30,**                          | ** ** |
| ** **               | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| Risk-free interest rate  |       | 4.7                                             | %          | 4.6 | % |
| Expected life (in years) |       | 0.6                                             |       | 1.2 |   |
| Dividend yield           |       | 0.0                                             | %          | 0.0 | % |
| Expected volatility      |       | 45.5                                            | %          | 109.9 | % |

 

**6. Revenue Recognition**

 

We recognize revenue from our contract arrangements. Our revenuearrangements with multiple elements are evaluated under EITF No. 00-21, *“Revenue Arrangements with Multiple Deliverables,”*and are divided 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 theundelivered items. The consideration we receive is allocated among the separateunits based on their respective fair values, and the applicable revenuerecognition criteria is applied to each of the separate units. Advance paymentsreceived in excess of amounts earned are classified as deferred revenue untilearned.

 

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

 

Revenue related to collaborative research with our corporatecollaborators is recognized as research services are performed over the relateddevelopment funding periods for each contract. Under these agreements, we arerequired to perform research and development activities as specified in theapplicable agreement. The payments received are not refundable and aregenerally based on a contractual cost per full-time equivalent employee workingon the project. Research and development expenses under the collaborativeresearch agreements, except for the Merck collaboration signed inNovember 2004 related to ubiquitin ligases, approximate or exceed therevenue recognized under such agreements over the term of the respectiveagreements. For the Merck collaboration, we recognized a pro-rata portion ofthe invoiced amounts for funding of our research scientists based on theheadcount dedicated to the project for the quarter. When the research portionof the collaboration ended in May 2007, we recognized the full amount of thedeferred revenue related to the contract as we had no further obligations. Itis our policy to recognize revenue based on our level of effort expended, andthat revenue recognized will not exceed amounts billable under the arrangement.

 

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

 

Royalties will be recognized as earned in accordance with the contractterms when the third party results are reliably measurable and collectibilityis reasonably assured.

 

8

----

 

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

 

Cash,cash equivalents and available-for-sale securities consist of the following (inthousands):

 
| ** **                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                    | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| Checking account              |       | $                 | 1,083      |             | $          | 332 |   |
| Money market funds            |       | 9,616             |       | 4,441            |       |
| Federal agency securities     |       | 14,730            |       | 13,463           |       |
| Corporate bonds and notes     |       | 87,071            |       | 86,235           |       |
|                          |       | $                 | 112,500    |             | $          | 104,471 |   |
| Reported as:                  |       |              |       |             |       |
| Cash and cash equivalents     |       | $                 | 38,769     |             | $          | 47,727 |   |
| Available-for-sale securities |       | 73,731            |       | 56,744           |       |
|                          |       | $                 | 112,500    |             | $          | 104,471 |   |
|                               |            |                   |            |                  |            |  |  |  |  |

 

Available-for-salesecurities consist of the following (in thousands):

 
| ** **                   | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                   | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **          | ** ** |
| ** **                   | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| September 30, 2007 |       |          |       |           |       |           |       |                |       |
| Federal agency securities    |       | $             | 14,717     |           | $          | 13             |       | $                   | —     |   | $ | 14,730 |   |
| Corporate bonds and notes    |       | 58,900        |       | 114            |       | (13            | )          | 59,001              |       |
|                         |       |          |       |           |       |           |       |                |       |
| Total                        |       | $             | 73,617     |           | $          | 127            |       | $                   | (13        | ) | $ | 73,731 |   |

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

 

AtSeptember 30, 2007, the above available-for-sale securities had a weightedaverage maturity of approximately 131 days. Two securities with a combined fairmarket value of approximately $4.2 million had maturities greater than 360days.

 

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

 
| ** **                   | ** ** | ** **          | ** ** | **Unrealized** | ** ** |
|------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                   | ** ** | **Fair Value** | ** ** | **Losses**     | ** ** |
| September 30, 2007 |       |                |       |           |       |
| Federal agency securities    |       | $                   | —     |           | $          | — |   |
| Corporate bonds and notes    |       | 11,624              |       | (13            | )          |
| Total                        |       | $                   | 11,624     |           | $          | (13 | ) |

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

 

9

----

 

AtSeptember 30, 2007 and December 31, 2006, we had no investment that had been ina continuous unrealized loss position for more than twelve months.

 

Asof September 30, 2007, a total of four individual securities were in anunrealized loss position for twelve months or less and deemed to be temporary.As of December 31, 2006, five individual securities were in an unrealizedloss position for less than twelve months and deemed to be temporary.

 

*Investment Grade Debt Securities.*Our investments in investment grade debtsecurities consist primarily of investments in federal agency securities andcorporate bonds and notes. The unrealized losses on our investments ininvestment grade debt securities were caused by interest rate increases. Due tothe fact that the decline in market value is attributable to changes ininterest rates and not credit quality, and because the severity and duration ofthe unrealized losses were not significant, we considered these unrealizedlosses to be temporary at September 30, 2007.

 

**8. Income Taxes**

 

Weadopted SFAS Interpretation 48, *Accountingfor Uncertainty in Income Taxes*, (“FIN 48”), on January 1,2007. We did not recognize any adjustment to the liability for uncertaintax positions nor did we have any unrecognized tax benefits and therefore didnot record any adjustment to the beginning balance of retained earnings on thebalance sheet.

 

Wefile income tax returns in the U.S. federal jurisdiction and in California, andthe tax returns filed for the years 2002 through 2006 have not been examinedand have not expired by the statute of limitations. Because of net operatingloss and research credit carryovers, substantially all of the Company’s taxyears remain open to examination.

 

Ourpolicy is that we recognize interest and penalties accrued on any unrecognizedtax benefits as a component of income tax expense. As of the date of adoptionof FIN 48, we did not have any accrued interest or penalties associated withany unrecognized tax benefits.

 

**9. Equipment Lease Line**

 

InJune 2006, we obtained a new borrowing limit of $1.5 million under ourequipment lease line. This equipment lease line was originally scheduled toterminate in June 2007, however, the termination date was extended to December2007 in June 2007. We have the ability to draw down on this line through thetermination date and the repayment period will be for three years beginning onthe date of each draw down, with the interest rate on the line fixed at eachdraw down. Each line has a bargain purchase buyout provision of $101. Duringthe nine months ended September 30, 2007, we drew down approximately $640,000,which is included in our capital lease obligation on our balance sheet. Approximately$446,000 remained available under the equipment lease line as of September 30,2007.

 

**10. Equity Financings**

 

OnMay 8, 2007, we completed a public offering in which we sold 5,000,000 sharesof common stock at a price of $9.75 per share. We received net proceeds ofapproximately $45.5 million after deducting commissions, underwriting discountsand offering costs. On June 1, 2007, we issued an additional 750,000 shares ofour common stock at $9.75 per share pursuant to the full exercise of theunderwriters’ overallotment option. We received net proceeds of approximately$6.8 million after deducting commissions as a result of the exercise of theover-allotment option.

 

10

----

 

**Report ofIndependent Registered Public Accounting Firm**

 

TheBoard of DirectorsRigel Pharmaceuticals, Inc.

 

Wehave reviewed the accompanying condensed balance sheet of RigelPharmaceuticals, Inc. as of September 30, 2007, the related condensedstatements of operations for the three-month and nine-month periods endedSeptember 30, 2007 and 2006, and the condensed statements of cash flows for thenine-month periods ended September 30, 2007 and 2006. These interim financialstatements are the responsibility of the Company’s management.

 

Weconducted our review in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). A review of interim financialinformation consists principally of applying analytical procedures and makinginquiries of persons responsible for financial and accounting matters. It issubstantially less in scope than an audit conducted in accordance with thestandards of the Public Company Accounting Oversight Board, the objective ofwhich is the expression of an opinion regarding the financial statements takenas a whole. Accordingly, we do not express such an opinion.

 

Basedon our review, we are not aware of any material modifications that should bemade to the condensed interim financial statements referred to above for themto be in conformity with U.S. generally accepted accounting principles.

 

Wehave previously audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the balance sheet of RigelPharmaceuticals, Inc. as of December 31, 2006, and the related statementsof operations, stockholders’ equity, and cash flows for the year then ended(not presented herein), and in our report dated March 6, 2007, weexpressed an unqualified opinion on those financial statements and included anexplanatory paragraph referencing Rigel Pharmaceuticals, Inc.’s change inmethod of accounting for stock-based compensation in 2006 and Note 1 to thefinancial statements. In our opinion, the information set forth in theaccompanying balance sheet as of December 31, 2006, is fairly stated, inall material respects, in relation to the balance sheet from which it has beenderived.

 
|                  |   | /s/ Ernst & Young LLP |
|-----------------------|--------|--------------------------------|
| Palo Alto, California |   |                           |
| November 2, 2007      |   |                           |

 

11

----

 

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

 

*This discussion and analysis should be read inconjunction with our financial statements and accompanying notes included inthis report and the audited financial statements and accompanying notes includedin our Annual Report on Form 10-K for the year ended December 31,2006. Operating results for the three and nine months ended September 30, 2007are not necessarily indicative of results that may occur in future periods.*

 

*This report contains statements that involveexpectations, plans or intentions. These statements are forward-looking and aresubject to risks and uncertainties, so actual results may vary materially. Weusually use words such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,”“believe,” “estimate,” “predict,” “intend,” or the negative of these terms orsimilar expressions to identify these forward-looking statements. Thesestatements appear throughout this quarterly report on Form 10-Q and arestatements regarding our current expectation, belief or intent, primarily withrespect to our operations and related industry developments. Examples of thesestatements include, but are not limited to, statements regarding the following:our business and scientific strategies; the progress of our product developmentprograms, including clinical testing; our corporate collaborations, includingrevenues that may be received from these collaborations; our drug discoverytechnologies; our research and development expenses; protection of ourintellectual property; sufficiency of our cash resources; and our operationsand legal risks. You should not place undue reliance on these forward-lookingstatements. Our actual results could differ materially from those anticipatedin these forward-looking statements for many reasons, including as a result ofthe risks and uncertainties discussed in the “Risk Factors” in Item 1A of PartII of this quarterly report on Form 10-Q. Any forward-looking statement speaksonly as of the date on which it is made, and we undertake no obligation toupdate any forward-looking statement to reflect events or circumstances afterthe 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**

 

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

 

Rigelhas the following product candidates in development:

 

•                  *R788—Product Candidate forRheumatoid Arthritis (RA).*R788is our lead product candidate. It has a novel mechanism of action-blocking IgGreceptor signaling in macrophages and B-cells. Previously, we studied R788 in aPhase 1 single center, double-blind, randomized, placebo-controlled clinicaltrial evaluating the safety and pharmacokinetics of escalating single andmultiple doses of R788. We also completed a clinical trial of R788 to evaluateits safety and pharmacokinetics in combination with methotrexate, a commonlyprescribed treatment for RA. Results of this clinical trial suggested thatthere is not an adverse interaction between R788 and methotrexate. In September2006, we initiated a 90-day Phase 2, multicenter, ascending dose, randomized,double-blind, placebo-controlled, dose ranging clinical trial to evaluate up tothree doses of R788 in RA patients who were taking methotrexate. We havecompleted enrollment and dosing in all three groups and expect to receiveinitial results by the end of 2007.

 

•                  *R788—Product Candidate forImmune Thombocytopenic Purpura (ITP).*Platelet destruction from ITP is mediated by IgG signaling, and R788 isa potent inhibitor of IgG signaling. In preclinical studies, R788 was shown toimprove thrombocytopenia in an ITP mouse model. We initiated an exploratoryPhase 2 clinical trial of R788 in January 2007 to evaluate its safety andefficacy in chronic ITP patients. In this clinical trial, R788 was orallyadministered in varying doses for 30 or more days. We have observed encouragingpreliminary drug activity in raising platelet counts in a number of thepatients studied to date. Based on these initial results, we submitted anamended protocol to the Food and Drug Administration, or FDA, and expanded thistrial to allow for a greater range of dose regimens and to continue to treatthose patients that are responding beyond 90 days. We expect to receive initialresults from this clinical trial by the end of 2007.

 

12

----

 

•                  *R788—Product Candidate forB-Cell Lymphoma.*Research hasshown that overactivity of the signaling enzyme spleen tyrosine kinase, or Syk,is an essential mechanism in several types of B-cell lymphoma survival and thatR788 inhibits the growth of B-cell lymphoma driven by Syk overactivity. Wefiled an IND for this indication in December 2006. In April 2007, we beganenrolling patients in a multicenter, open label Phase 1/2 clinical trial toevaluate the safety and efficacy of R788 for the treatment of patients withB-cell lymphoma. The clinical trial is expected to enroll a total ofapproximately 60 patients at 10 major treatment centers in the United Statesand will focus on certain types of B-cell lymphomas. We expect to receiveinitial results from this clinical trial in 2008.

 

•                  *R763—Product Candidate forOncology.*We have identifiedR763 as a lead compound in our aurora kinase inhibition program targetingcancer cell proliferation. R763 is a potent, highly-selective, small-moleculeinhibitor of aurora kinase. In October 2005, we signed a licensing agreementwith Merck Serono that granted to Merck Serono an exclusive license to developand commercialize inhibitors in our aurora kinase program, including R763.Under the agreement, we were responsible for filing an IND for R763, which wefiled with the FDA in December 2005, and were allowed to proceed under the INDin January 2006. In October 2007, Merck Serono elected to secure Japaneserights for R763, which will result in a $3.0 million milestone payment toRigel. Merck Serono is responsible for the further development andcommercialization of R763. In September 2006, Merck Serono initiated a Phase 1multicenter clinical trial to evaluate R763 for the treatment of patients withrefractory solid tumors. In February 2007, Merck Serono began an additional Phase1 clinical trial evaluating R763 on patients with hematological malignancies.In July 2007, Merck Serono began a Phase 1 clinical trial evaluating R763 incombination with a standard of care therapy in patients with advancedmalignancies. We expect initial results from these clinical trials in 2008.

 

Inthe first quarter of 2005, we announced that we entered into a collaborativeresearch and license agreement with Pfizer for the development of inhaledproducts for the treatment of allergic asthma and other respiratory diseases,such as chronic obstructive pulmonary disease, or COPD. The collaboration isfocused on our preclinical small molecule compounds, which inhibit IgE receptorsignaling in respiratory tract mast cells by blocking the signaling enzyme Syk,a novel drug target for respiratory diseases. Mast cells play important rolesin both early and late phase allergic reactions, and Syk inhibitors couldprevent both phases. In May 2006, Pfizer nominated R343 to commence advancedpreclinical development in allergic asthma. We expect R343 to be deliveredusing Pfizer’s dry powder inhaler and to enter into a Phase 1 clinical trial bythe end of 2007.

 

InOctober 2006, we announced that we selected R348, an orally-available, potentand selective inhibitor of Janus Kinase 3, or JAK3, to enter preclinicalstudies to support an IND application. We plan to initiate a Phase 1 clinicaltrial of R348 by the end of 2007. We are also studying Axl and JAK2 inhibitionin oncology. In addition to the aforementioned product candidates, we haveongoing research programs involving back-up candidates for the productcandidates set forth above and drug discovery efforts in ourimmunology/inflammation, virology, oncology, and metabolism programs.

 

**Corporate Collaborations**

 

Weconduct research and development programs in connection with our corporatecollaborations. As of September 30, 2007, we had collaborations with thefollowing six major pharmaceutical/biotech companies: one with JanssenPharmaceutica N.V., a division of Johnson & Johnson, relating tooncology therapeutics and diagnostics; two with Pfizer Inc., one initiatedin 1999 in immunology and the other in 2005, relating to intrapulmonary asthmaand allergy therapeutics; one with Novartis Pharma AG with respect to fourdifferent programs relating to immunology, oncology and chronic bronchitis; onewith Daiichi Pharmaceuticals Co., Ltd. relating to oncology; one withMerck, also relating to oncology; and one with Merck Serono relating tooncology. All of these collaborations, other than the recent Pfizer and MerckSerono collaborations, had a research phase during which we received fundingbased on the level of headcount allocated to the program. None of theseprograms currently provides regular research reimbursement. The research phaseof the Merck collaboration ended in May 2007. In all of these collaborations,if certain conditions are met, we are entitled to receive future milestonepayments and royalties. We cannot guarantee that these conditions will be metor that research and development efforts will be successful. As a result, wemay not receive any further milestone payments or royalties under theseagreements.

 

Weare exploring new opportunities with existing and potential collaborators. Ourearliest partnerships focused on the early stages of drug discovery,specifically on target discovery and validation. Our collaborations withDaiichi and Merck are both later stage, focusing on drug discovery anddevelopment. Our 2005 collaboration with Pfizer covers a compound that Pfizeris expected to take into the clinic by the end of 2007, while our 2005collaboration with Merck Serono covers a compound that began clinical trials inSeptember 2006. We currently anticipate that in order to support ourcurrent research programs, we will need to self-fund our own research programs,which involves an increased rate of spending on later stages

 

13

----

 

ofdevelopment prior to partnering with collaborative partners. Therefore, it is expectedthat future collaborations may have an expanded focus and could include highthroughput screening, combinatorial and medicinal chemistry, preclinicalevaluations and/or clinical development of compounds we have discovered. Inaddition, we believe these future collaborations could be structured to consistof upfront payments, the purchase of our common stock, milestone payments uponmeeting certain conditions, research or development reimbursement paymentsand/or royalties upon commercialization of products resulting from thecollaboration.

 

**Equity Financings**

 

OnMay 8, 2007, we completed a public offering in which we sold 5,000,000 sharesof common stock at a price of $9.75 per share. We received net proceeds ofapproximately $45.5 million after deducting commissions, underwriting discountsand offering costs. On June 1, 2007, we issued an additional 750,000 shares ofour common stock at $9.75 per share pursuant to the full exercise of theunderwriters’ overallotment option. We received net proceeds of approximately$6.8 million after deducting commissions as a result of the exercise of theover-allotment option.

 

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

 

Ourdiscussion and analysis of our financial condition and results of operations isbased upon our financial statements, which have been prepared in accordancewith U.S generally accepted accounting principles. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. We evaluate our estimates,including those related to terms of the research collaborations (i.e.,amortization of upfront fees and certain milestone payments), investments,stock compensation, impairment issues, the estimated useful life of assets andcontingencies, on an on-going basis. Our estimates are based on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. There have been nosignificant changes in our critical accounting policies during the period endedSeptember 30, 2007 as compared to those previously disclosed in our AnnualReport on Form 10-K for the year ended December 31, 2006.

 

***Recent Accounting Pronouncements***

 

OnJune 27, 2007, the Financial Accounting Standards Board (“FASB”) ratified theconsensus reached by the Emerging Issues Task Force (“EITF”) on EITF Issue No.07-3, *“Accounting for Advance Payments forGoods or Services to Be Used in Future Research and Development Activities”*(“EITF 07-3”). EITF 07-3 requires companies to defer and capitalize prepaid,nonrefundable research and development payments to third parties, and amortizethem over the period that the research and development activities are performedor the services are provided, subject to an assessment of recoverability. EITF07-3 is effective for new contracts entered into during fiscal years beginningafter December 15, 2007, including interim periods within those fiscal years.We are currently evaluating the impact of adopting EITF 07-3 on our financialstatements and can not estimate the impact of adoption at this time.

 

***Revenue Recognition***

 

Ourrevenue from contractual arrangements with multiple elements are evaluated underEITF No. 00-21, *“Revenue Arrangements withMultiple Deliverables,”* and are divided into separate units ofaccounting if certain criteria are met, including whether the delivered elementhas stand-alone value to the customer and whether there is objective andreliable evidence of the fair value of the undelivered items. The considerationwe receive is allocated among the separate units based on their respective fairvalues, and the applicable revenue recognition criteria are applied to each ofthe separate units. Advance payments received in excess of amounts earned areclassified as deferred revenue until earned.

 

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

 

14

----

 

Revenuerelated to collaborative research with our corporate collaborators isrecognized as research services are performed over the related developmentfunding periods for each contract. Under these agreements, we are required toperform research and development activities as specified in the applicable agreement.The payments received are not refundable and are generally based on acontractual cost per full-time equivalent employee working on the project.Research and development expenses under the collaborative research agreements,except for the Merck collaboration signed in November 2004 related toubiquitin ligases, approximate or exceed the revenue recognized under suchagreements over the term of the respective agreements. For the Merckcollaboration, we recognized a pro-rata portion of the invoiced amounts forfunding of our research scientists based on the headcount dedicated to theproject for the quarter. When the research portion of the collaboration endedin May 2007, we recognized the full amount of the deferred revenue related tothe contract as we had no further obligations. It is our policy to recognizerevenue based on our level of effort expended and that revenue recognized willnot exceed amounts billable under the arrangement.

 

Revenueassociated with at-risk milestones pursuant to collaborative agreements isrecognized based upon the achievement of the milestones as set forth in theapplicable agreement.

 

Royaltieswill be recognized as earned in accordance with the contract terms when thethird party results are reliably measurable and collectibility is reasonablyassured.

 

***Stock-based Compensation***

 

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

 

Ifthese factors change and we employ different assumptions in the application ofSFAS 123(R) in future periods, the compensation expense that we record underSFAS 123(R) may differ significantly from what we have recorded in the currentperiod. Therefore, we believe it is important to be aware of the high degree ofsubjectivity involved when using option pricing models to estimate share-basedcompensation under SFAS 123(R).

 

**Results of Operations**

 

**Three and Nine Months Ended September 30, 2007 and2006**

 

**Revenues**

 
| ** **              | ** ** | **Three months ended  September 30,** | ** ** | ** ** | ** ** | **Nine months ended  September 30,** | ** ** | ** ** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **              | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **Aggregate Change**                           | ** ** | **2007**   | ** ** | **2006** | ** ** | **Aggregate Change** | ** ** |
| ** **              | ** ** | **(in thousands)**                              | ** ** |
| ***Contract revenues*** |       | $                                                    | —     |       | $          | 6,127                                               |       | $          | (6,127     | ) | $ | 4,600 |   | $ | 30,345 |   | $ | (25,745 | ) |
|                         |            |                                                      |            |            |            |                                                     |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Contractrevenues by collaborator were:

 
| ** **         | ** ** | **Three months ended  September 30,** | ** ** | ** ** | ** ** | **Nine months ended  September 30,** | ** ** | ** ** | ** ** |
|--------------------|------------|---------------------------------------|------------|------------|------------|--------------------------------------|------------|------------|------------|
| ** **         | ** ** | **2007**                              | ** ** | **2006**   | ** ** | **Aggregate Change**                 | ** ** | **2007**   | ** ** | **2006** | ** ** | **Aggregate Change** | ** ** |
| ** **         | ** ** | **(in thousands)**                    | ** ** |
| ***Merck Serono*** |       | $                                     | —     |       | $          | 3,000                                |       | $          | (3,000     | ) | $ | — |   | $ | 15,527 |   | $ | (15,527 | ) |
| ***Merck***        |       | —                                |       | 1,877      |       | (1,877                               | )          | 3,841      |       | 6,068 |   | (2,227 | ) |
| ***Pfizer***       |       | —                                |       | 1,250      |       | (1,250                               | )          | 759        |       | 8,750 |   | (7,991 | ) |
| ***Total***        |       | $                                     | —     |       | $          | 6,127                                |       | $          | (6,127     | ) | $ | 4,600 |   | $ | 30,345 |   | $ | (25,745 | ) |

 

There were no contract revenues reported during thethree months ended September 30, 2007. Contract revenues from collaborationsfor the three months ended September 2006 and for the nine months endedSeptember 30, 2007 and 2006 consisted primarily of research support andamortization of upfront fees and milestone payments from our collaborations.

 

15

----

 

Contract revenues for the three months endedSeptember 30, 2006 included a $3.0 million milestone payment from Merck Seronoupon the initiation of a Phase 1 study for R763. Contract revenues for the ninemonths ended September 30, 2007 included the recognition of approximately $1.0million of deferred revenue from the Merck collaboration due to the ending ofthe research phase of the collaboration in May 2007. Contract revenues for thenine months ended September 30, 2006 included a $5.0 million milestone paymentand $3.8 million amortization of license payments from Pfizer, as well as $7.5million related to the amortization of upfront payments and $8.0 millionmilestone payment from Merck Serono. We have no deferred revenue as ofSeptember 30, 2007. Our potential revenues for the remainder of 2007 mayinclude certain milestone payments from Pfizer and Merck Serono.

 

**Research and Development Expenses**

 
| ** **                                                                            | ** ** | **Three months ended  September 30,** | ** ** | ** ** | ** ** | **Nine months ended  September 30,** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                                                            | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **Aggregate Change**                           | ** ** | **2007**   | ** ** | **2006** | ** ** | **Aggregate Change** | ** ** |
| ** **                                                                            | ** ** | **(in thousands)**                              | ** ** |
| ***Research and development expenses***                                               |       | $                                                    | 15,372     |       | $          | 14,050                                              |       | $          | 1,322      |   | $ | 48,404 |   | $ | 41,966 |   | $ | 6,438 |   |
| ***Stock-based compensation expense included  in research and development expenses*** |       | $                                                    | 1,294      |       | $          | 1,734                                               |       | $          | (440       | ) | $ | 4,212 |   | $ | 5,198 |   | $ | (986 | ) |

 

Theincrease in research and development expenses for the three and nine monthsended September 30, 2007, as compared to the same periods in 2006, wasprimarily due to an increase in preclinical and clinical costs attributable torunning our ongoing Phase 2 clinical trials of R788 in the three differentindications. We expect that our research and development expenses will continueat this level for the remainder of 2007 as we continue our Phase 2 clinicaltrials of R788 for RA, ITP and lymphoma and initiate clinical trials for ourJak3 inhibitor, R348.

 

Thescope and magnitude of future research and development expenses are difficultto predict given the number of studies that we will need to conduct for any ofour potential products, as well as our limited capital resources. In general,biopharmaceutical development involves a series of steps, beginning withidentification of a potential target and including, among others, proof ofconcept in animals and Phase 1, 2 and 3 clinical studies in humans. Eachof these steps is typically more expensive than the previous step. Success indevelopment, therefore, results in increasing expenditures. Our research anddevelopment expenditures currently include costs for scientific personnel,supplies, equipment, consultants, sponsored research, allocated facility costs,costs related to preclinical and clinical trials, and stock-based compensation.

 

**General and Administrative Expenses**

 
| ** **                                                                              | ** ** | **Three months ended  September 30,** | ** ** | ** ** | ** ** | **Nine months ended  September 30,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                                                              | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **Aggregate Change**                           | ** ** | **2007**   | ** ** | **2006** | ** ** | **Aggregate Change** | ** ** |
| ** **                                                                              | ** ** | **(in thousands)**                              | ** ** |
| ***General and administrative expenses***                                               |       | $                                                    | 5,054      |       | $          | 4,804                                               |       | $          | 250        |   | $ | 15,466 |   | $ | 14,532 |   | $ | 934 |   |
| ***Stock-based compensation expense included  in general and administrative expenses*** |       | $                                                    | 1,500      |       | $          | 1,715                                               |       | $          | (215       | ) | $ | 4,909 |   | $ | 4,939 | *** *** | ***$*** | ***(30*** | ***)*** |

 

Theincrease in general and administrative expenses for the three and nine monthsended September 30, 2007, as compared to the same periods in 2006, is primarilyattributable to increased legal costs associated with the expansion of ourpatent estate.

 

16

----

 

**Stock-Based Compensation**

 
| ** **                                   | ** ** | **Three months ended  September 30,** | ** ** | ** ** | ** ** | **Nine months ended  September 30,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                   | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **Aggregate Change**                           | ** ** | **2007**   | ** ** | **2006** | ** ** | **Aggregate Change** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                              | ** ** |
| **Stock-based compensation expense from:**   | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ***Officer, director and employee options*** |       | $                                                    | 2,739      |       | $          | 3,438                                               |       | $          | (699       | ) | $ | 9,011 |   | $ | 9,942 |   | $ | (931 | ) |
| ***Consultant options***                     |       | 55                                                   |       | 11         |       | 44                                                  |       | 110        |       | 195 |   | (85 | ) |
| ***Other employee options***                 |       | —                                               |       | —     |       | —                                              |       | —     |       | — |   | — |   |
| ***Total***                                  |       | $                                                    | 2,794      |       | $          | 3,449                                               |       | $          | (655       | ) | $ | 9,121 |   | $ | 10,137 |   | $ | (1,016 | ) |

 

Thedecrease in stock-based compensation expense for the three months endedSeptember 30, 2007, as compared to the same period in 2006, is due to fewerunvested options granted prior to 2006 for which the expense is recognizedusing the accelerated method. The decrease in stock-based compensation expensefor the nine months ended September 30, 2007, as compared to the same period in2006, is due to the same reason, partially offset by the recording of a$924,000 adjustment to our stock compensation expense in the second quarter of2007. The $924,000 adjustment corrected the misapplication of our estimatedforfeiture rate to stock-based compensation expense in 2006. In 2006, ourquarterly reported amounts of stock compensation expense were inadvertentlyreduced by the effect of the expected forfeitures which had already been takeninto account in the preceding quarters. The impact of this adjustment was notmaterial to 2006 and prior reporting periods.

 

**Interest Income**

 
| ** **            | ** ** | **Three months ended  September 30,** | ** ** | ** ** | ** ** | **Nine months ended  September 30,** | ** ** | ** ** | ** ** |
|-----------------------|------------|------------------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **            | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **Aggregate Change**                           | ** ** | **2007**   | ** ** | **2006** | ** ** | **Aggregate Change** | ** ** |
| ** **            | ** ** | **(in thousands)**                              | ** ** |
| ***Interest income*** |       | $                                                    | 1,538      |       | $          | 1,447                                               |       | $          | 91         |   | $ | 4,172 |   | $ | 4,287 |   | $ | (115 | ) |
|                       |            |                                                      |            |            |            |                                                     |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Interestincome results from our interest-bearing cash and investment balances. Theamounts were relatively flat for the periods presented.

 

**Interest Expense**

 
| ** **             | ** ** | **Three months ended  September 30,** | ** ** | ** ** | ** ** | **Nine months ended  September 30,** | ** ** | ** ** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **Aggregate Change**                           | ** ** | **2007**   | ** ** | **2006** | ** ** | **Aggregate Change** | ** ** |
| ** **             | ** ** | **(in thousands)**                              | ** ** |
| ***Interest expense*** |       | $                                                    | 56         |       | $          | 102                                                 |       | $          | (46        | ) | $ | 172 |   | $ | 315 |   | $ | (143 | ) |
|                        |            |                                                      |            |            |            |                                                     |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Interest expense is the result of our capital leaseobligations associated with fixed asset acquisitions. Interest expensedecreased for the three and nine months ended September 30, 2007, ascompared to the same periods in 2006, due to the decrease in capital leaseobligations outstanding during those periods.

 

**Liquidity and Capital Resources**

 

***Cash Requirements***

 

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

 

Webelieve that our existing capital resources and anticipated proceeds fromcurrent collaborations will be sufficient to support our current operating planthrough at least the next 12 months. In the foreseeable future, ouroperations will require significant additional funding, in large part due toour research and development expenses, future preclinical and clinical testingcosts and the absence of any meaningful revenues from product sales. The amountof future funds needed will depend largely on the timing and structure ofpotential future collaborations. We do not know whether additional financing willbe available when needed, or that, if available, we will obtain financing onterms favorable to our stockholders or us.

 

17

----

 

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

 

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

 

•                  the progress and success of clinical trialsand preclinical activities (including studies and manufacture of materials) ofour product candidates conducted by us or our collaborative partners orlicensees;

 

•      our ability to establish new collaborations and to maintain ourexisting collaboration relationships;

 

•      the progress of research programs carried out by us;

 

•      any changes in the breadth of our research and development programs;

 

•      our ability to meet the milestones identified in our collaborativeagreements that trigger payments;

 

•      the progress of the research and development efforts of ourcollaborative partners or licensees;

 

•      our ability to acquire or license other technologies or compounds thatwe seek to pursue;

 

•      our ability to manage our growth;

 

•      competing technological and market developments;

 

•                  the costs and timing of obtaining, enforcingand defending our patent and intellectual property rights;

 

•      the costs and timing of regulatory approvals and filings by us and ourcollaborators; and

 

•      expenses associated with unforeseen litigation.

 

Insufficientfunds may require us to delay, scale back or eliminate some or all of ourresearch or development programs, to lose rights under existing licenses or torelinquish greater or all rights to product candidates at an earlier stage ofdevelopment or on less favorable terms than we would otherwise choose or mayadversely affect our ability to operate as a going concern. As of September 30,2007, we had approximately $112.5 million in cash, cash equivalents andavailable-for-sale securities, as compared to $104.5 million as ofDecember 31, 2006, an increase of approximately $8.0 million. Theincrease was primarily attributable to net proceeds of approximately $52.3million from our public offering in the second quarter of 2007, offset byoperating spending for the nine months ended September 30, 2007. For the threeand nine months ended September 30, 2007 and 2006, we maintained an investmentportfolio primarily in money market funds, federal agency securities andcorporate bonds and notes. Cash in excess of immediate requirements is investedwith regard to liquidity and capital preservation. Wherever possible, we seekto minimize the potential effects of concentration and degrees of risk.

 

**Contractual Obligations**

 

Asof September 30, 2007, we had the following contractual commitments (by fiscalyear):

 
| ** **                   | ** ** | **Total**               | ** ** | **2007** | ** ** | **2008-2010** | ** ** | **2011-2013** | ** ** | **2014-2018** | ** ** |
|------------------------------|------------|-------------------------|------------|----------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                   | ** ** | **(in thousands)** | ** ** |
| Capital lease obligations(1) |       | $                       | 2,021      |     | $          | 256           |       | $             | 1,765      |          | $          | — |   | $ | — |   |
| Facilities lease             |       | 152,894                 |       | 1,591    |       | 44,988        |       | 44,001        |       | 62,314        |       |
|                         |       |                    |       |     |       |          |       |          |       |          |       |
| Total                        |       | $                       | 154,915    |     | $          | 1,847         |       | $             | 46,753     |          | $          | 44,001 |   | $ | 62,314 |   |
|                              |            |                         |            |          |            |               |            |               |            |               |            |  |  |  |  |  |  |  |  |

 

----

(1)            Asof September 30, 2007, we had approximately $2.0 million in capital leaseobligations (including the interest portion) associated with our equipmentadditions. All existing capital lease agreements as of September 30, 2007 aresecured by the equipment financed, bearing interest at rates between 9.2% and12.2% and are due in monthly installments through 2010.

 

18

----

 

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

 

Theprimary objective of our investment activities is to preserve principal whileat the same time maximizing the income we receive from our investments withoutsignificantly increasing risk. Some of the securities in which we invest mayhave market risk. This means that a change in prevailing interest rates maycause the fair value amount of the investment to fluctuate. For example, if wehold a security that was issued with a fixed interest rate at thethen-prevailing rate and the prevailing interest rate later rises, the marketvalue amount of our investment will decline. To minimize this risk in thefuture, we intend to maintain our portfolio of cash equivalents andavailable-for-sale securities in a variety of securities, including moneymarket funds and government and non-government debt securities. For the threeand nine months ended September 30, 2007 and 2006, we maintained an investmentportfolio primarily in money market funds, federal agency securities andcorporate bonds and notes. Due to the short-term nature of the majority ofthese investments, we believe we do not have a material exposure to interestrate risk arising from our investments. Therefore, no quantitative tabulardisclosure is provided.

 

Weoperate primarily in the United States, and all funding activities with ourcollaborators to date have been made in U.S. dollars. Accordingly, we have hadminimal exposure to foreign currency rate fluctuations.

 

**Item 4.   Controlsand Procedures**

 

*Evaluation of Disclosure Controls and Procedures.*Based on our management’s evaluation (withthe participation of our chief executive officer and chief financial officer),our chief executive officer and chief financial officer have concluded that ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended), wereeffective as of September 30, 2007.

 

*Changes in Internal Controls.*There were no changes in our internalcontrols over financial reporting during the quarter ended September 30, 2007that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

*Limitations on the Effectiveness of Controls.*A control system, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the controls are met. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues, if any, within a company have beendetected. Accordingly, our disclosure controls and procedures are designed toprovide reasonable, not absolute, assurance that the objectives of ourdisclosure control system are met and, as set forth above, our chief executiveofficer and chief financial officer have concluded, based on their evaluationas of the end of the period covered by this quarterly report on Form 10-Q,that our disclosure controls and procedures were sufficiently effective toprovide reasonable assurance that the objectives of our disclosure controlsystem were met.

 

**PART II. OTHER INFORMATION**

 

**Item1A. Risk Factors**

 

*In evaluating our business, you should carefullyconsider the following risks, as well as the other information contained in ourQuarterly Report on Form 10-Q. If any of the following risks actuallyoccurs, our business could be harmed. The risks and uncertainties describedbelow are not the only ones facing us. Additional risks and uncertainties notpresently known to us, or that we currently see as immaterial, may also harmour business.*

 

*We have marked with an asterisk (*) those riskfactors below that reflect material changes from the risk factors included inour Annual Report on Form 10-K filed with the Securities and ExchangeCommission on March 8, 2007.*

 

**We will need additional capital in the future to sufficientlyfund our operations and research.***

 

Wehave consumed substantial amounts of capital to date, and operatingexpenditures are expected to increase over the next several years as we expandour research and development activities. We believe that our existing capitalresources and anticipated proceeds from current collaborations will besufficient to support our current operating plan through at least the next12 months. In the foreseeable future, our operations will requiresignificant additional funding in large part due to our research anddevelopment expenses, future preclinical and clinical-testing costs, and theabsence of any meaningful revenues. The amount of future funds needed willdepend largely on the timing and structure of potential future collaborations.We do not know whether additional financing will be available when needed, orthat, if available, we will obtain financing on terms favorable to ourstockholders or us. As of September 30, 2007 and December 31, 2006,our cash, cash equivalents and available-for-sale securities were$112.5 million and $104.5 million, respectively.

 

19

----

 

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

 

**Our future funding requirements will depend on many uncertainfactors.**

 

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

 

•       the progress and success of clinical trialsand preclinical activities (including studies and manufacture of materials) ofour product candidates conducted by us or our collaborative partners orlicensees;

 

•       our ability to establish new collaborationsand to maintain our existing collaboration partnerships;

 

•       the progress of research programs carried outby us;

 

•       any changes in the breadth of our researchand development programs;

 

•       our ability to meet the milestones identifiedin our collaborative agreements that trigger payments;

 

•       the progress of the research and developmentefforts of our collaborative partners;

 

•       our ability to acquire or license othertechnologies or compounds that we seek to pursue;

 

•       our ability to manage our growth;

 

•       competing technological and marketdevelopments;

 

•       the costs and timing of obtaining, enforcingand defending our patent and intellectual property rights;

 

•       the costs and timing of regulatory approvalsand filings by us and our collaborators; and

 

•       expenses associated with unforeseenlitigation.

 

Insufficientfunds may require us to delay, scale back or eliminate some or all of ourresearch or development programs, to lose rights under existing licenses or torelinquish greater or all rights to product candidates at an earlier stage ofdevelopment or on less favorable terms than we would otherwise choose or mayadversely affect our ability to operate as a going concern.

 

**Our success as a company is uncertain due to our history ofoperating losses and the uncertainty of future profitability.***

 

Duein large part to the significant research and development expenditures requiredto identify and validate new product candidates and pursue our developmentefforts, we have not been profitable and have incurred operating losses sincewe were incorporated in June 1996. The extent of our future losses and thetiming of potential profitability are highly uncertain, and we may neverachieve profitable operations. We incurred net losses of approximately $18.9million and $55.3 million for the three and nine months ended September 30,2007, $37.6 million for the year ended December 31, 2006 and $45.3 million forthe year ended December 31, 2005. Currently, our revenues are generated solelyfrom payments pursuant to our collaboration agreements and licenses and areinsufficient to generate profitable operations. As of September 30, 2007, wehad an accumulated deficit of approximately $350.4 million. We expect to incurlosses for at least the next several years and expect that these losses couldincrease as we expand our research and development activities and incursignificant clinical and testing costs.

 

20

----

 

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

 

At the present time, the majority of our operationsare in various stages of drug identification and development. We currently havetwo product compounds in the clinical testing stage: one with indications forRA, ITP and B-Cell lymphoma, which is proprietary to our company, and the otherwith three indications for oncology, which is subject to a collaborationagreement with Merck Serono. In our industry, it is statistically unlikely thatthe limited number of compounds that we have identified as potential productcandidates will actually lead to successful product development efforts, and wedo not expect any drugs resulting from our research to be commerciallyavailable for several years, if at all. Our compounds in clinical trials andour future leads for potential drug compounds are subject to the risks andfailures inherent in the development of pharmaceutical products. These risksinclude, but are not limited to, the inherent difficulty in selecting the rightdrug and drug target and avoiding unwanted side effects as well asunanticipated problems relating to product development, testing, regulatorycompliance, manufacturing, competition and costs and expenses that may exceedcurrent estimates. The results of preliminary studies do not necessarilypredict clinical or commercial success, and larger later-stage clinical trialsmay fail to confirm the results observed in the preliminary studies. Withrespect to our own compounds in development, we have established anticipatedtimelines with respect to the initiation or completion of clinical studiesbased on existing knowledge of the compound. However, we cannot provideassurance that we will meet any of these timelines for clinical development.

 

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

 

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

 

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

 

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

 

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

 

In addition, we typically rely on third-party clinicalinvestigators to conduct our clinical trials and other third-partyorganizations to oversee the operations of such trials and to perform datacollection and analysis. As a result, we may face additional delaying factorsoutside our control if these parties do not perform their obligations in atimely fashion. While we have not yet experienced delays that have materially impactedour clinical trials or product development costs, delays of this sort couldoccur for the reasons identified above or other reasons. If we have delays intesting or approvals, our product development costs will increase. For example,we may need to make additional payments to third-party investigators andorganizations to retain their services or we may need to pay recruitmentincentives. If the delays are significant, our financial results and thecommercial prospects for our product candidates will be harmed, and our abilityto become profitable will be delayed.

 

**We lack the capability tomanufacture compounds for development and rely on third parties to manufactureour product candidates, and we may be unable to obtain required material in atimely manner, at an acceptable cost or at a quality level required to receiveregulatory approval.***

 

21

----

 

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

 

Our current and anticipated future dependence uponthese third-party manufacturers may adversely affect our ability to develop andcommercialize product candidates on a timely and competitive basis. Thesemanufacturers may not be able to produce material on a timely basis ormanufacture material at the quality level or in the quantity required to meetour development timelines and applicable regulatory requirements. We may not beable to maintain or renew our existing third-party manufacturing arrangements,or enter into new arrangements, on acceptable terms, or at all. Our third-partymanufacturers could terminate or decline to renew our manufacturingarrangements based on their own business priorities, at a time that is costlyor inconvenient for us. If we are unable to contract for the production ofmaterials in sufficient quantity and of sufficient quality on acceptable terms,our planned clinical trials may be significantly delayed. Manufacturing delayscould postpone the filing of our IND applications and/or the initiation ofclinical trials that we have currently planned.

 

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

 

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

 

Our ability to generate revenue in the near termdepends on our ability to enter into additional collaborative agreements withthird parties and to maintain the agreements we currently have in place. Ourability to enter into new collaborations and the revenue, if any, that may berecognized under these collaborations is highly uncertain. If we are unable toenter into new collaborations, our business prospects could be harmed, whichcould have an immediate adverse effect on the trading price of our stock.

 

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

 

Our business requires us to generate meaningfulrevenue from royalties and licensing agreements. To date, we have not receivedany revenue from royalties for the commercial sale of drugs, and we do not knowwhen we will receive any such revenue, if at all. Likewise, we have notlicensed any lead compounds or drug development candidates to third parties,and we do not know whether any such license will be entered into on acceptableterms in the future, if at all.

 

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

 

22

----

 

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

 

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

 

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

 

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

 

**If conflicts arise between our collaborators oradvisors and us, any of them may act in their self-interest, which may beadverse to our stockholders’ interests.**

 

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

 

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

 

**Our success is dependent on intellectual propertyrights held by us and third parties, and our interest in such rights is complexand uncertain.**

 

Our success will depend to a large part on our own,our licensees’ and our licensors’ ability to obtain and defend patents for eachparty’s respective technologies and the compounds and other products, if any,resulting from the application of such technologies. We have over 160 pendingpatent applications and over 90 issued patents in the United States that areowned or exclusively licensed in our field as well as pending correspondingforeign patent applications. In the future, our patent position might be highlyuncertain and involve complex legal and factual questions. For example, we maybe involved

 

23

----

 

in interferences before the United States Patent andTrademark Office. Interferences are complex and expensive legal proceedings andthere is no assurance we will be successful in such proceedings. Aninterference could result in our losing our patent rights and/or our freedom tooperate and/or require us to pay significant royalties. Additional uncertaintymay result because no consistent policy regarding the breadth of legal claimsallowed in biotechnology patents has emerged to date. Accordingly, we cannotpredict the breadth of claims allowed in our or other companies’ patents.

 

Because the degree offuture protection for our proprietary rights is uncertain, we cannot ensurethat:

 

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

 

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

 

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

 

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

 

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

 

•       wewill develop additional proprietary technologies that are patentable; or

 

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

 

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

 

We are a party to certain in-license agreements thatare important to our business, and we generally do not control the prosecutionof in-licensed technology. Accordingly, we are unable to exercise the samedegree of control over this intellectual property as we exercise over ourinternally-developed technology. Moreover, some of our academic institutionlicensors, research collaborators and scientific advisors have rights topublish data and information in which we have rights. If we cannot maintain theconfidentiality of our technology and other confidential information inconnection with our collaborations, then our ability to receive patentprotection or protect our proprietary information will be impaired. Inaddition, some of the technology we have licensed relies on patented inventionsdeveloped using U.S. government resources. The U.S. government retains certainrights, as defined by law, in such patents, and may choose to exercise suchrights. Certain of our in-licenses may be terminated if we fail to meetspecified obligations. If we fail to meet such obligations and any of ourlicensors exercise their termination rights, we could lose our rights underthose agreements. If we lose any of our rights, it may adversely affect the waywe conduct our business. In addition, because certain of our licenses aresublicenses, the actions of our licensors may affect our rights under thoselicenses.

 

**If a dispute arises regarding the infringement ormisappropriation of the proprietary rights of others, such dispute could becostly and result in delays in our research and development activities andpartnering.**

 

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

 

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

 

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

 

•       subjectus to potential liability for damages;

 

24

----

 

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

 

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

 

**If we are unable to obtain regulatory approval tomarket products in the United States and foreign jurisdictions, we might not bepermitted to commercialize products from our research and development.**

 

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

 

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

 

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

 

•       mustmeet requirements for institutional review board oversight;

 

•       mustmeet requirements for informed consent;

 

•       aresubject to continuing FDA oversight;

 

•       mayrequire large numbers of test subjects; and

 

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

 

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

 

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

 

If regulatory approval of a product is granted, thisapproval will be limited to those indications or disease states and conditionsfor which the product is demonstrated through clinical trials to be safe andefficacious. We cannot ensure that any compound developed by us, alone or withothers, will prove to be safe and efficacious in clinical trials and will meetall of the applicable regulatory requirements needed to receive marketingapproval.

 

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

 

**If our competitors develop technologies that are moreeffective than ours, our commercial opportunity will be reduced or eliminated.**

 

25

----

 

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

 

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

 

We believe that our ability to compete is dependent,in part, upon our ability to create, maintain and license scientifically-advancedtechnology and upon our and our collaborators’ ability to develop andcommercialize pharmaceutical products based on this technology, as well as ourability to attract and retain qualified personnel, obtain patent protection orotherwise develop proprietary technology or processes and secure sufficientcapital resources for the expected substantial time period betweentechnological conception and commercial sales of products based upon ourtechnology. The failure by us or any of our collaborators in any of those areasmay prevent the successful commercialization of our potential drug targets.

 

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

 

**Our ability to generate revenues will be diminished ifour collaborative partners fail to obtain acceptable prices or an adequatelevel of reimbursement for products from third-party payors or governmentagencies.**

 

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

 

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

 

•       governmentand health administration authorities;

 

•       privatehealth insurers; and

 

•       otherthird-party payors.

 

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

 

26

----

 

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

 

The testing and marketing of medical products entailan inherent risk of product liability. If we cannot successfully defendourselves against product liability claims, we may incur substantialliabilities or be required to limit commercialization of our products althoughwe are not currently aware of any specific causes for concern with respect toclinical liability claims. We currently do not have product liabilityinsurance, and our inability to obtain sufficient product liability insuranceat an acceptable cost to protect against potential product liability claimscould prevent or inhibit the commercialization of pharmaceutical products wedevelop, alone or with corporate collaborators. We, or our corporatecollaborators, might not be able to obtain insurance at a reasonable cost, ifat all. While under various circumstances we are entitled to be indemnifiedagainst losses by our corporate collaborators, indemnification may not beavailable or adequate should any claim arise.

 

**Our research and development efforts will be seriouslyjeopardized, if we are unable to attract and retain key employees andrelationships.***

 

As a small company with only 154 employees as ofSeptember 30, 2007, our success depends on the continued contributions ofour principal management and scientific personnel and on our ability to developand maintain important relationships with leading academic institutions,scientists and companies in the face of intense competition for such personnel.In particular, our research programs depend on our ability to attract andretain highly skilled chemists, other scientists, and development, regulatoryand clinical personnel. If we lose the services of any of our personnel, ourresearch and development efforts could be seriously and adversely affected. Ouremployees can terminate their employment with us at any time.

 

**We depend on various scientific consultants andadvisors for the success and continuation of our research and developmentefforts.**

 

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

 

**If we use biological and hazardous materials in amanner that causes injury or violates laws, we may be liable for damages.**

 

Our research and development activities involve thecontrolled use of potentially harmful biological materials as well as hazardousmaterials, chemicals and various radioactive compounds. We cannot completelyeliminate the risk of accidental contamination or injury from the use, storage,handling or disposal of these materials. In the event of contamination or injury,we could be held liable for damages that result, and such liability couldexceed our resources. We are also subject to federal, state and local laws andregulations governing the use, storage, handling and disposal of thesematerials and specified waste products. The cost of compliance with, or anypotential violation of, these laws and regulations could be significant.

 

**Our facilities are located near known earthquake faultzones, and the occurrence of an earthquake or other catastrophic disaster couldcause damage to our facilities and equipment, which could require us to ceaseor curtail operations.**

 

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

 

27

----

 

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

 

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

 

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

 

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

 

•       sellingby large stockholders;

 

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

 

•       developmentsconcerning proprietary rights, including patents;

 

•       developmentsconcerning our collaborations;

 

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

 

•       regulatorydevelopments in the United States and foreign countries;

 

•       litigation;

 

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

 

•       period-to-periodfluctuations in financial results.

 

**Anti-takeover provisions in our charter documents andunder Delaware law may make an acquisition of us, which may be beneficial toour stockholders, more difficult.**

 

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

 

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

 

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

 

•       limitwho may call a special meeting of stockholders;

 

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

 

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

 

•       providefor a board of directors with staggered terms; and

 

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

 

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

 

28

----

 

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

 

The exhibits listed on the accompanying index toexhibits are filed or incorporated by reference (as stated therein) as part ofthis 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)                                                                                                                                                                  |
|            |       |                                                                                                                                                                                              |
| 10.34           |       | Rigel Pharmaceuticals,  Inc. 2000 Non-Employee Directors’ Stock Option Plan, as amended.                                                                                                     |
|            |       |                                                                                                                                                                                              |
| 15.1            |       | Letter re: unaudited  interim financial information.                                                                                                                                              |
|            |       |                                                                                                                                                                                              |
| 31.1            |       | Certification required  by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.                                                                                              |
|            |       |                                                                                                                                                                                              |
| 31.2            |       | Certification required  by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.                                                                                              |
|            |       |                                                                                                                                                                                              |
| 32.1            |       | Certification required  by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act  and Section 1350 of Chapter 63 of Title 18 of the United States Code (18  U.S.C. 1350). |

 

----

(1)          Filedas an exhibit to Rigel’s Current Report on Form 8-K filed on June 24,2003 and incorporated herein by reference.

 

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

 

29

----

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, the registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
|        | RIGEL PHARMACEUTICALS,  INC. |
|--------|------------------------------|
|   |                         |
|   |                         |
|   | By:                          | /s/ JAMES M. GOWER |   |
|   |                         | James M. Gower |
|   |                         | Chief Executive Officer |
|   |                         |
|   |                         |
|   | Date: November 6, 2007       |
|   |                         |
|   |                         |
|   | By:                          | /s/ RYAN D. MAYNARD |   |
|   |                         | Ryan D. Maynard |
|   |                         | Vice President and  Chief Financial Officer |
|   |                         | (Principal Financial  and Accounting Officer) |
|   |                         |
|   |                         |
|   | Date: November 6, 2007       |

 

30

----

 

**INDEX TO EXHIBITS**

 
| Exhibit Number | ** ** | **Description of Document**                                                                                                                                                             |
|----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                                                                              |
| 3.1            |       | Amended and Restated  Certificate of Incorporation.(1)                                                                                                                                            |
|           |       |                                                                                                                                                                                              |
| 3.2            |       | Amended and Restated  Bylaws.(2)                                                                                                                                                                  |
|           |       |                                                                                                                                                                                              |
| 10.34          |       | Rigel Pharmaceuticals,  Inc. 2000 Non-Employee Directors’ Stock Option Plan, as amended.                                                                                                     |
|           |       |                                                                                                                                                                                              |
| 15.1           |       | Letter re: unaudited interim  financial information.                                                                                                                                              |
|           |       |                                                                                                                                                                                              |
| 31.1           |       | Certification required  by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.                                                                                              |
|           |       |                                                                                                                                                                                              |
| 31.2           |       | Certification required  by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.                                                                                              |
|           |       |                                                                                                                                                                                              |
| 32.1           |       | Certification required  by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act  and Section 1350 of Chapter 63 of Title 18 of the United States Code (18  U.S.C. 1350). |

 

----

(1)          Filedas an exhibit to Rigel’s Current Report on Form 8-K filed on June 24,2003 and incorporated herein by reference.

 

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

 

----