**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-K**

| **(Mark One)**                                        |       |                                                                                                     |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| **x**                                                 | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
| **For the  fiscal year ended December 31, 2006** |
| **or**                                                |
| o                                                     |       | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                       |
| **Commission  file number 0-29889**                   |

**RIGELPHARMACEUTICALS, INC.**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                                                    |   | **94-3248524**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |   | (IRS Employer Identification Number) |
| **1180 Veterans Blvd.  South San Francisco, California**        |   | **94080**                            |
| (Address of principal executive offices)                        |   | (Zip Code)                           |

 

**(650) 624-1100**

(Registrant’s telephone number, including area code)

Securitiesregistered pursuant to Section 12(b) of the Act:

| **Title of each class:**                    |   | **Name of exchange on which registered:** |
|---------------------------------------------|--------|-------------------------------------------|
| **Common Stock, par value $.001 per share** |   | **The Nasdaq Global Market**              |

 

Securities registered pursuant to Section 12(g) of the Act:

**None**

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o   No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes  ̈   No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x   No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

Indicateby a check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of theExchange Act).

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

 

Indicate by a check markwhether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)   Yes o   No x

The approximate aggregatemarket value of the Common Stock held by non-affiliates of the registrant,based upon the closing price of the registrant’s Common Stock as reported onthe Nasdaq National Market on June 30, 2006, the last business day of theregistrant’s most recently completed second fiscal quarter, was $129,633,471.Shares of the registrant’s outstanding Common Stock held by each executiveofficer, director and holder of 5% or more of the registrant’s outstandingCommon Stock have been excluded. The determination of affiliate status for thepurposes of this calculation is not necessarily a conclusive determination forother purposes.

As of February 27,2007, there were 25,185,213 shares of the registrant’s Common Stockoutstanding.

**DOCUMENTS INCORPORATED BY REFERENCE**

Items 10,11, 12, 13 and 14 of Part III incorporate information by reference fromthe definitive proxy statement for the Registrant’s Annual Meeting ofStockholders to be held on May 31, 2007.

 

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**TABLE OF CONTENTS**

| ** **    | ** ** | ** **                                                                                  | ** ** | Page   | ** ** |
|---------------|------------|---------------------------------------------------------------------------------------------|------------|--------|------------|
| PART I   |       |                                                                                        |       |   |       |
| Item 1.       |       | Business                                                                                    |       | 1      |       |
| Item 1A.      |       | Risk Factors                                                                                |       | 13     |       |
| Item 1B.      |       | Unresolved Staff Comments                                                                   |       | 24     |       |
| Item 2.       |       | Properties                                                                                  |       | 24     |       |
| Item 3.       |       | Legal Proceedings                                                                           |       | 24     |       |
| Item 4.       |       | Submission of Matters to a Vote of Security Holders                                         |       | 24     |       |
| PART II  |       |                                                                                        |       |   |       |
| Item 5.       |       | Market for the Registrant’s Common Equity and Related  Stockholder Matters             |       | 25     |       |
| Item  6.      |       | Selected  Financial Data                                                                    |       | 26     |       |
| Item 7.       |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |       | 27     |       |
| Item 7A.      |       | Quantitative and Qualitative Disclosures about Market  Risk                                 |       | 36     |       |
| Item 8.       |       | Financial Statements and Supplementary Data                                                 |       | 37     |       |
| Item 9.       |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure       |       | 64     |       |
| Item 9A.      |       | Controls and Procedures                                                                     |       | 64     |       |
| Item  9B.     |       | Other  Information                                                                          |       | 64     |       |
| PART III |       |                                                                                        |       |   |       |
| Item 10.      |       | Directors and Executive Officers of the Registrant                                          |       | 65     |       |
| Item 11.      |       | Executive Compensation                                                                      |       | 65     |       |
| Item 12.      |       | Security Ownership of Certain Beneficial Owners and  Management                             |       | 65     |       |
| Item 13.      |       | Certain Relationships and Related Transactions                                              |       | 65     |       |
| Item 14.      |       | Principal Accounting Fees and Services                                                      |       | 65     |       |
| PART IV  |       |                                                                                        |       |   |       |
| Item 15.      |       | Exhibits, Financial Statement Schedules                                                     |       | 66     |       |
|          |       | Signatures                                                                                  |       | 69     |       |

 

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**FORWARD-LOOKINGSTATEMENTS**

This annual report on Form 10-K, includingthe documents that we incorporate by reference, contains statements indicatingexpectations about future performance and other forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended, that involve risks and uncertainties. We usually use words such as “may,”“will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”“future,” “intend,” “potential” or “continue” or the negative of these terms orsimilar expressions to identify these forward-looking statements. Thesestatements appear throughout this annual report on Form 10-K and arestatements regarding our current intent, belief or expectation, 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 aresult of the risks and uncertainties discussed under the heading “Risk Factors”in Part I, Item 1A of this annual report on Form 10-K. Anyforward-looking statement speaks only as of the date on which it is made,and we undertake no obligation to update any forward-looking statement toreflect events or circumstances after the date on which the statement is madeor to reflect the occurrence of unanticipated events. New factors emerge fromtime to time, and it is not possible for us to predict which factors willarise. In addition, we cannot assess the impact of each factor on our businessor the extent to which any factor, or combination of factors, may cause actualresults to differ materially from those contained in any forward-lookingstatements.

**PART I**

**Item 1. Business**

**Overview**

Rigel Pharmaceuticals, Inc. was incorporated inDelaware in June 1996, and is based in South San Francisco. Rigel is aclinical-stage drug development company that discovers and develops novel,small molecule drugs for the treatment of inflammatory diseases, cancer andviral diseases. Our goal is to file one new investigative new drug (IND)application in a significant indication each year. We have achieved this goaleach year beginning in 2002. Our pioneering research focuses on intracellularsignaling pathways and related targets that are critical to disease mechanisms.Rigel’s productivity has resulted in strategic collaborations with largepharmaceutical partners to develop and market our product candidates. We haveproduct development programs in inflammatory/autoimmune diseases such asrheumatoid arthritis, thrombocytopenia, asthma and allergy as well as in cancer*.*

During 2006 and thestart of 2007, we:

·       Initiateda Phase 2 clinical trial in rheumatoid arthritis, or RA, with R788 (ThirdQuarter 2006);

·       Initiateda Phase 2 clinical trial in Immune Thrombocytopenia Purpura, or ITP, with R788(2007);

·       Filedan Investigational New Drug Application to test R788 as a treatment forpatients with Lymphoma (Fourth Quarter 2006);

·       SelectedR348, an orally-available selective inhibitor of Janus Kinase 3 (JAK3) to enterpreclinical studies (Fourth Quarter 2006)

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·       Announcedthat Merck Serono, S.A., or Merck Serono, initiated two Phase 1 studies withR763, the first for the treatment of patients with refractory solid tumors(Third Quarter 2006) and the second for the treatment of patients withhematologic tumors (2007); and

·       AnnouncedPfizer’s selection of R343 for advanced preclinical development in allergicasthma triggering a $5.0 million milestone payment to us (Second Quarter of2006).

**Strategy**

Rigel’s research team is focused on creating aportfolio of product candidates that can be developed into small moleculetherapeutics for our own proprietary programs as well as with potentialcollaborative partners. We recognize that the product development process issubject to both high costs and a high risk of failure. We believe thatidentifying a variety of product candidates and working in conjunction withother pharmaceutical companies may minimize the risk of failure, fill theproduct pipeline gap at major pharmaceutical companies and ultimately, mayincrease the likelihood of advancing clinical development and commercialsuccess.

The key elements toour scientific and business strategy are to:

*·**       utilizeour robust discovery engine to rapidly discover and validate new productcandidates in a broad range of therapeutic indications;*

*·**       developa diverse portfolio of drug candidates that address a large range oftherapeutic indications or that represent significant market opportunities;*

*·**       advanceat least one new product candidate into the clinic each year; and*

*·**       establishstrategic collaborations with pharmaceutical and biotechnology companies,preferably after Phase 2 trials, to develop and market our product candidates.*

**Clinical andPreclinical Product Development Programs**

Rigel’sproduct development portfolio features multiple novel small molecule drugcandidates whose specialized mechanisms of action are intended to providetherapeutic benefit for a range of immune/autoimmune disease areas as well ascancers and infection diseases. 

| **Product  Pipeline** | ** ** | **Current Stage**                  | ** ** | **Outlook**            |
|-----------------------|------------|------------------------------------|------------|------------------------|
|                  |       |                               |       |                   |   |   |
| **R788****-**         |       | ***Oral SYK Inhibitor***           |       |                   |   |   |
|                  |       | RA                                 |       | Phase 2                |   | Top-line data in 2H 2007 |
|                  |       | ITP                                |       | Phase 2                |   | Top-line data in middle 2007 |
|                  |       | B-Cell Lymphoma                    |       | IND filed, Phase 1     |   | Expect to  initiate a clinical trial in 1H 2007 |
|                  |       |                               |       |                   |   |   |
|                  |       |                               |       |                   |   |   |
| **R763****-**         |       | ***Oral Aurora Kinase Inhibitor*** |       |                   |   |   |
|                  |       | Solid Tumors                       |       | Phase 1 - Merck Serono |   |   |
|                  |       | Hematological  malignancies        |       | Phase 1 - Merck Serono |   |   |
|                  |       |                               |       |                   |   |   |
| **R343****-**         |       | *** Inhaled SYK Inhibitor***  |       |                   |   |   |
|                  |       | Asthma                             |       | Preclinical - Pfizer   |   | Phase 1 in 2007 |
|                  |       |                               |       |                   |   |   |
| **R348****-**         |       | ***Oral JAK3 Inhibitor***          |       |                   |   |   |
|                  |       | RA/Psoriasis                       |       | Preclinical            |   |   |
|                  |       | Transplant  rejection              |       | Preclinical            |   |   |

 

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Key:  “Phase 1” refers to clinical testing inhumans to determine safety;   “Phase 2”refers to clinical testing in humans to determine efficacy.

**Clinical StagePrograms**

***Rheumatoid Arthritis***

*Diseasebackground.**  *Rheumatoidarthritis, or RA, is a chronic inflammatory disease that affects multipletissues, but typically produces its most pronounced symptoms in the joints. RAis often progressive and debilitating, preventing people from living asymptom-free life. Ultimately the chronic inflammation of the joints affects nearly 2.1 million people in theUnited States.

The current treatment options for RA have significantpotential side effects and other shortfalls, including gastrointestinalcomplications and kidney damage. RA patients receive multiple drugs dependingon the extent and aggressiveness of the disease. Most RA patients eventuallyrequire some form of disease modifying anti-rheumatic drug or DMARD. DMARDsinclude methotrexate, an anti-cancer agent, and/or a variety ofimmunomodulatory agents (TNF inhibitors, co-stimulation inhibitors), of which,the latter must be delivered via injection.

*Orally-availableSyk Inhibitor Program.**  *We intend to focus our RAprogram on the development of a safe oral DMARD that can be used early in thecourse of the disease, preventing its progression prior to major bone andcartilage destruction.

R788 is our lead product candidate. It has a novelmechanism of action blocking IgG receptor signaling in macrophages and B-cells.We completed R788 studies to evaluate its safety and pharmacokinetics incombination with methotrexate, a commonly prescribed treatment for RA. Resultsof this trial suggest no adverse interaction. In September 2006, wecommenced a Phase 2, multicenter, ascending dose, randomized, double-blind,placebo-controlled, dose ranging study to evaluate up to three doses of R788 inRA patients failing to respond to methotrexate. We expect to receive results from the study in the second half of 2007.

*Orally-available JAK3inhibitor Program.**  *Anotherapproach to the treatment of RA may be through the inhibition of JAK3, acytoplasmic tyrosine kinase which plays an important role in lymphocytedifferentiation and proliferation in a variety of autoimmune diseases. Rigel isconducting  a preclinical developmentprogram with R348, an oral, selective JAK3 inhibitor which is aimed atevaluating the drug candidates’ potential in RA and other diseases (seePreclinical Research Programs section on page 5).

***Immune Thrombocytopenia Purpura***

*Diseasebackground.**  *Immune thrombocytopenia purpura, also referred to asthrombocytopenia or ITP, is a blood disorder whereby the immune system attacksand destroys platelets in the blood resulting in an abnormally low plateletcount, which can result in easy bruising, bleeding gums, and internal bleeding.Approximately 200,000 people in the U.S. suffer from ITP. The majority of casesare in women, with 50% of the new cases being found in children.

First line medical therapy for ITP consists primarilyof steroids, which help prevent bleeding by decreasing the rate of plateletdestruction. The current treatment options for chronic ITP have potentiallysignificant side effects and lack long-term effectiveness. When steroid therapyfails, the patient’s spleen may need to be removed (splenectomy), which posesthe risk of other significant complications. There is no consensus on theappropriate management for chronic ITP, but due to the fact that sustainedremission is infrequent—new therapies are needed. Rigel is focusing its ITP programon the chronic form of the disorder, targeting the underlying autoimmune causeof the disease.

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*Orally-available SykInhibitor Program.**  *Platelet destruction from ITP is mediated by IgGsignaling. R788 is a potent inhibitor of IgG signaling. In preclinical studies,R788 was shown to improve thrombocytopenia in an ITP mouse model. We commencedPhase 2 clinical trials of R788 to evaluate its safety and efficacy inrefractory ITP patients in the January 2007 and expect to receive resultsfrom the study in the middle of 2007.

***B-Cell Lymphoma***

*Diseasebackground.**  *Lymphomais a large class of blood cancers that**affect thelymphatic system, which is part of the immune system. In 2006, lymphomaaffected an estimated 500,000 Americans, with 332,000 of them suffering fromnon-Hodgkins varieties of the disease. Diffuse large B-cell lymphoma is themost common type of non-Hodgkin’s lymphoma and is generally categorized asaggressive, marked by rapidly growing tumors in the lymph nodes, spleen, liver,bone marrow and other organs.

A variety of treatment options exist, includingchemotherapy and radiation, but the five year survival rates for non-Hodgkins lymphomapatients are only about 50%.  For thosewho do survive, recurrences of the disease are common, warranting additionaland novel approaches to treatment of the lymphoma as well.

*Orally-availableSyk Inhibitor Program.**  *Researchhas shown that Syk kinase appears to amplify B-cell antigen receptor signaling,a mechanism which causes proliferation of B-cell lymphoma cell lines. Inhibitionof Syk kinase, via Rigel’s R788, resulted in the inhibited proliferation of andwas shown to be cytotoxic in multiple diffuse large B-cell lymphoma cell lines,suggesting that R788 may be useful in the treatment of certain B-celllymphomas.

Rigel has filed an IND forthis indication and expects to begin a clinical trial in the first half of2007.

***Lupus***

*Diseasebackground.*   Systemic Lupus Erythematosus (SLE)is a chronic inflammatory disease that can affect multiple parts of the body,including the skin, joints, lungs, blood vessels, hearts, kidneys, liver, brainand the nervous system. An autoimmune disease, Lupus occurs when the body’simmune system loses its ability to distinguish between foreign substances(antigens) and its own cells and tissues. The patient’s immune system producesauto-antibodies which target the body’s cells and form immune complexes. Asthese immune complexes build up in the tissues, inflammation, pain and otherdisease symptoms “flare” up. The disease leads to inflammation-mediated endorgan damage and may, in severe cases, be life-threatening.

More than 16,000 Americans develop lupus each year andestimates are that nearly 1.5 million Americans have been diagnosed with Lupus.Current treatments involve a range of non-steroidal anti-inflammatory drugs(NSAIDs) and corticosteroids to stem inflammation as needed.

*Orally-available SykInhibitor Program.**  *R788 hasbeen shown to block immune complex mediated inflammation in preclinical studiesand may also provide protection against organ failure in patients with thedisease. Rigel is evaluating the feasibility of entering R788 in clinical testsin patients with SLE in the future.

***Oncology***

*Diseasebackground.**  *Cancer is the second leadingcause of death in the United States. More than one million Americans arediagnosed with cancer each year, and nearly half of all men and over one-thirdof all women in the United States will develop cancer during their lifetimes.Anyone can get cancer at any age, however, approximately 77% of all cancers arediagnosed in people age 55 and older. Although cancer occurs in all racialand ethnic groups, the rate of incidence varies from group to group.

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*AuroraKinase Inhibitor Program.**  *Aurora kinase plays a centralrole in the cell division process and the overexpression of Aurora kinase cancause cells to quickly form an abnormal number of chromosomes. As such, Aurorakinase is frequently associated with various solid tumor human cancers such ascancers of the breast, bladder, colon, ovary, head and neck, and pancreas.Increased knowledge of Aurora kinase and its potential to regulate cell growthmay be the basis for treating and even preventing some cancers.

Rigel has identified R763as a lead compound in our Aurora kinase inhibition program, targeting cancercell proliferation. R763 is a potent, highly-selective, small-moleculeinhibitor of Aurora kinase. In October 2005, we signed a licensingagreement with Merck Serono, that gave Merck Serono the exclusive rights todevelop and commercialize R763, in addition to other product candidates arisingfrom our Aurora kinase inhibitor program. Under the agreement, we wereresponsible for filing an IND for R763, while Merck Serono will be responsiblefor the further development and commercialization of R763. We filed an IND forR763 with the Food and Drug Administration, or FDA, in December 2005 andobtained FDA approval to proceed under the IND in January 2006. MerckSerono initiated clinical trials for R763 in solid tumors in September 2006and leukemia is 2007.

***Asthma***

*Diseasebackground.**  *Allergic**asthmais a chronic inflammatory disorders of the airways. Asthma affects the lowerrespiratory tract and is marked by episodic flare-ups, or attacks, that can belife threatening. In some patients, allergens, such as pollen, trigger theproduction of immunoglobulin E antibodies, or IgE antibodies, which then bindto mast cells and cause an intracellular signal that results in the release ofvarious chemical mediators. When this process occurs repeatedly over time, itcreates persistent inflammation of the airway passages, resulting in thechronic congestion and airway obstruction associated with allergic rhinitis andasthma, respectively.

*InhaledSyk Inhibitor Program.**  *In the first quarter of 2005,we announced a collaborative research and license agreement with Pfizer, Inc.for the development of inhaled products for the treatment of allergic asthmaand other respiratory diseases, such as chronic obstructive pulmonary disease(COPD). The collaboration is focused on our preclinical small moleculecompounds, which inhibit IgE receptor signaling in respiratory tract mast cellsby blocking the signaling enzyme Syk, or spleen tyrosine kinase, a novel drug targetfor respiratory diseases. Mast cells play important roles in both early andlate phase allergic reactions, and Syk inhibitors could prevent both phases.

In May 2006, Rigelannounced that Pfizer had selected R343 for advanced preclinical development inallergic asthma via intrapulmonary delivery. As a result, Rigel received a $5million milestone payment from Pfizer. We expect Pfizer will enter the clinicwith R343 by the end of 2007.

**PreclinicalResearch Programs**

Rigel is conducting proprietary research in threebroad disease areas: immunology/inflammation, virology and oncology. With eachdisease area, we are investigating mechanisms of action of pathogens as well asscreening compounds against potential novel intracellular targets andoptimizing those leads that appear to have the greatest potential.

***Immunology/Inflammation.***   Currently, we areresearching autoimmune mediated inflammation disorders such as RA, transplantrejection, Graft vs. Host Disease (GVHD), psoriasis, multiple sclerosis andinflammation of the bowel. We have identified more than one kinase that may beinhibited in order to treat inflammation related disorders, and we are in theprocess of screening other compounds against various kinases in order to findadditional lead compounds to potentially treat inflammation-related disorders.

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Rigel’s JAK3 Program isfocused on RA, organ transplant and other immune disorders. JAK3 is anattractive target based on its selectivity. It plays a critical role in lymphocytedevelopment and function. In October 2006, Rigel selected R348, anorally-available potent, selective JAK3 inhibitor to enter preclinical studies. During 2007, we hope to move it into theclinic in one or more of the indications noted above.

***Virology.*****  **In the area ofvirology, Rigel is investigating various targets to inhibit the replication ofhepatitis C virus (HCV) and Human Immune Deficiency Virus (HIV). Recent Rigeldata elucidates the signaling pathway of HIV replication and suggests thepotential for an entirely new class of antiretroviral therapies.  Rigel will continue to explore innovative andselective means of arresting these and other viral pathogens and expects toadvance this area of preclinical research in 2007.

***Oncology.*****  **In addition toour programs focused on inhibiting kinases, as with the clinical candidate R763which is under development by our partner, Merck Serono, Rigel is exploringligases, a class of enzymes that also may yield possible drug targets inimmunology and virology. Aside from R763, our oncology research programs are focused in two areas: ubiquitinligases and inhibition of the tyrosine kinase receptor known as Axl.

*Ubiquitinligase program.**  *Ubiquitin ligases are enzymesthat regulate protein degradation within the cell. The breakdown of proteins,in turn, affects many important cellular functions, including cell division.Targeting ligases represents a novel approach to treating diseases where normalcellular processes are out of balance. Because unchecked cell division is thehallmark of cancer, researchers believe that this part of the cell machineryrepresents a particularly compelling target for cancer therapies. Ubiquitinligase targets are numerous and modular. This provides the potential forintervening in a highly specific fashion with respect to a disease, potentiallyimproving efficacy and minimizing side-effects.

We believe we are a leader in investigating andcharacterizing the ubiquitin ligase system for the discovery and development ofpotential new therapeutics in the oncology as well as immunology and virologyareas. We have initiated one of the industry’s broadest efforts with respect toubiquitin ligases, working on the development of numerous ligase targets, andwere one of the first companies to discover potent and highly selective smallmolecule inhibitors of ubiquitin ligases. Some of these inhibitors have shownpositive activity in animal models of disease.

In November 2004, we entered into a broadcollaboration agreement with Merck and Co., Inc., or Merck, to investigateubiquitin ligases to find treatments for cancer and potentially other diseases.The collaboration is based on a number of new targets designated by Merck.However, we may nominate our own targets for potential inclusion in thecollaboration. We also have an ongoing program with Daiichi to pursue compoundsagainst a specific ubiquitin ligase target.

*Axl Inhibition.**  *Our scientists identified and characterizeda role for the receptor tyrosine kinase Axl in angiogenesis and tumor growth.These findings were published in Cancer Research, the journal of the AmericanAssociation for Cancer Research in October 2005. We found that Axlsignaling controls diverse processes in endothelial cells, including growth,survival, migration, and morphologic differentiation—mechanisms that arecentral to tumor growth and formation. As part of an effort to develop noveltherapeutic strategies for cancer treatment, we developed a unique geneticscreening protocol to discover genes that regulate cell migration in primaryhuman endothelial cells. Our findings indicate that Axl regulates processesvital for both neovascularization and tumorigenesis. Axl inhibition couldpotentially target tumor growth and angiogenesis.

**CorporateCollaborations**

Rigel currently hascollaborations with six major pharmaceutical/biotech companies to leverage ourproduct development efforts. These collaborations are:  one with Janssen Pharmaceutica N.V., adivision of Johnson & Johnson, relating to oncology therapeutics anddiagnostics, two with Pfizer Inc.; one initiated 

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in 1999and the other in January 2005, relating to intrapulmonary asthma andallergy therapeutics; one with Novartis Pharma AG with four different programsrelating to immunology, oncology and chronic bronchitis; one with DaiichiPharmaceuticals Co., Ltd. in the area of oncology; one with Merck, also inthe area of oncology, and one with Merck Serono, relating to our Aurora kinaseinhibitor program.

***Merck Serono***

In October 2005, we entered into a collaborativeresearch and license agreement with Merck Serono under which we granted toMerck Serono an exclusive license to develop and commercialize productcandidates from our Aurora kinase inhibitor program. Our Aurora kinaseinhibitor program includes R763 which is a highly potent, orally-availablemulti-Aurora kinase inhibitor that has been shown in vitro and in in-vivo tumorxenograft models to inhibit proliferation and trigger apoptosis in severaltumor cell lines including the cancer of the cervix, colon, lung, pancreas andprostate.

We were responsible forall costs associated with the preparation and filing of an IND for R763, whileMerck Serono is responsible for all development of R763 following regulatoryacceptance of the IND and costs thereafter. In February 2006, we receiveda milestone payment of $5 million upon the regulatory acceptance ofthe R763 IND in January 2006. In September 2006, we received a$3.0 million payment from Merck Serono in connection with the initiation of thePhase 1 study of R763. In February 2007, we announced that Merck Seronohas also initiated a Phase 1 study in hematologic tumors. We will be eligibleto receive additional milestones, under certain conditions, upon commencementof a Phase 2 clinical trial of R763, other clinical events and marketingapproval and royalties on any future product sales.

***Pfizer***

Effective January 1999, we entered into aresearch collaboration with Pfizer to identify and validate intracellular drugtargets that control and inhibit the production of IgE in B-cells in the areaof asthma/allergy. The research phase of the collaboration was initiallyscheduled to end in January 2001, but Pfizer elected to exercise itsoption to extend the collaboration to January 2002. During the researchphase, the collaboration was successful in identifying several intracellulardrug targets that control the production of IgE, a key mediator in allergicreactions and asthma in B-cells. Through the conclusion of the research phaseof the collaboration, which was extended to February 2002, Pfizer accepteda total of seven validated targets. Pfizer continues to be obligated to pay usvarious milestones and royalties if certain conditions are met.

In January 2005, we entered into a secondresearch collaboration with Pfizer that has a license component. Thecollaboration is for the development of inhaled products for the treatment ofallergic asthma and other respiratory diseases such as COPD. The collaborationis primarily focused on our preclinical small molecule compounds, which inhibitIgE receptor signaling in respiratory tract mast cells by blocking thesignaling enzyme Syk kinase. Pursuant to the terms of the currentcollaboration, we received an upfront cash payment, and are eligible to receivemilestone payments and royalties on any future product sales. Pfizer made anequity investment in Rigel at a premium and will be responsible for theworldwide development and commercialization of any resulting products.

In May 2006, weachieved the first milestone payment when Pfizer nominated R343 to commenceadvanced preclinical development in allergic asthma. Pfizer paid us $5.0million for the exclusive right to R343 and will be responsible for alldevelopment related to R343 going forward.

***Merck***

In November 2004, weentered into a broad collaboration agreement with Merck to investigateubiquitin ligases, a new class of drug target, to find treatments for cancerand potentially other diseases. Under the terms of the agreement, we receivedan initial cash payment and will receive funding for our 

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researchscientists for two and a half years, at which point the research phase of thiscollaboration will terminate. The collaboration is based on a number of newtargets designated by Merck. In addition, we may nominate our own targets forpotential inclusion in the collaboration. Merck is responsible for worldwidedevelopment and commercialization of any resulting compounds and will pay usroyalties on future product sales, if any. Under this collaboration, if certainconditions are met, we are eligible to receive milestone payments for selectionof target, preclinical and clinical events and have thus far achieved suchmilestones.

***Daiichi***

In August 2002, weentered into an agreement with Daiichi to pursue research related to ligases, anovel class of drug targets that control cancer cell proliferation throughprotein degradation. Through this collaboration, we are working with Daiichi todiscover and develop cancer pharmaceutical drugs. The initial stages of theDaiichi collaboration focused on the development of the assay for the specifictarget and the initiation of high-throughput compound screening to identifytherapeutic molecules we and Daiichi would like to advance to later stages ofproduct development. Daiichi holds all development and promotion rights to theproduct. Per the agreement, the research phase of this collaboration expired inAugust 2005. Daiichi may become obligated to pay us certain othermilestone payments, and we are also entitled to receive royalties on anycommercialized products to emerge from the collaboration.

***Novartis***

In May 1999, weentered into a broad collaboration with Novartis on up to five differentfive-year research projects to identify drug targets for products that cantreat, prevent or diagnose the effects of human disease. Two of the researchprojects that were conducted jointly by Novartis and us focused in the areas oftransplant rejection and autoimmunity. In May 2002, Novartis elected toconclude the research phases of our two initial joint projects in theautoimmunity and transplant rejection areas in November 2002 and February 2003,respectively. The third research project, a project conducted at Novartis, wasfocused on identifying small molecule drug targets that regulate chronicbronchitis. In July 2001, we amended the agreement to add a three-yearjoint project at our facilities in the area of angiogenesis and as a result ofthis amendment, Novartis provided funding for research that was conducted atour facilities and made an additional upfront payment. In January 2002,Novartis chose not to exercise its option to add a final project that was to beconducted at their facility.

***Johnson & Johnson***

From December 1998thru 2003, we engaged in a research collaboration with Janssen PharmaceuticaN.V., a division of Johnson & Johnson, to identify, discover andvalidate novel drug targets that regulate cell cycle, and, specifically, toidentify drug targets and the active peptides that bind to them that canrestore a mutated cell’s ability to stop uncontrolled cell division. We enteredinto an amendment in July 2000, which expanded the collaboration by havingus perform compound screening and medicinal chemistry on some of the validatedtargets accepted by Johnson & Johnson. We have identified severalnovel drug targets in this program, nine of which have been accepted by Johnson &Johnson as validated and two of which completed high-throughput screening, orHTS, at our facilities. Johnson & Johnson continues to be obligated topay us various milestones and royalties if certain conditions are met.

**Our DiscoveryEngine**

The technologies that we use in connection with bothour proprietary product development programs and our corporate collaborationsare designed to identify protein targets for compound screening and validatethe role of those targets in the disease process. Unlike genomics-basedapproaches, which begin by identifying genes and then search for theirfunctions, our approach identifies proteins that are 

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demonstrated to have animportant role in a disease pathway. By understanding the disease pathway, weattempt to avoid studying genes that will not make good drug targets and focusonly on the subset of expressed proteins of genes that we believe arespecifically implicated in the disease process.

We begin bydeveloping assays that model the key events in a disease process at thecellular level. We then efficiently search hundreds of millions of cells toidentify potential protein targets. In addition, we identify the proteinsinvolved in the intracellular process and prepare a map of their interactions,thus giving us a comprehensive picture of the intracellular disease pathway. Webelieve that our approach has a number of advantages, including:

·                    *improved target identification*: itfocuses only on the sub set of expressed proteins of genes believed to bespecifically implicated in the disease process;

·                    *rapid validation of protein targets*: itproduces validated protein targets more quickly because it uses key events inthe disease process as the basis to design the functional, disease-basedscreen;

·                    *improved disease pathway mapping*: itproduces a comprehensive map of the intracellular disease pathway enabling theidentification of a larger number of potential protein targets;

·                    *better informed target selection*: itprovides a variety of different types of targets and information concerning therole each plays in their endogenous state to better select targets moresusceptible to pharmaceutical intervention;

·                    *more efficient compound screening*: itincreases the probability and speed that compound screening will identify “hits”because it provides more detailed knowledge of the target that can be used toguide the design of the compound screen; and

·                    *risk reduction*: itmay reduce the risk of failure in the product development process due toserious side effects, including toxicity or other reasons, by selecting onlytargets that are specific to the disease in question and that have no apparentrole in other cell types or signaling pathways.

Because of the very largenumber of cells and proteins employed, our technology is labor intensive. Thecomplexity of our technology requires a high degree of skill and diligence toperform successfully. In addition, successful application of our technologydepends on a highly diverse collection of proteins to test in cells. We believewe have been able to and will continue to meet these challenges successfully andincrease our ability to identify targets for drug discovery. Although othercompanies may utilize technologies similar to certain aspects of ourtechnology, we are unaware of any other company that employs the samecombination of technologies as we do.

*Pharmacology andPreclinical Development*

We believe that the rapidcharacterization and optimization of lead compounds identified in HTS willgenerate high-quality preclinical development candidates. Our pharmacology andpreclinical development group facilitates lead optimization by characterizinglead compounds with respect to pharmacokinetics, potency, efficacy andselectivity. The generation of proof-of-principle data in animals and theestablishment of standard pharmacological models with which to assess leadcompounds represent integral components of lead optimization. As programs movethrough the lead optimization stage, our pharmacology and preclinicaldevelopment groups support our chemists and biologists by performing thenecessary studies, including toxicology, for IND application submissions.

*ClinicalDevelopment*

We have assembled a teamof experts in drug development to design and implement clinical trials and toanalyze the data derived from these studies. The clinical development grouppossesses expertise in project management and regulatory affairs.

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**Research andDevelopment Expenses**

Our research anddevelopment expenses were $57.0 million in 2006, $52.0 million in2005 and $48.5 million in 2004.

**IntellectualProperty**

We are able to protect ourtechnology from unauthorized use by third parties only to the extent that it iscovered by valid and enforceable patents or is effectively maintained as atrade secret. Accordingly, patents or other proprietary rights are an essentialelement of our business. We have over 160 pending patent applications and over80 issued patents in the United States that are owned by or exclusivelylicensed to us in our field as well as pending corresponding foreign patentapplications. Our policy is to file patent applications to protect technology,inventions and improvements to inventions that are commercially important tothe development of our business. We seek United States and international patentprotection for a variety of technologies, including new screening methodologiesand other research tools, target molecules that are associated with diseasestates identified in our screens, and lead compounds that can affect diseasepathways. We also intend to seek patent protection or rely upon trade secretrights to protect other technologies that may be used to discover and validatetargets and that may be used to identify and develop novel drugs. We seekprotection, in part, through confidentiality and proprietary informationagreements. We are a party to various license agreements that give us rights touse technologies in our research and development.

**Competition**

We face, and will continue to face, intensecompetition from pharmaceutical and biotechnology companies, as well as fromacademic and research institutions and government agencies, both in the UnitedStates and abroad. Some of these competitors are pursuing the development ofpharmaceuticals that target the same diseases and conditions as our researchprograms. Our major competitors include fully integrated pharmaceuticalcompanies that have extensive drug discovery efforts and are developing novelsmall molecule pharmaceuticals. We also face significant competition fromorganizations that are pursuing the same or similar technologies, including thediscovery of targets that are useful in compound screening, as the technologiesused by us in our drug discovery efforts. Our competitors or theircollaborative partners may utilize discovery technologies and techniques orpartner more rapidly or successfully than we or our collaborators are able todo.

Many of thesecompanies and institutions, either alone or together with their collaborativepartners, have substantially greater financial resources and larger researchand development staffs than we do. In addition, many of these competitors,either alone or together with their collaborative partners, have significantlygreater experience than we do in:

·                    identifyingand validating targets;

·                    screeningcompounds against targets; and

·                    undertakingpreclinical testing and clinical trials.

Accordingly, our competitors may succeed in obtainingpatent protection, identifying or validating new targets or discovering newdrug compounds before we do.

Competition mayalso arise from:

·                    newor better methods of target identification or validation;

·                    otherdrug development technologies and methods of preventing or reducing theincidence of disease;

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·                    newsmall molecules; or

·                    otherclasses of therapeutic agents.

Developments by others may render our productcandidates or technologies obsolete or noncompetitive. We face and willcontinue to face intense competition from other companies for collaborativearrangements with pharmaceutical and biotechnology companies, for establishingrelationships with academic and research institutions and for licenses toadditional technologies. These competitors, either alone or with theircollaborative partners, may succeed in developing technologies or products thatare more effective than ours.

Our ability tocompete successfully will depend, in part, on our ability to:

·                    identifyand validate targets;

·                    discovercandidate drug compounds that interact with the targets we identify;

·                    attractand retain scientific and product development personnel;

·                    obtainpatent or other proprietary protection for our new drug compounds andtechnologies; and

·                    entercommercialization agreements for our new drug compounds.

**GovernmentRegulation**

Our ongoingdevelopment activities are and will be subject to extensive regulation bynumerous governmental authorities in the United States and other countries,including FDA under the Federal Food, Drug and Cosmetic Act. The regulatoryreview and approval process is expensive and uncertain. Securing FDA approvalrequires the submission of extensive preclinical and clinical data andsupporting information to the FDA for each indication to establish a productcandidate’s safety and efficacy. The approval process takes many years,requires the expenditure of substantial resources and may involve ongoingrequirements for post-marketing studies. Clinical trials are subject tooversight by institutional review boards and the FDA and:

·                    mustbe conducted in conformance with the FDA’s IND regulations;

·                    mustmeet requirements for institutional review board oversight;

·                    mustmeet requirements for informed consent;

·                    mustmeet requirements for good clinical practices;

·                    aresubject to continuing FDA oversight;

·                    mayrequire large numbers of participants; and

·                    maybe suspended by us, our strategic partners or the FDA at any time if it isbelieved that 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.

Even if we are able to achieve success in our clinicaltesting, we, or our collaborative partners, must provide the FDA and foreignregulatory authorities with clinical data that demonstrates the safety andefficacy of our products in humans before they can be approved for commercialsale. We also do not know whether any future clinical trials will demonstratesufficient safety and efficacy necessary to obtain the requisite regulatoryapprovals or will result in marketable products. Our failure, or the failure ofour strategic partners, to adequately demonstrate the safety and efficacy ofour products under development will prevent receipt of FDA and similar foreignregulatory approval and, ultimately, commercialization of our products.

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Any clinical trial may fail to produce resultssatisfactory to the FDA. Preclinical and clinical data can be interpreted indifferent ways, which could delay, limit or prevent regulatory approval.Negative or inconclusive results or adverse medical events during a clinicaltrial could cause a clinical trial to be repeated or a program to beterminated. In addition, delays or rejections may be encountered based uponadditional government regulation from future legislation or administrativeaction or changes in FDA policy or interpretation during the period of productdevelopment, clinical trials and FDA regulatory review. Failure to comply withapplicable FDA or other applicable regulatory requirements may result incriminal prosecution, civil penalties, recall or seizure of products, total orpartial suspension of production or injunction, as well as other regulatoryaction against our potential products, collaborative partners or us.Additionally, we have no experience in working with our partners in conductingand managing the clinical trials necessary to obtain regulatory approval.

Outside the United States,our ability to market a product is contingent upon receiving a marketingauthorization from the appropriate regulatory authorities. The requirementsgoverning the conduct of clinical trials, marketing authorization, pricing andreimbursement vary widely from country to country. At present, foreignmarketing authorizations are applied for at a national level, although withinthe European Union, or EU, registration procedures are available to companieswishing to market a product in more than one EU member state. If the regulatoryauthority is satisfied that adequate evidence of safety, quality and efficacyhas been presented, a marketing authorization will be granted. This foreignregulatory approval process involves all of the risks associated with FDAclearance.

**Employees**

As of December 31,2006, we had 152 employees.

**Scientific &Medical Advisors**

We utilize scientists and physicians to advise us onscientific and medical matters as part of our ongoing research and productdevelopment efforts, including experts in clinical trial design, preclinicaldevelopment work, chemistry, biology, infectious diseases, immunology andoncology. Certain of our scientific and medical advisors and consultantsreceive an option to purchase our common stock and an honorarium for time spentassisting us.

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**AvailableInformation**

We maintain a site on theworld wide web at www.rigel.com. The information found on our website is notincorporated by reference into this annual report on Form 10-K. Weelectronically file with the Securities and Exchange Commission our annualreport on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, our director and officers’ Section 16reports, other SEC filings and amendments to the reports filed or furnishedpursuant to Section 13(a) or 15(d) of the Securities ExchangeAct of 1934. We make available free of charge on or through our website copiesof these reports as soon as reasonably practicable after we electronically filesuch material with, or furnish it to, the Securities and Exchange Commission,or SEC. Further, a copy of these reports is located at the Securities andExchange Commission’s Public Reference Room at 100 F Street, NE,Washington, D.C. 20549. Information on the operation of the Public Reference Room canbe obtained by calling the SEC at 1-800-SEC-0330. The SECalso maintains an internet site that contains reports, proxy and informationstatements and other information regarding issuers that file electronicallywith the SEC at www.sec.gov.

**Item 1A. RiskFactors**

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

*We have marked withan asterisk(*) those risk factors below that reflect material changes from therisk factors included in our Annual Report on Form 10-K filed withthe Securities and Exchange Commission on March 8, 2006.*

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

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

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

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

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

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

·       our ability to establishnew collaborations and to maintain our existing collaboration partnerships;

·       the progress of researchprograms carried out by us;

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

·       our ability to meet themilestones identified in our collaborative agreements that trigger payments;

·       the progress of theresearch and development efforts of our collaborative partners;

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

·       our ability to manage ourgrowth;

·       competing technological andmarket developments;

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

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

·       expenses associated withunforeseen litigation.

Insufficient funds mayrequire us to delay, scale back or eliminate some or all of our research ordevelopment programs, to lose rights under existing licenses or to relinquishgreater or all rights to product candidates at an earlier stage of developmentor on less favorable terms than we would otherwise choose or may adverselyaffect our ability to operate as a going concern.

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

Due in large part to thesignificant research and development expenditures required to identify andvalidate new product candidates and pursue our development efforts, we have notbeen profitable and have incurred operating losses since we were incorporatedin June 1996. The extent of our future losses and the timing of potentialprofitability are highly uncertain, and we may never achieve profitableoperations. We incurred net losses of approximately $37.6 million in 2006,$45.3 million in 2005 and $56.3 million in 2004. Currently, our revenues aregenerated solely from research payments pursuant to our collaborationagreements and licenses and are insufficient to generate profitable operations.As of December 31, 2006, we had an accumulated deficit of approximately$295.2 million. We expect to incur losses for at least the next several yearsand expect that these losses could increase as we expand our research anddevelopment activities and incur significant clinical and testing costs.

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

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

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development, we haveestablished anticipated timelines with respect to the initiation or completionof clinical studies based on existing knowledge of the compound. However, wecannot provide assurance that we will meet any of these timelines for clinicaldevelopment.

Because of the uncertaintyof whether the accumulated preclinical evidence (pharmacokinetic,pharmacodynamic, safety and/or other factors) or early clinical results will beobserved in later clinical trials, we can make no assurances regarding thelikely results from our future clinical trials or the impact of those resultson our business.

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

Commercialization of ourproduct candidates depends upon successful completion of preclinical studiesand clinical trials. Preclinical testing and clinical development are long,expensive and uncertain processes. We do not know whether we, or any of ourcollaborative partners, will be permitted to undertake clinical trials ofpotential products beyond the trials already concluded and the trials currentlyin process. It will take us or our collaborative partners several years tocomplete any such testing, and failure can occur at any stage of testing.Interim results of trials do not necessarily predict final results, andacceptable results in early trials may not be repeated in later trials. Anumber of companies in the pharmaceutical industry, including biotechnologycompanies, have suffered significant setbacks in advanced clinical trials, evenafter achieving promising results in earlier trials. Moreover, we or ourcollaborative partners or regulators may decide to discontinue development ofany or all of these projects at any time for commercial, scientific or otherreasons.

**Delays in clinicaltesting could result in increased costs 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 typicallyrely on third-party clinical investigators to conduct our clinical trials andother third-party organizations to oversee the operations of such trials and toperform data collection and analysis. As a result, we may face additionaldelaying factors outside our control if these parties do not perform theirobligations in a timely fashion. While we have not yet experienced delays thathave materially impacted our clinical trials or product development costs,delays of this sort could occur for the reasons identified above or otherreasons. If we have delays in testing or approvals, our product developmentcosts will increase. For example, we may need to make additional payments tothird-party investigators and organizations to retain their services or we mayneed to pay recruitment incentives. If the delays are significant, ourfinancial results and the commercial prospects for our product candidates willbe harmed, and our ability to become profitable will be delayed.

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

We currently do not have manufacturing capabilities orexperience necessary to produce our product candidate R788. We rely on a singlemanufacturer for the R788 product for clinical trials. We will rely onmanufacturers to deliver materials on a timely basis and to comply withapplicable regulatory 

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requirements, includingthe U.S. Food and Drug Administration’s, or FDA’s current Good ManufacturingPractices, or GMP. These outsourcing efforts with respect to manufacturingpreclinical and clinical supplies will result in a dependence on our suppliersto timely manufacture and deliver sufficient quantities of materials producedunder GMP conditions to enable us to conduct planned preclinical studies,clinical trials and, if possible, to bring products to market in a timelymanner.

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-partymanufacturers may not be able to comply with the GMP regulations, otherapplicable FDA regulatory requirements or similar regulations applicableoutside of the United States. Additionally, if we are required to enter intonew supply arrangements, we may not be able to obtain approval from the FDA ofany alternate supplier in a timely manner, or at all, which could delay orprevent the clinical development and commercialization of any related productcandidates. Failure of our third-party manufacturers or us to obtain approvalfrom the FDA or to comply with applicable regulations could result in sanctionsbeing imposed on us, including fines, civil penalties, delays in or failure togrant marketing approval of our product candidates, injunctions, delays,suspension or withdrawal of approvals, license revocation, seizures or recallsof products and compounds, operating restrictions and criminal prosecutions,any of which could significantly and adversely 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 advancedproduct candidates into clinical testing, which may never occur or may notoccur until some time well into the future. If we are not able to generaterevenue under our collaborations when and in accordance with our expectationsor the expectations of 

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industry analysts, thisfailure could harm our business and have an immediate adverse effect on thetrading price of our stock.

Our business requires usto generate meaningful revenue from royalties and licensing agreements. Todate, we have not received any revenue from royalties for the commercial saleof drugs, and we do not know when we will receive any such revenue, if at all.Likewise, we have not licensed any lead compounds or drug developmentcandidates to third parties, and we do not know whether any such license willbe entered into on acceptable terms in the future, if at all.

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

Our strategy depends upon the formation andsustainability of multiple collaborative arrangements and license agreementswith third parties in the future. We rely on these arrangements for not only financialresources, but also for expertise that we expect to need in the future relatingto clinical trials, manufacturing, sales and marketing, and for licenses totechnology rights. To date, we have entered into several such arrangements withcorporate collaborators; however, we do not know if such third parties willdedicate sufficient resources or if any development or commercializationefforts by third parties will be successful. Should a collaborative partnerfail to develop or commercialize a compound or product to which it has rightsfrom us for any reason including corporate restructuring, such failure mightdelay ongoing research and development efforts at Rigel, because we might notreceive any future milestone payments, and we would not receive any royaltiesassociated with such compound or product. In addition, the continuation of someof our partnered drug discovery and development programs may be dependent onthe periodic renewal of our corporate collaborations.

The research phase of our collaboration with Johnson &Johnson ended in 2003, and the research phases conducted at our facilitiesunder our broad collaboration with Novartis ended in 2004. The researchphase of our corporate collaboration agreement with Daiichi ended in 2005. In2004, we signed a new corporate collaboration with Merck and in 2005, we signedadditional collaborations with Pfizer and Merck Serono. These agreements couldbe terminated by the other party, and we may not be able to renew thesecollaborations on acceptable terms, if at all, or negotiate additionalcorporate collaborations on acceptable terms, if at all. If thesecollaborations terminate or are not renewed, any resultant loss of revenuesfrom these collaborations or loss of the expertise of our collaborative partnerscould adversely affect our business.

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

We are also a party tovarious license agreements that give us rights to use specified technologies inour research and development processes. The agreements pursuant to which wehave in-licensed technology permit our licensors to terminate the agreementsunder certain circumstances. If we are not able to continue to license theseand future technologies on commercially reasonable terms, our productdevelopment and research may be delayed.

**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 

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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 corporatecollaborators were to breach or terminate its agreement with us or otherwisefail to conduct the collaborative activities successfully and in a timelymanner, the preclinical or clinical development or commercialization of theaffected product candidates or research programs could be delayed orterminated. We generally do not control the amount and timing of resources thatour corporate collaborators devote to our programs or potential products. We donot know whether current or future collaborative partners, if any, might pursuealternative technologies or develop alternative products either on their own orin collaboration with others, including our competitors, as a means fordeveloping treatments for the diseases targeted by collaborative arrangementswith 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 80 issued patents in the United States that areowned or exclusively licensed in our field as well as pending correspondingforeign patent applications. In the future, our patent position might be highlyuncertain and involve complex legal and factual questions. For example, we maybe involved in interferences before the United States Patent and TrademarkOffice. Interferences are complex and expensive legal proceedings and there isno assurance we will be successful in such proceedings. An interference couldresult in our losing our patent rights and/or our freedom to operate and/orrequire us to pay significant royalties. Additional uncertainty may resultbecause no consistent policy regarding the breadth of legal claims allowed inbiotechnology patents has emerged to date. Accordingly, we cannot predict thebreadth of claims allowed in our or other companies’ patents.

Because the degreeof future protection for our proprietary rights is uncertain, we cannot ensurethat:

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

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

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

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

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

·       we will develop additionalproprietary technologies that are patentable; or

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

We rely on trade secrets to protect technology 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 

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trade secrets or otherproprietary information in the event of any unauthorized use or disclosure orthe lawful development by others of such information.

We are a party to certainin-license agreements that are important to our business, and we generally donot control the prosecution of in-licensed technology. Accordingly, we areunable to exercise the same degree of control over this intellectual propertyas we exercise over our internally-developed technology. Moreover, some of ouracademic institution licensors, research collaborators and scientific advisorshave rights to publish data and information in which we have rights. If wecannot maintain the confidentiality of our technology and other confidentialinformation in connection with our collaborations, then our ability to receivepatent protection or protect our proprietary information will be impaired. Inaddition, some of the technology we have licensed relies on patented inventionsdeveloped using U.S. government resources. The U.S. government retains certainrights, as defined by law, in such patents, and may choose to exercise suchrights. Certain of our in-licenses may be terminated if we fail to meetspecified obligations. If we fail to meet such obligations and any of 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 and partnering.**

Our success willalso depend, in part, on our ability to operate without infringing ormisappropriating the proprietary rights of others. There are many issuedpatents and patent applications filed by third parties relating to products orprocesses that are similar or identical to ours or our licensors, and othersmay be filed in the future. There can be no assurance that our activities, orthose of our licensors, will not infringe patents owned by others. We believethat there may be significant litigation in the industry regarding patent andother intellectual property rights, and we do not know if we or ourcollaborators would be successful in any such litigation. Any legal actionagainst our collaborators or us claiming damages or seeking to enjoincommercial activities relating to the affected products, our methods orprocesses could:

·       require our collaboratorsor us to obtain a license to continue to use, manufacture or market theaffected products, methods or processes, which may not be available oncommercially reasonable terms, if at all;

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

·       subject us to potentialliability for damages;

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

·       result in litigation oradministrative proceedings that may be costly, whether we win or 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.

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Before commencingclinical trials in humans in the United States, we, or our collaborativepartners, will need to submit and receive approval from the FDA of an IND.Clinical trials are subject to oversight by institutional review boards and theFDA and:

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

·       must meet requirements forinstitutional review board oversight;

·       must meet requirements forinformed consent;

·       are subject to continuingFDA oversight;

·       may require large numbersof test subjects; and

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

While we have stated that we intend to file 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 patient populationand the indication that will be treated. Data obtained from preclinical andclinical activities are susceptible to varying interpretations that coulddelay, limit or prevent regulatory approvals. In addition, delays or rejectionsmay be encountered based upon additional government regulation from futurelegislation or administrative action or changes in FDA policy during the periodof product development, clinical trials and FDA regulatory review. Failure tocomply with applicable FDA or other applicable regulatory requirements mayresult in criminal prosecution, civil penalties, recall or seizure of products,total or partial suspension of production or injunction, as well as otherregulatory action against our potential products or us. Additionally, we havelimited experience in conducting and managing the clinical trials necessary toobtain 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 our collaborative partners, to market a product iscontingent upon receiving a marketing authorization from the appropriateregulatory authorities. This foreign regulatory approval process typicallyincludes all of the risks associated with FDA approval described above and mayalso include additional risks.

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

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

Our competitors may utilize discovery technologies andtechniques or partner with collaborators in order to develop products morerapidly or successfully than we, or our collaborators, are able to do. Many 

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of our competitors,particularly large pharmaceutical companies, have substantially greaterfinancial, technical and human resources than we do. In addition, academicinstitutions, government agencies and other public and private organizationsconducting research may seek patent protection with respect to potentiallycompetitive products or technologies and may establish exclusive collaborativeor licensing relationships with our competitors.

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

Our competitors mightdevelop technologies and drugs that are more effective or less costly than anythat are being developed by us or that would render our technology andpotential drugs obsolete and noncompetitive. In addition, our competitors maysucceed in obtaining the approval of the FDA or other regulatory agencies forproduct candidates more rapidly. Companies that complete clinical trials,obtain required regulatory agency approvals and commence commercial sale oftheir drugs before their competitors may achieve a significant competitiveadvantage, including certain patent and FDA marketing exclusivity rights thatwould delay or prevent our ability to market certain products. Any drugsresulting from our research and development efforts, or from our joint effortswith our existing or future collaborative partners, might not be able tocompete successfully with competitors’ existing or future products or obtainregulatory approval in the United States or elsewhere.

**Our ability to generaterevenues will be diminished if our collaborative partners fail to obtainacceptable prices or an adequate level of reimbursement for products from third-partypayors or government agencies.**

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

Our ability tocommercialize pharmaceutical products with collaborators may depend, in part,on the extent to which reimbursement for the products will be available from:

·       government and healthadministration authorities;

·       private health insurers;and

·       other third-party payors.

Significant uncertaintyexists as to the reimbursement status of newly-approved healthcare products.Third-party payors, including Medicare, are challenging the prices charged formedical products and services. Government and other third-party payorsincreasingly are attempting to contain healthcare costs by limiting bothcoverage and the level of reimbursement for new drugs and by refusing, in somecases, to 

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providecoverage for uses of approved products for disease indications for which theFDA has not granted labeling approval. Third-party insurance coverage may notbe available to patients for any products we discover and develop, alone orwith collaborators. If government and other third-party payors do not provideadequate coverage and reimbursement levels for our products, the marketacceptance of these products may be reduced.

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

The testing and marketingof medical products entail an inherent risk of product liability. If we cannotsuccessfully defend ourselves against product liability claims, we may incursubstantial liabilities or be required to limit commercialization of ourproducts although we are not currently aware of any specific causes for concernwith respect to clinical liability claims. We currently do not have productliability insurance, and our inability to obtain sufficient product liabilityinsurance at an acceptable cost to protect against potential product liabilityclaims could prevent or inhibit the commercialization of pharmaceuticalproducts we develop, alone or with corporate collaborators. We, or ourcorporate collaborators, might not be able to obtain insurance at a reasonablecost, if at all. While under various circumstances we are entitled to beindemnified against losses by our corporate collaborators, indemnification maynot be available or adequate should any claim arise.

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

As a small company withonly 152 employees as of December 31, 2006, our success depends on thecontinued contributions of our principal management and scientific personneland on our ability to develop and maintain important relationships with leadingacademic institutions, scientists and companies in the face of intensecompetition for such personnel. In particular, our research programs depend onour ability to attract and retain highly skilled chemists, other scientists,and development, regulatory and clinical personnel. If we lose the services ofany of our personnel, our research and development efforts could be seriouslyand adversely affected. Our employees can terminate their employment with us atany time.

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

We work extensively withvarious scientific consultants and advisors. The potential success of our drugdiscovery and development programs depends, in part, on continuedcollaborations with certain of these consultants and advisors. We, and variousmembers of our management and research staff, rely on certain of theseconsultants and advisors for expertise in our research, regulatory and clinicalefforts. Our scientific advisors are not our employees and may have commitmentsto, or consulting or advisory contracts with, other entities that may limittheir availability to us. We do not know if we will be able to maintain suchconsulting agreements or that such scientific advisors will not enter intoconsulting arrangements, exclusive or otherwise, with competing pharmaceuticalor biotechnology companies, any of which would have a detrimental impact on ourresearch objectives and could have a material adverse effect on our business,financial condition 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 anddevelopment activities involve the controlled use of potentially harmfulbiological materials as well as hazardous materials, chemicals and variousradioactive compounds. We cannot completely eliminate the risk of accidentalcontamination or injury from the use, storage, handling or 

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disposalof these materials. In the event of contamination or injury, we could be heldliable for damages that result, and such liability could exceed our resources.We are also subject to federal, state and local laws and regulations governingthe use, storage, handling and disposal of these materials and specified wasteproducts. The cost of compliance with, or any potential violation of, theselaws 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 locatedin the San Francisco Bay Area near known earthquake fault zones and arevulnerable to significant damage from earthquakes. We are also vulnerable todamage from other types of disasters, including fires, floods, power loss,communications failures and similar events. If any disaster were to occur, ourability to operate our business at our facilities would be seriously, orpotentially completely, impaired, and our research could be lost or destroyed.In addition, the unique nature of our research activities and of much of ourequipment could make it difficult for us to recover from a disaster. Theinsurance we maintain may not be adequate to cover our losses resulting fromdisasters or other business interruptions.

**Our stock price maybe volatile, and our stockholders’ investment in our stock could decline invalue.**

The market pricesfor our securities and those of other biotechnology companies have been highlyvolatile and may continue to be highly volatile in the future. The followingfactors, in addition to other risk factors described in this section, may havea significant impact on the market price of our common stock:

·       the progress and success ofclinical trials and preclinical activities (i.e., studies, manufacture ofmaterials) of our product candidates conducted by us or our collaborativepartners or licensees;

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

·       selling by largestockholders;

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

·       developments concerningproprietary rights, including patents;

·       developments concerning ourcollaborations;

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

·       regulatory developments inthe United States and foreign countries;

·       litigation;

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

·       period-to-periodfluctuations in financial results.

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**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 ouramended and restated certificate of incorporation and bylaws, as well asprovisions of Delaware law, could make it more difficult for a third party toacquire us, even if doing so would benefit our stockholders. These provisions:

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

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

·       limit who may call aspecial meeting of stockholders;

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

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

·       provide for a board ofdirectors with staggered terms; and

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

In addition, Section 203of the Delaware General Corporation Law, which imposes certain restrictionsrelating to transactions with major stockholders, may discourage, delay orprevent a third party from acquiring us.

**Item1B. Unresolved Staff Comments**

None.

**Item2. Properties**

We currently leasefacilities consisting of approximately 147,000 square feet of research andoffice space located at 1180 Veterans Boulevard, South San Francisco,California. The lease expires in January 2018. In May 2004, wesubleased approximately 15,000 square feet of our space to a tenant for aperiod of two years. In September 2005, the sublease was amended to extendthe term for an additional year. We believe our facilities are in goodoperating condition and that the leased real property is adequate for allpresent and near term uses.

**Item 3. LegalProceedings**

None.

**Item4. Submission of Matters to a Vote of Security Holders**

None.

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**PART II**

**Item 5. Market forthe Registrant’s Common Equity and Related Stockholder Matters**

Ourcommon stock has traded on the Nasdaq National Market under the symbol “RIGL”since November 29, 2000. The following table sets forth, for the periodsindicated, the high and low sales prices (based on daily closing prices) forthe common stock as reported by the Nasdaq National Market:

| ** **                             | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------|------------|----------|------------|---------|------------|
| **Year Ended December 31,  2005** |       |     |       |    |       |
| First Quarter                          |       | $        | 24.99      |    | $          | 15.56 |   |
| Second Quarter                         |       | $        | 20.24      |    | $          | 14.52 |   |
| Third Quarter                          |       | $        | 23.79      |    | $          | 18.83 |   |
| Fourth Quarter                         |       | $        | 24.86      |    | $          | 7.43 |   |
| **Year Ended December 31,  2006** |       |     |       |    |       |
| First Quarter                          |       | $        | 11.68      |    | $          | 7.18 |   |
| Second Quarter                         |       | $        | 11.61      |    | $          | 8.82 |   |
| Third Quarter                          |       | $        | 10.95      |    | $          | 8.88 |   |
| Fourth Quarter                         |       | $        | 12.38      |    | $          | 10.00 |   |

 

On February 28, 2007,the last reported sale price for our common stock on the Nasdaq National Marketwas $10.47 per share.

**Holders**

As of February 28,2007, there were approximately 185 stockholders of record of our common stock.

**Dividends**

We have not paid dividendson our common stock and currently do not plan to pay any cash dividends in theforeseeable future.

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**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN***AmongRigel Pharmaceuticals, Inc., The NASDAQ Composite IndexAnd The NASDAQ Biotechnology Index

****

 

***$100 invested on 12/31/01 in stock or index-includingreinvestment of dividends Fiscal year ending December 31.**

**Item 6. SelectedFinancial Data**

Thefollowing selected financial data should be read in conjunction with “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and “Item 8. Financial Statements and Supplementary Data” includedelsewhere in this annual report on Form 10-K.

| ** **                                                                                 | ** ** | **Fiscal Years Ended December 31,**               | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                 | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Statements of Operations Data:**                                                         |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Contract revenues from  collaborations                                                     |       | $                                                                     | 33,473     |   | $ | 16,526 |   | $ | 4,733 |   | $ | 11,055 |   | $ | 15,788 |   |
| Costs and expenses:                                                                        |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Research and development                                                                   |       | 56,968                                                                |       | 52,038 |   | 48,523 |   | 41,649 |   | 40,800 |   |
| General and  administrative                                                                |       | 19,552                                                                |       | 12,410 |   | 13,077 |   | 10,233 |   | 12,004 |   |
|                                                                                       |       | 76,520                                                                |       | 64,448 |   | 61,600 |   | 51,882 |   | 52,804 |   |
| Loss from operations                                                                       |       | (43,047                                                               | )          | (47,922 | ) | (56,867 | ) | (40,827 | ) | (37,016 | ) |
| Loss on disposal/sale of  property and equipment                                           |       | —                                                                |       | — |   | (30 | ) | (169 | ) | — |   |
| Interest income                                                                            |       | 5,700                                                                 |       | 2,942 |   | 966 |   | 374 |   | 856 |   |
| Interest expense                                                                           |       | (290                                                                  | )          | (276 | ) | (324 | ) | (575 | ) | (870 | ) |
| Net loss                                                                                   |       | (37,637                                                               | )          | (45,256 | ) | (56,255 | ) | (41,197 | ) | (37,030 | ) |
| Loss per common share,  basic and diluted                                                  |       | $                                                                     | (1.51      | ) | $ | (2.07 | ) | $ | (3.12 | ) | $ | (3.62 | ) | $ | (7.41 | ) |
| Weighted average common shares used in computing  loss per common share, basic and diluted |       | 24,936                                                                |       | 21,857 |   | 18,053 |   | 11,395 |   | 4,995 |   |

 

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| ** **                                                | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                | ** ** | **(in thousands)**               | ** ** |
| **Balance  Sheet Data:**                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents and available-for-sale securities |       | $                                     | 104,471    |   | $ | 138,196 |   | $ | 71,427 |   | $ | 46,500 |   | $ | 27,291 |   |
| Working capital                                           |       | 96,776                                |       | 118,949 |   | 62,821 |   | 41,907 |   | 22,493 |   |
| Total assets                                              |       | 113,240                               |       | 147,668 |   | 78,822 |   | 55,524 |   | 44,342 |   |
| Capital lease  obligations, less current portion          |       | 1,082                                 |       | 1,132 |   | 781 |   | 1,236 |   | 2,313 |   |
| Deferred stock  compensation                              |       | —                                |       | (26 | ) | (56 | ) | (200 | ) | (772 | ) |
| Accumulated  deficit                                      |       | (295,159                              | )          | (257,522 | ) | (212,266 | ) | (156,011 | ) | (114,814 | ) |
| Total stockholders’  equity                          |       | 87,229                                |       | 108,588 |   | 52,301 |   | 39,973 |   | 25,441 |   |
|                                                           |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The share numbers setforth in the table reflect a one-for-nine reverse split of shares of ouroutstanding common stock effected on June 24, 2003. See Notes to theFinancial Statements for description of the number of shares used in thecomputation of basic and diluted loss per common share.

**Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**Overview**

Rigel is a clinical stage drug development companythat discovers and develops novel, small-molecule drugs for the treatment ofinflammatory diseases, cancer and viral diseases. Our goal is to file one newinvestigative new drug (IND) application in a significant indication each year.We have achieved this goal each year since 2002. Our pioneering researchfocuses on intracellular signaling pathways and related targets that arecritical to disease mechanisms. Rigel’s productivity has resulted in strategiccollaborations with large pharmaceutical partners to develop and market ourproduct candidates. We have product development programs ininflammatory/autoimmune diseases such as rheumatoid arthritis,thrombocytopenia, and asthma and allergy, as well as in cancer*.*

Rigel has multipleproduct candidates in development as follows:

·       *R788—ProductCandidate for Rheumatoid Arthritis (RA). *R788 is our leadproduct candidate. It has a novel mechanism of action-blocking IgG receptorsignaling in macrophages and B-cells. Previously, we studied R788 in a Phase 1single center, double-blind, randomized, placebo-controlled trial evaluatingthe safety and pharmacokinetics of escalating single and multiple doses ofR788. We completed R788 studies to evaluate its safety and pharmacokinetics incombination with methotrexate, a commonly prescribed treatment for RA. Resultsof this trial suggest no adverse interaction. In September 2006, wecommenced a Phase 2, multicenter, ascending dose, randomized, double-blind,placebo-controlled, dose ranging study to evaluate up to three doses of R788 inRA patients failing to respond to methotrexate. We expect to receive resultsfrom the study in the second half of 2007.

·       *R788—ProductCandidate for Immune Thombocytopenic Purpura (ITP).*Plateletdestruction from ITP is mediated by IgG signaling. R788 is a potent inhibitorof IgG signaling. In preclinical studies, R788 was shown to improvethrombocytopenia in an ITP mouse model. We commenced Phase 2 clinical trials ofR788 to evaluate its safety and efficacy in refractory ITP patients in January 2007and expect to receive results from the study in the middle of 2007.

·       *R788—ProductCandidate for B-Cell Lymphoma.*Research has shown that Sykoveractivity is an essential mechanism in several types of B-cell lymphomasurvival and that R788 inhibits the growth 

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of B-cell lymphoma drivenby Syk overactivity. We filed an IND for this indication in December 2006and plan to begin a clinical trial by the first half of 2007.

·       *R763—Product Candidate for Oncology. * R763 is apotent, highly-selective, small-molecule inhibitor of Aurora kinase targetingcancer cell proliferation. In October 2005, we signed a licensingagreement with Merck Serono that grants to Merck Serono an exclusive license todevelop and commercialize inhibitors in our Aurora kinase program, includingR763. Under the agreement, we were responsible for filing an IND for R763,which we filed with the Food and Drug Administration, or FDA, in December 2005,and were allowed to proceed under the IND in January 2006. Merck Serono isresponsible for the further development and commercialization of R763. During February 2006,we received a payment of $5.0 million from Merck Serono triggered by theregulatory acceptance. In September 2006, we received a payment of $3.0million from Merck Serono triggered by Merck Serono’s initiation of a Phase 1trial for R763. This initial trial is a multicenter study on patients withrefractory solid tumors. In February 2007, Merck Serono began anadditional Phase 1 trial evaluating R763 in hematological malignancies.

In 2005, we announced that we entered into acollaborative research and license agreement with Pfizer for the development ofinhaled products for the treatment of allergic asthma and other respiratorydiseases, such as chronic obstructive pulmonary disease, or COPD. Thecollaboration is focused on our preclinical small molecule compounds, whichinhibit IgE receptor signaling in respiratory tract mast cells by blocking thesignaling enzyme Syk, a novel drug target for respiratory diseases. Mast cellsplay important roles in both early and late phase allergic reactions, and Sykinhibitors could prevent both phases. In May 2006, we achieved the firstcollaboration milestone when Pfizer nominated R343 to commence advancedpreclinical development in allergic asthma. Pfizer paid us $5.0 million for theexclusive right to R343, which is expected to be delivered using Pfizer’s drypowder inhaler and is expected to enter the clinic in 2007.

In October 2006, weannounced that we selected R348, an orally-available, potent and selectiveinhibitor of JAK3 to enter preclinical studies to support an IND applicationplanned for 2007. We are also studying Axl inhibition in oncology. In additionto the aforementioned product candidates, we have ongoing research programsinvolving back-up candidates for the product candidates above and drugdiscovery efforts in our immunology/inflammation, virology and oncologyprograms.

**CorporateCollaborations**

We carry on research and development programs inconnection with our corporate collaborations. As of December 31, 2006, wehad collaborations with six major pharmaceutical/biotech companies comprisedof: one with Janssen Pharmaceutica N.V., a division of Johnson &Johnson, relating to oncology therapeutics and diagnostics, two withPfizer Inc., one initiated in 1999 and the other in 2005, relating tointrapulmonary asthma and allergy therapeutics, one with Novartis Pharma AGwith respect to four different programs relating to immunology, oncology andchronic bronchitis, one with Daiichi Pharmaceuticals Co., Ltd. in the areaof oncology, one with Merck, in the area of oncology, and one with Merck Seronoin the area of oncology. All of these collaborations, excluding the recentPfizer and the Merck Serono collaborations, have a research phase during whichwe receive or received funding based on the level of headcount allocated to aprogram. In all of these collaborations, if certain conditions are met, we areentitled to receive future milestone payments and royalties. We cannotguarantee that these conditions will be met or that research and developmentefforts will be successful. As a result, we may not receive any furthermilestone payments or royalties under these agreements. Only the Merck programcurrently provides for regular research reimbursement payments.

We are exploring newopportunities with existing and potential collaborators. Our earliestpartnerships focused on the early stages of drug discovery, specifically on targetdiscovery and validation. 

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Ourcollaborations with Daiichi and recently with Merck are both later stage,focusing on drug discovery and development. Our 2005 collaboration with Pfizercovers a compound that Pfizer selected for advanced preclinical development in May 2006,while our 2005 collaboration with Merck Serono covers a compound that beganclinical trials in September 2006. We currently anticipate that in orderto support our current research programs, we will need to self-fund our ownresearch programs, which involves an increased rate of spending on later stagesof development prior to partnering with collaborative partners. Therefore, itis expected that future collaborations may have an expanded focus and couldinclude high throughput screening, combinatorial and medicinal chemistry,preclinical evaluations and/or clinical development of compounds we havediscovered. In addition, we believe these future collaborations could bestructured to consist of upfront payments, the purchase of our common stock,milestone payments upon meeting certain conditions, research or developmentreimbursement payments and/or royalties upon commercialization of productsresulting from the collaboration.

**Critical AccountingPolicies and the Use of Estimates**

Our discussion and analysis of our financial conditionand results of operations is based upon our financial statements, which havebeen prepared in accordance with U.S generally accepted accounting principles.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. Weevaluate our estimates, including those related to terms of the research collaborations(i.e., amortization of upfront fees and certain milestones), investments, stockcompensation, impairment issues, the estimated useful life of assets andcontingencies, on an on-going basis. We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for 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. We believe the followingcritical accounting policies affect our more significant judgments andestimates used in the preparation of our financial statements.

In addition, we believethat there have been no significant changes in our critical accounting policiesduring the period ended December 31, 2006 as compared to those previouslydisclosed in our Annual Report on Form 10-K for the year ended December 31,2005, except for the adoption of Statement of Financial Accounting Standards,or SFAS, No. 123(R), “Share-Based Payment (Revised 2004),” or SFAS 123(R),for equity-based compensation costs in January 2006.

*Revenue Recognition*

We recognize revenue from our contract arrangements.Our revenue arrangements with multiple elements are evaluated under EmergingIssues Task Force No. 00-21, *“RevenueArrangements with Multiple Deliverables,”* and are divided intoseparate units of accounting if certain criteria are met, including whether thedelivered element has stand-alone value to the customer and whether there isobjective and reliable evidence of the fair value of the undelivered items. Theconsideration we receive is allocated among the separate units based on theirrespective fair values, and the applicable revenue recognition criteria isapplied to each of the separate units. Advance payments received in excess ofamounts earned are classified as deferred revenue until earned.

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

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Revenue related to collaborative research with ourcorporate collaborators is recognized as research services are performed overthe related development funding periods for each contract. Under theseagreements, we are required to perform research and development activities asspecified in the applicable agreement. The payments received are not refundableand are generally based on a contractual cost per full-time equivalent employeeworking on the project. Research and development expenses under thecollaborative research agreements, except for the Merck collaboration signed inNovember 2004 related to ubiquitin ligases, approximate or exceed therevenue recognized under such agreements over the term of the respectiveagreements. For the Merck collaboration, we are recognizing a pro-rata portionof the invoiced amounts for funding of our research scientists based on theheadcount dedicated to the project. It is our policy to recognize revenue basedon our level of effort expended and that revenue recognized will not exceed amountsbillable under the arrangement.

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

Royalties will berecognized as earned in accordance with the contract terms when the third partyresults are reliably measurable and collectibility is reasonably assured.

*Stock-based Compensation*

| ** **                                              | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| ** **                                              | ** ** | **2006**                                    | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2006 from 2005** | ** ** | **2005 from 2004** | ** ** |
| ** **                                              | ** ** | **(in thousands)**                     | ** ** |
| **Stock-based compensation (recovery)/  expense from:** |       |                                        |       |                      |       |   |   |   |   |   |   |   |   |   |   |
| ***Officer,  director and employee options***           |       | $                                           | 12,312     |                      | $          | 31 |   | $ | 236 |   |   | $ | 12,281 |   |   |   | $ | (205 | ) |   |
| ***Consultant  options***                               |       | 267                                         |       | (232                      | )          | 430 |   |   | 499 |   |   |   | (662 | ) |   |
| ***Re-priced  options***                                |       | —                                      |       | (1,889                    | )          | 1,900 |   |   | 1,889 |   |   |   | (3,789 | ) |   |
| ***Total***                                             |       | $                                           | 12,579     |                      | $          | (2,090 | ) | $ | 2,566 |   |   | $ | 14,669 |   |   |   | $ | (4,656 | ) |   |

 

We grant options to purchase our common stock to ourofficers, directors and all other employees and consultants under our stockoption plans. Eligible employees can also purchase shares of our common stockat a price per share equal to the lesser of 85% of the fair market value on thefirst day of the offering period or 85% of the fair market value on thepurchase date under our employee stock purchase plan, or ESPP. The benefitsprovided under these plans are share-based payments subject to the provisionsof SFAS 123(R). Effective January 1, 2006, we adopted the provisions ofSFAS 123(R) using the modified prospective application transition method.Under this method, the share-based compensation cost recognized beginning January 1,2006 includes compensation cost for (i) all share-based payments grantedprior to, but not vested as of January 1, 2006, based on the grant datefair value originally estimated in accordance with the provisions of SFAS 123, “Accountingfor Stock-Based Compensation,” or SFAS 123, and calculated for pro formadisclosures under SFAS No. 148, “Accounting for Stock-Based Compensation—Transitionand Disclosure,” or SFAS 148, and (ii) all share-based payments grantedsubsequent to January 1, 2006, based on the grant date fair valueestimated in accordance with the provisions of SFAS 123(R) and StaffAccounting Bulletin No. 107, or SAB 107. Compensation cost under SFAS 123(R) forawards granted prior to January 1, 2006 is recognized using an acceleratedmethod pursuant to the FASB Interpretation No. 28, “Accounting for StockAppreciation Rights and Other Variable Stock Option or Award Plans,” or FIN 28.For awards granted after January 1, 2006, we have adopted the use of thestraight-line attribution method over the requisite service period for theentire award. Results of prior periods do not reflect any restated amounts, andthe cumulative effect of a change in accounting principle was insignificantupon adoption of SFAS No. 123(R) under the modified prospectivemethod. In addition pursuant to SFAS 123(R), we are required to estimate theamount of 

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expected forfeitures whencalculating compensation costs, instead of accounting for forfeitures asincurred, which was our previous method. We will record actual forfeitures asthey occur, and we will review our forfeiture rates each quarter and make anynecessary changes to our estimates.

Prior to adopting SFAS 123(R) on January 1,2006, we accounted for equity-based employee compensation costs under therecognition and measurement principles of Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” or APB 25. Under APB 25, theintrinsic value method of accounting, no compensation expense is recognized,because the exercise price of our employee stock options equals the marketprice of the underlying stock on the date of grant. Pro forma informationregarding net loss and net loss per share was determined as if we had accountedfor issuances under our stock option plans and ESPP under the fair value methodprescribed by SFAS 123, as amended by SFAS 148. The fair value for theseoptions was estimated at the date of grant using the Black-Scholes optionpricing model.

In 2005, we recorded charges associated with the stockoptions that were eligible for re-pricing under a tender offer initiated in June 2003.All replacement options, as well as the eligible options that were notsurrendered under the original offer to exchange, were treated for financialreporting purposes as variable awards. Therefore, for the period prior toadoption of SFAS 123(R), we recorded non-cash charges, generally for theintrinsic value of the options as they vested, utilizing the accelerated vestingmethod, reflecting increases and decreases (down to, but not below, theexercise price) in the price of our common stock as compensation expense(recovery) in connection with the replacement options and the eligible optionsthat were not exchanged. For the year ended December 31, 2005, we recordednon-cash compensation recovery of approximately $1.9 million related to alloptions eligible for the replacement. The recovery resulted from the decreasein the market price of our common stock during 2005. For the year ended December 31,2004, we recorded a non-cash compensation charge of $1.9 million related to alloptions eligible for the replacement. The expense was attributable to theincrease in the market price of our common stock during 2004. For periods afterthe adoption of SFAS 123(R), we continued to account for these repriced optionsin accordance with provisions of SFAS 123. In August 2006, our board ofdirectors granted new options to employees, non-employee directors andconsultants who held repriced options that had expired in August 2006. Wegranted options to purchase approximately 179,000 shares of common stock withan exercise price of $9.56 per share. The options vested 50% at the date of thegrant and the remaining 50% will vest monthly over two years. We recordedstock-based compensation expense of approximately $689,000 relating to thesenewly granted options for the year ended December 31, 2006.

We also record charges associated with options grantedto consultants reflecting the fair value valuation and periodic fair valueremeasurement of outstanding consultant options under Emerging Issues TaskForce No. 96-18, “Accounting for Equity Instruments That are Issuedto Other Employees for Acquiring, or in Conjunction with Selling Goods or Services,”or EITF 96-18. The valuation is based upon the current market value ofour common stock and other assumptions, including the expected futurevolatility of our stock price, risk-free interest rate and expected term. Forconsultant options granted in 2006, we amortize stock-based compensation usinga straight-line attribution method consistent with the method used foremployees and with the attribution election we made upon adoption of SFAS123(R). For options granted prior to January 1, 2006, we use theaccelerated method for expensing stock-based compensation, which was the methodwe used prior to adoption. We expect to see continued fluctuations in thefuture as a portion of these options are remeasured based on the changes in thecurrent market price of our common stock.

The determination of thefair value of share-based payment awards on the date of grant using anoption-pricing model is affected by our stock price as well as assumptionsregarding a number of complex and subjective variables. These variablesinclude, but are not limited to, our expected stock price volatility over theterm of the awards, actual and projected employee stock option exercisebehaviors, risk-free interest rate and expected dividends. If factors changeand we employ different assumptions in the 

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applicationof SFAS 123(R) in future periods, the compensation expense that we recordunder SFAS 123(R) may differ significantly from what we have recorded inthe current period. Therefore, we believe it is important to be aware of thehigh degree of subjectivity involved when using option pricing models toestimate share-based compensation under SFAS 123(R). The guidance in andapplication of SFAS 123(R) and the Securities and Exchange Commission’sStaff Accounting Bulleting No. 107, or SAB 107, may be subject to furtherinterpretation and refinement over time. There are significant differencesamong valuation models, and there is a possibility that we may adopt differentvaluation models in the future. This may result in a lack of consistency infuture periods and materially affect the fair value estimate of share-basedpayments. It may also result in a lack of comparability with other companiesthat use different models, methods and assumptions.

**Results ofOperations**

***Years Ended December 31, 2006, 2005 and 2004***

**Revenues**

| ** **                                   | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| ** **                                   | ** ** | **2006**                                    | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2006 from 2005** | ** ** | **2005 from 2004** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                     | ** ** |
| ***Contract  revenues from collaborations*** |       | $                                           | 33,473     |                      | $          | 16,526 |   | $ | 4,733 |   |   | $ | 16,947 |   |   |   | $ | 11,793 |   |   |
|                                              |            |                                             |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Revenuesby collaborator were:

| ** **          | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change** | ** ** |
|---------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| ** **          | ** ** | **2006**                                    | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2006 from 2005** | ** ** | **2005 from 2004** | ** ** |
| ** **          | ** ** | **(in thousands)**                     | ** ** |
| ***Merck  Serono*** |       | $                                           | 15,527     |                      | $          | 2,473 |   | $ | — |   |   | $ | 13,054 |   |   |   | $ | 2,473 |   |   |
| ***Pfizer***        |       | 10,000                                      |       | 4,241                     |       | — |   |   | 5,759 |   |   |   | 4,241 |   |   |
| ***Merck***         |       | 7,946                                       |       | 7,369                     |       | 438 |   |   | 577 |   |   |   | 6,931 |   |   |
| ***Daiichi***       |       | —                                      |       | 2,443                     |       | 2,629 |   |   | (2,443 | ) |   |   | (186 | ) |   |
| ***Novartis***      |       | —                                      |       | —                    |       | 1,666 |   |   | — |   |   |   | (1,666 | ) |   |
| ***Total***         |       | $                                           | 33,473     |                      | $          | 16,526 |   | $ | 4,733 |   |   | $ | 16,947 |   |   |   | $ | 11,793 |   |   |

 

Contract revenues from collaborations in 2006 and 2005consisted primarily of amortization of upfront fees, milestone payments andresearch support from the continuation of our current collaborations. Contractrevenues from collaborations in 2004 consisted primarily of amortization ofupfront fees and research support. The increase in revenues in 2006, ascompared to the similar period in 2005, was primarily due to the recognition ofthe Merck Serono milestone payments totaling $8.0 million, the fullamortization of the Merck Serono upfront payment of $7.5 million and therecognition of the Pfizer milestone payment of $5.0 million offset by thetermination of the Daiichi collaboration in 2005. The increase in revenues in2005, as compared to the similar period in 2004, was primarily due to a fullyear of Merck collaboration and the initiation of the Pfizer and Merck Seronocollaborations offset by the termination of the research phase of the Novartisoncology program in 2004. We have deferred a total of approximately $994,000 ofresearch reimbursement revenue from Merck in order to account for the headcounteffort expended by us for the time period invoiced, which covers the relevantperiods from the initiation of the collaboration in 2004 through December 31,2006. We expect contract revenues from collaborations to continue to be asignificant component of our total revenues for the foreseeable future.

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*Research andDevelopment*

| ** **                                                                                       | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| ** **                                                                                       | ** ** | **2006**                                    | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2006 from 2005** | ** ** | **2005 from 2004** | ** ** |
| ** **                                                                                       | ** ** | **(in thousands)**                     | ** ** |
| ***Research  and development expenses***                                                         |       | $                                           | 56,968     |                      | $          | 52,038 |   | $ | 48,523 |   |   | $ | 4,930 |   |   |   | $ | 3,515 |   |   |
| ***Stock-based  compensation expense/(recovery) included in research and development expenses*** |       | 6,515                                       |       | (1,467                    | )          | 2,000 |   |   | 7,982 |   |   |   | (3,467 | ) |   |
|                                                                                                  |            |                                             |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in research and development expenses in2006, as compared to the similar period in 2005, was primarily attributable toan increase in stock-based compensation expense upon the adoption of SFAS 123(R) aspreviously discussed under “Critical Accounting Policies and the Use ofEstimates - Stock-based Compensation,” offset by a decrease in preclinical andclinical costs. The decrease in our preclinical and clinical costs in 2006, ascompared to the similar period in 2005, was primarily due to the termination ofthe R112 and R803 programs in 2005 and the transfer of sponsorship relating toR763 to Merck Serono in 2006, offset by increased costs relating to our R788program, which initiated a Phase 2 trial in August 2006. The increase inresearch and development expenses in 2005, as compared to the similar period in2004, was due to the increase in our preclinical and clinical costs and personnelcosts offset by a decrease in stock-based compensation expense related to therepriced stock options as discussed under “Critical Accounting Policies and theUse of Estimates—Stock-based Compensation.” The increase in preclinical and clinical costs and personnel costs in2005, as compared to the similar period in 2004, was primarily due to costsassociated with our R112, R788 and R763 programs, offset by the decrease incosts associated with our R803 program, which was discontinued in July 2005.We expect that our research and development expenses will increase as wecontinue our Phase 2 trials of R788 in RA and ITP, commence our Phase 1 trial ofR788 in lymphoma and continue to work on programs for other indications.

The scope and magnitude offuture research and development expenses are difficult to predict at this timegiven the number of studies that will need to be conducted for any of ourpotential products, as well as our limited capital resources. In general,biopharmaceutical-development involves a series of steps—beginning withidentification of a potential target and including, among others, proof ofconcept in animals and Phase 1, 2 and 3 clinical studies in humans—each ofwhich 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-basedcompensation.

*General andAdministrative Expenses*

| ** **                                                                                          | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| ** **                                                                                          | ** ** | **2006**                                    | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2006 from 2005** | ** ** | **2005 from 2004** | ** ** |
| ** **                                                                                          | ** ** | **(in thousands)**                     | ** ** |
| ***General  and administrative expenses***                                                          |       | $                                           | 19,552     |                      | $          | 12,410 |   | $ | 13,077 |   |   | $ | 7,142 |   |   |   | $ | (667 | ) |   |
| ***Stock-based  compensation expense/(recovery) included in general and administrative  expenses*** |       | 6,064                                       |       | (623                      | )          | 566 |   |   | 6,687 |   |   |   | (1,189 | ) |   |
|                                                                                                     |            |                                             |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in generaland administrative expenses in 2006, as compared to the similar period in 2005,was primarily due to an increase in stock-based compensation expense upon theadoption of SFAS 123(R) as discussed under “Critical Accounting Policiesand the Use of Estimates—Stock-based Compensation” and increased personnel andfacility costs. The decrease in administrative expenses in 2005, as compared tothe similar period in 2004, was primarily due to the decrease in stock-basedcompensation expense related to the repriced stock options as discussed under “CriticalAccounting 

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Policiesand the Use of Estimates - Stock-Based Compensation,” offset by increasedpersonnel and facility costs.

*Loss onDisposal/Sale of Property and Equipment*

| ** **                                              | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| ** **                                              | ** ** | **2006**                                    | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2006 from 2005** | ** ** | **2005 from 2004** | ** ** |
| ** **                                              | ** ** | **(in thousands)**                     | ** ** |
| ***Loss  on disposal /sale of property and equipment*** |       |                                        | $          | —                    |       |   |   | $ | — |   |   |   | $ | 30 |   |   |   | $ | — |   |   |   | $ | (30 | ) |   |
|                                                         |            |                                             |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During 2004, we wrote-off$4,900,000 of assets at their original acquisition cost and related accumulateddepreciation of $4,870,000 for assets that were no longer in use. We recorded aloss on disposal of property and equipment of $30,000.

*Interest income*

| ** **             | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change** | ** ** |
|------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| ** **             | ** ** | **2006**                                    | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2006 from 2005** | ** ** | **2005 from 2004** | ** ** |
| ** **             | ** ** | **(in thousands)**                     | ** ** |
| ***Interest  income*** |       | $                                           | 5,700      |                      | $          | 2,942 |   | $ | 966 |   |   | $ | 2,758 |   |   |   | $ | 1,976 |   |   |
|                        |            |                                             |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interest income resultsfrom our interest-bearing cash and investment balances. The increases ininterest income in 2006, as compared to the similar periods in 2005 and2004,  were primarily due to the increasein our investment balances as a result of the public offering we completed in July 2005where we raised $81.6 million in net proceeds combined with an increase in theinterest rates we earned on these balances.

*Interest expense*

| ** **              | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| ** **              | ** ** | **2006**                                    | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2006 from 2005** | ** ** | **2005 from 2004** | ** ** |
| ** **              | ** ** | **(in thousands)**                     | ** ** |
| ***Interest  expense*** |       | $                                           | (290       | )                         | $          | (276 | ) | $ | (324 | ) |   | $ | (14 | ) |   |   | $ | 48 |   |   |
|                         |            |                                             |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interest expense is theresult of our capital lease obligations associated with fixed asset acquisitions.Interest expense was flat in 2006, 2005 and 2004 due to comparable debtobligations outstanding during those years.

**Future AccountingRequirements**

In July 2006, the FASB issued FIN 48, “Accountingfor Uncertainty in Income Taxes,” or FIN 48. This interpretation requires thatwe recognize in our financial statements, the impact of a tax position, if thatposition is more likely than not of being sustained in an audit, based on thetechnical merits of the position. The provisions of FIN 48 are effective forfiscal years beginning after December 15, 2006, with the cumulative effectof the change in accounting principle recorded as an adjustment to openingretained earnings. We are currently evaluating the impact of adopting FIN 48 onour financial statements.

In September 2006, the SEC released SAB 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements,” or SAB 108. SAB 108 provides interpretiveguidance on the SEC’s views regarding the process of quantifying materiality offinancial statement misstatements. SAB 108 is effective for fiscal years endingafter November 15, 2006. We adopted SAB 108 for the year ended December 31,2006.

In September 2006,the FASB issued SFAS 157, “Fair Value Measurements,” or SFAS 157. This standarddefines fair value, establishes a framework for measuring fair value ingenerally accepted 

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accountingpriniciples, and expands disclosures about fair value measurements. SFAS 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007. We are currently evaluating the impact of adopting SFAS 157 on ourfinancial statements.

**Liquidity andCapital Resources**

**Cash Requirements**

We have financed our operations from inceptionprimarily through sales of equity securities, contract payments payable to usunder our collaboration agreements and equipment financing arrangements. Wehave consumed substantial amounts of capital to date, and operatingexpenditures are expected to increase over the next several years. During 2006,we received payments of approximately $18.2 million from our collaborationswith Merck Serono, Pfizer and Merck.

We believe that our existing capital resources andanticipated proceeds from current collaborations will be sufficient to supportour current operating plan through at least the next 12 months. 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 for the foreseeable future.The amount of future funds needed will depend largely on the timing andstructure of potential future collaborations. We do not know whether additionalfinancing will be available when needed, or that, if available, we will obtainfinancing on terms favorable to our stockholders or us.

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

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

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

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

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

·       theprogress of research programs carried out by us;

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

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

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

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

·       ourability to manage our growth;

·       competingtechnological and market developments;

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

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

·       expensesassociated with unforeseen litigation.

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

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As of December 31,2006, we had $104.5 million in cash and cash equivalents and available-for-salesecurities, as compared to $138.2 million as of December 31, 2005, adecrease of $33.7 million. The decrease was primarily attributable to operatingspending in the period, offset by collaboration proceeds of $18.2 million. Wealso received approximately $2.8 million from the issuance of our common stockresulting from our stock option plans and ESPP and approximately $1.4 millionunder our equipment financing arrangements. For the years ended December 31,2006 and 2005, we maintained an investment portfolio primarily in money marketfunds, federal agency securities, and corporate bonds and notes. Cash in excessof immediate requirements is invested with regard to liquidity and capitalpreservation. Wherever possible, we seek to minimize the potential effects ofconcentration and degrees of risk.

**ContractualObligations**

The following areour contractual commitments (by fiscal year) as of December 31, 2006associated with debt obligations, contracted research obligations, and leaseobligations: (in thousands)

| ** **                                | ** ** | **Total**               | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5  years** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **(in thousands)** | ** ** |
| Debt obligations  (1)                     |       | $                       | 2,617      |                            |       | $                  | 1,454      |               |       | $                                | 1,160      |   | $ | 3 |   |   | $ | — |   |   |
| Contracted  research                      |       | —                  |       |                            | —     |               |       | —             |       | —                           |       |   | — |   |   |
| Facilities lease,  net of sublease (2)(3) |       | 159,777                 |       |                            | 8,475      |               |       | 44,987             |       | 44,001                           |       |   | 62,314 |   |   |
| Total                                     |       | $                       | 162,394    |                            |       | $                  | 9,929      |               |       | $                                | 46,147     |   | $ | 44,004 |   |   | $ | 62,314 |   |   |

----

1)               Asof December 31, 2006, we had $2.4 million in debt obligationsassociated with our equipment additions. All existing debt agreements as of December 31,2006 are secured by the equipment financed, bear interest at rates in a rangeof 9% to 12.2% and are due in monthly installments through 2010.

2)               DuringMay 2004, we initiated a sublease of approximately 15,000 square feet ofour premises to a tenant for a period of two years. The sublease was amended inSeptember 2005 to extend term for an additional year. The facilities leaseobligations above are reflective of the sublease income stream of approximately$276,000.

3)               Thepayments above also reflect the remaining twelve years of the lease term.

**Item 7A.Quantitative and Qualitative Disclosures about Market Risk**

The primary objective of our investment activities isto preserve principal while at the same time maximizing the income we receivefrom our investments without significantly increasing risk. Some of thesecurities in which we invest may have market risk. This means that a change inprevailing interest rates may cause the fair value amount of the investment tofluctuate. For example, if we hold a security that was issued with a fixedinterest rate at the then-prevailing rate and the prevailing interest ratelater rises, the market value amount of our investment will decline. Tominimize this risk in the future, we intend to maintain our portfolio of cashequivalents and available-for-sale securities in a variety of securities,including money market funds and government and non-government debt securities.In 2006, 2005 and 2004, we maintained an investment portfolio primarily inmoney market funds, federal agency securities, and corporate bonds and notes.Due to the primarily short-term nature of these investments, we believe we donot have a material exposure to interest rate risk arising from ourinvestments. Therefore, no quantitative tabular disclosure is provided.

We have operated primarily in the United States, andall funding activities with our collaborators to date have been made in U.S.dollars. Accordingly, we have not had any exposure to foreign currency ratefluctuations.

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**Item8. Financial Statements and Supplementary Data**

**INDEX TO FINANCIALSTATEMENTSRigel Pharmaceuticals, Inc.**

|                                                           | ** ** | **Page** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|
| Reports of Independent Registered Public Accounting  Firm |       | 38       |       |
| Balance Sheets                                            |       | 40       |       |
| Statements of Operations                                  |       | 41       |       |
| Statement of Stockholders’ Equity                    |       | 42       |       |
| Statements of Cash Flows                                  |       | 43       |       |
| Notes to  Financial Statements                            |       | 44       |       |

 

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**Report ofIndependent Registered Public Accounting Firm**

The Board of Directors and StockholdersRigel Pharmaceuticals, Inc.

We have audited the accompanying balance sheets ofRigel Pharmaceuticals, Inc. as of December 31, 2006 and 2005, and therelated statements of operations, stockholders’ equity, and cash flows for eachof the three years in the period ended December 31, 2006. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position of RigelPharmaceuticals, Inc. at December 31, 2006 and 2005, and the resultsof its operations and its cash flows for each of the three years in the periodended December 31, 2006, in conformity with U.S. generally acceptedaccounting principles.

As discussed in Note 1 to the financial statements,Rigel Pharmaceuticals, Inc. changed its method of accounting forshare-based compensation in 2006.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of RigelPharmaceuticals, Inc.’s internal control over financial reporting as of December 31,2006, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated March 6, 2007 expressed an unqualified opinionthereon.

|                            | /s/ Ernst & Young LLP |
|----------------------------|--------------------------------|
| **Palo  Alto, California** |                           |
| March 6, 2007         |                           |

 

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**Report ofIndependent Registered Public Accounting Firm**

The Board of Directors and StockholdersRigel Pharmaceuticals, Inc.

We have audited management’sassessment, included in the accompanying “Management’s Report on InternalControl Over Financial Reporting”, that Rigel Pharmaceuticals, Inc.maintained effective internal control over financial reporting as of December 31,2006, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). Rigel Pharmaceutical, Inc.’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the company’s internalcontrol over financial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management’sassessment that Rigel Pharmaceuticals, Inc. maintained effective internalcontrol over financial reporting as of December 31, 2006, is fairlystated, in all material respects, based on the COSO criteria. Also, in ouropinion, Rigel Pharmaceuticals, Inc. maintained, in all material respects,effective internal control over financial reporting as of December 31,2006, based on the COSO criteria.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the balance sheets of RigelPharmaceutical, Inc. as of December 31, 2006 and 2005, and therelated statements of operations, stockholders’ equity, and cash flows for eachof the three years in the period ended December 31, 2006 of RigelPharmaceuticals, Inc. and our report dated March 6, 2007 expressed anunqualified opinion thereon.

|                                                |   | /s/ Ernst & Young LLP |
|------------------------------------------------|--------|--------------------------------|
| **Palo  Alto, California  March 6, 2007** |   |                           |

 

39

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**RIGEL PHARMACEUTICALS, INC.BALANCE SHEETS(In thousands, except share and per share amounts)**

| ** **                                                                                                                                                                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| **Assets**                                                                                                                                                                                   | ** ** |                  | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current assets:                                                                                                                                                                              |       |                  |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                    |       |                  | $          | 47,727                |       |   |   | $ | 76,779 |   |   |
| Available-for-sale securities                                                                                                                                                                |       |                  | 56,744     |                  |       |   | 61,417 |   |   |
| Accounts receivable                                                                                                                                                                          |       |                  | 1,104      |                  |       |   | 1,050 |   |   |
| Other receivables                                                                                                                                                                            |       |                  | 286        |                  |       |   | 777 |   |   |
| Prepaid expenses and other current assets                                                                                                                                                    |       |                  | 2,153      |                  |       |   | 2,573 |   |   |
| Total current assets                                                                                                                                                                         |       |                  | 108,014    |                  |       |   | 142,596 |   |   |
| Property and  equipment, net                                                                                                                                                                 |       |                  | 2,975      |                  |       |   | 3,457 |   |   |
| Other assets                                                                                                                                                                                 |       |                  | 2,251      |                  |       |   | 1,615 |   |   |
|                                                                                                                                                                                         |       |                  | $          | 113,240               |       |   |   | $ | 147,668 |   |   |
| **Liabilities and stockholders’  equity**                                                                                                                                               |       |                  |       |                  |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                         |       |                  |       |                  |       |   |   |   |   |
| Accounts payable                                                                                                                                                                             |       |                  | $          | 1,957                 |       |   |   | $ | 2,497 |   |   |
| Accrued compensation                                                                                                                                                                         |       |                  | 3,060      |                  |       |   | 2,189 |   |   |
| Other accrued liabilities                                                                                                                                                                    |       |                  | 1,886      |                  |       |   | 2,324 |   |   |
| Deferred revenue                                                                                                                                                                             |       |                  | 3,066      |                  |       |   | 15,567 |   |   |
| Capital lease obligations                                                                                                                                                                    |       |                  | 1,269      |                  |       |   | 1,070 |   |   |
| Total current liabilities                                                                                                                                                                    |       |                  | 11,238     |                  |       |   | 23,647 |   |   |
| Long-term portion  of capital lease obligations                                                                                                                                              |       |                  | 1,082      |                  |       |   | 1,132 |   |   |
| Long-term portion  of deferred revenue                                                                                                                                                       |       |                  | —     |                  |       |   | 2,771 |   |   |
| Long-term portion  of deferred rent                                                                                                                                                          |       |                  | 13,328     |                  |       |   | 11,121 |   |   |
| Other long-term  liabilities                                                                                                                                                                 |       |                  | 363        |                  |       |   | 409 |   |   |
| Commitments                                                                                                                                                                                  |       |                  |       |                  |       |   |   |   |   |
| Stockholders’ equity:                                                                                                                                                                   |       |                  |       |                  |       |   |   |   |   |
| Common stock,  $0.001 par value; 100,000,000 shares authorized; 25,180,687 and 24,814,671  shares issued and outstanding on December 31, 2006 and December 31,  2005, respectively |       |                  | 25         |                  |       |   | 25 |   |   |
| Additional  paid-in capital                                                                                                                                                                  |       |                  | 382,350    |                  |       |   | 366,203 |   |   |
| Deferred stock  compensation                                                                                                                                                                 |       |                  | —     |                  |       |   | (26 | ) |   |
| Accumulated other  comprehensive income/(loss)                                                                                                                                               |       |                  | 13         |                  |       |   | (92 | ) |   |
| Accumulated  deficit                                                                                                                                                                         |       |                  | (295,159   | )                     |       |   | (257,522 | ) |   |
| Total  stockholders’ equity                                                                                                                                                             |       |                  | 87,229     |                  |       |   | 108,588 |   |   |
|                                                                                                                                                                                         |       |                  | $          | 113,240               |       |   |   | $ | 147,668 |   |   |

 

See accompanying notes

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**RIGELPHARMACEUTICALS, INC.STATEMENTS OF OPERATIONS(In thousands, except per share amounts)**

| ** **                                                                              | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                              | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Contract revenues  from collaborations                                                  |       | $                                           | 33,473     |   | $ | 16,526 |   | $ | 4,733 |   |
| Costs and expenses:                                                                     |       |                                        |       |   |   |   |   |
| Research and development                                                                |       | 56,968                                      |       | 52,038 |   | 48,523 |   |
| General and administrative                                                              |       | 19,552                                      |       | 12,410 |   | 13,077 |   |
|                                                                                    |       | 76,520                                      |       | 64,448 |   | 61,600 |   |
| Loss from  operations                                                                   |       | (43,047                                     | )          | (47,922 | ) | (56,867 | ) |
| Loss on  disposal/sale of property and equipment                                        |       | —                                      |       | — |   | (30 | ) |
| Interest income                                                                         |       | 5,700                                       |       | 2,942 |   | 966 |   |
| Interest expense                                                                        |       | (290                                        | )          | (276 | ) | (324 | ) |
| Net loss                                                                                |       | $                                           | (37,637    | ) | $ | (45,256 | ) | $ | (56,255 | ) |
| Net loss per  common share, basic and diluted                                           |       | $                                           | (1.51      | ) | $ | (2.07 | ) | $ | (3.12 | ) |
| Weighted average shares  used in computing net loss per common share, basic and diluted |       | 24,936                                      |       | 21,857 |   | 18,053 |   |

 

See accompanying notes.

41

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**RIGELPHARMACEUTICALS, INC.STATEMENT OF STOCKHOLDERS’ EQUITY(In thousands, except per share and per share amounts)**

| ** **                                                                                                    | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **   | ** ** | ** **             | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|------------------------|------------|--------------|------------|------------------------|------------|------------|------------|
| ** **                                                                                                    | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | **Deferred**      | ** ** | **Other**              | ** ** | ** **   | ** ** | ** **             | ** ** | **Total**  | ** ** |
| ** **                                                                                                    | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Stock**      | ** ** | **Comprehensive** | ** ** | **Accumulated**        | ** ** | **Treasury** | ** ** | **Stockholders’** | ** ** |
| ** **                                                                                                    | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Compensation**  | ** ** | **Income (Loss)** | ** ** | **Deficit**  | ** ** | **Stock**              | ** ** | **Equity** | ** ** |
| Balance at December 31, 2003                                                                             |       | 14,828,546            |       |        | $          | 15             |       |              |       | $                      | 196,215    |         |       |                   | $          | (200       | )          |   |   | $ | (13 | ) |   |   | $ | (156,011 | ) |   |   | $ | (33 | ) |   |   | $ | 39,973 |   |   |
| Net loss                                                                                                      |       | —                |       |        | —     |           |       |              | —     |                   |       |         | —     |                   |       |       | —     |   |   |   | (56,255 | ) |   |   | — |   |   |   | (56,255 | ) |   |
| Change in unrealized loss on available-for-sale securities                                                    |       |                  |       |        |       |           |       |              |       |                   |       |         |       |                   |       |       | (207       | ) |   |   |   |   |   |   |   |   |   |   | (207 | ) |   |
| Comprehensive loss                                                                                            |       |                  |       |        |       |           |       |              |       |                   |       |         |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | (56,462 | ) |   |
| Issuance of common stock at $20.00 per share for cash, net of  issuance costs                                 |       | 3,135,075             |       |        | 3          |           |       |              | 58,338     |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 58,341 |   |   |
| Issuance of common stock upon exercise of options and participation  in Purchase Plan                         |       | 227,892               |       |        | —     |           |       |              | 1,884      |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 1,884 |   |   |
| Issuance of common stock upon cash exercise of warrants at $5.76                                              |       | 1,041,666             |       |        | 1          |           |       |              | 6,000      |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 6,001 |   |   |
| Issuance of common stock upon net exercise of warrants at $5.76                                               |       | 415,687               |       |        | 1          |           |       |              | —     |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |
| Issuance of common stock upon net exercise of warrants                                                        |       | 12,429                |       |        | —     |           |       |              | —     |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Grant of treasury stock to employees                                                                          |       | —                |       |        | —     |           |       |              | 39         |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | 33 |   |   |   | 72 |   |   |
| Compensation expense related to options granted to consultants,  repriced options, and an option modification |       | —                |       |        | —     |           |       |              | 2,289      |                   |       |         | 75         |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 2,364 |   |   |
| Deferred stock compensation related to option modification                                                    |       | —                |       |        | —     |           |       |              | 58         |                   |       |         | (58        | )                      |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Amortization of deferred stock compensation,                                                                  |       | —                |       |        | —     |           |       |              | —     |                   |       |         | 127        |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 127 |   |   |
| Balance at December 31, 2004                                                                             |       | 19,661,295            |       |        | 20         |           |       |              | 264,823    |                   |       |         | (56        | )                      |       |       | (220       | ) |   |   | (212,266 | ) |   |   | — |   |   |   | 52,301 |   |   |
| Net loss                                                                                                      |       | —                |       |        | —     |           |       |              | —     |                   |       |         | —     |                   |       |       | —     |   |   |   | (45,256 | ) |   |   | — |   |   |   | (45,256 | ) |   |
| Change in unrealized loss on available-for-sale securities                                                    |       | —                |       |        | —     |           |       |              | —     |                   |       |         | —     |                   |       |       | 128        |   |   |   | — |   |   |   | — |   |   |   | 128 |   |   |
| Comprehensive loss                                                                                            |       |                  |       |        |       |           |       |              |       |                   |       |         |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | (45,128 | ) |   |
| Issuance of common stock at $20.75 per share for cash, net of  issuance costs                                 |       | 4,197,500             |       |        | 4          |           |       |              | 81,586     |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 81,590 |   |   |
| Issuance of common stock  upon exercise of options, participation in Purchase Plan                            |       |                  |       |        |       |           |       |              |       |                   |       |         |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and net exercise of a warrant                                                                                 |       | 219,164               |       |        | —     |           |       |              | 1,915      |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 1,915 |   |   |
| Issuance of common stock at $27.47 per share to Merck Serono                                                  |       | 546,018               |       |        | 1          |           |       |              | 14,999     |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 15,000 |   |   |
| Issuance of common stock at $26.22 per share to Pfizer                                                        |       | 190,694               |       |        | —     |           |       |              | 5,000      |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 5,000 |   |   |
| Compensation expense  related to                                                                              |       |                  |       |        |       |           |       |              |       |                   |       |         |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| options granted to consultants, repriced options, and an option  modification                                 |       | —                |       |        | —     |           |       |              | (2,120     | )                      |       |         |       |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | (2,120 | ) |   |
| Amortization of deferred stock compensation,                                                                  |       | —                |       |        | —     |           |       |              | —     |                   |       |         | 30         |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 30 |   |   |
| Balance at December 31, 2005                                                                             |       | 24,814,671            |       |        | 25         |           |       |              | 366,203    |                   |       |         | (26        | )                      |       |       | (92        | ) |   |   | (257,522 | ) |   |   | — |   |   |   | 108,588 |   |   |
| Net loss                                                                                                      |       | —                |       |        | —     |           |       |              | —     |                   |       |         | —     |                   |       |       | —     |   |   |   | (37,637 | ) |   |   | — |   |   |   | (37,637 | ) |   |
| Change in unrealized loss on available-for-sale securities                                                    |       | —                |       |        | —     |           |       |              | —     |                   |       |         | —     |                   |       |       | 105        |   |   |   | — |   |   |   | — |   |   |   | 105 |   |   |
| Comprehensive loss                                                                                            |       |                  |       |        |       |           |       |              |       |                   |       |         |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | (37,532 | ) |   |
| Issuance of common stock upon exercise of options and participation  in Purchase Plan                         |       | 366,016               |       |        | —     |           |       |              | 2,793      |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   |   |   |   |   | 2,793 |   |   |
| Stock compensation expense related to options granted to consultants,  officers, directors and employees      |       | —                |       |        | —     |           |       |              | 11,298     |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   |   |   |   |   | 11,298 |   |   |
| Stock compensation expenses related to ESPP                                                                   |       | —                |       |        | —     |           |       |              | 1,281      |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   |   |   |   |   | 1,281 |   |   |
| Reversal of deferred compensation balance due to adoption of SFAS 123  (R)                                    |       | —                |       |        | —     |           |       |              | (26        | )                      |       |         | 26         |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Warrants issued with lease amendment                                                                          |       | —                |       |        | —     |           |       |              | 801        |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   |   |   |   |   | 801 |   |   |
| Balance at December 31, 2006                                                                             |       | 25,180,687            |       |        | $          | 25             |       |              |       | $                      | 382,350    |         |       |                   | $          | —     |       |   |   | $ | 13 |   |   |   | $ | (295,159 | ) |   |   | $ | — |   |   |   | $ | 87,229 |   |   |

 

See accompanying notes.

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**RIGELPHARMACEUTICALS, INC.STATEMENTS OF CASH FLOWS (In thousands)**

| ** **                                                                   | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Operating activities**                                                     |       |                                        |       |   |   |   |   |
| Net loss                                                                     |       | $                                           | (37,637    | ) | $ | (45,256 | ) | $ | (56,255 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                                |       | 1,418                                       |       | 1,150 |   | 2,246 |   |
| Amortization of deferred stock compensation, net                             |       | —                                      |       | 30 |   | 127 |   |
| Non-cash stock compensation expense (recovery)                               |       | 12,579                                      |       | (2,120 | ) | 2,367 |   |
| Issuances of equity instruments for noncash benefits                         |       | —                                      |       | — |   | 72 |   |
| Loss on disposal/sale of property and equipment                              |       | —                                      |       | — |   | 30 |   |
| Changes in assets  and liabilities:                                          |       |                                        |       |   |   |   |   |
| Accounts receivable                                                          |       | (54                                         | )          | (1,050 | ) | 500 |   |
| Other receivables                                                            |       | 491                                         |       | (78 | ) | 88 |   |
| Prepaid expenses and other current assets                                    |       | 420                                         |       | (460 | ) | 61 |   |
| Other assets                                                                 |       | 165                                         |       | 155 |   | 249 |   |
| Accounts payable                                                             |       | (540                                        | )          | 552 |   | 567 |   |
| Accrued compensation                                                         |       | 871                                         |       | 550 |   | 928 |   |
| Other accrued liabilities                                                    |       | (438                                        | )          | 769 |   | 91 |   |
| Deferred revenue                                                             |       | (15,272                                     | )          | 10,430 |   | 5,120 |   |
| Deferred rent and other long term liabilities                                |       | 2,161                                       |       | 158 |   | 5,657 |   |
| Net cash used in operating activities                                        |       | (35,836                                     | )          | (35,170 | ) | (38,152 | ) |
| **Investing  activities**                                                    |       |                                        |       |   |   |   |   |
| Purchases of available-for-sale securities                                   |       | (85,209                                     | )          | (89,584 | ) | (96,436 | ) |
| Maturities of available-for-sale securities                                  |       | 89,987                                      |       | 89,227 |   | 72,176 |   |
| Proceeds from the sale of property and equipment                             |       | 83                                          |       | — |   | — |   |
| Capital expenditures                                                         |       | (913                                        | )          | (1,794 | ) | (1,545 | ) |
| Net cash provided by (used in) investing activities                          |       | 3,948                                       |       | (2,151 | ) | (25,805 | ) |
| **Financing  activities**                                                    |       |                                        |       |   |   |   |   |
| Proceeds from capital lease financing                                        |       | 1,449                                       |       | 1,656 |   | 831 |   |
| Payments on capital lease obligations                                        |       | (1,406                                      | )          | (1,556 | ) | (2,224 | ) |
| Net proceeds from issuances of common stock and  warrants                    |       | 2,793                                       |       | 103,505 |   | 66,224 |   |
| Net cash provided by financing activities                                    |       | 2,836                                       |       | 103,605 |   | 64,831 |   |
| Net (decrease)  increase in cash and cash equivalents                        |       | (29,052                                     | )          | 66,284 |   | 874 |   |
| Cash and cash  equivalents at beginning of period                            |       | 76,779                                      |       | 10,495 |   | 9,621 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                           | 47,727     |   | $ | 76,779 |   | $ | 10,495 |   |
| **Supplemental  disclosure of cash flow information**                        |       |                                        |       |   |   |   |   |
| Interest paid                                                                |       | $                                           | 247        |   | $ | 210 |   | $ | 324 |   |
| **Schedule  of non cash transactions**                                       |       |                                        |       |   |   |   |   |
| Deferred stock  compensation                                                 |       | $                                           | —     |   | $ | — |   | $ | 58 |   |
| Issuance of warrants  with lease amendment                                   |       | $                                           | 801        |   | $ | — |   | $ | — |   |

 

See accompanying notes.

43

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS**

In this annual report on Form 10-K,“Rigel,” “we,” “us” and “our” refer to Rigel Pharmaceuticals, Inc. “commonstock” refers to Rigel’s common stock, par value $0.001 per share.

**1. SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

**Nature ofoperations and basis of presentation**

We were incorporated inthe state of Delaware on June 14, 1996. We are engaged in the discoveryand development of novel, small-molecule drugs for the treatment ofinflammatory diseases, cancer and viral diseases.

**Financial StatementPreparation**

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

Comprehensive net loss didnot differ materially from the net loss as reported.

**Stock Award Plans**

We have two stock option plans, the 2000 EquityIncentive Plan and 2000 Non-Employee Directors Stock Option Plan, that providefor granting to our officers, directors and all other employees and consultantsoptions to purchase shares of our common stock. Under the plans, we may issuenon-qualified options or incentive stock options. We also have an employeestock purchase plan, or ESPP, where eligible employees can purchase shares ofour common stock at a price per share equal to the lesser of 85% of the fairmarket value on the first day of the offering period or 85% of the fair marketvalue on the purchase date. The benefits provided under these plans areshare-based payments subject to the provisions of Statement of FinancialAccounting Standards, or SFAS, No. 123(R), “Share-Based Payment (Revised2004),” or SFAS 123(R), and guidance under the Securities and Exchange Commission’sStaff Accounting Bulletin 107, or SAB No. 107.

Effective January 1,2006, we adopted the provisions of SFAS 123(R) using the modifiedprospective application transition method. Under this method, the share-basedcompensation cost recognized beginning January 1, 2006 includescompensation cost for (i) all share-based payments granted prior to, butnot vested as of January 1, 2006, based on the grant date fair valueoriginally estimated in accordance with the provisions of SFAS No. 123, “Accountingfor Stock-Based Compensation,” or SFAS 123, and calculated for pro formadisclosures under SFAS No. 148, “Accounting for Stock-Based Compensation—Transitionand Disclosure,” or SFAS 148, and (ii) all share-based payments grantedsubsequent to January 1, 2006, based on the grant date fair valueestimated in accordance with the provisions of SFAS 123(R). Compensation costunder SFAS 123(R) for awards granted prior to January 1, 2006 isrecognized using an accelerated method pursuant to the Financial AccountingStandards Board, or FASB, Interpretation No. 28, “Accounting for StockAppreciation Rights and Other Variable Stock Option or Award Plans,” or FIN 28.For awards granted after January 1, 2006, we have adopted the use of thestraight-line attribution method over the requisite service period for theentire award. Results of prior periods do not reflect any restated amounts, andwe had no cumulative effect adjustment upon adoption of SFAS No. 123(R) underthe modified prospective method.

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

***Impact of the Adoption of SFAS 123(R)***

Totalstock-based compensation expense related to all of the Company’s share-basedawards that we recognized for the years ended December 31, 2006, 2005 and2004 was comprised as follows (in thousands, except per share amounts):

| ** **                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Research and  development                              |       | $                                          | 6,515      |   | $ | (1,467 | ) | $ | 2,000 |   |
| General and  administrative                            |       | 6,064                                      |       | (623 | ) | 566 |   |
| Stock-based  compensation expense (recovery)           |       | $                                          | 12,579     |   | $ | (2,090 | ) | $ | 2,566 |   |
| Stock-based compensation  expense (recovery) per share |       |                                       |       |   |   |   |   |
| Basic and diluted                                      |       | $                                          | 0.50       |   | $ | (0.10 | ) | $ | 0.14 |   |

 

We recorded approximately $12.6 million in stock-basedcompensation expense for the year ended December 31, 2006, consisting ofapproximately $12.3 million in stock-based awards granted to officers,directors and all other employees from our stock option plans and ESPP, andapproximately $267,000 from options granted to consultants. Pursuant to SFAS123(R), we are required to estimate the amount of expected forfeitures whencalculating compensation costs, instead of accounting for forfeitures asincurred, which was our previous method. Our estimated annual weighted averageforfeiture rate was 7.9% as of December 31, 2006. We adjust ourstock-based compensation expense as actual forfeitures occur, review ourestimated forfeiture rates each quarter and make changes to our estimate asappropriate.

For the year ended December 31, 2006, we recordedstock-based compensation expense of approximately $267,000, associated withoptions granted to consultants, reflecting the fair value and periodic fairvalue remeasurement of outstanding consultant options under Emerging IssuesTask Force No. 96-18, “Accounting for Equity Instruments That areIssued to Other Than Employees for Acquiring, or in Conjunction with SellingGoods or Services,” or EITF 96-18.  The valuation is based upon the current marketvalue of our common stock and other assumptions, including the expected futurevolatility of our stock price, risk-free interest rate and expected term. Forconsultant options granted in 2006, we amortized stock-based compensation usinga straight-line attribution method consistent with the method used foremployees and with the attribution election we made upon adoption of SFAS123(R). For options granted prior to January 1, 2006, we used theaccelerated method for expensing stock-based compensation, which was the methodwe used prior to adoption. We recorded stock-based compensation recovery ofapproximately $232,000 and stock-based compensation expense of approximately$430,000 for the years ended December 31, 2005 and 2004, respectively,relating to consultant options. We expect to see continued fluctuations in thefuture as a portion of these options are remeasured based on the changes in thecurrent market price of our common stock.

In 2005, we recorded charges associated with the stockoptions that were eligible for re-pricing under a tender offer initiated in June 2003.All replacement options, as well as the eligible options that were notsurrendered under the original offer to exchange, were treated for financialreporting purposes as variable awards. Therefore, for the period prior toadoption of SFAS 123(R), we recorded non-cash charges, generally for theintrinsic value of the options, in accordance with Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees,” or APB 25,utilizing the accelerated vesting method, reflecting increases and decreases(down to, but not below, the exercise price) in the price of our common 

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

stock as compensationexpense (recovery) in connection with the replacement options and the eligibleoptions that were not exchanged. For the year ended December 31, 2005, werecorded a non-cash compensation recovery of approximately $1.9 million relatedto all employee options eligible for replacement. The recovery resulted fromthe decrease in the market price of our common stock during 2005. For the yearended December 31, 2004, we recorded a non-cash compensation charge ofapproximately $1.9 million related to all employee options eligible forreplacement. The amount recorded was attributable to the increases in themarket price of our common stock during 2004. For periods after the adoption ofSFAS 123(R), we continue to account for the vested portion of the repricedoptions in  accordance with theprovisions of SFAS 123. In August 2006, our board of directors granted newoptions to officers, directors and all other employees and consultants who heldthese repriced options that expired in August 2006. We grantedapproximately 179,000 options with an exercise price of $9.56 per share. Theoptions vested 50% at the date of the grant and the remaining 50% will vestmonthly over two years. We recorded stock-based compensation expense ofapproximately $689,000, in accordance with SFAS 123(R), relating to these newoptions for the year ended December 31, 2006.

Under SFAS 123(R), the fair value of each option awardis estimated on the date of grant using the Black-Scholes option pricing model.We have segregated option awards into three homogenous groups (i.e., Officersand Directors, All Other Employees and Consultants) for purposes of determiningfair values of options.

We determinedweighted-average valuation assumptions separately for the groups as follows:

·                    Volatility -  We estimated volatility using the historicalshare price performance over the expected life of the option up to the pointwhere we have historical market data. As our publicly listed options are notactively traded, implied volatility was not representative of our currentvolatility. We also considered other factors such as our current clinicaltrials and other company activities that may affect volatility of our stock inthe future but determined that at this time, the historical volatility was moreindicative of our expected future stock performance.

·                    Expected term - We worked withvarious data points to determine the most applicable expected term for eachoption group. The data points included: (1) expected term of the optionsfrom option grant date to exercise date; (2) cancellation term of optionsfrom grant date to cancellation date and excluding unvested option forfeituresfrom the determination; and (3) term of options that remain outstandingfrom grant date to the end of the reporting period. The analysis of the abovedata points gave us a range of expected terms to consider; however, we alsoconsidered the vesting schedules of the options granted and factors surroundingexercise behavior of our groups, our current market price and company activitythat may affect our market price. In addition, we also considered the vestingschedules of the options, the optionee type (i.e., officers and directors, allother employees and consultants) and other factors that may affect the expectedterm of the option. For options granted to consultants, we use the contractualterm of the option, which is generally ten years, for the initial valuation ofthe option and the remaining contractual term of the option for the succeedingyears.

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

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

·                    Forfeiture rate - We estimated theforfeiture rate using our historical experience with pre-vesting options. Ourannual weighted-average forfeiture rate was approximately 7.9% as of December 31,2006. We review our estimated forfeiture rates each quarter and make changes asfactors affecting our forfeiture rate calculations and assumptions change.

·                    Dividend yield - The expecteddividend yield is 0% as we have not paid and do not expect to pay dividends.

The following tablesummarizes the weighted-average assumptions relating to our employee optionsfor the years ended December 31, 2006, 2005 and 2004, as permitted underSFAS 123(R) for 2006 and SFAS 123 for 2005 and 2004:

| ** **                | ** ** | **Stock Option Plans Year Ended December 31,** | ** ** |
|---------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rate  |       | 4.7                                                                          | %          | 4.2 | % | 2.6 | % |
| Expected life (in  years) |       | 4.4                                                                          |       | 2.8 |   | 3.1 |   |
| Dividend yield            |       | 0.0                                                                          | %          | 0.0 | % | 0.0 | % |
| Expected volatility       |       | 95.6                                                                         | %          | 86.8 | % | 85.0 | % |

 

Options are priced at themarket price of our common stock on the date of grant, become exercisable atvarying dates and generally expire ten years from the date of grant. At December 31,2006, options to purchase 1,476,206 shares of common stock were available forgrant under our stock option plans.

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

***Employee Stock Purchase Plan***

Thefair value of awards granted under our ESPP is estimated on the date of grantusing the Black-Scholes option pricing model, which uses the weighted-averageassumptions set forth in the table below. Our ESPP provides for a twenty-fourmonth offering period comprised of four six-month purchase periods with alook-back option. A look-back option is a provision in our ESPP where eligible employeescan purchase shares of our common stock at a price per share equal to thelesser of 85% of the fair market value on the first day of the offering periodor 85% of the fair market value on the purchase date. The plan also includes afeature whereby a new offering period begins when the fair market value of ourcommon stock on a purchase date during an offering falls below the fair marketvalue of our common stock on the first day of such offering period. Participantsare automatically enrolled in the new offering period. Expected volatilitiesare based on historical volatility of our stock. Expected term represents thepurchase periods within our offering period. The risk-free rate for periodswithin the contractual life of the option is based on U.S. Treasury constantmaturity rates. Stock-basedcompensation expense relating to our ESPP is recognized according to the FASBTechnical Bulletin No. 97-1, “Accounting under Statement 123 forCertain Employee Stock Purchase Plans with a Look-back Option,” or FTB 97-1.As of December 31, 2006, there were approximately 68,000 shares in reservefor future issuance under the ESPP. The following table summarizes theweighted-average assumptions relating to our ESPP for the years ended Deceember31, 2006, 2005 and 2004:

| ** **                | ** ** | **Employee Stock  Purchase Plan  Year Ended  December 31,** | ** ** |
|---------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rate  |       | 4.6                                                                             | %          | 4.1 | % | 3.5 | % |
| Expected life (in  years) |       | 1.2                                                                             |       | 0.5 |   | 0.6 |   |
| Dividend yield            |       | 0.0                                                                             | %          | 0.0 | % | 0.0 | % |
| Expected volatility       |       | 109.9                                                                           | %          | 88.3 | % | 85.0 | % |

 

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

Thefollowing table summarizes activity under our equity incentive and stock optionplans as of December 31, 2006 (in thousands, except per share amounts):

| ** **                                             | ** ** | **Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual Term** | ** ** | **Aggregate   Intrinsic Value** | ** ** |
|--------------------------------------------------------|------------|------------|------------|-------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                             | ** ** | ** ** | ** ** | ** **                                | ** ** | ***(Years)***                                          | ** ** | ** **                                | ** ** |
| Outstanding at  December 31, 2005                 |       | 3,893,219  |       |                                      | $          | 15.98                                                  |       |                                      |       |   |   |   |   |   |   |   |
| Granted                                                |       | 1,229,967  |       |                                      | $          | 8.79                                                   |       |                                      |       |   |   |   |   |   |   |   |
| Exercised                                              |       | (206,636   | )          |                                      | $          | 7.96                                                   |       |                                      |       |   |   |   |   |   |   |   |
| Forfeited/Expired/Cancelled                            |       | (511,339   | )          |                                      | $          | 14.72                                                  |       |                                      |       |   |   |   |   |   |   |   |
| Outstanding at  December 31, 2006                 |       | 4,405,211  |       |                                      | $          | 14.50                                                  |       |                                      |       | 7.87 |   |   |   | $ | 8,653,135 |   |   |
| Vested and  expected to vest at December 31, 2006 |       | 4,276,208  |       |                                      | $          | 14.44                                                  |       |                                      |       |   |   |   |   |   |   |   |
| Exercisable at  December 31, 2006                 |       | 2,768,121  |       |                                      | $          | 13.39                                                  |       |                                      |       | 7.46 |   |   |   | $ | 6,569,970 |   |   |

 

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

The aggregate intrinsicvalue is calculated as the difference between the exercise price of theunderlying awards and the quoted price of our common stock for the options toacquire 2.4 million shares that were in-the-money at December 31, 2006.During the years ended December 31, 2006, 2005 and 2004, the aggregateintrinsic value of options exercised under our stock option plans wereapproximately $470,000, $1.7 million and $1.9 million, respectively, determinedas of the date of option exercise. As of December 31, 2006, there wasapproximately $9.4 million of total unrecognized compensation cost, net offorfeitures, related to unvested share-based compensation arrangements grantedunder our stock option plans and $380,000 of total unamortized compensationcost related to our ESPP. These costs are expected to be recognized over aweighted-average period of 1.62 years. We also had approximately 1.6 million ofunvested stock options at December 31, 2006. Future option grants andtheir valuation will increase our compensation cost in the future as theoptions are granted, valued and expensed ratably according to their vestingperiods. The weighted average grant-date fair values of options granted in theyear ended December 31, 2006, 2005 and 2004 were $6.24, $12.42 and $11.12,respectively.

***Pro FormaInformation under SFAS 123 for Periods Prior to Fiscal 2006***

Prior to adopting SFAS 123(R) on January 1,2006, we accounted for equity-based employee compensation costs under therecognition and measurement principles of APB 25. Under APB 25, the intrinsicvalue method of accounting, no compensation expense is recognized, because theexercise price of our employee stock options equals the market price of theunderlying stock on the date of grant. Pro forma information regarding net lossand net loss per share was determined as if we had accounted for issuancesunder our stock option plans and ESPP under the fair value method prescribed bySFAS 123, as amended by SFAS No. 148. The fair value for theseoptions was estimated at the date of grant using the Black-Scholes optionpricing model. See the weighted-average assumptions discussed above.

For purposes of pro formadisclosures, the estimated fair value of the options was amortized to expenseover the vesting period of the options prior to adopting SFAS 123(R). Our proforma information is as follows (in thousands, except per share amounts):

| ** **                                                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2005**                                    | ** ** | ** ** | ** ** | **2004** | ** ** |
| Net loss—as  reported:                                                                                       |       | $                                           | (45,256    | ) |   |   | $(56,255 | ) |
| Add (Deduct):  Total stock-based employee compensation (recovery)/expense determined under  APB 25                |       | (1,859                                      | )          |   |   | 2,135 |   |
| Add: Total  stock-based employee compensation expense determined under the fair value  based method of all awards |       | 9,401                                       |       |   |   | 8,506 |   |
| Pro forma net  loss                                                                                               |       | $                                           | (56,516    | ) |   |   | $ | (62,626 | ) |
| Basic and diluted  net loss per common share:                                                                     |       |                                        |       |   |   |   |   |
| As reported                                                                                                       |       | $                                           | (2.07      | ) |   |   | $ | (3.12 | ) |
| Pro forma                                                                                                         |       | (2.59                                       | )          |   |   | (3.47 | ) |

 

49

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

**Cash, cashequivalents and available-for-sale securities**

We consider all highly liquid investments in debtsecurities with a remaining maturity from the date of purchase of 90 daysor less to be cash equivalents. Cash equivalents consist of money market funds,corporate debt securities and government agencies. Our short-term investmentsinclude obligations of governmental agencies and corporate debt securities. Bypolicy, we limit the concentration of credit risk by diversifying ourinvestments among a variety of high credit-quality issuers.

All other cash equivalentsand short-term investments are classified as available-for-sale securities.Available-for-sale securities are carried at fair value at December 31,2006 and 2005. Unrealized gains (losses) are reported in stockholders’ equityand included in other comprehensive income (loss). Fair value is estimatedbased on available market information. The cost of securities sold is based onthe specific identification method. For the years ended December 31, 2006,2005 and 2004, we did not have any realized gains and losses onavailable-for-sale securities. See Note 4 for a summary ofavailable-for-sale securities at December 31, 2006 and 2005.

**Fair value offinancial instruments**

Financial instruments,including cash and cash equivalents, accounts receivable, accounts payable,accrued liabilities and accrued compensation are carried at cost or amortizedcost, which management believes approximates fair value.

**Property andequipment**

Property and equipment arestated at cost. Depreciation is calculated using the straight-line method overthe estimated useful lives of the assets, which range from three to sevenyears. Leasehold improvements, if any, are amortized using the straight-linemethod over the estimated useful lives of the assets or the term of the lease,whichever is shorter.

**Revenue recognition**

We recognize revenue from our contract arrangements.Our revenue arrangements with multiple elements are evaluated under EmergingIssues Task Force No. 00-21, *“RevenueArrangements with Multiple Deliverables,”* and are divided intoseparate units of accounting if certain criteria are met, including whether thedelivered element has stand-alone value to the customer and whether there isobjective and reliable evidence of the fair value of the undelivered items. Theconsideration we receive is allocated among the separate units based on theirrespective fair values, and the applicable revenue recognition criteria areapplied to each of the separate units. Advance payments received in excess ofamounts earned are classified as deferred revenue until earned

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

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

Revenues related to collaborative research with ourcorporate collaborators are recognized as research services are performed overthe related development funding periods for each contract. Under theseagreements, we are required to perform research and development activities asspecified in each respective agreement. The payments received are notrefundable and are generally based on a contractual cost per full-timeequivalent employee working on the project. Research and development expensesunder the collaborative research agreements, except for the Merck collaborationsigned in November 2004 related to ubiquitin ligases, approximate orexceed the revenue recognized under such agreements over the term of therespective agreements. For the Merck collaboration, we are recognizing apro-rata portion of the invoicedamounts for funding of our****researchscientists based on the headcount dedicated to the project. It is our policy torecognize revenue based on our level of effort expended, however, revenuerecognized will not exceed amounts billable under the arrangement which correspondsto cash receipts.

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

Royalties will berecognized as earned in accordance with the contract terms when the third partyresults are reliably measurable and collectibility is reasonably assured.

**Research anddevelopment**

Research and developmentexpenses include costs for scientific personnel, supplies, equipment,consultants, research sponsored by us, allocated facility costs, costs relatedto pre-clinical and clinical trials, and stock-based compensationexpense. All such costs are charged to research and development expense asincurred. Collaboration agreements generally specify minimum levels of researcheffort required to be performed by us.

**Segment reporting**

We operate our business inone reportable segment: the discovery and development of novel, small moleculedrugs for the treatment of inflammatory diseases, cancer and other viraldiseases. We primarily operate in the United States.

**Contingencies**

We are subject to claimsrelated to the patent protection of certain of our technologies. We arerequired to assess the likelihood of any adverse judgments or outcomes to thesematters as well as potential ranges of probable losses. A determination of theamount of reserves required, if any, for these contingencies is made aftercareful analysis of each individual issue. The required reserves may change inthe future due to new developments in each matter or changes in approach suchas a change in settlement strategy in dealing with these matters.

**Income Taxes**

We use the asset andliability method to account for income taxes. Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating loss and taxcredit carryforwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to 

51

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

apply totaxable income in the years in which those temporary differences are expectedto be recovered or settled. The effect on deferred tax assets and liabilitiesfrom a change in tax rates is recognized in income in the period the change isenacted. A valuation allowance is established to reduce deferred tax assets toan amount whose realization is more likely than not.

**Net loss per share**

Net loss per share has been computed according toFinancial Accounting Standards Board Statement No. 128, “Earnings PerShare,” which requires disclosure of basic and diluted earnings per share.Basic earnings per share excludes any dilutive effects of options, sharessubject to repurchase, warrants and convertible securities. Diluted earningsper share includes the impact of potentially dilutive securities.

Duringall periods presented, we had securities outstanding, which could potentiallydilute basic earnings per share in the future, but were excluded from thecomputation of diluted net loss per share, as their effect would have beenantidilutive. These outstanding securities consist of the following (inthousands, except per share information):

| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Outstanding  options                         |       | 4,405                 |       | 3,893 |   | 2,750 |   |
| Warrants                                     |       | 175                   |       | 91 |   | 92 |   |
| Weighted average  exercise price of options  |       | $14.50                |       | $15.98 |   | $11.94 |   |
| Weighted average  exercise price of warrants |       | $13.23                |       | $28.39 |   | $28.33 |   |

 

**Recent accountingpronouncements**

In July 2006, the FASB issued FIN 48, “Accountingfor Uncertainty in Income Taxes,” or FIN 48. This interpretation requires thatwe recognize in our financial statements, the impact of a tax position, if thatposition is more likely than not of being sustained in an audit, based on thetechnical merits of the position. The provisions of FIN 48 are effective forfiscal years beginning after December 15, 2006, with the cumulative effectof the change in accounting principle recorded as an adjustment to openingretained earnings. We are currently evaluating the impact of adopting FIN 48 onour financial statements.

In September 2006, the SEC released SAB 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements,” or SAB 108. SAB 108 provides interpretiveguidance on the SEC’s views regarding the process of quantifying materiality offinancial statement misstatements. SAB 108 is effective for fiscal years endingafter November 15, 2006. We adopted SAB 108 for the year ended December 31,2006.

In September 2006,the FASB issued SFAS 157, “Fair Value Measurements,” or SFAS 157. This standarddefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting priniciples, and expands disclosures about fairvalue measurements. SFAS 157 is effective for financial statements issued forfiscal years beginning after November 15, 2007. We are currentlyevaluating the impact of adopting SFAS 157 on our financial statements.

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**2. SPONSORED RESEARCH ANDLICENSE AGREEMENTS**

**Research agreements**

In December 1998, we entered into a researchcollaboration agreement with Janssen Pharmaceutica N.V., a division of Johnsonand Johnson Pharmaceutical and Development, LLC to research and identify noveltargets for drug discovery. At the time we entered into the contract, Johnson &Johnson paid a one-time non-refundable, non-creditable fee and provided supportfor research activities during the research period, which concluded in December 2003.In addition to these fees, we also received various milestones payments.Johnson & Johnson remains obligated to pay us various milestones androyalties in the future if certain conditions are met.

In January 1999, we entered into a two-year collaborativeresearch agreement with Pfizer Inc. to discover and develop variousmolecular targets. Upon signing of the agreement, Pfizer paid a one-time,nonrefundable, noncreditable fee. Under the terms of the contract, Pfizerprovided support for research for two years. In 2001, Pfizer notified us thatit was electing to exercise its option to extend the funded research portion ofthe collaboration one additional year to January 31, 2002 and thenextended it again for one additional month to February 28, 2002. In February 2002,the research phase of our collaboration with Pfizer concluded with Pfizeraccepting a total of seven validated targets. In January 2005, we signed acollaborative research and license agreement with Pfizer for the development ofintrapulmonary products for the treatment of allergic asthma and chronicobstructive pulmonary disease (COPD). The collaboration is primarily focused onour preclinical small molecule compounds, which inhibit IgE receptor signalingin respiratory tract mast cells by blocking the signaling enzyme Syk kinase.The goal of the collaboration is for Pfizer to nominate two of the licensedcompounds in order to commence advanced preclinical development with ourassistance. We will earn milestone payments upon the selection of each of thetwo compounds, as well as in connection with other clinical events androyalties from sales of the resulting products upon marketing approval. Pfizeris responsible for the manufacture of all preclinical and clinical materialsfor each compound/product and all costs associated with development andcommercialization. In connection with this collaboration, Pfizer paid us $10.0million upfront and purchased $5.0 million of our common stock at a premium. Weare amortizing the upfront amount into revenue over 24 months which we considerto be the overall amount of time it will take Pfizer to nominate two of ourcompounds for advanced pre-clinical development. In May 2006, we achievedthe first milestone payment when Pfizer nominated R343 to commence advancedpreclinical development in allergic asthma. Pfizer paid us $5.0 million for theexclusive right to R343 and will be responsible for all development related toR343 going forward.

In May 1999, we entered into a broadcollaboration with Novartis Pharma AG, pursuant to which we and Novartis agreedto work on up to five different research programs to identify various targetsfor drug development. Two programs were initiated in 1999 while the thirdprogram to be conducted at Novartis was initiated on January 1, 2000. In July 2001,we expanded our collaboration with Novartis with the initiation of ourangiogenesis program, the fourth and final program in our Novartiscollaboration as Novartis chose not to exercise its option to add a fifthproject that was to be conducted at Novartis. Pursuant to the expanded Novartiscollaboration, we received a $4.0 million up-front payment from Novartis,which was recognized as revenue ratably through July 2004. We currentlyhave no programs with Novartis in the research phase. Novartis remains obligedto pay us various milestones and royalties in the future if certain conditionsare met.

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**2.SPONSORED RESEARCH AND LICENSE AGREEMENTS (Continued)**

In August 2002, we signed an agreement for acollaboration with Daiichi to pursue research related to a specific target froma novel class of drug targets called ligases that control cancer cellproliferation through protein degradation. Daiichi paid us $0.9 million atthe time we entered into the agreement, three milestone payments totaling$4.6 million, and may become obligated to pay us certain other milestonespayments in the future. The research phase of this three-year collaborationexpired in August 2005. In addition, we are entitled to receive royaltieson any commercialized products to emerge from the collaboration. Under terms ofthe agreement, we retain the rights to co-develop and co-promote certainproducts resulting from this collaboration in North America while Daiichiretains co-development and promotion rights in the remainder of theworld.

In November 2004, we entered into a broadcollaboration agreement with Merck & Co., Inc. to investigateubiquitin ligases, a new class of drug target, to find treatments for cancerand potentially other diseases. At the time we entered into the agreement, wereceived an initial cash payment of $7.6 million and funding for our researchscientists for two and a half years. We are recognizing the upfront paymentratably over the two and a half year term of the research agreement. We arerecognizing a pro-rata portion of the invoiced amounts for funding of ourresearch scientists based on the headcount dedicated to the project. The amountdeferred is currently anticipated to be recognized as revenue at the end of theresearch phase when all of our obligations have been fulfilled under the termsof the contract. As of December 31, 2006, $994,000 remains deferred whichrepresents amounts invoiced to Merck from the initiation of the research termin excess of the required headcount to be allocated to the project through thebalance sheet date. In 2006, we received payments from Merck triggered by theirselection of a fourth target and our achievement of a milestone relating to atarget. We are also eligible to receive milestone payments and royalties in thefuture. Merck is responsible for worldwide development and commercialization ofany resulting compounds and will pay Rigel royalties on future product sales,if any. The collaboration is based on a number of new targets delivered by Merck.In addition, we may nominate our own targets for potential inclusion in thecollaboration.

In October 2005, we entered into a collaborativeresearch and license agreement with Merck Serono granting them an exclusivelicense to develop and commercialize product candidates from our Aurora kinaseinhibitor program. Even though the agreement included a basket of compoundswithin the Aurora kinase inhibitor program, the collaboration and our effortsunder the agreement were focused on R763. We were responsible for all costsassociated with the preparation and filing of an IND for R763 while MerckSerono is responsible for all development of R763 following regulatoryacceptance of the IND and will bear all costs thereafter. In connection with this collaboration, Merck Serono paid us$10.0 million upfront and purchased $15.0 million of our common stock at apremium. We amortized the upfront amount into revenue over the nine months fromthe initiation of the collaboration in October 2005. This was the periodof time that we estimated it would take to perform our deliverables such asassisting Merck Serono with certain studies and activities leading up to theinitiation of the first clinical trial to be run by Merck Serono. As of June 2006,we had completely recognized the upfront amount into revenue as we hadperformed all our deliverables and did not have any further obligations toMerck Serono leading up to the initiation of the first clinical trial.

54

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**2.SPONSORED RESEARCH AND LICENSE AGREEMENTS (Continued)**

DuringFebruary 2006, we received a milestone payment of $5.0 milliontriggered by the regulatory acceptance of the R763 IND in January 2006. InSeptember 2006, we received a $3.0 million milestone payment from MerckSerono in connection with the initiation of the Phase 1 study of R763. We willbe eligible to receive additional milestones, under certain conditions, uponcommencement of a Phase 2 clinical trial for R763, other clinical events,marketing approval and royalties on any future product sales.

**3. SIGNIFICANTCONCENTRATIONS**

For the year ended December 31, 2006, MerckSerono, Pfizer and Merck accounted for 46%, 30% and 24% of total revenues,respectively. For the year ended December 31, 2005, Merck, Pfizer, MerckSerono and Daiichi accounted for 45%, 26%, 14% and 15% of total revenues,respectively. For the year ended December 31, 2004, Daiichi, Novartis andMerck accounted for 56%, 35% and 9% of total revenues, respectively. AtDecember 31, 2006, accounts receivable was comprised of two customers, andat December 31, 2005, accounts receivable was comprised of one customer.Rigel does not require collateral or other securities for accounts receivable.

**4. CASH, CASH EQUIVALENTSAND AVAILABLE-FOR-SALE SECURITIES**

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

| ** **                     | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Checking account               |       |                  | $          | 332                   |       |   |   | $ | 742 |   |   |
| Money market  funds            |       |                  | 4,441      |                  |       |   | 3,421 |   |   |
| Federal agency  securities     |       |                  | 13,463     |                  |       |   | 21,067 |   |   |
| Corporate bonds  and notes     |       |                  | 86,235     |                  |       |   | 112,966 |   |   |
|                           |       |                  | $          | 104,471               |       |   |   | $ | 138,196 |   |   |
| Reported as:                   |       |                  |       |                  |       |   |   |   |   |
| Cash and cash  equivalents     |       |                  | $          | 47,727                |       |   |   | $ | 76,779 |   |   |
| Available-for  sale-securities |       |                  | 56,744     |                  |       |   | 61,417 |   |   |
|                           |       |                  | $          | 104,471               |       |   |   | $ | 138,196 |   |   |

 

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

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

 

| ** **                 | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|----------------------------|------------|---------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                 | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** ** | ** ** |
| **2005**                   | ** ** | ** **    | ** ** | **Cost**       | ** ** | **Gains**      | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| Federal agency  securities |       |          | $          | 17,090         |       |           |       | $          | 1          |   |   |   | $ | (17 | ) |   |   | $ | 17,074 |   |   |
| Corporate bonds  and notes |       |          | 44,419     |           |       |           | 1          |       |       |   | (77 | ) |   |   | 44,343 |   |   |
| Total                      |       |          | $          | 61,509         |       |           |       | $          | 2          |   |   |   | $ | (94 | ) |   |   | $ | 61,417 |   |   |
|                            |            |               |            |                |            |                |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

55

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**4. CASH,CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES (Continued)**

As of December 31,2006, the contractual maturities of our available-for-sale securities were (inthousands):

| ** **                 | ** ** | **Years to Maturity** | ** ** |
|----------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | ** **                      | ** ** | **After One   year** | ** ** |
| ** **                 | ** ** | **Within One**             | ** ** | **through Five** | ** ** |
| ** **                 | ** ** | **year**                        | ** ** | **Years** | ** ** |
| Federal agency  securities |       |                            | $          | 9,489 |   |   |   | $ | — |   |   |
| Corporate bonds  and notes |       |                            | 47,253     |   |   |   | — |   |   |
| Total                      |       |                            | $          | 56,742 |   |   |   | $ | — |   |   |

 

At December 31, 2006, the aboveavailable-for-sale securities had a weighted average maturity of approximately100 days. There were no realized gains or losses from sales of securities inthe periods presented. We have the ability and intent to hold all investmentsas of December 31, 2006 to maturity.

The following table showsthe gross unrealized losses and fair values of our investments in individualsecurities in available-for-sale securities that have been in a continuousunrealized loss position deemed to be temporary for less than twelve monthsaggregated by investment category, (in thousands):

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

 

At December 31, 2006, we had no investment thathas been in a continuous unrealized loss position for  more than twelve months. As of December 31,2006, 5 individual securities were in an unrealized loss position deemedto be temporary for less than twelve months. As of December 31, 2005,34 individual securities were in an unrealized loss position deemed to betemporary for less than twelve months.

*Investment Grade DebtSecurities.**  *Ourinvestments in investment grade debt securities consist primarily ofinvestments in federal agency securities and corporate bonds and notes. Theunrealized losses on our investments in investment grade debt securities werecaused by interest rate increases. Due to the fact that the decline in marketvalue is attributable to changes in interest rates and not credit quality, andbecause the severity and duration of the unrealized losses were notsignificant, we considered these unrealized losses to be temporary at December 31,2006.

56

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**5. PROPERTY AND EQUIPMENT**

Propertyand equipment consists of the following (in thousands):

| ** **                                      | ** ** | **Years Ended**  | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **December 31,** | ** ** |
| ** **                                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Laboratory and  office equipment                |       | $                     | 16,279     |   | $ | 15,064 |   |
| Construction in  progress                       |       | 5                     |       | 556 |   |
| Total property  and equipment                   |       | 16,284                |       | 15,620 |   |
| Less accumulated  depreciation and amortization |       | (13,309               | )          | (12,163 | ) |
| Property and equipment,  net                    |       | $                     | 2,975      |   | $ | 3,457 |   |

 

During 2006, we disposed approximately $248,000 ofassets with related accumulated depreciation of approximately $165,000. In2005, we wrote-off approximately $266,000 of assets at their originalacquisition cost and related accumulated depreciation of $266,000 for assetsthat are no longer in use.

At December 31, 2006and 2005, equipment under capital leases was approximately $3.7 million and$3.9 million, respectively. Total depreciation expense, which includedamortization from equipment under capital leases, was $1.4 million,$1.1 million, and $2.2 million for the years ended December 31,2006, 2005 and 2004, respectively.

**6. LONG-TERM OBLIGATIONS**

At December 31,2006, future minimum lease payments and obligations under all noncancelableleases were as follows (in thousands):

| ** **                                   | ** ** | **Capital** | ** ** | **Operating** | ** ** |
|----------------------------------------------|------------|-------------|------------|---------------|------------|
| ** **                                   | ** ** | **Leases**  | ** ** | **Leases**    | ** ** |
| 2007                                         |       | $           | 1,454      |          | $          | 8,751 |   |
| 2008                                         |       | 892         |       | 13,945        |       |
| 2009                                         |       | 269         |       | 16,481        |       |
| 2010                                         |       | 3           |       | 14,561        |       |
| 2011                                         |       | —      |       | 14,838        |       |
| 2012 and  thereafter                         |       | —      |       | 91,477        |       |
| Total minimum  payments required             |       | 2,618       |       | $             | 160,053    |   |
| Less amount  representing interest           |       | (267        | )          |          |       |
| Present value of  future lease payments      |       | 2,351       |       |          |       |
| Less current  portion                        |       | (1,269      | )          |          |       |
| Noncurrent obligations  under capital leases |       | $           | 1,082      |          |       |   |

 

We moved into our currentfacilities in February 2003. In January 2005, we entered into anamendment with the landlord to decrease the contractual rental commitments in2005 by approximately $1.0 million. In July 2006, we amended ourfacility lease once again in order to defer certain rent payments to originallyoccur in 2006 and 2007. The deferred payments are due to be paid to thelandlord over the period starting from 2009 to 2012, but we may prepay thedeferred amount at any time without penalty. We reevaluated the lease amendmentunder FAS 13, “Accounting for Leases” and determined that the amended leasestill qualified as an operating lease. In conjunction with the lease amendment,a warrant 

57

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**6.LONG-TERM OBLIGATIONS (Continued)**

wasissued to purchase 100,000 shares of our common stock at $10.57 per share. Thewarrant remains exercisable until July 2013 and is exercisable at theoption of the holder. See further discussion of the warrants in Note 7—Stockholder’sEquity.

During May 2004, weinitiated a sublease of approximately 15,000 square feet of our premises to atenant for a period of two years. The sublease was amended in September 2005to extend the term for an additional year. The operating minimum lease paymentsabove are reflective of the new sublease income stream of approximately$276,000 thru May 2007.

Rent expense net ofsublease income under all operating leases amounted to approximately$14.4 million, $13.5 million and $14.0 million for the yearsended December 31, 2006, 2005 and 2004, respectively.

In December 2002, weentered into an additional equipment lease line agreement for an aggregatetotal of $2.0 million. Only $1.4 million of this line was utilizedbefore the drawdown period expired. The lease period is for three years, andthe interest on the lease is fixed at the time of any draw down and equates toapproximately 10%. This line has a buyout provision of the lesser of the fair-marketvalue of the equipment or 10% of the original utilized line amount. As of December 31,2006, the remaining principal balance was approximately $7,000.

In June 2005, ourequipment credit line under the August 2000 master agreement was extendedto create an additional borrowing limit of $1.5 million, which was fully drawndown. In June 2006, we obtained approval to extend our equipment leaseline to create a new total borrowing limit of $1.5 million. We have the abilityto draw down on this line through June 2007. The lease period will be forthree years with the interest rate on the lease fixed at drawdown and rangesapproximately from 10.3% to 10.9%. At December 31, 2006, we utilizedapproximately $415,000 of the 2006 extended line. Each line has a bargainpurchase buyout provision of $101. As of December 31, 2006, the remainingprincipal balance under the credit lines was approximately $2.3 million.

Obligations under allcapital leases are secured by the assets financed under the leases.

**7.STOCKHOLDERS’ EQUITY**

**Common Stock**

In July 2005, wecompleted a public offering in which we sold 4,197,500 shares of common stock,including 547,500 shares issued upon exercise of an option granted to theunderwriters to cover over-allotments, at a price to the public of $20.75 pershare. We received net proceeds of approximately $81.6 million after deductingunderwriting discounts and commissions and related expenses.

**Warrants**

In conjunction with thefacilities lease entered into in June 1998, we issued three warrants tothe lessor to purchase an aggregate of 16,666 shares of common stock at anexercise price of $10.26 per share. During 2005, warrants to purchase 333shares of common stock  were netexercised and 155 shares of common stock were issued. As of December 31,2006, warrants to purchase16,333 shares of common stock are 

58

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**7.STOCKHOLDERS’ EQUITY (Continued)**

outstandingand are exercisable at any time up to December 2007, the seventhanniversary of the closing of our initial public offering.

In conjunction with thefacilities lease entered into in May 2001, we issued a warrant to thelessor to purchase 16,666 shares of our common stock at an exercise price of$80.21 per share, a 15% premium to market at the time of issuance. This warrantexpired in May 2006. The fair market value of this warrant, as determinedusing the Black-Scholes valuation model, was approximately $683,000. Thisamount has been capitalized in other long-term assets and is being amortizedinto expense over the life of the lease. As of December 31, 2006,approximately $504,000 remained to be amortized over the life of the lease.

In conjunction with thefacilities lease amendment in October 2002, we issued a warrant to thelessor to purchase 55,555 shares of our common stock at an exercise price of$17.73 per share. The warrant is outstanding as of December 31, 2006 andexercisable at any time up to October 2007. The fair value of thiswarrant, as determined using the Black-Scholes valuation model, wasapproximately $565,000. This amount has been capitalized in other long-termassets and is being amortized into expense over the life of the lease. As of December 31,2006, approximately $417,000 remained to be amortized over the life of thelease.

In conjunction with thefacilities lease amendment in July 2006, we issued a warrant to the lessorto purchase 100,000 shares of our common stock at an exercise price of $10.57per share. The warrant is outstanding as of December 31, 2006 andexercisable at any time up to July 2013. The fair value of this warrant,as determined using the Black-Scholes valuation model, was approximately $801,000.The amount has been included in other long-term assets and is being amortizedinto expense over the life of the lease. As of December 31, 2006,approximately $767,000 remained to be amortized over the life of the lease.

In conjunction with theequipment lease line executed in January 2002, we issued a warrant to thelender to purchase 2,645 shares of our common stock at an exercise price of$37.80 per share. This warrant was outstanding as of December 31, 2006 butexpired on January 31, 2007. The fair market value of this warrant, asdetermined by the Black-Scholes valuation model, was approximately$66,000. This amount was capitalized in other long-term assets and was fully amortized to expense in 2005.

**Stock option plans**

In 2005, an amendment tothe 2000 Plan was approved to primarily (i) increase the number of sharesauthorized for issuance under the 2000 Plan by 2,275,000 shares of common stock;(ii) prohibit the board of directors from repricing stock options withoutstockholder approval; and (iii) eliminate the “evergreen” provisionfeature that provides for automatic annual increases in the total number ofshares reserved for issuance. In 2006, an amendment to the 2000 Plan wasapproved to primarily increase the number of shares authorized for issuance by500,000 shares of common stock from an aggregate total of 5,322,222 shares to5,822,222 shares. Options granted under our 2000 Plan expire no later than tenyears from the date of grant. The option price of each incentive stock optionshall be at least 100% of the fair value on the date of grant, and the optionprice for each nonstatutory stock option shall be not less than 85% of the fairvalue on the date of grant, as determined by the board of directors. Optionsmay be granted with different vesting terms from time to time, not to exceedfive years from the date of grant. As of December 31, 2006, a total of5,559,206 shares of common stock are authorized for issuance under the 2000Plan.

In 2005, the Directors’ Plan was amended to primarily:(i) increase the number of shares of common stock authorized for issuanceunder the Directors’ Plan by 225,000 shares; (ii) increase the number ofshares of common stock subject to the annual option grant to each non-employeedirector by 8,333 shares 

59

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**7. STOCKHOLDERS’ EQUITY (Continued)**

to10,000 shares; (iii) increase the number of shares of common stock subjectto the initial option grant to each new non-employee director under the plan by13,333 to 20,000 shares; (iv) eliminate the board of directors’ ability toreprice stock options; and (v) amend the vesting schedule for futureoptions grants, including annual option grants made the day following theAnnual Meeting. The exercise price of options under the Directors’ Plan will beequal to the fair market value of the common stock on the date of grant. Themaximum term of the options granted under the Directors’ Plan is ten years. Allgrants under the Directors’ Plan will vest monthly over two years from date ofgrant. The Directors’ Plan will terminate in September 2009, unlessterminated earlier in accordance with the provisions of the Directors’ Plan. Asof December 31, 2006, a total of 322,211 shares of common stock are authorized for issuance under theDirectors’ Plan.

In June 2003, weinitiated an offer to exchange options to purchase shares of our common stockwith exercise prices equal to or greater than $9.00 per share to officers,employees, consultants and non-employee members of our board of directors. Wegranted replacement options to purchase an aggregate of 344,207 shares of ourcommon stock at an exercise price of $9.20 per share, the fair market value onthe date of grant. Any outstanding replacement options expired in August 2006.In August 2006, the board of directors granted new options to officers,employees, consultants and non-employee members of our board of directors. Wegranted approximately 179,000 options, with an exercise price of $9.56 pershare. The options vested 50% at the date of grant and the remaining 50% willvest monthly over two years. We recorded stock-based compensation expense ofapproximately $689,000 relating to these newly granted options for the yearended December 31, 2006.

In January 2006, weadopted FAS 123(R), SAB 107 and related pronouncements. Seediscussion in Note1—Summary of Significant Accounting Policies.

 

60

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**7.STOCKHOLDERS’ EQUITY (Continued)**

Activity under all of the option plans throughDecember 31, 2006 was as follows:

| ** **                                                  | ** ** | **Shares Available** | ** ** | **Number of** | ** ** | **Weighted-Average**    | ** ** |
|-------------------------------------------------------------|------------|---------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                                  | ** ** | **For Grant**        | ** ** | **Options**        | ** ** | **Exercise Price** | ** ** |
| Outstanding at January 1, 2004                         |       |                      | 894,179    |               |       | 2,081,219               |       |   | $ | 8.31 |   |   |
| Authorized for grant                                        |       |                      | 392,159    |               |       | —                  |       |   |   |   |   |
| Granted                                                     |       |                      | (840,327   | )                  |       | 840,327                 |       |   | $ | 20.42 |   |   |
| Exercised                                                   |       |                      | —     |               |       | (134,363                | )          |   | $ | 7.93 |   |   |
| Cancelled                                                   |       |                      | 37,038     |               |       | (37,038                 | )          |   | $ | 15.11 |   |   |
| Outstanding at  December 31, 2004                      |       |                      | 483,049    |               |       | 2,750,145               |       |   | $ | 11.94 |   |   |
| Authorized for grant                                        |       |                      | 2,500,000  |               |       | —                  |       |   |   |   |   |
| Granted                                                     |       |                      | (1,381,807 | )                  |       | 1,381,807               |       |   | $ | 23.22 |   |   |
| Exercised                                                   |       |                      | —     |               |       | (145,141                | )          |   | $ | 8.07 |   |   |
| Cancelled                                                   |       |                      | 93,592     |               |       | (93,592                 | )          |   | $ | 16.13 |   |   |
| Outstanding at  December 31, 2005                      |       |                      | 1,694,834  |               |       | 3,893,219               |       |   | $ | 15.98 |   |   |
| Authorized for grant                                        |       |                      | 500,000    |               |       | —                  |       |   |   |   |   |
| Granted                                                     |       |                      | (1,229,967 | )                  |       | 1,229,967               |       |   | $ | 8.79 |   |   |
| Exercised                                                   |       |                      | —     |               |       | (206,636                | )          |   | $ | 7.96 |   |   |
| Cancelled                                                   |       |                      | 511,339    |               |       | (511,339                | )          |   | $ | 14.72 |   |   |
| Outstanding at December 31, 2006                       |       |                      | 1,476,206  |               |       | 4,405,211               |       |   | $ | 14.50 |   |   |
| Exercisable at December 31, 2006                       |       |                      |       |               |       | 2,768,121               |       |   | $ | 13.39 |   |   |
| Exercisable at December 31, 2005                       |       |                      |       |               |       | 1,786,133               |       |   | $ | 13.25 |   |   |
| Exercisable at December 31, 2004                       |       |                      |       |               |       | 954,412                 |       |   | $ | 10.72 |   |   |
| Weighted average fair value of options granted during  2006 |       |                      |       |               |       |                    |       |   | $ | 6.24 |   |   |
| Weighted average fair  value of options granted during 2005 |       |                      |       |               |       |                    |       |   | $ | 12.42 |   |   |
| Weighted  average fair value of options granted during 2004 |       |                      |       |               |       |                    |       |   | $ | 11.12 |   |   |

 

Detailsof our stock options by exercise price is as follows:

| ** **              | ** ** | **Options Outstanding** | ** ** | ** **           | ** ** | ** **                | ** ** |
|-------------------------|------------|------------------------------|------------|----------------------|------------|---------------------------|------------|
| ** **              | ** ** | **Number of**           | ** ** | **Weighted-Average** | ** ** | **Weighted-Average**      | ** ** | **Options Exercisable** | ** ** |
| ** **              | ** ** | **Outstanding**              | ** ** | **Remaining**        | ** ** | **Exercise**              | ** ** | **Number of** | ** ** | **Weighted-Average** | ** ** |
| **Exercise Price** | ** ** | ** **                   | ** ** | **Options**          | ** ** | **Contractual Life** | ** ** | **Price** | ** ** | **Options** | ** ** | **Exercise Price** | ** ** |
| $0.90-$8.15             |       |                         | 925,290    |                 |       |                      | 7.73       |   |   |   | $ | 7.29 |   |   | 691,128 |   |   | $ | 7.09 |   |   |
| $8.25-$9.93             |       |                         | 1,211,525  |                 |       |                      | 7.18       |   |   |   | 8.55 |   |   | 934,261 |   |   | 8.42 |   |   |
| $10.20-$14.75           |       |                         | 340,716    |                 |       |                      | 9.26       |   |   |   | 11.09 |   |   | 75,686 |   |   | 12.96 |   |   |
| $15.49-$22.54           |       |                         | 642,854    |                 |       |                      | 7.74       |   |   |   | 19.09 |   |   | 486,863 |   |   | 19.52 |   |   |
| $23.00-$24.56           |       |                         | 1,268,446  |                 |       |                      | 8.32       |   |   |   | 23.81 |   |   | 568,571 |   |   | 23.61 |   |   |
| $25.36-$37.80           |       |                         | 12,491     |                 |       |                      | 7.61       |   |   |   | 25.91 |   |   | 7,723 |   |   | 26.26 |   |   |
| $40.50-$73.53           |       |                         | 3,889      |                 |       |                      | 3.79       |   |   |   | 49.94 |   |   | 3,889 |   |   | 49.94 |   |   |
| $0.90 - $73.53          |       |                         | 4,405,211  |                 |       |                      | 7.87       |   |   |   | $ | 14.50 |   |   | 2,768,121 |   |   | $ | 13.39 |   |   |
|                         |            |                              |            |                      |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

61

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**7. STOCKHOLDERS’ EQUITY (Continued)**

**2000 employee stockpurchase plan**

In August 2000, we adopted the 2000 EmployeeStock Purchase Plan, or Purchase Plan, which was approved in September 2000by our stockholders. In April 2003, the Purchase Plan was amended to (i) increasethe number of shares authorized for issuance under the Purchase Plan by 66,667shares of common stock, and (ii) change the evergreen feature of the plan.The amendment provides that the increase in the number of shares reservedautomatically pursuant to the evergreen feature will be equal to the least of1% of the outstanding shares on the date of the annual increase, 88,888 sharesor such amount as may be determined by the board. The Purchase Plan permitseligible employees to purchase common stock at a discount through payrolldeductions during defined offering periods. The price at which the stock ispurchased is equal to the lesser of 85% of the fair market value of the commonstock on the first day of the offering or 85% of the fair market value of ourcommon stock on the purchase date. The initial offering period commenced on theeffective date of our initial public offering. We issued 159,380, 73,868 and93,529 shares of common stock during 2006, 2005 and 2004, respectively,pursuant to the Purchase Plan at an average price of $7.21 per share, $10.07 pershare, and $8.76 per share in 2006, 2005 and 2004, respectively. For 2006, 2005and 2004, the weighted average fair value of stock issued under the PurchasePlan was $4.95, $8.56 and $6.71, respectively. The Purchase Plan provides forannual increases in the number of shares available for issuance under thePurchase Plan on each anniversary date of the effective date of the offering.The number of shares reserved for future issuance under the Purchase Plan wasincreased by 88,888 per year during 2006, 2005 and 2004, respectively.

**Reserved shares**

As of December 31,2006, we had reserved shares of common stock for future issuance as follows:

| ** **             | ** ** | **December 31,** | ** ** |
|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2006**              | ** ** |
| Warrants               |       |                  | 174,533    |   |   |
| Incentive stock  plans |       |                  | 1,476,206  |   |   |
| Purchase Plan          |       |                  | 67,601     |   |   |
| Total                  |       |                  | 1,718,340  |   |   |

 

**8. INCOME TAXES**

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Significant components of ourdeferred tax assets are as follows:

| ** **                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Deferred tax  assets                          |       |                  |       |   |   |
| Net operating loss carryforwards              |       | $                     | 90,670     |   | $ | 81,184 |   |
| Research and development credits              |       | 14,581                |       | 11,946 |   |
| Capitalized research and development expenses |       | 10,570                |       | 9,004 |   |
| Other, net                                    |       | 11,039                |       | 7,599 |   |
| Total deferred  tax assets                    |       | 126,860               |       | 109,733 |   |
| Valuation  allowance                          |       | (126,860              | )          | (109,733 | ) |
| Net deferred tax assets                       |       | $                     | —     |   | $ | — |   |

 

62

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**Rigel Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (Continued)**

**8. INCOMETAXES (Continued)**

No federal or state income tax expense or benefit wasrecorded for the years ended December 31, 2006, 2005 and 2004, as weincurred net operating losses during these periods. Realization of deferred taxassets is dependent upon future earnings, if any, the timing and amount ofwhich are uncertain. Accordingly, the net deferred tax assets have been fullyoffset by a valuation allowance. The valuation allowance increased by$17.1 million, $21.0 million and $24.1 million during 2006, 2005and 2004, respectively.

Included in the valuation allowance balance at December 31,2006 is $2.8 million related to the exercise of stock options which arenot reflected as an expense for financial reporting purposes. Accordingly, anyfuture reduction in the valuation allowance relating to this amount will becredited directly to equity and not reflected as an income tax benefit in thestatement of operations.

As of December 31, 2006, we had net operatingloss carryforwards for federal income tax purposes of approximately $254.0 million,which expire beginning in the year 2011 and state net operating losscarryforwards of approximately $75.0 million, which expire beginning in theyear 2013.

The Company also has federal research and developmenttax credits of $9.0 million, which begin to expire in the year 2012 and stateresearch and development tax credits of approximately $8.2 million, whichhave no expiration date. Upon further analysis of our research and developmenttax credits, we revised the 2005 deferred tax asset relating to research anddevelopment from $10.2 million to $11.9 million.

Utilization of the netoperating loss may be subject to annual limitations if there were ownershipchanges in the future. The limitations are subject to Internal Revenue Code andsimilar state provisions and such limitations could result in the expiration ofthe net operating loss before utilization. In addition, we are currentlyevaluating the impact of adopting FIN 48 on our financial statements.

**9. SELECTED QUARTERLYFINANCIAL DATA (unaudited, in thousands, except per share amounts)**

| ** **                                                                              | ** ** | **Year Ended December 31, 2006** | ** ** | **Year Ended December 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **Q1**                                               | ** ** | **Q2**                                               | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| Revenue                                                                                 |       | $                                                    | 9,897      |                                                 | $          | 14,321 |   | $ | 6,127 |   | $ | 3,128 |   | $ | 2,618 |   | $ | 4,606 |   | $ | 3,282 |   | $ | 6,020 |   |
| Net loss                                                                                |       | $                                                    | (8,469     | )                                                    | $          | (2,330 | ) | $ | (11,382 | ) | $ | (15,456 | ) | $ | (11,164 | ) | $ | (12,293 | ) | $ | (12,906 | ) | $ | (8,893 | ) |
| Net loss per  common share, basic and   diluted                                         |       | $                                                    | (0.34      | )                                                    | $          | (0.09 | ) | $ | (0.46 | ) | $ | (0.62 | ) | $ | (0.57 | ) | $ | (0.62 | ) | $ | (0.56 | ) | $ | (0.36 | ) |
| Weighted average shares  used in computing net loss per common share, basic and diluted |       | 24,816                                               |       | 24,842                                               |       | 24,987 |   | 25,093 |   | 19,713 |   | 19,887 |   | 23,235 |   | 24,524 |   |

 

63

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**Item 9. Changes inand Disagreements with Accountants on Accounting and Financial Disclosure**

None.

**Item 9A. Controlsand Procedures**

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of ourdisclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the Exchange Act). Basedon this evaluation, our principal executive officer and our principal financialofficer concluded that our disclosure controls and procedures were effective asof the end of the period covered by this annual report.

**Management’s Reporton Internal Control Over Financial Reporting**

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rules 13a-15(f).Under the supervision and with the participation of our management, includingour principal executive officer and principal financial officer, we conductedan evaluation of the effectiveness of our internal control over financialreporting based on the framework in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation under theframework in *Internal Control—IntegratedFramework*, our management concluded that our internal control overfinancial reporting was effective as of December 31, 2006. Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2006 has been audited by Ernst &Young LLP, an independent registered public accounting firm, as stated in itsattestation report, which is set forth in “Item 8. Financial Statementsand Supplementary Data” elsewhere in the annual report on Form 10-K.

**Changes in InternalControls over Financial Reporting**

There were no changes inour internal controls over financial reporting that occurred during our mostrecent fiscal quarter that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.

**Item 9B. OtherInformation**

None.

64

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**PART III**

**Item 10. Directorsand Executive Officers of the Registrant**

Information regarding our directors and executiveofficers is incorporated by reference to the information set forth under thecaption “Directors and Executive Officers” in our Proxy Statement for theAnnual Meeting of Stockholders to be filed with the Securities and ExchangeCommission on or prior to March 23, 2007.

In 2003, we adopted a codeof ethics that applies to our principal executive officer, principal financialofficer, principal accounting officer or controller, or persons performingsimilar functions. Our code of ethics is on our website at **http://www.rigel.com/pdf/codeofconduct.pdf**with “Investor Resources” materials. If we make any substantive amendments tothe code or grant any waiver from a provision of the code applicable to anyexecutive officer or director, we will promptly disclose the nature of theamendment or waiver on a Form 8-K.

**Item 11. ExecutiveCompensation**

Information regardingexecutive compensation is incorporated by reference to the information setforth under the caption “Executive Compensation” in our Proxy Statement for theAnnual Meeting of Stockholders to be filed with the Securities and ExchangeCommission on or prior to March 23, 2007.

**Item 12. Security Ownershipof Certain Beneficial Owners and Management**

Information regardingsecurity ownership of certain beneficial owners and management is incorporatedby reference to the information set forth under the caption “Security Ownershipof Certain Beneficial Owners and Management” and “Equity Compensation PlanInformation” in our Proxy Statement for the Annual Meeting of Stockholders tobe filed with the Securities and Exchange Commission on or around March 23,2007.

**Item 13. CertainRelationships and Related Transactions**

Information regardingcertain relationships and related transactions is incorporated by reference tothe information set forth under the caption “Certain Transactions” in our ProxyStatement for the Annual Meeting of Stockholders to be filed with theSecurities and Exchange Commission on or prior to March 23, 2007.

**Item 14. PrincipalAccounting Fees and Services**

Information regarding principal accounting fees andservices is incorporated by reference to the information set forth under thecaption “Ratification of Independent Auditors” in our Proxy Statement for theAnnual Meeting of Stockholders to be filed with the Securities and ExchangeCommission on or prior to March 23, 2007.

65

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**PART IV**

**Item 15. Exhibits,Financial Statement Schedules**

(a)           The following documentsare being filed as part of this annual report on Form 10-K:

1.                FinancialStatements—Index to Financial Statements in Item 8 of this annual report onForm 10-K and selected quarterly financial data for the last twoyears in Note 10

2.                Financial StatementSchedules—None—As all required disclosures have been made in the footnotes tothe financial statements.

3.                Exhibits:

| 3.1   |   | Amended and Restated Certificate of Incorporation (filed  as an exhibit to Rigel’s Current Report on Form 8-K (No. 000-29889)  dated June 24, 2003, and incorporated herein by reference).                                                                                       |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2   |   | Amended and Restated Bylaws (filed as an exhibit to  Rigel’s Current Report on Form 8-K (No. 000-29889),  dated February 2, 2007, and incorporated herein by reference).                                                                                                         |
| 4.1   |   | Form of warrant to purchase shares of common stock  (filed as an exhibit to Rigel’s Registration Statement on Form S-1  (No. 333-45864), as amended, and incorporated herein by reference).                                                                                      |
| 4.2   |   | Warrant issued to TBCC Funding Trust II for the purchase  of shares of common stock (filed as an exhibit to Rigel’s Quarterly Report on  Form 10-Q for the quarter ended March 31, 2002 (No. 000-29889)  and incorporated herein by reference).                                  |
| 4.3   |   | Amended and Restated Warrant issued to Kwacker Limited  for the purchase of shares of common stock (filed as an exhibit to Rigel’s  Annual Report on Form 10-K (No. 000-29889), as amended,  for the fiscal year ended December 31, 2002 and incorporated herein by  reference). |
| 4.4   |   | Warrant issued to Kwacker Limited for the purchase of  shares of common stock (filed as an exhibit to Rigel’s Annual Report on  Form 10-K (No. 000-29889), as amended, for the fiscal  year ended December 31, 2002 and incorporated herein by reference).                       |
| 4.5   |   | Specimen Common Stock Certificate (filed as an exhibit to  Rigel’s Current Report on Form 8-K (No. 000-29889)  dated June 24, 2003, and incorporated herein by reference).                                                                                                       |
| 4.6   |   | Warrant issued to Kwacker Limited for the purchase of  shares of common stock (filed as an exhibit to Rigel’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2006  (No. 000-29889) and incorporated herein by reference).                                    |
| 10.1+ |   | Form of Stock Option Agreement pursuant to 2000  Equity Incentive Plan (filed as an exhibit to Rigel’s Registration Statement  on Form S-1 (No. 333-45864), as amended, and  incorporated herein by reference).                                                                  |
| 10.2  |   | Collaboration Agreement between Rigel and Janssen  Pharmaceutica N.V., dated December 4, 1998 (filed as an exhibit to  Rigel’s Registration Statement on Form S-1 (No. 333-45864),  as amended, and incorporated herein by reference).                                           |
| 10.3  |   | Collaborative Research and License Agreement between  Rigel and Pfizer Inc., dated January 31, 1999 (filed as an exhibit to  Rigel’s Registration Statement on Form S-1 (No. 333-45864),  as amended, and incorporated herein by reference).                                     |
| 10.4  |   | Collaboration Agreement between Rigel and Novartis Pharma  AG, dated May 26, 1999 (filed as an exhibit to Rigel’s Registration  Statement on Form S-1 (No. 333-45864), as amended, and  incorporated herein by reference).                                                       |

66

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| 10.5*  |   | License and Research Agreement between Rigel and Cell  Genesys, Inc., dated September 2, 1999 (filed as an exhibit to  Rigel’s Registration Statement on Form S-1 (No. 333-45864),  as amended, and incorporated herein by reference).                                                         |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.6+  |   | Employment Agreement between Rigel and Donald Payan,  dated January 16, 1997 (filed as an exhibit to Rigel’s Registration  Statement on Form S-1 (No. 333-45864), as amended, and  incorporated herein by reference).                                                                               |
| 10.7   |   | Technology Transfer Agreement between Rigel and Questcor  Pharmaceuticals, Inc., dated September 22, 2000 (filed as an  exhibit to Rigel’s Registration Statement on Form S-1  (No. 333-45864), as amended, and incorporated herein by  reference).                                            |
| 10.8   |   | Build-to-suit lease between Rigel and Slough  BTC, LLC, dated May 16, 2001 (filed as an exhibit to Rigel’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2001  (No. 000-29889) and incorporated herein by reference).                                                          |
| 10.9   |   | First Amendment to the Collaboration Agreement between  Rigel and Novartis Pharma AG, dated May 18, 2001 (filed as an exhibit to  Rigel’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2001 (No. 000-29889) and incorporated herein by  reference).                           |
| 10.10* |   | Second Amendment to the Collaboration Agreement between  Rigel and Novartis Pharma AG, dated July 6, 2001 (filed as an exhibit to  Rigel’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2001 (No. 000-29889) and incorporated herein by  reference).                     |
| 10.11* |   | Second Amendment, dated July 1, 2001, to the  Collaboration Agreement between Rigel and Cell Genesys, Inc. (filed as  an exhibit to Rigel’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2001 (No. 000-29889) and  incorporated herein by reference).               |
| 10.12  |   | First Amendment to the Collaboration Agreement by and  between Rigel and Janssen Pharmaceutical N.V., dated June 30, 2000  (filed as an exhibit to Rigel’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2001 (No. 000-29889) and  incorporated herein by reference).     |
| 10.13  |   | Second Amendment to the Collaboration Agreement by and  between Rigel and Janssen Pharmaceutical N.V., dated December 4, 2001  (filed as an exhibit to Rigel’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2001 (No. 000-29889) and  incorporated herein by reference). |
| 10.14  |   | Loan and Security Agreement between Rigel and Comerica  Bank—California, dated July 12, 2002 (filed as an exhibit to Rigel’s  Quarterly Report on Form 10-Q for the quarter ended  September 30, 2002 (No. 000-29889) and incorporated herein by  reference).                             |
| 10.15* |   | Collaboration Agreement between Rigel and Daiichi  Pharmaceutical Co., Ltd., dated August 1, 2002 (filed as an exhibit to  Rigel’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2002 (No. 000-29889) and incorporated herein by  reference).                             |
| 10.16* |   | Amendment to Build-to-suit lease between  Rigel and Slough BTC, LLC, dated October 18, 2002 (filed as an exhibit  to Rigel’s Annual Report on Form 10-K (No. 000-29889),  as amended, for the fiscal year ended December 31, 2002 and incorporated  herein by reference).                      |
| 10.17  |   | Master Lease Agreement between Rigel and Lighthouse  Capital Partners IV, L.P., dated December 23, 2002 (filed as an exhibit  to Rigel’s Annual Report on Form 10-K (No. 000-29889),  as amended, for the fiscal year ended December 31, 2002 and incorporated  herein by reference).          |
| 10.18+ |   | Employment Agreement between Rigel and Elliott B.  Grossbard, dated as of March 18, 2002 (filed as an exhibit to Rigel’s  Annual Report on Form 10-K (No. 000-29889), as amended,  for the fiscal year ended December 31, 2002 and incorporated herein by  reference).                         |

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| 10.19+     |   | Amendment to Employment Agreement, between Rigel and  Donald Payan, dated as of March 5, 2003 (filed as an exhibit to Rigel’s  Annual Report on Form 10-K (No. 000-29889), as amended,  for the fiscal year ended December 31, 2002 and incorporated herein by  reference).                                                                              |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20+     |   | 2000 Employee Stock Purchase Plan, as amended (filed as  an exhibit to Rigel’s Registration Statement on Form S-8  (No. 333-106532) filed on June 26, 2003 and incorporated  herein by reference).                                                                                                                                                            |
| 10.21*     |   | Collaborative Research and License Agreement by and  between Rigel and Pfizer Inc., dated January 18, 2005 (filed as an  exhibit to Rigel’s Quarterly Report on Form 10-Q for the quarter  ended March 31, 2005 (No. 000-29889) and incorporated herein  by reference).                                                                                  |
| 10.22+     |   | 2000 Non-Employee Directors’ Stock Option Plan, as  amended (filed as an exhibit to Rigel’s Current on Form 8-K  (No. 000-29889) filed on June 6, 2005 and incorporated herein  by reference).                                                                                                                                                           |
| 10.23*     |   | License and Research Agreement (Amended and Restated)  between Rigel and Cell Genesys, Inc., dated September 2, 1999, as  amended and restated on March 26, 2001 (filed as an exhibit to Rigel’s  Quarterly Report on Form 10-Q for the quarter ended  September 30, 2005 (No. 000-29889), as amended, and  incorporated herein by reference). |
| 10.24+     |   | 2006 Base Salaries for Named Executive Officers (filed as  an exhibit to Rigel’s Current on Form 8-K (No. 000-29889)  filed on and incorporated herein by reference).                                                                                                                                                                                              |
| 10.25+     |   | 2000 Equity Incentive Plan, as amended (filed as an  exhibit to Rigel’s Registration Statement on Form S-8  (No. 333-134622) filed on June 1, 2006 and incorporated  herein by reference).                                                                                                                                                                    |
| 10.26+     |   | 2006 Bonus Plan (filed as an exhibit to Rigel’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2006  (No. 000-29889) and incorporated herein by reference).                                                                                                                                                                                    |
| 10.27+     |   | Form of Indemnity Agreement (filed as an exhibit to  Rigel’s Registration Statement on Form S-1 (No. 333-45864), as amended, and  incorporated herein by reference).                                                                                                                                                                                                    |
| 10.28+     |   | 2007 Base Salaries for Named Executive Officers (filed as  an exhibit to Rigel’s Current on Form 8-K (No. 000-29889)  filed on February 2, 2007 and incorporated herein by reference).                                                                                                                                                                        |
| 10.29+     |   | 2007 Cash Incentive Compensation Plan (filed as an  exhibit to Rigel’s Current on Form 8-K (No. 000-29889)  filed on February 2, 2007 and incorporated herein by reference).                                                                                                                                                                                  |
| 23.1#      |   | Consent of Ernst & Young LLP, Independent  Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                            |
| 24.1       |   | Power of Attorney (included on signature page).                                                                                                                                                                                                                                                                                                                                   |
| 31.1#      |   | Certification required by Rule 13a-14(a) or  Rule 15d-14(a).                                                                                                                                                                                                                                                                                                       |
| 31.2#      |   | Certification required by Rule 13a-14(a) or  Rule 15d-14(a).                                                                                                                                                                                                                                                                                                       |
| 32.1· |   | Certification required by Rule 13a-14(b) or  Rule 15d-14(b) and Section 1350 of Chapter 63 of Title  18 of the United States Code (18 U.S.C. 1350).                                                                                                                                                                                                      |

----

+                Managementcontract or compensatory plan.

*                    Confidentialtreatment requested as to specific portions, which portions are omitted andfiled separately with the Securities and Exchange Commission.

#                 Filed herewith.

·                     Thecertification attached as Exhibit 32.1 accompanies the Annual Report on Form 10-Kpursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shallnot be deemed “filed” by the Company for purposes of Section 18 of theSecurities Exchange Act of 1934, as amended.

68

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**SIGNATURES**

Pursuantto the requirements of the Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-Kto be signed on its behalf by the undersigned, thereunto duly authorized, inthe City of South San Francisco, State of California, on March 8, 2007.

|        |   | Rigel Pharmaceuticals, Inc. |
|--------|--------|----------------------------------|
|   |   | By:                              |   | /s/  JAMES M. GOWER |
|   |   | * *                         | * * | James M. Gower*Chairman of the Board and Chief Executive Officer* |
|   |   | By:                              |   | /s/  RYAN D. MAYNARD |
|   |   | * *                         | * * | Ryan D. Maynard*Vice President and Chief Financial Officer* |

 

**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints James M. Gower and RyanD. Maynard, and each of them, as his true and lawful attorneys-in-fact andagents, with full power of substitution and resubstitution, for him and in hisname, place, and stead, in any and all capacities, to sign any and allamendments to this Annual Report on Form 10-K, and to file the same,with all exhibits thereto, and other documents in connection therewith, withthe Securities and Exchange Commission, granting unto said attorneys-in-factand agents, and each of them, full power and authority to do and perform eachand every act and thing requisite and necessary to be done in connectiontherewith, as fully to all intents and purposes as he might or could do inperson, hereby ratifying and confirming that all said attorneys-in-fact andagents, or any of them or their or his substitute or substitutes, may lawfullydo or cause to be done by virtue hereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this Annual Reporton Form 10-K has been signed below by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated:

|                      | **Signature** | ** **                             | ** ** | ** **         | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|----------------------|---------------|----------------------------------------|------------|--------------------|-----------|------------|------------|------------|----------|------------|
| /s/ JAMES M.  GOWER  |          | Chairman of the Board, Chief Executive |       | March 8, 2007 |
| James  M. Gower      |          | Officer  and Director                  |       |               |
|                 | * *      | *(Principal Executive Officer)*        |       |               |
| /s/ RYAN D.  MAYNARD |          | Vice President and                     |       | March 8, 2007 |
| Ryan  D. Maynard     |          | Chief  Financial Officer               |       |               |
|                 | * *      | *(Principal Finance and Accounting*    |       |               |
|                 | * *      | *Officer)*                             |       |               |
| /s/ DONALD G.  PAYAN |          | Executive Vice President, Chief        |       | March 8, 2007 |
| Donald  G. Payan     |          | Scientific  Officer and Director       |       |               |

 

69

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|                          | **Signature** | ** ** | ** ** | ** **         | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|--------------------------|---------------|------------|------------|--------------------|-----------|------------|------------|------------|----------|------------|
| /s/ JEAN  DELEAGE        |          | Director   |       | March 8, 2007 |
| Jean Deleage             |          |       |       |               |
| /s/ BRADFORD  S. GOODWIN |          | Director   |       | March 8, 2007 |
| Bradford  S. Goodwin     |          |       |       |               |
| /s/ GARY A.  LYONS       |          | Director   |       | March 8, 2007 |
| Gary  A. Lyons           |          |       |       |               |
| /s/ WALTER H.  MOOS      |          | Director   |       | March 8, 2007 |
| Walter  H. Moos          |          |       |       |               |
| /s/ HOLLINGS  C. RENTON  |          | Director   |       | March 8, 2007 |
| Hollings  C. Renton      |          |       |       |               |
| /s/ PETER S.  RINGROSE   |          | Director   |       | March 8, 2007 |
| Peter  S. Ringrose       |          |       |       |               |
| /s/ STEPHEN A.  SHERWIN  |          | Director   |       | March 8, 2007 |
| Stephen A.  Sherwin      |          |       |       |               |
|                          |               |            |            |                    |           |            |            |            |          |            |  |

 

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**EXHIBITINDEX**

| 3.1   |   | Amended and Restated Certificate of Incorporation (filed  as an exhibit to Rigel’s Current Report on Form 8-K (No. 000-29889)  dated June 24, 2003, and incorporated herein by reference).                                                                                       |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2   |   | Amended and Restated Bylaws (filed as an exhibit to  Rigel’s Current Report on Form 8-K (No. 000-29889),  dated February 2, 2007, and incorporated herein by reference).                                                                                                         |
| 4.1   |   | Form of warrant to purchase shares of common stock  (filed as an exhibit to Rigel’s Registration Statement on Form S-1  (No. 333-45864), as amended, and incorporated herein by  reference).                                                                                     |
| 4.2   |   | Warrant issued to TBCC Funding Trust II for the purchase  of shares of common stock (filed as an exhibit to Rigel’s Quarterly Report on  Form 10-Q for the quarter ended March 31, 2002 (No. 000-29889)  and incorporated herein by reference).                                  |
| 4.3   |   | Amended and Restated Warrant issued to Kwacker Limited  for the purchase of shares of common stock (filed as an exhibit to Rigel’s  Annual Report on Form 10-K (No. 000-29889), as amended,  for the fiscal year ended December 31, 2002 and incorporated herein by  reference). |
| 4.4   |   | Warrant issued to Kwacker Limited for the purchase of  shares of common stock (filed as an exhibit to Rigel’s Annual Report on  Form 10-K (No. 000-29889), as amended, for the fiscal  year ended December 31, 2002 and incorporated herein by reference).                       |
| 4.5   |   | Specimen Common Stock Certificate (filed as an exhibit to  Rigel’s Current Report on Form 8-K (No. 000-29889)  dated June 24, 2003, and incorporated herein by reference).                                                                                                       |
| 4.6   |   | Warrant issued to Kwacker Limited for the purchase of  shares of common stock (filed as an exhibit to Rigel’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2006  (No. 000-29889) and incorporated herein by reference).                                    |
| 10.1+ |   | Form of Stock Option Agreement pursuant to 2000  Equity Incentive Plan (filed as an exhibit to Rigel’s Registration Statement  on Form S-1 (No. 333-45864), as amended, and  incorporated herein by reference).                                                                  |
| 10.2  |   | Collaboration Agreement between Rigel and Janssen  Pharmaceutica N.V., dated December 4, 1998 (filed as an exhibit to  Rigel’s Registration Statement on Form S-1 (No. 333-45864),  as amended, and incorporated herein by reference).                                           |
| 10.3  |   | Collaborative Research and License Agreement between  Rigel and Pfizer Inc., dated January 31, 1999 (filed as an exhibit to  Rigel’s Registration Statement on Form S-1 (No. 333-45864),  as amended, and incorporated herein by reference).                                     |
| 10.4  |   | Collaboration Agreement between Rigel and Novartis Pharma  AG, dated May 26, 1999 (filed as an exhibit to Rigel’s Registration  Statement on Form S-1 (No. 333-45864), as amended, and  incorporated herein by reference).                                                       |
| 10.5* |   | License and Research Agreement between Rigel and Cell  Genesys, Inc., dated September 2, 1999 (filed as an exhibit to  Rigel’s Registration Statement on Form S-1 (No. 333-45864),  as amended, and incorporated herein by reference).                                      |
| 10.6+ |   | Employment Agreement between Rigel and Donald Payan,  dated January 16, 1997 (filed as an exhibit to Rigel’s Registration  Statement on Form S-1 (No. 333-45864), as amended, and  incorporated herein by reference).                                                            |
| 10.7  |   | Technology Transfer Agreement between Rigel and Questcor  Pharmaceuticals, Inc., dated September 22, 2000 (filed as an  exhibit to Rigel’s Registration Statement on Form S-1  (No. 333-45864), as amended, and incorporated herein by  reference).                         |

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| 10.8   |   | Build-to-suit lease between Rigel and Slough  BTC, LLC, dated May 16, 2001 (filed as an exhibit to Rigel’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2001  (No. 000-29889) and incorporated herein by reference).                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9   |   | First Amendment to the Collaboration Agreement between  Rigel and Novartis Pharma AG, dated May 18, 2001 (filed as an exhibit to  Rigel’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2001 (No. 000-29889) and incorporated herein by  reference).                           |
| 10.10* |   | Second Amendment to the Collaboration Agreement between  Rigel and Novartis Pharma AG, dated July 6, 2001 (filed as an exhibit to  Rigel’s Quarterly Report on Form 10-Q for the quarter ended September 30,  2001 (No. 000-29889) and incorporated herein by reference).                      |
| 10.11* |   | Second Amendment, dated July 1, 2001, to the  Collaboration Agreement between Rigel and Cell Genesys, Inc. (filed as  an exhibit to Rigel’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 2001 (No. 000-29889) and incorporated  herein by reference).               |
| 10.12  |   | First Amendment to the Collaboration Agreement by and  between Rigel and Janssen Pharmaceutical N.V., dated June 30, 2000  (filed as an exhibit to Rigel’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2001 (No. 000-29889) and  incorporated herein by reference).     |
| 10.13  |   | Second Amendment to the Collaboration Agreement by and  between Rigel and Janssen Pharmaceutical N.V., dated December 4, 2001  (filed as an exhibit to Rigel’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2001 (No. 000-29889) and  incorporated herein by reference). |
| 10.14  |   | Loan and Security Agreement between Rigel and Comerica  Bank—California, dated July 12, 2002 (filed as an exhibit to Rigel’s  Quarterly Report on Form 10-Q for the quarter ended  September 30, 2002 (No. 000-29889) and incorporated herein by  reference).                             |
| 10.15* |   | Collaboration Agreement between Rigel and Daiichi  Pharmaceutical Co., Ltd., dated August 1, 2002 (filed as an exhibit to  Rigel’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2002 (No. 000-29889) and incorporated herein by  reference).                             |
| 10.16* |   | Amendment to Build-to-suit lease between  Rigel and Slough BTC, LLC, dated October 18, 2002 (filed as an exhibit  to Rigel’s Annual Report on Form 10-K (No. 000-29889),  as amended, for the fiscal year ended December 31, 2002 and incorporated  herein by reference).                      |
| 10.17  |   | Master Lease Agreement between Rigel and Lighthouse  Capital Partners IV, L.P., dated December 23, 2002 (filed as an exhibit  to Rigel’s Annual Report on Form 10-K (No. 000-29889),  as amended, for the fiscal year ended December 31, 2002 and incorporated  herein by reference).          |
| 10.18+ |   | Employment Agreement between Rigel and Elliott B.  Grossbard, dated as of March 18, 2002 (filed as an exhibit to Rigel’s  Annual Report on Form 10-K (No. 000-29889), as amended,  for the fiscal year ended December 31, 2002 and incorporated herein by  reference).                         |
| 10.19+ |   | Amendment to Employment Agreement, between Rigel and  Donald Payan, dated as of March 5, 2003 (filed as an exhibit to Rigel’s  Annual Report on Form 10-K (No. 000-29889), as amended,  for the fiscal year ended December 31, 2002 and incorporated herein by  reference).                    |
| 10.20+ |   | 2000 Employee Stock Purchase Plan, as amended (filed as  an exhibit to Rigel’s Registration Statement on Form S-8  (No. 333-106532) filed on June 26, 2003 and incorporated  herein by reference).                                                                                                  |
| 10.21* |   | Collaborative Research and License Agreement by and  between Rigel and Pfizer Inc., dated January 18, 2005 (filed as an  exhibit to Rigel’s Quarterly Report on Form 10-Q for the quarter  ended March 31, 2005 (No. 000-29889) and incorporated herein  by reference).                        |

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| 10.22+     |   | 2000 Non-Employee Directors’ Stock Option Plan, as  amended (filed as an exhibit to Rigel’s Current on Form 8-K  (No. 000-29889) filed on June 6, 2005 and incorporated herein  by reference).                                                                                                                                                           |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.23*     |   | License and Research Agreement (Amended and Restated)  between Rigel and Cell Genesys, Inc., dated September 2, 1999, as  amended and restated on March 26, 2001 (filed as an exhibit to Rigel’s  Quarterly Report on Form 10-Q for the quarter ended  September 30, 2005 (No. 000-29889), as amended, and  incorporated herein by reference). |
| 10.24+     |   | 2006 Base Salaries for Named Executive Officers (filed as  an exhibit to Rigel’s Current on Form 8-K (No. 000-29889)  filed on and incorporated herein by reference).                                                                                                                                                                                              |
| 10.25+     |   | 2000 Equity Incentive Plan, as amended (filed as an  exhibit to Rigel’s Registration Statement on Form S-8  (No. 333-134622) filed on June 1, 2006 and incorporated  herein by reference).                                                                                                                                                                    |
| 10.26+     |   | 2006 Bonus Plan (filed as an exhibit to Rigel’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2006  (No. 000-29889) and incorporated herein by reference).                                                                                                                                                                                    |
| 10.27+     |   | Form of Indemnity Agreement (filed as an exhibit to  Rigel’s Registration Statement on Form S-1 (No. 333-45864), as amended, and  incorporated herein by reference).                                                                                                                                                                                                    |
| 10.28+     |   | 2007 Base Salaries for Named Executive Officers (filed as  an exhibit to Rigel’s Current on Form 8-K (No. 000-29889)  filed on February 2, 2007 and incorporated herein by reference).                                                                                                                                                                        |
| 10.29+     |   | 2007 Cash Incentive Compensation Plan (filed as an  exhibit to Rigel’s Current on Form 8-K (No. 000-29889)  filed on February 2, 2007 and incorporated herein by reference).                                                                                                                                                                                  |
| 23.1#      |   | Consent of Ernst & Young LLP, Independent  Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                            |
| 24.1       |   | Power of Attorney (included on signature page).                                                                                                                                                                                                                                                                                                                                   |
| 31.1#      |   | Certification required by Rule 13a-14(a) or  Rule 15d-14(a).                                                                                                                                                                                                                                                                                                       |
| 31.2#      |   | Certification required by Rule 13a-14(a) or  Rule 15d-14(a).                                                                                                                                                                                                                                                                                                       |
| 32.1· |   | Certification required by Rule 13a-14(b) or  Rule 15d-14(b) and Section 1350 of Chapter 63 of Title  18 of the United States Code (18 U.S.C. 1350).                                                                                                                                                                                                      |

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+                Managementcontract or compensatory plan.

*                    Confidentialtreatment requested as to specific portions, which portions are omitted andfiled separately with the Securities and Exchange Commission.

#                 Filed herewith.

·                     Thecertification attached as Exhibit 32.1 accompanies the Annual Report on Form 10-Kpursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shallnot be deemed “filed” by the Company for purposes of Section 18 of theSecurities Exchange Act of 1934, as amended.

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