**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**FORM 10-K**

**(Mark One)**

**x**                               ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Forthe fiscal year ended December 31, 2005**

**or**

**o**                                  TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Commissionfile number 0-29889**

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**RIGELPHARMACEUTICALS, INC.**

(Exact name of registrantas 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)

Securities registeredpursuant to Section 12(b) of the Act:

**None**

Securities registered pursuant toSection 12(g) of the Act:

**Common Stock, par value$0.001 per share**

(Title of Class)

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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 the Exchange 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, 2005, the last business day of theregistrant’s most recently completed second fiscal quarter, was $302,387,771.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 28,2006, there were 24,816,566 shares of the registrant’s Common Stockoutstanding.

**DOCUMENTSINCORPORATED 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 30, 2006.

 

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**TABLE OF CONTENTS**

| ** **    | ** ** | ** **                                                                                  | ** ** | **Page** | ** ** |
|---------------|------------|---------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I   |       |                                                                                        |       |     |       |
| Item 1.       |       | Business                                                                                    |       | 1        |       |
| Item 1A.      |       | Risk  Factors                                                                               |       | 12       |       |
| Item 1B.      |       | Unresolved Staff  Comments                                                                  |       | 23       |       |
| Item 2.       |       | Properties                                                                                  |       | 23       |       |
| Item 3.       |       | Legal  Proceedings                                                                          |       | 23       |       |
| Item 4.       |       | Submission of  Matters to a Vote of Security Holders                                        |       | 23       |       |
| PART II  |       |                                                                                        |       |     |       |
| Item 5.       |       | Market for the  Registrant’s Common Equity and Related Stockholder Matters             |       | 24       |       |
| Item 6.       |       | Selected Financial  Data                                                                    |       | 25       |       |
| Item 7.       |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 26       |       |
| Item 7A.      |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |       | 35       |       |
| Item 8.       |       | Financial  Statements and Supplementary Data                                                |       | 36       |       |
| Item 9.       |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure       |       | 61       |       |
| Item 9A.      |       | Controls and  Procedures                                                                    |       | 61       |       |
| Item 9B.      |       | Other Information                                                                           |       | 61       |       |
| PART III |       |                                                                                        |       |     |       |
| Item 10.      |       | Directors and  Executive Officers of the Registrant                                         |       | 62       |       |
| Item 11.      |       | Executive  Compensation                                                                     |       | 62       |       |
| Item 12.      |       | Security  Ownership of Certain Beneficial Owners and Management                             |       | 62       |       |
| Item 13.      |       | Certain  Relationships and Related Transactions                                             |       | 62       |       |
| Item 14.      |       | Principal  Accounting Fees and Services                                                     |       | 62       |       |
| PART IV  |       |                                                                                        |       |     |       |
| Item 15.      |       | Exhibits,  Financial Statement Schedules                                                    |       | 63       |       |
|          |       | Signatures                                                                                  |       | 66       |       |

 

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**FORWARD-LOOKING STATEMENTS**

This annual report on Form 10-K,including the documents that we incorporate by reference, contains statementsindicating expectations 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 move one new product candidate for a significantindication into the clinic each year. We have achieved this goal each yearbeginning in 2002. Our pioneering research focuses on intracellular signalingpathways and related targets that are critical to disease mechanisms. Rigel’sproductivity has resulted in strategic collaborations with large pharmaceuticalpartners to discover, develop and market our product candidates. We haveproduct development programs in inflammatory/autoimmune diseases such asrheumatoid arthritis, thrombocytopenia, asthma and allergy as well as incancer.

During 2005, we:

·       Signeda collaboration agreement with Serono that grants Serono an exclusive licenseto develop and commercialize product candidates from our Aurora kinaseinhibitor program, which includes R763 (October 2005);

·       Completeda 4.2 million share public offering of our common stock that raisedapproximately $81.6 million in net proceeds (July 2005);

·       Initiateda clinical development program in rheumatoid arthritis with R788 (July 2005);

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·       Completeda Phase 2 trial of R112 for the treatment of allergic rhinitis, which did notachieve the primary endpoint (December 2005);

·       Receiveda milestone payment in connection with the Merck ligase collaboration (December 2005);and

·       Announced a newcollaborative 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 (January 2005).

**Our Strategy**

Our objective is to create a portfolio of productcandidates that can be developed into small molecule therapeutics for our ownproprietary programs and with potential collaborative partners. We believe thatproducing a portfolio of many product candidates and working in conjunctionwith pharmaceutical companies increase our probability of development and commercialsuccess. The product development process is subject to both high costs and highrisk of failure. We believe that this approach helps minimize the risk offailure, while concurrently strategically placing us in a position to help fillthe continuing product pipeline gap at major pharmaceutical companies.

The key elements toour scientific and business strategy are to:

·       *utilize our robust discovery engine to rapidly discover and validatenew product candidates in a broad range of therapeutic indications;*

·       *develop a diverse portfolio of drug candidates that address a largerange of therapeutic indications or that represent significant marketopportunities;*

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

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

**Clinicaland Preclinical Product Development Programs**

Weconduct research programs for our own proprietary programs as well as forprograms conducted jointly through our corporate collaborations. We arecurrently developing multiple proprietary product candidates. The followingtable summarizes our clinical outlook:

| **Compound/Indication**         | ** ** | ** **             | ** ** | **Clinical Outlook** | ** ** |
|---------------------------------|------------|------------------------|------------|---------------------------|------------|
| R788 in Rheumatoid  Arthritis   |       | Ph  II, 2H 2006        |       |
| R788 in  Thrombocytopenia (ITP) |       | Ph  II, 2H 2006        |       |
| R763 in Oncology                |       | Ph  I, 1H 2006         |       |
| Transplant  Rejection Program   |       | Name  compound in 2006 |       |
| Asthma Program                  |       | Name compound in 2006  |       |

 

(1)          “Phase I”: Clinicaltesting in humans to determine safety.

(2)          “Phase II”:Clinical testing in humans to determine efficacy.

***Rheumatoid Arthritis***

*Diseasebackground.**  *Rheumatoid arthritis, or RA, is a chronicinflammatory disease that affects multiple tissues, but typically produces itsmost pronounced symptoms in the joints. RA is often progressive anddebilitating, preventing people from living a symptom-free life. Ultimately thechronic 

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inflammation of the jointsleads to the destruction of soft tissue and erosion of the articular surfacesof the bone. The disease is estimated toaffect nearly 2.1 million people in the United 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 of immunomodulatoryagents (TNF inhibitors, co-stimulation inhibitors), which must be delivered viainjection.

*Rheumatoidarthritis program.**  *Weintend to focus our RA program on the development of an oral, safe DMARD thatcan be used earlier in the course of the disease, preventing its progressionprior to major bone and cartilage destruction.

R788 is our lead productcandidate. It has a novel mechanism of action blocking IgG receptor signalingin macrophages and B-cells. Previously, we studied R788 in a Phase I singlecenter, double-blind, randomized, placebo-controlled trial evaluating thesafety and pharmacokinetics of escalating single and multiple doses of R788. Weare now studying R788 safety and pharmacokinetics in combination withmethotrexate, a commonly prescribed treatment for RA. Preliminary analysis ofthe results of this trial suggests no adverse interaction. We expect to commence Phase II efficacy studiesfor RA in the second half of 2006.

***Immune Thrombocytopenia Purpura***

*Diseasebackground.*   Immune thrombocytopenia purpura, orITP, is a blood disorder whereby the immune system attacks and destroysplatelets in the blood resulting in an abnormally low platelet count, which canresult in easy bruising, bleeding gums, and internal bleeding. Rigel isfocusing its ITP program on the chronic form of the disorder, targeting theunderlying autoimmune cause of the disease, rather than stimulation of plateletproduction. Approximately 200,000 people in the U.S. suffer from ITP. Themajority of cases are in women, with 50% of the new cases being found inchildren.

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.

*ITP Program.**  *Platelet destruction from ITP is mediated by IgGsignaling. R788 is a potent inhibitor of IgG signaling. In preclinical studies,Rigel has shown R788 to protect from thrombocytopenia in animal models and toimprove thrombocytopenia in an ITP mouse model. We plan to commence Phase IIclinical trials of R788 to evaluate its safety and efficacy in refractory ITPpatients in the second half of 2006.

***Asthma and Allergy***

*Diseasebackground.**  *Asthmaand allergic rhinitis are chronic inflammatory disorders of the airways. Asthmaaffects the lower respiratory tract and is marked by episodic flare-ups, orattacks, that can be life threatening. In some patients, allergens, such aspollen, trigger the production of immunoglobulin E antibodies, or IgEantibodies, which then bind to mast cells and cause an intracellular signalthat results in the release of various chemical mediators. When this processoccurs repeatedly over time, it creates persistent inflammation of the airwaypassages, resulting in the chronic congestion and airway obstruction associatedwith allergic rhinitis and asthma, respectively. Allergic rhinitis, or allergy,is an acute inflammatory reaction in the upper respiratory tract resulting innasal congestion, sneezing, itching and 

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watery eyes. Over59 million people in the United States suffer from allergic disorders, andover 11 million people suffer from asthmatic disorders.

*Asthmaprogram.**  *Inthe first quarter of 2005, we announced a collaborative research and licenseagreement with Pfizer for the development of inhaled products for the treatmentof allergic asthma and other respiratory diseases, such as COPD. Thecollaboration is focused on our preclinical small molecule compounds, whichinhibit IgE receptor signaling in respiratory tract mast cells by blocking thesignaling enzyme Syk, or spleen tyrosine kinase, a novel drug target forrespiratory diseases. Mast cells play important roles in both early and latephase allergic reactions, and Syk inhibitors could prevent both phases. Weexpect Pfizer to advance a compound to the clinic combining their dry powderinhaler, their drug development capabilities and our novel small molecules. Thefirst significant milestone under this collaboration is Pfizer’s selection of aspecific molecule to take into drug development, which we expect to occur in2006.

*Allergic rhinitis program.**  *R112, our prior clinical productcandidate for allergic rhinitis, failed to achieve its primary endpoint in amulti-center Phase II clinical trial completed in December 2005. We arecurrently evaluating alternatives on how to best proceed with our allergicrhinitis program either on our own or with a collaborative partner.

***Oncology***

*Diseasebackground.**  *Canceris the second leading cause of death in the United States. More than onemillion people get cancer each year, and nearly half of all men and overone-third of all women in the United States will develop cancer during theirlifetimes. Anyone can get cancer at any age, however, approximately 77% of allcancers are diagnosed in people age 55 and older. Although cancer occursin all racial and ethnic groups, the rate of incidence varies from group togroup.

*AuroraKinase program.**  *Aurorakinase plays a central role in the cell division process and the overexpressionof Aurora kinase can cause cells to quickly form an abnormal number ofchromosomes. As such, Aurora kinase is frequently associated with various solidtumor human cancers such as cancers of the breast, bladder, colon, ovary, headand neck, and pancreas. Increased knowledge of aurora kinase and its regulationpotential may be the basis for treating and even preventing cancer.

We have identified R763 asa lead compound in our Aurora kinase inhibition program, targeting cancer cellproliferation. R763 is a potent, highly-selective, small-moleculeinhibitor of Aurora kinase. In October 2005, we signed a licensingagreement with Serono that grants to Serono an exclusive license to develop andcommercialize R763, in addition to other product candidates arising from ourAurora kinase inhibitor program. Under the agreement, we were responsible forfiling an investigational new drug application, or IND, for R763, while Seronowill be responsible for the further development and commercialization of R763. Wefiled an IND for R763 with the Food and Drug Administration, or FDA, in December 2005and obtained FDA approval to proceed under the IND in January 2006. Weanticipate that Serono will initiate clinical trials for R763 in the first halfof 2006.

**Research Programs**

We are conducting proprietary research in three broaddisease areas: immunology/inflammation, virology and oncology. With eachdisease area we are conducting basic research as well as screening compoundsagainst potential novel intracellular targets and optimizing those leads thatappear to have the greatest potential.

***Immunology/Inflammation.***   Currently,we are researching autoimmune mediated inflammation disorders such astransplant rejection, multiple sclerosis and inflammation of the bowel. We haveidentified more than one kinase that may be inhibited in order to treatinflammation related disorders, and we are in 

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the process of screeningother compounds against various kinases in order to find additional leadcompounds to potentially treat inflammation-related disorders.

We are focusing our organtransplant rejection program on inhibition of Janus Tyrosine Kinase 3, or JAK3,an attractive target based on its selectivity. JAK3 has limited expression in T &B cells, natural killer cells, mast cells, and macrophages. It also plays acritical role in lymphocyte development and function. Rigel has a series ofcompounds that are selective, potent inhibitors of JAK3. In preclinicalstudies, these compounds have shown good exposure and distribution to targettissues, are well tolerated in animal studies and have good efficacy in the ratheterotopic heart allograft model. We plan to complete transplant animal modelsand continue preclinical development in 2006.

***Virology.*****  **In the area of virology, we are investigating varioustargets to inhibit the hepatitis C virus, or HCV, replication. In addition, weare conducting initial screening tests of potential product candidates againstother viruses. We announced that we will undertake the development of variouschemical scaffolds in our HCV program. We expect to bring one of thesealternate scaffolds into pre-clinical studies in 2006.

***Oncology.*****  **In the area of oncology, we are focused on inhibitingkinases as well as ligases, a new target class that also may yield possibledrug targets in immunology and virology. In addition to R763, our oncology research programs are focused in twoareas: ubiquitin ligases and inhibition of the tyrosine kinase receptor knownas Axl.

*Ubiquitinligase program.**  *Ubiquitinligases are enzymes that regulate protein degradation within the cell. Thebreakdown of proteins, in turn, affects many important cellular functions,including cell division. Targeting ligases represents a novel approach totreating diseases where normal cellular processes are out of balance. Becauseunchecked cell division is the hallmark of cancer, researchers believe thatthis part of the cell machinery represents a particularly compelling target forcancer therapies. Ubiquitin ligase targets are numerous and modular. Thisprovides the potential for intervening in a highly specific fashion withrespect to a disease, potentially improving efficacy and minimizingside-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. to investigate ubiquitinligases to find treatments for cancer and potentially other diseases. Thecollaboration is based on a number of new targets designated by Merck. However,we may nominate our own targets for potential inclusion in the collaboration.We also have an ongoing program with Daiichi to pursue compounds against aspecific ubiquitin ligase target.

*Other research in oncology.**  *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.

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**Corporate Collaborations**

*CurrentCollaborations*

We currently havecollaborations with six major pharmaceutical/biotech companies to leverage ourefforts. These collaborations are: one with Janssen Pharmaceutica N.V., adivision of Johnson & Johnson, relating to oncology therapeutics anddiagnostics, two with Pfizer Inc.; one initiated in 1999 and the other in January 2005,relating to intrapulmonary asthma and allergy therapeutics; one with NovartisPharma AG with four different programs relating to immunology, oncology andchronic bronchitis; one with Daiichi Pharmaceuticals Co., Ltd. in the areaof oncology; one with Merck and Co., Inc., also in the area of oncology,and one with Serono, relating to our Aurora kinase inhibitor program.

***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. Under terms of the agreement, we retain the rights toco-develop and co-promote certain products resulting from this collaboration inNorth America while Daiichi retains co-development and promotion rights in theremainder of the world. Per the agreement, the research phase of thiscollaboration expired in August 2005. Daiichi may become obligated to payus certain other milestone payments. We are also entitled to receive royaltieson any commercialized products to emerge from the collaboration.

***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.

***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 research scientistsfor two and a half years, at which point the research phase of thiscollaboration will terminate. The collaboration is based on a number of new targetsdesignated by Merck. In addition, we may nominate our own targets for potentialinclusion in the collaboration. Merck is responsible for worldwide developmentand commercialization of any resulting compounds and will pay us royalties onfuture product sales, if any. Under this collaboration, if certain conditionsare met, we are eligible to receive milestone payments for selection of target,preclinical and clinical events and have thus far achieved one such milestone.

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***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.

***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, weentered into a second research collaboration with Pfizer that has a licensecomponent. The collaboration is for the development of inhaled products for thetreatment of allergic asthma and other respiratory diseases such as COPD. Thecollaboration is primarily focused on our preclinical small molecule compounds,which inhibit IgE receptor signaling in respiratory tract mast cells byblocking the signaling 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.

***Serono***

In October 2005, we entered into a collaborativeresearch and license agreement with Serono under which we granted to Serono anexclusive license to develop and commercialize product candidates from ourAurora kinase inhibitor program. Our Aurora kinase inhibitor program includes R763 which is a highlypotent, orally-available multi-Aurora kinase inhibitor that has been shown invitro and in in-vivo tumor xenograft models to inhibit proliferation andtrigger apoptosis in several tumor cell lines including the cancer of thecervix, colon, lung, pancreas and prostate.

While the agreementincludes a basket of compounds within the Aurora kinase inhibitor program andthe potential for additional compounds, the collaboration and our efforts underthe agreement are focused on R763. We are responsible for all costs associatedwith the preparation and filing of an IND for R763, while Serono is responsiblefor all development of R763 following regulatory acceptance of the IND andcosts thereafter. In February 2006, we received a milestone payment uponthe regulatory acceptance of the R763 IND in January 2006. We will beeligible to receive additional milestones, under certain conditions, uponcommencement of a Phase I clinical trial of R763, other clinical events andmarketing 

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approvaland royalties on any future product sales. We anticipate assisting Serono withcertain studies and activities through the beginning of the Phase 1 clinicaltrial.

**Our Discovery Engine**

The technologies that we use in connection with bothour proprietary product development programs and our corporate collaborations aredesigned to identify protein targets for compound screening and validate therole 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 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*: it focuses only on thesub set of expressed proteins of genes believed to be specifically implicatedin the disease process;

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

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

·       *better informed target selection*: it provides avariety of different types of targets and information concerning the role eachplays in their endogenous state to better select targets more susceptible topharmaceutical intervention;

·       *more efficient compound screening*: it increases theprobability and speed that compound screening will identify “hits” because itprovides more detailed knowledge of the target that can be used to guide thedesign of the compound screen; and

·       *risk reduction*: it may reduce the risk of failure inthe product development process due to serious side effects, including toxicityor other reasons, by selecting only targets that are specific to the disease inquestion and that have no apparent role in other cell types or signalingpathways.

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 successfullyand increase 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 

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componentsof lead optimization. As programs move through the lead optimization stage, ourpharmacology and preclinical development group supports our chemists andbiologists by performing the necessary studies, including toxicology, forinvestigational new drug, or 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.

**Research and Development Expenses**

Our research anddevelopment expenses were $52.0 million in 2005, $48.5 million in2004 and $41.6 million in 2003.

**Intellectual Property**

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 150 pending patent applications and over50 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, eitheralone or together with their collaborative partners, have significantly greaterexperience than we do in:

·       identifyingand validating targets;

·       screeningcompounds against targets; and

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·       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;

·       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

·       enter commercializationagreements for our new drug compounds.

**Government Regulation**

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

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·       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.

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 regulatory actionagainst our potential products, collaborative partners or us. Additionally, wehave no experience in working with our partners in conducting and managing theclinical 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 31,2005, we had 151 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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**Available Information**

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. Risk Factors**

*In evaluating our business, you should carefullyconsider the following risks, as well as the other information contained inthis annual report on Form 10-K. If any of the following risksactually occurs, our business could be harmed. The risks and uncertaintiesdescribed below are not the only ones facing us. Additional risks anduncertainties not presently known to us, or that we currently see asimmaterial, may also harm our business.*

**Wewill need additional capital in the future to sufficiently fund our operationsand research.**

We have consumed substantial amounts of capital todate, and operating expenditures are expected to increase over the next severalyears. In July 2005, we completed a public offering in which we sold4,197,500 shares of our common stock, including547,500 sharesissued upon exercise of an option granted to the underwriters to coverover-allotments, at a price to the public of $20.75 per share, whichresulted in net proceeds to us of approximately $81.6 million after deductingunderwriting discounts and commissions and related expenses. We believe thatour existing capital resources and anticipated proceeds from currentcollaborations will be sufficient to support our current operating plan throughat least the next 12 months. Our operations will require significantadditional funding in large part due to our research and development expenses,future preclinical and clinical-testing costs, and the absence of anymeaningful revenues for the foreseeable future. The amount of future fundsneeded will depend largely on the timing and structure of potential futurecollaborations. We do not know whether additional financing will be availablewhen needed, or that, if available, we will obtain financing on terms favorableto our stockholders or us. We have consumed substantial amounts of capital todate, and operating expenditures are expected to increase over the next severalyears as we expand our infrastructure and research and development activities.

On October 24, 2005, we signed a licensingagreement with Serono that grants to Serono an exclusive license to develop andcommercialize product candidates from our Aurora kinase inhibitor program,which includes R763. Under the terms of the agreement, we received initialpayments totaling $25.0 million, comprised of a license fee of $10.0 millionand the purchase of $15.0 million of our common stock, at a premium. During February 2006,we received a milestone payment of $5.0 million triggered by the regulatoryacceptance of the R763 IND in January 2006.

To the extent we raiseadditional capital by issuing equity securities, our stockholders could at thattime experience substantial dilution. To the extent that we raise additionalfunds through collaboration and licensing arrangements, we may be required torelinquish some rights to our technologies or product candidates, or grantlicenses on terms that are not favorable to us.

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**Ourfuture funding requirements will depend on many uncertain factors.**

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

·       theprogress and success of preclinical studies (including studies and manufactureof materials) and clinical trials of our product candidates conducted by us orour 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 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.

**Oursuccess as a company is uncertain due to our history of operating losses andthe 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 $45.3 million in 2005,$56.3 million in 2004 and $41.2 million in 2003. Currently, our revenuesare generated solely from research payments pursuant to our collaborationagreements and licenses and are insufficient to generate profitable operations.As of December 31, 2005, we had an accumulated deficit of approximately$257.5 million. We expect to incur losses for at least the next severalyears and expect that these losses could increase as we expand our research anddevelopment activities and incur significant clinical and testing costs.

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

At the present time, the majority of our operationsare in various stages of drug identification and development. We currently havetwo product compounds in the clinical testing stage: one is for RA, which isproprietary to our Company and the other is for oncology, which is partneredwith Serono. In our industry, it is statistically unlikely that the limitednumber of compounds that we have identified as potential product candidateswill actually lead to successful product development efforts, and we do notexpect any drugs resulting from our research to be commercially available forseveral years, if at all. Our product compounds in the clinic and our futureleads for potential drug compounds are subject to the risks 

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and failures inherent inthe development of pharmaceutical products. These risks include, but are notlimited to, the inherent difficulty in selecting the right drug and drug targetand avoiding unwanted side effects as well as unanticipated problems relatingto product development, testing, regulatory compliance, manufacturing,marketing, competition and costs and expenses that may exceed currentestimates. 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 development, we have established anticipated timelines forclinical development based on existing knowledge of the compound. However, wecannot provide assurance that we will meet any of these timelines with respectto the initiation or completion of clinical studies. In December 2005, wecompleted a Phase 2 trial of R112 for the treatment of allergic rhinitis, whichdid not achieve the primary endpoint.

In addition, we expectSerono to initiate clinical trials of R763 in 2006. 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 assurance regarding thelikely results from our future clinical trials or the impact of those resultson our business.

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

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. For example, in December 2005, we completed Phase II trial ofR112 for the treatment of allergic rhinitis, which did not achieve the primaryendpoint.

**Delaysin clinical testing could result in increased costs to us.**

Significant delays in clinical testing couldmaterially impact our product development costs. We do not know whether plannedclinical trials will begin on time, will need to be halted or revamped or willbe completed on schedule, or at all. Clinical trials can be delayed for avariety of reasons, including delays in obtaining regulatory approval tocommence a study, delays from scale up delays in reaching agreement onacceptable clinical study agreement terms with prospective clinical sites,delays in obtaining institutional review board approval to conduct a study at aprospective clinical site or delays in recruiting subjects to participate in astudy. Environmental conditions may impact the execution of some clinicaltrials, particularly during the allergy season for our allergic rhinitisprogram.

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 

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delaysare significant, our financial results and the commercial prospects for ourproduct candidates will be harmed, and our ability to become profitable will bedelayed.

**Welack the capability to manufacture compounds for development and rely on thirdparties to manufacture our product candidates, and we may be unable to obtainrequired material in a timely manner, at an acceptable cost or at a qualitylevel required to receive regulatory approval.**

We currently do not have manufacturing capabilities orexperience necessary to produce our product candidates, including R788 forpreclinical testing and clinical trials. We relied on a single third-partycontractor to produce R763. We also rely on a single manufacturer for R788product for preclinical and clinical testing. We will rely on manufacturers todeliver materials on a timely basis and to comply with applicable regulatoryrequirements, including the U.S. Food and Drug Administration’s, or FDA’scurrent Good Manufacturing Practices, or GMP. These outsourcing efforts withrespect to manufacturing preclinical and clinical supplies will result in adependence on our suppliers to timely manufacture and deliver sufficientquantities of materials produced under GMP conditions to enable us to conductplanned preclinical studies, clinical trials and, if possible, to bringproducts to market in a timely manner.

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

Our third-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.

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

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

To date, most of our revenues have been related to theresearch phase of each of our collaborative agreements. Such revenues are forspecified periods, and the impact of such revenues on our results of operationsis partially offset by corresponding research costs. Following the completionof the research 

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phase of eachcollaborative agreement, additional revenues may come only from milestonepayments and royalties, which may not be paid, if at all, until some time wellinto the future. The risk is heightened due to the fact that unsuccessfulresearch efforts may preclude us from receiving any milestone payments underthese agreements. Our receipt of revenues from collaborative arrangements isalso significantly affected by the timing of efforts expended by us and ourcollaborators and the timing of lead compound identification. In late 2001, werecorded the first revenue from achievement of milestones in both the Pfizerand Johnson & Johnson collaborations. In addition, we havesubsequently received milestone payments from Novartis, Daiichi, Merck andSerono. Under many agreements, however, milestone payments may not be earneduntil the collaborator has advanced products into clinical testing, which maynever occur or may not occur until some time well into the future. If we arenot able to generate revenue under our collaborations when and in accordancewith our expectations or the expectations of industry analysts, this failure couldharm our business and have an immediate adverse effect on the trading price ofour 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.

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

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

The research phase of our collaboration with Johnson &Johnson ended in December 2003, and the research phases conducted at ourfacilities under our broad collaboration with Novartis ended in July 2004.The research phase of our corporate collaboration agreement with Daiichi endedin August 2005. In November 2004, we signed a new corporatecollaboration with Merck, in January 2005 we signed an additionalcollaboration with Pfizer, and in October 2005 we signed an additionalcollaboration with Serono. These agreements could be terminated by the otherparty, and we may not be able to renew these collaborations on acceptableterms, if at all, or negotiate additional corporate collaborations onacceptable terms, if at all. If these collaborations terminate or are notrenewed, any resultant loss of revenues from these collaborations or loss ofthe expertise of our collaborative partners could adversely affect our business.

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

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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.

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

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

If any of our 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.

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

Our success willdepend to a large part on our own, our licensees’ and our licensors’ ability toobtain and defend patents for each party’s respective technologies and thecompounds and other products, if any, resulting from the application of suchtechnologies. We have over 150 pending patent applications and over 50 issuedpatents in the United States that are owned or exclusively licensed in ourfield as well as pending corresponding foreign patent applications. In thefuture, our patent position might be highly uncertain and involve complex legaland factual questions. For example, we may be involved in interferences beforethe United States Patent and Trademark Office. Interferences are complex andexpensive legal proceedings and there is no assurance we will be successful insuch proceedings. An interference could result in our losing our patent rightsand/or our freedom to operate and/or require us to pay significant royalties.Additional uncertainty may result because no consistent policy regarding thebreadth of legal claims allowed in biotechnology patents has emerged to date.Accordingly, we cannot predict the breadth of claims allowed in our or othercompanies’ patents.

·       Becausethe degree of future protection for our proprietary rights is uncertain, wecannot ensure that:

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

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

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

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

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

·       wewill develop additional proprietary technologies that are patentable; or

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

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

We are a party to 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 those licenses.

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

Our success 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:

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

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

·       subjectus to potential liability for damages;

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

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

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

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

Before 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:

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

·       mustmeet requirements for institutional review board oversight;

·       mustmeet requirements for informed consent;

·       aresubject to continuing FDA oversight;

·       mayrequire large numbers of test subjects; and

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

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

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

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

Outside the United States,our ability, or that of our collaborative partners, to market a product iscontingent upon receiving a marketing authorization from the appropriateregulatory authorities. This 

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foreignregulatory approval process typically includes all of the risks associated withFDA approval described above and may also include additional risks.

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

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

Our competitors may utilize discovery technologies andtechniques or partner with collaborators in order to develop products morerapidly or successfully than we, or our collaborators, are able to do. Many ofour competitors, particularly large pharmaceutical companies, have substantiallygreater financial, technical and human resources than we do. In addition,academic institutions, government agencies and other public and privateorganizations conducting research may seek patent protection with respect topotentially competitive products or technologies and may establish exclusivecollaborative or licensing relationships with our competitors.

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

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

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

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

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the future. Further, costcontrol initiatives could adversely affect our collaborators’ ability tocommercialize our products and our ability to realize royalties from thiscommercialization.

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

·       governmentand health administration authorities;

·       privatehealth insurers; and

·       otherthird-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 provide coverage for uses of approved products for disease indicationsfor which the FDA has not granted labeling approval. Third-party insurancecoverage may not be available to patients for any products we discover anddevelop, alone or with collaborators. If government and other third-partypayors do not provide adequate coverage and reimbursement levels for ourproducts, the market acceptance of these products may be reduced.

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

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 liability insuranceat an acceptable cost to protect against potential product liability claimscould prevent or inhibit the commercialization of pharmaceutical products wedevelop, alone or with corporate collaborators. We, or our corporatecollaborators, might not be able to obtain insurance at a reasonable cost, ifat all. While under various circumstances we are entitled to be indemnifiedagainst losses by our corporate collaborators, indemnification may not beavailable or adequate should any claim arise.

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

As a small company withonly 151 employees as of December 31, 2005, 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.

**Wedepend on various scientific consultants and advisors for the success andcontinuation 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 

21

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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 weuse biological and hazardous materials in a manner that causes injury orviolates 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 disposal of thesematerials. In the event of contamination or injury, we could be held liable fordamages that result, and such liability could exceed our resources. We are alsosubject to federal, state and local laws and regulations governing the use,storage, handling and disposal of these materials and specified waste products.The cost of compliance with, or any potential violation of, these laws and regulationscould be significant.

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

Our facilities are 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.

**Ourstock price may be volatile, and our stockholders’ investment in our stockcould decline in value.**

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:

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

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

·       sellingby large stockholders;

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

·       developmentsconcerning proprietary rights, including patents;

·       developmentsconcerning our collaborations;

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

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·       regulatorydevelopments in the United States and foreign countries;

·       litigation;

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

·       period-to-periodfluctuations in financial results.

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

Provisions of 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:

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

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

·       limitwho may call a special meeting of stockholders;

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

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

·       providefor a board of directors with staggered terms; and

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

In addition, Section 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.

**Item 1B. Unresolved Staff Comments**

None.

**Item 2. Properties**

We currently leasefacilities consisting of approximately 147,000 square feet of research andoffice space located at 1180 Veterans Boulevard, South San Francisco,California. In May 2004, we subleased approximately 15,000 square feet ofour space to a tenant for a period of two years. In September 2005, thesublease was amended to extend the term for an additional year. We believe ourfacilities are in good operating condition and that the leased real property isadequate for all present and near term uses.

**Item 3. Legal Proceedings**

None.

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

None.

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**PART II**

**Item 5. Market for the Registrant’s Common Equity andRelated 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,  2004** |       |     |       |    |       |
| First Quarter                          |       | $        | 26.50      |    | $          | 16.20 |   |
| Second Quarter                         |       | $        | 23.66      |    | $          | 12.92 |   |
| Third Quarter                          |       | $        | 25.32      |    | $          | 10.86 |   |
| Fourth Quarter                         |       | $        | 29.00      |    | $          | 22.40 |   |
| **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 |   |

 

On February 28, 2006,the last reported sale price for our common stock on the Nasdaq National Marketwas $9.50 per share.

**Holders**

As of February 28,2006, there were approximately 223 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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**Item 6. Selected Financial Data**

The following selectedfinancial data should be read in conjunction with “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and “Item8. Financial Statements and Supplementary Data” included elsewhere in thisannual report on Form 10-K.

| ** **                                                                                 | ** ** | **Fiscal Years Ended December 31,**               | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                 | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Statements of Operations Data:**                                                         |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Contract revenues from  collaborations                                                     |       | $                                                                     | 16,526     |   | $ | 4,733 |   | $ | 11,055 |   | $ | 15,788 |   | $ | 15,303 |   |
| Costs and expenses:                                                                        |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Research and development                                                                   |       | 52,038                                                                |       | 48,523 |   | 41,649 |   | 40,800 |   | 30,806 |   |
| General and administrative                                                                 |       | 12,410                                                                |       | 13,077 |   | 10,233 |   | 12,004 |   | 9,457 |   |
|                                                                                       |       | 64,448                                                                |       | 61,600 |   | 51,882 |   | 52,804 |   | 40,263 |   |
| Loss from operations                                                                       |       | (47,922                                                               | )          | (56,867 | ) | (40,827 | ) | (37,016 | ) | (24,960 | ) |
| Loss on disposal/sale of  property and equipment                                           |       | —                                                                |       | (30 | ) | (169 | ) | — |   | — |   |
| Interest income                                                                            |       | 2,942                                                                 |       | 966 |   | 374 |   | 856 |   | 1,957 |   |
| Interest expense                                                                           |       | (276                                                                  | )          | (324 | ) | (575 | ) | (870 | ) | (802 | ) |
| Net loss                                                                                   |       | (45,256                                                               | )          | (56,255 | ) | (41,197 | ) | (37,030 | ) | (23,805 | ) |
| Loss per common share,  basic and diluted                                                  |       | $                                                                     | (2.07      | ) | $ | (3.12 | ) | $ | (3.62 | ) | $ | (7.41 | ) | $ | (5.75 | ) |
| Weighted average common  shares used in computing loss per common share, basic and diluted |       | 21,857                                                                |       | 18,053 |   | 11,395 |   | 4,995 |   | 4,143 |   |

 

| ** **                                                | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                | ** ** | **(in thousands)**               | ** ** |
| **Balance  Sheet Data:**                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents  and available-for-sale securities |       | $                                     | 138,196    |   | $ | 71,427 |   | $ | 46,500 |   | $ | 27,291 |   | $ | 33,415 |   |
| Working capital                                           |       | 118,949                               |       | 62,821 |   | 41,907 |   | 22,493 |   | 26,371 |   |
| Total assets                                              |       | 147,668                               |       | 78,822 |   | 55,524 |   | 44,342 |   | 46,448 |   |
| Capital lease  obligations, less current  portion         |       | 1,132                                 |       | 781 |   | 1,236 |   | 2,313 |   | 4,243 |   |
| Deferred stock  compensation                              |       | (26                                   | )          | (56 | ) | (200 | ) | (772 | ) | (2,452 | ) |
| Accumulated  deficit                                      |       | (257,522                              | )          | (212,266 | ) | (156,011 | ) | (114,814 | ) | (77,784 | ) |
| Total stockholders’  equity                          |       | 108,588                               |       | 52,301 |   | 39,973 |   | 25,441 |   | 28,941 |   |
|                                                           |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theshare numbers set forth in the table reflect a one-for-nine reverse split ofshares of our outstanding common stock effected on June 24, 2003. SeeNotes to the Financial Statements for description of the number of shares usedin the computation of basic and diluted loss per common share.

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**Item 7. Management’s Discussion and Analysis ofFinancial 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 move one newproduct candidate for a significant indication into the clinic each year. Wehave achieved this goal each year beginning in 2002. Our research focuses onintracellular signaling pathways and related targets that are critical todisease mechanisms. Our productivity has resulted in strategic collaborationswith large pharmaceutical partners to discover, develop and market our productcandidates. We have product development programs in inflammatory/autoimmunediseases such as rheumatoid arthritis, thrombocytopenia, asthma and allergy aswell as in cancer*.*

Since 2004, we havematured into a clinical stage drug development company with multiple productcandidates in development as follows:

·       *R788—ProductCandidate for Rheumatoid Arthritis. *R788, an oral solid dosage formulation of R406, is our lead productcandidate. It has a novel mechanism of action blocking IgG receptor signalingin macrophages and B-cells. Previously, we studied R788 in a Phase I singlecenter, double-blind, randomized, placebo-controlled trial evaluating thesafety and pharmacokinetics of escalating single and multiple doses of R788. Weare now studying R788 safety and pharmacokinetics in combination withmethotrexate, a commonly prescribed treatment for RA. Preliminary analysis ofthe results of this trial suggests no adverse interaction. We expect to commence Phase II efficacy studiesfor RA in the second half of 2006.

*ITP Program.** *Platelet destruction from ITP is mediated by IgGsignaling. R788 is a potent inhibitor of IgG signaling. In preclinical studies,Rigel has shown R788 to improve thrombocytopenia in an ITP mouse model. We planto commence Phase II clinical trials of R788 to evaluate its safety andefficacy in refractory ITP patients in the second half of 2006.

·       *R763—Product Candidate for Oncology. *In July 2004,we identified R763 as a lead compound in our Aurora kinase inhibition program,targeting cancer cell proliferation. R763 is a potent, highly-selective,small-molecule inhibitor of Aurora kinase. InOctober 2005, we signed a licensing agreement with Serono that grants toSerono an exclusive license to develop and commercialize R763, in addition toother product candidates arising from our Aurora kinase inhibitor program. Underthe agreement, we were responsible for filing an IND for R763 while Serono willbe responsible for the further development and commercialization of R763. Wefiled the IND for R763 with the Food and Drug Administration, or FDA, in December 2005,and obtained FDA approval to proceed under the IND in January 2006. DuringFebruary 2006, we received a milestone payment of $5.0 million triggeredby the regulatory acceptance. We anticipate that Serono will initiate clinicaltrials for R763 by in the first half of 2006.

In the first quarter of 2005, we announced that weentered into a collaborative research and license agreement with Pfizer for thedevelopment of inhaled products for the treatment of allergic asthma and otherrespiratory diseases, such as COPD. The collaboration is focused on ourpreclinical small molecule compounds, which inhibit IgE receptor signaling inrespiratory tract mast cells by blocking the signaling enzyme Syk, or spleentyrosine kinase, a novel drug target for respiratory diseases. Mast cells playimportant roles in both early and late phase allergic reactions, and Sykinhibitors could prevent both phases. We expect Pfizer to advance a compound tothe clinic combining their dry powder inhaler, their drug developmentcapabilities and our novel small molecules. The first significant milestoneunder this collaboration is Pfizer’s selection of a specific molecule to takeinto drug development, which we expect to occur in 2006.

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In December 2005, weannounced that R112, our clinical candidate for allergic rhinitis,failed to achieve its primary endpoint in a multi-center Phase II clinicaltrial in December 2005. We are not planning to move R112 forward inclinical development. We are currently evaluating alternatives on how to bestproceed with our allergic rhinitis program either on our own with backupcompound or with a collaborative partner.

In July 2005, we announced that we will undertakethe study of other chemical scaffolds in our Hepatitis C virus program becausepreliminary findings from pre-clinical studies of a pro-drug of R803 showedinsufficient support to move forward. We expect to bring these alternatescaffolds into pre-clinical studies in 2006.

In addition to the abovementioned product candidates, we have ongoing research programs involvingback-up candidates for the product candidates discussed above as well as 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, 2005, wehave 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 the first quarter of2005, relating to intrapulmonary asthma and allergy therapeutics, one withNovartis Pharma AG with respect to four different programs relating toimmunology, oncology and chronic bronchitis, one with Daiichi PharmaceuticalsCo., Ltd. in the area of oncology, one with Merck, in the area ofoncology, and one with Serono in the area of oncology. All of these collaborations,excluding the recent Pfizer and the Serono collaborations, have a researchphase during which we receive or received funding based on the level ofheadcount allocated to a program. In all of these collaborations if certainconditions are met, we are entitled to receive future milestone payments androyalties. We cannot guarantee that these conditions will be met or thatresearch and development efforts will be successful. As a result, we may beprecluded from receiving any milestone payments or royalties under theseagreements. Only the Merck program currently provides for regular researchreimbursement payments as the research phase of the Daiichi collaboration endedin August 2005.

We are exploring newopportunities with existing and potential collaborators. Our earliestpartnerships focused on the early stages of drug discovery, specifically ontarget discovery and validation. Our collaborations with Daiichi and recentlywith Merck are both later stage focusing on drug discovery and development. Our2005 collaboration with Pfizer covers compounds at the preclinical and leaddesignation stages while our 2005 collaboration with Serono covers a compoundfor which an IND was filed in December 2005 and obtained FDA approval in January 2006.We currently anticipate that in order to support our current research programswe will need to self-fund our own research programs, which involve an increasedrate of spending, to later stages of development prior to partnering withcollaborative partners. Therefore, it is expected that future collaborationsmay have an expanded focus and could include high throughput screening,combinatorial and medicinal chemistry, preclinical evaluations and/or clinicaldevelopment of compounds we have discovered. In addition, we believe thesefuture collaborations could be structured to consist of upfront payments, thepurchase of our common stock, milestone payments upon meeting certainconditions, research or development reimbursement payments and/or royaltiesupon commercialization of products resulting from the collaboration.

**Critical AccountingPolicies and the Use of Estimates**

Our discussion and analysis of our financial conditionand results of operations are based upon our financial statements, which havebeen prepared in accordance with U.S generally accepted accounting 

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principles. Thepreparation 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. On anon-going basis, we evaluate our estimates, including those related to terms ofthe research collaborations, investments, stock compensation, impairmentissues, the estimated useful life of assets and contingencies. We base ourestimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates under different assumptions or conditions. We believe thefollowing critical accounting policies affect our more significant judgmentsand estimates used in the preparation of our financial statements.

We believe that there havebeen no significant changes in our critical accounting policies during the yearended December 31, 2005 as compared to those previously disclosed in ourAnnual Report on Form 10-K for the year ended December 31,2004.

*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,”* are divided into separateunits 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.

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 or exceedthe revenue 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, however, revenue recognized will not exceedamounts billable under the arrangement which corresponds to cash receipts.

Milestones are recognized pursuant to collaborativeagreements upon the achievement of at risk milestones.

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

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*Stock-based Compensation*

| ** **                                             | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| ** **                                             | ** ** | **2005**                                    | ** ** | **2004**                  | ** ** | **2003** | ** ** | **2005 from 2004** | ** ** | **2004 from 2003** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                     | ** ** |
| **Stock-based compensation (recovery)/expense  from:** |       |                                        |       |                      |       |   |   |   |   |   |   |   |   |   |   |
| ***Re-priced  options***                               |       | $                                           | (1,889     | )                         | $          | 1,900 |   | $ | 1,124 |   |   | $ | (3,789 | ) |   |   | $ | 776 |   |   |
| ***Consultant  options***                              |       | (232                                        | )          | 430                       |       | 158 |   |   | (662 | ) |   |   | 272 |   |   |
| ***Other  employee options***                          |       | 31                                          |       | 236                       |       | (167 | ) |   | (205 | ) |   |   | 403 |   |   |
| ***Total***                                            |       | $                                           | (2,090     | )                         | $          | 2,566 |   | $ | 1,115 |   |   | $ | (4,656 | ) |   |   | $ | 1,451 |   |   |

 

**Re-priced Options**

We have recorded expenses 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, have been treated forfinancial reporting purposes as variable awards. Therefore, we have recorded anon-cash charge (recovery), generally for the intrinsic value of the options asthey vest, utilizing the graded vesting method, reflecting increases anddecreases (down to, but not below, the exercise price) in the price of ourcommon stock as compensation expense (recovery) in connection with thereplacement options and the eligible options that were not exchanged. For theyear ended December 31, 2005, we recorded a non-cash compensation recoveryof $1.9 million related to all options eligible for the replacement. Therecovery resulted from the decrease in the market price of our common stockduring 2005. For the years ended December 31, 2004 and 2003, we recordednon-cash compensation charges of $1.9 million and $1.1 million,respectively, related to all options eligible for the replacement. The amountsrecorded were attributable to the increases in the market price of our commonstock during the respective years.

In December 2004, theFinancial Accounting Standards Board, or FASB, issued SFAS 123(R), “Share—BasedPayment (Revised 2004)”, which replaces SFAS 123 and supercedes APB 25. Fromthe first quarter of fiscal year 2006, we will be required to adopt SFAS 123(R) andmeasure all employee share-based compensation awards using a fair value basedmethod and record the share-based compensation expenses in our statements ofoperations if the requisite service to earn the award is provided. We arecurrently finalizing our methodology for implementing FAS 123(R) andexpect the adoption of SFAS 123(R), SAB 107 and related pronouncements willhave a material impact on our results of operations.

**Consultant Options**

We also record expensesassociated with options granted to consultants reflecting the periodicrevaluation of outstanding unvested consultant options based upon the currentmarket value of our common stock and other assumptions, including the expectedfuture volatility of our stock price. We recognized stock-basedcompensation recovery for revaluation of consultant options of $232,000 for theyear ended December 31, 2005 and stock-based compensation expenses of$430,000 and $158,000 for the years ended December 31, 2004 and 2003,respectively.

**Other EmployeeOptions**

We recorded no deferredstock compensation with respect to options granted to employees for the yearended December 31, 2005. We recorded $58,000 of deferred stockcompensation for the year ended December 31, 2004. We recorded no deferredstock compensation with respect to options granted to employees for the yearended December 31, 2003. The amount recorded in 2004 related to an optiongrant to a certain executive officer that was modified to reduce the vestingterm. This amount has been reflected 

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as acomponent of stockholders’ equity, and the deferred expense is being amortizedto operations over the remaining vesting period of the option grant using thegraded vesting method. As a result of our reduction in force on January 31,2003, we recognized approximately $599,000 of stock-based compensationrecovery associated with the unvested and cancelled options of the terminatedemployees which had previously been recognized under the graded vesting methodof deferred compensation amortization. We amortized deferred stock compensationof $30,000, $0.1 million and $0.6 million for the years ended December 31,2005, 2004 and 2003, respectively. At December 31, 2005, we had a total of$26,000 remaining to be amortized over the remaining vesting periods of thestock options.

**Results ofOperations**

***Years Ended December 31, 2005, 2004 and 2003***

*Revenues*

| ** **                                   | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| ** **                                   | ** ** | **2005**                                    | ** ** | **2004**                  | ** ** | **2003** | ** ** | **2005 from 2004** | ** ** | **2004 from 2003** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                     | ** ** |
| ***Contract  revenues from collaborations*** |       | $                                           | 16,526     |                      | $          | 4,733 |   | $ | 11,055 |   |   | $ | 11,793 |   |   |   | $ | (6,322 | ) |   |
|                                              |            |                                             |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Revenuesby collaborator were:

| ** **                        | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| ** **                        | ** ** | **2005**                                    | ** ** | **2004**                  | ** ** | **2003** | ** ** | **2005 from 2004** | ** ** | **2004 from 2003** | ** ** |
| ** **                        | ** ** | **(in thousands)**                     | ** ** |
| ***Merck***                       |       | $                                           | 7,369      |                      | $          | 438 |   | $ | — |   |   | $ | 6,931 |   |   |   | $ | 438 |   |   |
| ***Pfizer***                      |       | 4,241                                       |       | —                    |       | — |   |   | 4,241 |   |   |   | — |   |   |
| ***Serono***                      |       | 2,473                                       |       | —                    |       | — |   |   | 2,473 |   |   |   | — |   |   |
| ***Daiichi***                     |       | 2,443                                       |       | 2,629                     |       | 4,461 |   |   | (186 | ) |   |   | (1,832 | ) |   |
| ***Novartis***                    |       | —                                      |       | 1,666                     |       | 4,119 |   |   | (1,666 | ) |   |   | (2,453 | ) |   |
| ***Johnson &  Johnson*** |       | —                                      |       | —                    |       | 2,475 |   |   | — |   |   |   | (2,475 | ) |   |
| ***Total***                       |       | $                                           | 16,526     |                      | $          | 4,733 |   | $ | 11,055 |   |   | $ | 11,793 |   |   |   | $ | (6,322 | ) |   |

 

Contract revenues fromcollaborations in 2005, 2004 and 2003 consisted primarily of research supportand amortization of upfront fees from the continuation of our collaborationsabove. Revenues for 2005 and 2003 also included milestone payments from certaincollaborators. In the twelve months ended December 31, 2005, revenuesincluded a $900,000 milestone payment from Daiichi, which primarily related tothe acceptance by Daiichi of two compounds to move toward pre-clinical testingand a $500,000 milestone for Merck related to a certain ligase target. Theincrease in revenues in 2005 from 2004 was primarily due to a full year of theMerck collaboration and the initiation of the Pfizer and Serono collaborations,offset by the termination of the research phase of the Novartis oncologyprogram in 2004. The decrease in 2004 from 2003 revenues was primarily due tothe termination of the research phase of the Novartis oncology program and thetermination of the research phase of the Johnson & Johnson oncologyprogram. Also, revenues in 2003 included a $1.9 million milestone paymentfrom Daiichi for the completion of a certain screening phase of thecollaboration. The research phase of the Daiichi collaboration ended inAugust 2005 while the research phase of the Merck collaboration ends inMay 2007. We expect contract revenues from collaborations to continue tobe a significant component of our total revenues for the foreseeable future.

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*Research and Development*

| ** **                                                                                         | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| ** **                                                                                         | ** ** | **2005**                                    | ** ** | **2004**                  | ** ** | **2003** | ** ** | **2005 from 2004** | ** ** | **2004 from 2003** | ** ** |
| ** **                                                                                         | ** ** | **(in thousands)**                     | ** ** |
| ***Research  and development expenses***                                                           |       | $                                           | 52,038     |                      | $          | 48,523 |   | $ | 41,649 |   |   | $ | 3,515 |   |   |   | $ | 6,874 |   |   |
| ***Stock-based  compensation (recovery)/ expense included in research and development  expenses*** |       | (1,467                                      | )          | 2,000                     |       | 924 |   |   | (3,467 | ) |   |   | 1,076 |   |   |
|                                                                                                    |            |                                             |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in research and development expenses in2005 was due to the increase in our preclinical and clinical costs andpersonnel costs offset by a decrease in stock-based compensation expenserelated to the re-priced stock options subject to variable accounting, asdiscussed previously under “Stock-Based Compensation” in the “CriticalAccounting Policies and the Use of Estimates” section. The increase in ourpreclinical and clinical costs for twelve months ended December 2005 wasattributable to costs associated with our R788, R763 and R112 programs offsetby the decrease in costs associated with our R803 program, which wasdiscontinued in July 2005. The costs attributable to R788 were related toour ongoing clinical trials as well as the IND enabling studies. The costsassociated with R763 were related to the ongoing IND enabling studies, as wellas the production of material for the upcoming clinical trials. The costsassociated with R112 were related to clinical costs for the Phase II studyinitiated in August 2005. The increase in research and developmentexpenses in 2004 from 2003 was primarily attributable to an increase in ourpreclinical and clinical costs and a stock-based compensation expensecharge related to the re-priced stock options subject to variable accounting,as discussed previously under “Stock-Based Compensation” in the “CriticalAccounting Policies and the Use of Estimates” section. The increase in ourclinical costs in 2004 was attributable to costs associated with our Phase IIclinical trial for R112, our Phase I/II clinical trial for R803, and our PhaseI clinical trial for R406. The increase in our pre-clinical costs in 2004 wasprimarily attributable to the studies performed with R406 to enable theinitiation of clinical trials in December 2004.

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 I, II and III clinical studies in humans—eachof which 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 and Administrative Expenses*

| ** **                                                                                           | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| ** **                                                                                           | ** ** | **2005**                                    | ** ** | **2004**                  | ** ** | **2003** | ** ** | **2005 from 2004** | ** ** | **2004 from 2003** | ** ** |
| ** **                                                                                           | ** ** | **(in thousands)**                     | ** ** |
| ***General  and administrative expenses***                                                           |       | $                                           | 12,410     |                      | $          | 13,077 |   | $ | 10,233 |   |   | $ | (667 | ) |   |   | $ | 2,844 |   |   |
| ***Stock-based  compensation (recovery)/ expense included in general and administrative  expenses*** |       | (623                                        | )          | 566                       |       | 191 |   |   | (1,189 | ) |   |   | 375 |   |   |
|                                                                                                      |            |                                             |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The decrease inadministrative expenses in 2005 from 2004 was primarily due to the decrease ofstock-based compensation expense related to the re-priced stock options subjectto variable accounting, as discussed previously under “Stock-Based Compensation”in the “Critical Accounting Policies and the Use of Estimates” section offsetby increased personnel and facility costs. The increase in general and 

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administrativeexpenses in 2004 from 2003 million in 2004 was primarily attributable to anincrease in our intellectual property legal costs to expand our patent estate,an increase in our stock-based compensation expense charge related to there-priced stock options subject to variable accounting, as discussed previouslyunder “stock-based compensation” in the “Critical Accounting Policies andthe Use of Estimates” section, and an increase in personnel related costs.

*Loss on Disposal/Sale of Property and Equipment*

| ** **                                              | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change**        | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **  2005  **            | ** ** | **  2004  ** | ** ** | **  2003  ** | ** ** | **2005 from 2004** | ** ** | **2004 from 2003** | ** ** |
| ** **                                              | ** ** | **(in thousands)**                     | ** ** |
| ***Loss  on disposal /sale of property and equipment*** |       |                                        | $          | —                           |       |   |   | $ | 30 |   |   |   | $ | 169 |   |   |   | $ | (30 | ) |   |   | $ | (139 | ) |   |
|                                                         |            |                                             |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During2004, we wrote-off $4,900,000 of assets at their original acquisition cost andrelated accumulated depreciation of $4,870,000 for assets that are no longer inuse. We recorded loss on disposal of property and equipment of $30,000. Inconjunction with our move to our new facilities in February 2003, we soldto the new tenant of our previous facility certain furniture and equipment thatwould no longer be needed at our new location. This sale resulted in cashproceeds of approximately $71,000 and a loss on sale of $169,000. The lossrepresents the remaining net book value of those assets net of the cashreceived on the sale.

*Interest income*

| ** **             | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change** | ** ** |
|------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| ** **             | ** ** | **2005**                                    | ** ** | **2004**                  | ** ** | **2003** | ** ** | **2005 from 2004** | ** ** | **2004 from 2003** | ** ** |
| ** **             | ** ** | **(in thousands)**                     | ** ** |
| ***Interest  income*** |       | $                                           | 2,942      |                      | $          | 966 |   | $ | 374 |   |   | $ | 1,976 |   |   |   | $ | 592 |   |   |
|                        |            |                                             |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interestincome results from our interest-bearing cash and investment balances.The increase in interest income in 2005 from 2004 was primarily due to theincrease in our investment balances as a result of the public offering wecompleted in July 2005 where we raised $81.6 million in net proceedscombined with an increase in the interest rates we earn on these balances. Theincrease in interest income in 2004 from 2003 was primarily due to the increasein our investment balances as a result of the follow-on offering completed inearly 2004.

*Interest expense*

| ** **              | ** ** | **Years Ended December 31,** | ** ** | **Aggregate Change** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| ** **              | ** ** | **2005**                                    | ** ** | **2004**                  | ** ** | **2003** | ** ** | **2005 from 2004** | ** ** | **2004 from 2003** | ** ** |
| ** **              | ** ** | **(in thousands)**                     | ** ** |
| ***Interest  expense*** |       | $                                           | (276       | )                         | $          | (324 | ) | $ | (575 | ) |   | $ | 48 |   |   |   | $ | 251 |   |   |
|                         |            |                                             |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interest expense is theresult of our capital lease obligations associated with fixed assetacquisitions. Interest expense was flat in 2005 as compared to 2004 due tocomparable debt obligations outstanding during both years. The decrease in interestexpense in 2004 from 2003 was due to the decrease in debt obligations.

**Future Accounting Requirements**

In November 2005, FASB issued FSP FAS 115-1and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments” (“FSP FAS 115-1”), whichprovides guidance on determining when investments in certain debt and equitysecurities are considered impaired, whether that impairment isother-than-temporary, and on measuring such impairment loss. FSP FAS 115-1

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also includes accountingconsiderations subsequent to the recognition of an other-than temporaryimpairment and requires certain disclosures about unrealized losses that havenot been recognized as other-than-temporary impairments. FSP FAS 115-1is required to be applied to reporting periods beginning after December 15,2005. We are required to adopt FSP FAS 115-1 in the first quarter offiscal 2006. We do not expect that the adoption of the statement will have amaterial impact on our consolidated results or financial condition.

In May 2005, FASB issued SFAS 154, “AccountingChanges and Error Corrections—a replacement of APB Opinion No. 20 and FASBStatement No. 3”. SFAS 154 changes the requirements for the accounting forand reporting of a change in accounting principle, and applies to all voluntarychanges in accounting principle. It also applies to changes required by anaccounting pronouncement in the unusual instance that the pronouncement doesnot include specific transition provisions. This statement requires retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. SFAS 154 is effective foraccounting changes made in fiscal years beginning after December 15, 2005.We do not expect that adoption of this statement will have a material impact onour results of operations or financial condition.

In December 2004, FASB issued SFAS 123(R), “Share-BasedPayment (Revised 2004)”, which replaces SFAS 123 and supersedes APB 25. In March 2005,the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, providingsupplemental implementation guidance for SFAS 123(R). In April 2005, theSEC issued “Amendment to Rule 04-01(a) of Regulation S-XRegarding the Compliance Date for Statement of Financial Accounting StandardNo.123(R), ‘Share-Based Payment’” (the “Amendment to Rule 4-01(a)”),changing the effective date for most public companies to adopt SFAS 123(R) tothe first interim reporting period of a company’s fiscal year that begins on orafter June 15, 2005. Under the Amendment to Rule 4-01(a), weare now required to adopt SFAS 123(R) in our first quarter of fiscal year 2006.

SFAS 123(R) requiresthat compensation costs relating to share-based payment transactions berecognized in the financial statements. The pro forma disclosure previouslypermitted under SFAS 123 will no longer be an acceptable alternative torecognition of expense in the financial statements. SFAS 123(R) alsoprovides three alternative transition methods for its first adoption. Up to theend of fiscal year 2005, we had measured compensation costs related toshare-based payments under APB 25 and as allowed by SFAS 123, and provided proforma disclosure in notes to our financial statements as required by SFAS 123.On adoption of SFAS 123(R), we will use the modified prospective applicationtransition method. SFAS 123(R) also requires a classification change inthe statement of cash flows, whereby a portion of the tax benefits from stockoptions will be moved from cash from operating activities to cash fromfinancing activities, without changing the total cash flows. We are currentlyfinalizing the methodology for implementing FAS 123(R) and expect theadoption of SFAS 123(R), SAB 107 and related pronouncements will have amaterial impact on our results of operations.

**Liquidity and Capital Resources**

**Cash Requirements**

We have financed ouroperations from inception primarily through sales of equity securities,contract payments payable to us under our collaboration agreements andequipment financing arrangements. We have consumed substantial amounts ofcapital to date, and operating expenditures are expected to increase over thenext several years. In July 2005, we completed a public offering in whichwe sold 4,197,500 shares of our common stock, including 547,500shares issued upon exercise of an option granted to the underwriters to coverover-allotments, at a price to the public of $20.75 per share, whichresulted in net proceeds to us of approximately $81.6 million after deductingunderwriting discounts and commissions and 

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relatedexpenses. In October 2005, we signed a licensing agreement with Seronowhere we received initial payments totaling $25.0 million comprised of alicense fee of $10.0 million and the purchase of $15.0 million of our commonstock at a premium. In January 2005, we signed a licensing agreement withPfizer where we received initial payments totaling $15.0 million comprised of alicense fee of $10.0 million and the purchase of $5.0 million of our commonstock at a premium.

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. We have consumed substantial amounts of capital to date, and operatingexpenditures are expected to increase over the next several years as we expandour infrastructure and research and development activities.

To the extent we raiseadditional capital by issuing equity securities, our stockholders could at thattime experience substantial dilution. To the extent that we raise additionalfunds through collaboration and licensing arrangements, we may be required torelinquish some rights to our technologies or product candidates, or grantlicenses on terms that are not favorable to us.

**Ourfuture funding requirements will depend on many uncertain factors.**

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

·       theprogress and success of preclinical activities (including studies andmanufacture of materials) and clinical trials of our product candidatesconducted by us or 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 and intellectualrights;

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

·       expensesassociated with unforeseen litigation.

Insufficient funds mayrequire us to delay, scale back or eliminate some or all of our research or developmentprograms, to lose rights under existing licenses or to relinquish greater orall rights to product candidates at an earlier stage of development or on lessfavorable terms than we would otherwise choose or may adversely affect ourability to operate as a going concern.

As of December 31,2005, we had $138.2 million in cash, cash equivalents andavailable-for-sale securities, as compared to $71.4 million as of December 31,2004, an increase of $66.8 million. The increase was primarilyattributable to net proceeds of $81.6 million, after deducting offeringcosts, from the 

34

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follow-onoffering completed in July 2005 and proceeds from the sale of our commonstock from collaborative arrangements with Serono and Pfizer offset by ouroperating spending for the year. We also received $1.7 million under ourequipment financing arrangements, which was offset by debt service payments of$1.6 million relating to the equipment financing arrangements. For theyears ended December 31, 2005 and 2004, we maintained an investmentportfolio primarily in money market funds, federal agency securities, andcorporate bonds and notes. Cash in excess of immediate requirements is investedwith regard to liquidity and capital preservation. Wherever possible, we seekto minimize the potential effects of concentration and degrees of risk.

**Contractual Obligations**

Thefollowing are our contractual commitments (by fiscal year) as of December 31,2005 associated with debt obligations, contracted research obligations, andlease obligations: (in thousands)

| ** **                               | ** ** | **Total**               | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **(in thousands)** | ** ** |
| Debt obligations(1)                      |       | $                       | 2,453      |                            |       | $                  | 1,233      |               |       | $                                | 1,220      |   | $ | — |   | $ | — |   |
| Contracted  research                     |       | 300                     |       |                            | 300        |               |       | —             |       | —                           |       | — |   |
| Facilities lease,  net of sublease(2)(3) |       | 167,625                 |       |                            | 11,413     |               |       | 27,182             |       | 26,878                           |       | 102,152 |   |
| Total                                    |       | $                       | 170,378    |                            |       | $                  | 12,946     |               |       | $                                | 28,402     |   | $ | 26,878 |   | $ | 102,152 |   |

----

1)               As of December 31,2005, we had $2.2 million in debt obligations associated with ourequipment additions. All existing debt agreements as of December 31, 2005are secured by the equipment financed, bear interest at rates in a range of 9%to 12.2% and are due in monthly installments through 2008.

2)               During May 2004,we initiated a sublease of approximately 15,000 square feet of our premises toa tenant for a period of two years. The sublease was amended in September 2005to extend term for an additional year. The facilities lease obligations aboveare reflective of the sublease income stream of approximately $900,000.

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

**Item 7A. Quantitative and Qualitative Disclosuresabout 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 2005, 2004 and 2003, 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 operatedprimarily in the United States, and all funding activities with ourcollaborators to date have been made in U.S. dollars. Accordingly, we have nothad any exposure to foreign currency rate fluctuations.

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**Item8. Financial Statements and Supplementary Data**

**INDEXTO FINANCIAL STATEMENTSRigel Pharmaceuticals, Inc.**

|                                                           | ** ** | **Page** |
|-----------------------------------------------------------|------------|----------|
| Reports of Independent Registered Public Accounting  Firm |       | 37       |   |
| Balance Sheets                                            |       | 39       |   |
| Statements of Operations                                  |       | 40       |   |
| Statement of Stockholders’ Equity                    |       | 41       |   |
| Statements of Cash Flows                                  |       | 42       |   |
| Notes to Financial Statements                             |       | 43       |   |

 

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**Reportof Independent 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, 2005 and 2004, and therelated statements of operations, stockholders’ equity, and cash flows for eachof the three years in the period ended December 31, 2005. 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, 2005 and 2004, and the resultsof its operations and its cash flows for each of the three years in the periodended December 31, 2005, in conformity with U.S. generally acceptedaccounting principles.

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 31,2005, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated March 3, 2006 expressed an unqualified opinion thereon.
|  | /s/ Ernst & Young LLP |
|--|--------------------------------|

 

Palo Alto, CaliforniaMarch 3, 2006

37

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**Reportof Independent Registered Public Accounting Firm**

The Board of Directors andStockholdersRigel Pharmaceuticals, Inc.

We have audited management’s assessment, included inthe accompanying “Management’s Report on Internal Control Over Financial Reporting”,that Rigel Pharmaceuticals, Inc. maintained effective internal controlover financial reporting as of December 31, 2005, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (the COSO criteria). RigelPharmaceutical, Inc.’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the company’s internal control over financial reporting basedon our audit.

We conducted our audit 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 effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that RigelPharmaceuticals, Inc. maintained effective internal control over financialreporting as of December 31, 2005, is fairly stated, in all materialrespects, based on the COSO criteria. Also, in our opinion, RigelPharmaceuticals, Inc. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2005, basedon the COSO criteria.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the balance sheets of Rigel Pharmaceutical, Inc. as of December 31,2005 and 2004, and the related statements of operations, stockholders’ equity,and cash flows for each of the three years in the period ended December 31,2005 of Rigel Pharmaceuticals, Inc. and our report dated March 3,2006 expressed an unqualified opinion thereon.
|  | /s/ Ernst &  Young LLP |
|--|---------------------------------|

 

PaloAlto, CaliforniaMarch 3, 2006

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

| ** **                                                                                                                                                                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **Assets**                                                                                                                                                                                      |       |                  |       |   |   |
| Current assets:                                                                                                                                                                                 |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                       |       | $                     | 76,779     |   | $ | 10,495 |   |
| Available-for-sale securities                                                                                                                                                                   |       | 61,417                |       | 60,932 |   |
| Accounts receivable                                                                                                                                                                             |       | 1,050                 |       | — |   |
| Other receivables                                                                                                                                                                               |       | 777                   |       | 699 |   |
| Prepaid expenses and other current assets                                                                                                                                                       |       | 2,573                 |       | 2,113 |   |
| Total current assets                                                                                                                                                                            |       | 142,596               |       | 74,239 |   |
| Property and equipment, net                                                                                                                                                                     |       | 3,457                 |       | 2,813 |   |
| Other assets                                                                                                                                                                                    |       | 1,615                 |       | 1,770 |   |
|                                                                                                                                                                                            |       | $                     | 147,668    |   | $ | 78,822 |   |
| **Liabilities  and stockholders’ equity**                                                                                                                                                  |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                            |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                                |       | $                     | 2,497      |   | $ | 1,945 |   |
| Accrued compensation                                                                                                                                                                            |       | 2,189                 |       | 1,639 |   |
| Other accrued liabilities                                                                                                                                                                       |       | 2,324                 |       | 1,555 |   |
| Deferred revenue                                                                                                                                                                                |       | 15,567                |       | 3,728 |   |
| Deferred rent                                                                                                                                                                                   |       | —                |       | 1,230 |   |
| Capital lease obligations                                                                                                                                                                       |       | 1,070                 |       | 1,321 |   |
| Total current liabilities                                                                                                                                                                       |       | 23,647                |       | 11,418 |   |
| Long-term portion  of capital lease obligations                                                                                                                                                 |       | 1,132                 |       | 781 |   |
| Long-term portion  of deferred revenue                                                                                                                                                          |       | 2,771                 |       | 4,180 |   |
| Long-term portion  of deferred rent                                                                                                                                                             |       | 11,121                |       | 9,685 |   |
| Other long-term  liabilities                                                                                                                                                                    |       | 409                   |       | 457 |   |
| Commitments                                                                                                                                                                                     |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                                      |       |                  |       |   |   |
| Common stock, $0.001 par value; 100,000,000 shares  authorized; 24,814,671and 19,661,295 shares issued and outstanding on  December 31, 2005 and December 31, 2004, respectively |       | 25                    |       | 20 |   |
| Additional paid-in capital                                                                                                                                                                      |       | 366,203               |       | 264,823 |   |
| Deferred stock compensation                                                                                                                                                                     |       | (26                   | )          | (56 | ) |
| Accumulated other comprehensive loss                                                                                                                                                            |       | (92                   | )          | (220 | ) |
| Accumulated deficit                                                                                                                                                                             |       | (257,522              | )          | (212,266 | ) |
| Total  stockholders’ equity                                                                                                                                                                |       | 108,588               |       | 52,301 |   |
|                                                                                                                                                                                            |       | $                     | 147,668    |   | $ | 78,822 |   |

 

See accompanying notes.

39

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

| ** **                                                                              | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                              | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Contract revenues  from collaborations                                                  |       | $                                           | 16,526     |   | $ | 4,733 |   | $ | 11,055 |   |
| Costs and expenses:                                                                     |       |                                        |       |   |   |   |   |
| Research and development                                                                |       | 52,038                                      |       | 48,523 |   | 41,649 |   |
| General and administrative                                                              |       | 12,410                                      |       | 13,077 |   | 10,233 |   |
|                                                                                    |       | 64,448                                      |       | 61,600 |   | 51,882 |   |
| Loss from  operations                                                                   |       | (47,922                                     | )          | (56,867 | ) | (40,827 | ) |
| Loss on  disposal/sale of property and equipment                                        |       | —                                      |       | (30 | ) | (169 | ) |
| Interest income                                                                         |       | 2,942                                       |       | 966 |   | 374 |   |
| Interest expense                                                                        |       | (276                                        | )          | (324 | ) | (575 | ) |
| Net loss                                                                                |       | (45,256                                     | )          | (56,255 | ) | (41,197 | ) |
| Net loss per  common share, basic and diluted                                           |       | $                                           | (2.07      | ) | $ | (3.12 | ) | $ | (3.62 | ) |
| Weighted average shares  used in computing net loss per common share, basic and diluted |       | 21,857                                      |       | 18,053 |   | 11,395 |   |

 

See accompanying notes.

40

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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, 2002                                                                                  |       | 5,078,024             |       |        | $          | 5              |       |              |       | $                      | 141,023    |         |       |                   | $          | (772       | )          |   |   | $ | (1 | ) |   |   | $ | (114,814 | ) |   |   | $ | — |   |   |   | $ | 25,441 |   |   |
| Net loss                                                                                                            |       | —                |       |        | —     |           |       |              | —     |                   |       |         | —     |                   |       |       | —     |   |   |   | (41,197 | ) |   |   | — |   |   |   | (41,197 | ) |   |
| Change in  unrealized loss on available-for-sale securities                                                    |       | —                |       |        | —     |           |       |              | —     |                   |       |         | —     |                   |       |       | (12        | ) |   |   | — |   |   |   | — |   |   |   | (12 | ) |   |
| Comprehensive loss                                                                                                  |       |                  |       |        |       |           |       |              |       |                   |       |         |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   | (41,209 | ) |   |
| Issuance of common  stock at $5.76 per share for cash, net of issuance costs                                   |       | 7,986,110             |       |        | 8          |           |       |              | 34,073     |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 34,081 |   |   |
| Issuance of common  stock at $5.76 per share for cash, net of issuance costs                                   |       | 1,615,705             |       |        | 2          |           |       |              | 9,103      |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 9,105 |   |   |
| Issuance of  warrants to purchases common stock at $5.76 per share                                             |       | —                |       |        | —     |           |       |              | 10,957     |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 10,957 |   |   |
| Fractional shares  adjustment upon reverse split                                                                    |       | (101                  | )          |        | —     |           |       |              | (1         | )                      |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | (1 | ) |   |
| Issuance of common  stock upon exercise of options and participation in Purchase Plan                               |       | 148,808               |       |        | —     |           |       |              | 514        |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 514 |   |   |
| Purchase of common  stock upon net exercise                                                                         |       | —                |       |        | —     |           |       |              | —     |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | (37 | ) |   |   | (37 | ) |   |
| Grant of treasury  stock to an employee                                                                             |       | —                |       |        | —     |           |       |              | 2          |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | 4 |   |   |   | 6 |   |   |
| Compensation  expense related to options granted to consultants                                                     |       | —                |       |        | —     |           |       |              | 159        |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 159 |   |   |
| Compensation  expense related to repriced options                                                                   |       | —                |       |        | —     |           |       |              | 1,125      |                   |       |         | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | 1,125 |   |   |
| Amortization of  deferred stock compensation, net of cancellations                                                  |       | —                |       |        | —     |           |       |              | (740       | )                      |       |         | 572        |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   |   | (168 | ) |   |
| 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 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 |   |   |

 

See accompanying notes

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

| ** **                                                                   | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Operating activities**                                                     |       |                                        |       |   |   |   |   |
| Net loss                                                                     |       | $                                           | (45,256    | ) | $ | (56,255 | ) | $ | (41,197 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                        |       |   |   |   |   |
| Depreciation and  amortization                                               |       | 1,150                                       |       | 2,246 |   | 2,664 |   |
| Amortization of deferred  stock compensation, net                            |       | 30                                          |       | 127 |   | 513 |   |
| Non-cash stock  compensation (recovery)/expense                              |       | (2,120                                      | )          | 2,367 |   | 602 |   |
| Issuances of equity  instruments for noncash benefits                        |       | —                                      |       | 72 |   | 6 |   |
| Loss on disposal/sale of  property and equipment                             |       | —                                      |       | 30 |   | 169 |   |
| Changes in assets and liabilities:                                           |       |                                        |       |   |   |   |   |
| Accounts receivable                                                          |       | (1,050                                      | )          | 500 |   | 869 |   |
| Other receivables                                                            |       | (78                                         | )          | 88 |   | (520 | ) |
| Prepaid expenses and  other current assets                                   |       | (460                                        | )          | 61 |   | 5,610 |   |
| Other assets                                                                 |       | 155                                         |       | 249 |   | 406 |   |
| Accounts payable                                                             |       | 552                                         |       | 567 |   | (2,082 | ) |
| Accrued compensation                                                         |       | 550                                         |       | 928 |   | (88 | ) |
| Other accrued  liabilities                                                   |       | 769                                         |       | 91 |   | (1,198 | ) |
| Deferred revenue                                                             |       | 10,430                                      |       | 5,120 |   | (3,420 | ) |
| Deferred rent and other  long-term liabilities                               |       | 158                                         |       | 5,657 |   | 5,226 |   |
| Net cash used in  operating activities                                       |       | (35,170                                     | )          | (38,152 | ) | (32,440 | ) |
| **Investing activities**                                                     |       |                                        |       |   |   |   |   |
| Purchases of  available-for-sale securities                                  |       | (89,584                                     | )          | (96,436 | ) | (42,135 | ) |
| Maturities of  available-for-sale securities                                 |       | 89,227                                      |       | 72,176 |   | 6,000 |   |
| Proceeds from the sale  of property and equipment                            |       | —                                      |       | — |   | 71 |   |
| Capital expenditures                                                         |       | (1,794                                      | )          | (1,545 | ) | (1,242 | ) |
| Net cash used in  investing activities                                       |       | (2,151                                      | )          | (25,805 | ) | (37,306 | ) |
| **Financing activities**                                                     |       |                                        |       |   |   |   |   |
| Proceeds from capital lease  financing                                       |       | 1,656                                       |       | 831 |   | 1,351 |   |
| Payments on capital  lease obligations                                       |       | (1,556                                      | )          | (2,224 | ) | (3,557 | ) |
| Net proceeds from  issuances of common stock and warrants                    |       | 103,505                                     |       | 66,224 |   | 54,620 |   |
| Advance from landlord                                                        |       | —                                      |       | — |   | 418 |   |
| Net cash provided by  financing activities                                   |       | 103,605                                     |       | 64,831 |   | 52,832 |   |
| Net increase (decrease)  in cash and cash equivalents                        |       | 66,284                                      |       | 874 |   | (16,914 | ) |
| Cash and cash  equivalents at beginning of period                            |       | 10,495                                      |       | 9,621 |   | 26,535 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                           | 76,779     |   | $ | 10,495 |   | $ | 9,621 |   |
| **Supplemental disclosure of cash flow information**                         |       |                                        |       |   |   |   |   |
| Interest paid                                                                |       | $                                           | 210        |   | $ | 324 |   | $ | 575 |   |
| **Schedule of non cash transactions**                                        |       |                                        |       |   |   |   |   |
| Deferred stock compensation                                                  |       | $                                           | —     |   | $ | 58 |   | $ | — |   |

 

See accompanying notes.

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**RigelPharmaceuticals, Inc.NOTES TO FINANCIAL STATEMENTS**

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

**1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**Natureof operations 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 Statement Preparation**

The preparation offinancial statements in conformity with U.S generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes. Actualresults could differ from these estimates.

**Stock Award Plans**

We have elected to continue to follow AccountingPrinciples Board Opinion No. 25, or APB 25, “Accounting for Stock Issuedto Employees,” to account for employee stock options because the alternativefair value method of accounting prescribed by Statement of Financial AccountingStandards, or SFAS, No. 123, *“Accountingfor Stock-Based Compensation”,* as amended by SFAS No. 148 *“Accounting for Stock-Based Compensation,”*requires the use of option valuation models that were not developed for use invaluing employee stock options. Under APB 25, the intrinsic value method ofaccounting, no compensation expense is recognized because the exercise price ofour employee stock options equals the market price of the underlying stock onthe date of grant. Stock-based compensation arising primarily from optionsgranted to consultants and repriced options are amortized to expense over theperiod during which the options vest using an accelerated method. See “RecentAccounting Pronouncements” below for a discussion of a recently issued FASBStatement related to stock-based compensation.

In December 2004, the Financial AccountingStandards Board, or FASB, issued SFAS 123(R), “Share-Based Payment(Revised 2004)”, which replaces SFAS 123 and supercedes APB 25. From the firstquarter of fiscal year 2006, we will be required to adopt SFAS 123(R) andmeasure all employee share-based compensation awards using a fair value basedmethod and record the share-based compensation expenses in our statements ofoperations if the requisite service to earn the award is provided. We arefinalizing our methodology for implementing FAS 123(R) and currentlyexpect the adoption of SFAS 123(R), SAB 107 and related pronouncements willhave a material impact on our results of operations.

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

**1. SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

Pro forma informationregarding net loss and net loss per share has been determined as if we hadaccounted for our employee stock options and employee stock purchase plan underthe fair value method prescribed by SFAS 123, as amended by SFAS 148.The fair value for these options was estimated at the date of grant using theBlack-Scholes model, and the following table summarizes weighted-averageassumptions we used:

| ** **                | ** ** | **Stock Option Plans** | ** ** | **Employee Stock Purchase Plan** | ** ** |
|---------------------------|------------|----------------------------------|------------|-------------------------------------------------|------------|
| ** **                | ** ** | **2005**                         | ** ** | **2004**                                        | ** ** | **2003** | ** ** | **  2005  ** | ** ** | **  2004  ** | ** ** | **  2003  ** | ** ** |
| Risk-free  interest rate  |       | 4.2                              | %          | 2.6                                             | %          | 1.3 | % |   | 4.1 | % |   |   | 3.5 | % |   |   | 1.9 | % |   |
| Expected life (in  years) |       | 2.8                              |       | 3.1                                             |       | 3.4 |   |   | 0.5 |   |   |   | 0.6 |   |   |   | 0.5 |   |   |
| Dividend yield            |       | 0.0                              | %          | 0.0                                             | %          | 0.0 | % |   | 0.0 | % |   |   | 0.0 | % |   |   | 0.0 | % |   |
| Expected volatility       |       | 86.8                             | %          | 85.0                                            | %          | 100.0 | % |   | 88.3 | % |   |   | 85.0 | % |   |   | 100.0 | % |   |

 

For purposes of pro formadisclosures, the estimated fair value of the options is amortized to expense usingan accelerated method over the vesting period of the options. Our pro formainformation follows (in thousands, except per share amounts):

| ** **                                                                                                              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2005**                                    | ** ** | **2004(1)** | ** ** | **2003(1)** | ** ** |
| Net loss—as  reported:                                                                                             |       | $                                           | (45,256    | ) | $ | (56,255 | ) | $ | (41,197 | ) |
| Add (Deduct):  Total stock-based employee compensation (recovery)/expense determined under  APB 25                      |       | (1,859                                      | )          | 2,135 |   | 957 |   |
| Add: Total  stock-based employee compensation expense determined under under the fair  value based method of all awards |       | 9,401                                       |       | 8,506 |   | 1,949 |   |
| Pro forma net loss                                                                                                      |       | $                                           | (56,516    | ) | $ | (62,626 | ) | $ | (42,189 | ) |
| Basic and diluted net loss per common share:                                                                            |       |                                        |       |   |   |   |   |
| As reported                                                                                                             |       | $                                           | (2.07      | ) | $ | (3.12 | ) | $ | (3.62 | ) |
| Pro forma                                                                                                               |       | (2.59                                       | )          | (3.47 | ) | (3.70 | ) |

----

(1)          Duringthe preparation of footnotes to the financial statements, we determined thatthe calculation of our pro forma net loss under SFAS No. 123 for fiscalyears 2004 and 2003, as reported in those years, did not reflect the properapplication of our accounting policies in accordance with SFAS No. 123. Accordingly,the amount of pro forma net loss reported under SFAS No. 123 for fiscalyears 2004 and 2003 have been revised, resulting in an increase in the previouslyreported pro forma net loss amount of $1,174,000 or $0.07 per share for 2004and a decrease in the previously reported pro forma net loss amount of$1,117,000 or $0.10 per share for 2003. The revision had no effect on ourpreviously reported results of operations or financial condition.

**Cash,cash equivalents 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 

44

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

**1. SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

of governmental agenciesand corporate debt securities. By policy, we limit the concentration of creditrisk by diversifying our investments among a variety of high credit-qualityissuers.

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 31,2005 and 2004. 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, 2005,2004 and 2003, we did not have any realized gains and losses on available-for-salesecurities. See Note 4 for a summary of available-for-sale securities at December 31,2005 and 2004.

**Fair value of financial 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 and equipment**

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 are amortized using the straight-line method overthe estimated useful lives of the assets or the term of the lease, whichever isshorter.

**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.

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 

45

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

**1. SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

the invoiced amounts forfunding of our research scientists based on the headcount dedicated to theproject. It is our policy to recognize revenue based on our level of effortexpended, however, revenue recognized will not exceed amounts billable underthe arrangement which corresponds to cash receipts.

Milestones are recognized pursuant to collaborativeagreements upon the achievement of these at risk milestones.

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

**Research and development**

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.

**Impairment of long-lived assets**

Long-lived assets and certainidentifiable intangible assets to be held and used are reviewed for impairmentwhen events or changes in circumstances indicate that the carrying amount ofsuch assets may not be recoverable.

**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 apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton deferred tax assets and liabilities from a change in tax rates is recognizedin income 

46

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

**1. SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

in theperiod the change is enacted. A valuation allowance is established to reducedeferred tax assets to an 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 earnings pershare includes the impact of potentially dilutive securities.

During all periodspresented, we had securities outstanding, which could potentially dilute basicearnings per share in the future, but were excluded from the computation ofdiluted net loss per share, as their effect would have been antidilutive. Theseoutstanding securities consist of the following (in thousands, except per shareinformation):

| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Outstanding  options                         |       | 3,893                 |       | 2,750 |   | 2,081 |   |
| Warrants                                     |       | 91                    |       | 92 |   | 1,725 |   |
| Weighted average  exercise price of options  |       | $                     | 15.98      |   | $ | 11.94 |   | $ | 8.31 |   |
| Weighted average  exercise price of warrants |       | $                     | 28.39      |   | $ | 28.33 |   | $ | 7.17 |   |

 

**Recent accounting pronouncements**

In November 2005, FASB issued FASB StaffPosition, or FSP, FAS 115-1 and FAS 124-1, “The Meaningof Other-Than-Temporary Impairment and Its Application to Certain Investments”(“FSP FAS 115-1”), which provides guidance on determining wheninvestments in certain debt and equity securities are considered impaired,whether that impairment is other-than-temporary, and on measuring suchimpairment loss. FSP FAS 115-1 also includes accountingconsiderations subsequent to the recognition of an other-than temporaryimpairment and requires certain disclosures about unrealized losses that havenot been recognized as other-than-temporary impairments. FSP FAS 115-1is required to be applied to reporting periods beginning after December 15,2005. We are required to adopt FSP FAS 115-1 in the firstquarter of fiscal 2006. We do not expect that the adoption of the statementwill have a material impact on our consolidated results or financial condition.

In May 2005, FASB issued SFAS 154, “AccountingChanges and Error Corrections—a replacement of APB Opinion No. 20 and FASBStatement No. 3”. SFAS 154 changes the requirements for the accounting forand reporting of a change in accounting principle, and applies to all voluntarychanges in accounting principle. It also applies to changes required by anaccounting pronouncement in the unusual instance that the pronouncement doesnot include specific transition provisions. This statement requiresretrospective application to prior periods’ financial statements of changes inaccounting principle, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. SFAS 154 is effective foraccounting changes made in fiscal years beginning after December 15, 2005.We do not expect that adoption of this statement will have a material impact onour results of operations or financial condition.

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

**1. SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

In December 2004, FASB issued SFAS 123(R), “Share-BasedPayment (Revised 2004)”, which replaces SFAS 123 and supersedes APB 25. In March 2005,the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, providingsupplemental implementation guidance for SFAS 123(R). In April 2005, theSEC issued “Amendment to Rule 04-01(a) of Regulation S-XRegarding the Compliance Date for Statement of Financial Accounting StandardNo.123(R), ‘Share-Based Payment’” (the “Amendment to Rule 4-01(a)”),changing the effective date for most public companies to adopt SFAS 123(R) tothe first interim reporting period of a company’s fiscal year that begins on orafter June 15, 2005. Under the Amendment to Rule 4-01(a), weare now required to adopt SFAS 123(R) in our first quarter of fiscal year 2006.

SFAS 123(R) requiresthat compensation costs relating to share-based payment transactions be recognizedin the financial statements. The pro forma disclosure previously permittedunder SFAS 123 will no longer be an acceptable alternative to recognition ofexpense in the financial statements. SFAS 123(R) also provides threealternative transition methods for its first adoption. Up to the end of fiscalyear 2005, we had measured compensation costs related to share-based paymentsunder APB 25 and as allowed by SFAS 123, and provided pro forma disclosure innotes to our financial statements as required by SFAS 123. On adoption of SFAS123(R), we will use the modified prospective application transition method.SFAS 123(R) also requires a classification change in the statement of cashflows, whereby a portion of the tax benefits from stock options will be movedfrom cash from operating activities to cash from financing activities, withoutchanging the total cash flows. We are finalizing the methodology forimplementing FAS 123(R) and currently expect the adoption of SFAS 123(R),SAB 107 and related pronouncements will have a material impact on our resultsof operations.

**2. SPONSORED RESEARCH AND LICENSE 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, weentered into a two-year collaborative research agreement with Pfizer Inc.to discover and develop various molecular targets. Upon signing of theagreement, Pfizer paid a one-time, nonrefundable, noncreditable fee. Under theterms of the contract, Pfizer provided support for research for two years. In2001, Pfizer notified us that it was electing to exercise its option to extendthe funded research portion of the collaboration one additional year to January 31,2002 and then extended it again for one additional month to February 28,2002. In February 2002, the research phase of our collaboration withPfizer concluded with Pfizer accepting a total of seven validated targets. In January 2005,we signed a collaborative research and license agreement with Pfizer for thedevelopment of intrapulmonary products for the treatment of allergic asthma andchronic obstructive pulmonary disease (COPD). The collaboration is primarilyfocused on our preclinical small molecule compounds, which inhibit IgE receptorsignaling in respiratory tract mast cells by blocking the signaling enzyme Sykkinase. The goal of the collaboration is for 

48

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

**2. SPONSOREDRESEARCH AND LICENSE AGREEMENTS (Continued)**

Pfizerto nominate two of the licensed compounds in order to commence advancedpreclinical development with our assistance. We will earn milestone paymentsupon the selection of each of the two compounds, as well as in connection withother clinical events and royalties from sales of the resulting products uponmarketing approval. Pfizer is responsible for the manufacture of allpreclinical and clinical materials for each compound/product and all costsassociated with development and commercialization. In connection with thiscollaboration, Pfizer paid us $10.0 million upfront and purchased $5.0 millionof our common stock at a premium. We are amortizing the upfront amount intorevenue over 24 months which we consider to be the overall amount of time itwill take Pfizer to nominate two of our compounds for advanced pre-clinicaldevelopment.

In May 1999, weentered into a broad collaboration with Novartis Pharma AG, pursuant to whichwe and Novartis agreed to work on up to five different research programs toidentify various targets for drug development. Two programs were initiated in1999 while the third program to be conducted at Novartis was initiated on January 1,2000. In July 2001, we expanded our collaboration with Novartis with theinitiation of our angiogenesis program, the fourth and final program in ourNovartis collaboration as Novartis chose not to exercise its option to add afifth project that was to be conducted at Novartis. Pursuant to the expandedNovartis collaboration, we received a $4.0 million up-front payment fromNovartis, which was recognized as revenue ratably through July 2004. Wecurrently have no programs with Novartis in the research phase.

In August 2002, wesigned an agreement for the establishment of a collaboration with Daiichi topursue research related to a specific target from a novel class of drug targetscalled ligases that control cancer cell proliferation through proteindegradation. Daiichi has paid us $0.9 million at the time we entered intothe agreement, three milestone payments totaling $4.6 million, and maybecome obligated to pay us certain other milestones payments in the future. Theresearch phase of this three-year collaboration expired in August 2005. Inaddition, we are entitled to receive royalties on any commercialized productsto emerge from the collaboration. Under terms of the agreement, we retain therights to co-develop and co-promote certain products resulting from thiscollaboration in North America while Daiichi retains co-development andpromotion rights in the remainder of the world.

In November 2004, weentered into a broad collaboration agreement with Merck & Co., Inc.to investigate ubiquitin ligases, a new class of drug target, to findtreatments for cancer and potentially other diseases. At the time we enteredinto the agreement, we received an initial cash payment of $7.6 million andfunding for our research scientists for two and a half years. We arerecognizing the upfront payment ratably over the two and a half year term ofthe research agreement. We are recognizing a pro-rata portion of the invoicedamounts for funding of our research scientists based on the headcount dedicatedto the project. The amount deferred is currently anticipated to be recognizedas revenue at the end of the research phase when all of our obligations havebeen fulfilled under the terms of the contract. As of December 31, 2005,$873,000 remains deferred which represents amounts invoiced to Merck from theinitiation of the research term in excess of the required headcount to beallocated to the project through the balance sheet date. During December 2005,we received a $0.5 million milestone payment from Merck triggered by theirselection of a third target. We are also eligible to receive milestone paymentsand royalties in the future. Merck is responsible for worldwide development andcommercialization of any resulting compounds and will pay Rigel royalties onfuture product sales, if any. The collaboration is based on a number of newtargets delivered by Merck. In addition, we may nominate our own targets forpotential inclusion in the collaboration.

49

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

**2. SPONSOREDRESEARCH AND LICENSE AGREEMENTS (Continued)**

In October 2005, weentered into a collaborative research and license agreement with Seronogranting them an exclusive license to develop and commercialize productcandidates from our Aurora kinase inhibitor program. Even though the agreementincludes a basket of compounds within the Aurora kinase inhibitor program, thecollaboration and our efforts under the agreement are focused on R763. We areresponsible for all costs associated with the preparation and filing of an INDfor R763 while Serono is responsible for all development of R763 followingregulatory acceptance of the IND and will bear all costs thereafter. In connection with this collaboration,Serono paid us $10.0 million upfront and purchased $15.0 million of our commonstock at a premium. We are amortizing the upfront amount into revenue over thenine months from the initiation of the collaboration in October 2005. Thisis period of time that we estimate it will take to perform our deliverablessuch as assisting Serono with certain studies and activities leading up to theinitiation of the first clinical trial to be run by Serono. .

DuringFebruary 2006, we received a milestone payment of $5.0 milliontriggered by the regulatory acceptance of the R763 IND in January 2006. Wewill be eligible to receive additional milestones, under certain conditions, uponcommencement of a Phase I clinical trial for R763, other clinical events,marketing approval and royalties on any future product sales.

**3.SIGNIFICANT CONCENTRATIONS**

For the year ended December 31,2005, Merck, Pfizer, Serono and Daiichi accounted for 45%, 26%, 14% and 15% oftotal revenues, respectively. For the year ended December 31, 2004,Daiichi, Novartis and Merck accounted for 56%, 35% and 9% of total revenues,respectively. For the year ended December 31, 2003, Daiichi, Novartis andJohnson and Johnson accounted for 41%, 37% and 22% of total revenues,respectively. At December 31, 2005, accounts receivable was comprised ofone customer, and there was no balance in accounts receivable as of December 31,2004. Rigel does not require collateral or other securities for accountsreceivable.

**4. CASH, CASH EQUIVALENTS AND AVAILABLE-FOR-SALESECURITIES**

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

| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Checking account              |       | $                     | 742        |   | $ | 240 |   |
| Money market funds            |       | 3,421                 |       | 9,261 |   |
| Federal agency  securities    |       | 21,067                |       | 15,684 |   |
| Corporate bonds and  notes    |       | 112,966               |       | 46,242 |   |
|                          |       | $                     | 138,196    |   | $ | 71,427 |   |
| Reported as:                  |       |                  |       |   |   |
| Cash and cash  equivalents    |       | $                     | 76,779     |   | $ | 10,495 |   |
| Available-for sale-securities |       | 61,417                |       | 60,932 |   |
|                          |       | $                     | 138,196    |   | $ | 71,427 |   |

 

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

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

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

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

 

| ** **                 | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|----------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                 | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **          | ** ** |
| ** **                 | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| **2004**                   |       |          |       |           |       |           |       |                |       |   |   |   |   |   |   |   |   |
| Federal agency  securities |       |          | $          | 14,715         |       |           |       | $                   | 2          |   |   |   | $ | (27 | ) |   |   | $ | 14,690 |   |   |
| Corporate bonds and note   |       |          | 46,437     |           |       |           | 6          |                |       |   | (201 | ) |   |   | 46,242 |   |   |
| Total                      |       |          | 61,152     |           |       |           | 8          |                |       |   | (228 | ) |   |   | 60,932 |   |   |
|                            |            |               |            |                |            |                |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of December 31,2005, 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 |       |                            | $          | 17,074 |   |   |   | $ | — |   |   |
| Corporate bonds  and notes |       |                            | 44,343     |   |   |   | — |   |   |
| Total                      |       |                            | $          | 61,417 |   |   |   | $ | — |   |   |

 

At December 31, 2005, the aboveavailable-for-sale securities had a weighted average maturity of approximately189 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, 2005 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)/gains** | ** ** |
| Federal agency  securities |       |                | $          | 12,879             |       |   |   | $ | (17 | ) |   |
| Corporate bonds  and notes |       |                | 40,615     |               |       |   | (75 | ) |   |
| Total                      |       |                | $          | 53,494             |       |   |   | $ | (92 | ) |   |

 

At December 31, 2005, we had an investment incorporate bonds and notes with a fair market value of approximately $1.0million that has been in a continuous unrealized loss position for more thantwelve months. As of December 31, 2005, the unrealized loss position wasapproximately $1,500.  We have notrecorded an other-than-temporary impairment charge as of December 31,2005, since we have the ability and intent to hold the investment to maturityat which time no gain or loss would be recognized. As of December 31,2005, 34 individual securities were in an unrealized loss position deemedto be temporary for 

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

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

less than twelve months.As of December 31, 2004, 32 individual securities were in an unrealizedloss position deemed to be temporary 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 31,2005.

**5. PROPERTY AND EQUIPMENT**

Propertyand equipment consists of the following (in thousands):

| ** **                                      | ** ** | **Years Ended**  | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **December 31,** | ** ** |
| ** **                                      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Laboratory and office  equipment                |       | $                     | 15,064     |   | $ | 13,804 |   |
| Construction in progress                        |       | 556                   |       | 288 |   |
| Total property and  equipment                   |       | 15,620                |       | 14,092 |   |
| Less accumulated  depreciation and amortization |       | (12,163               | )          | (11,279 | ) |
| Property and equipment, net                     |       | $                     | 3,457      |   | $ | 2,813 |   |

 

During 2005, we wrote-off$266,000 of assets at their original acquisition cost and related accumulateddepreciation of 266,000 for assets that are no longer in use.

At December 31, 2005and 2004, equipment under capital leases was approximately $3.9 million and$5.9 million, respectively. Total depreciation expense, which includedamortization from equipment under capital leases, was $1.1 million,$2.2 million, and $2.6 million for the years ended December 31,2005, 2004 and 2003, respectively. No leasehold amortization was incurred forthe years ended December 31, 2005 and 2004. Leasehold amortization expensewas $24,000 for the year ended December 31, 2003.

**6. LONG-TERMOBLIGATIONS**

At December 31,2005, future minimum lease payments and obligations under all noncancelableleases were as follows (in thousands):

| ** **                                  | ** ** | **Capital** | ** ** | **Operating** | ** ** |
|---------------------------------------------|------------|-------------|------------|---------------|------------|
| ** **                                  | ** ** | **Leases**  | ** ** | **Leases**    | ** ** |
| 2006                                        |       | $           | 1,233      |          | $          | 11,413 |   |
| 2007                                        |       | 892         |       | 13,237        |       |
| 2008                                        |       | 328         |       | 13,945        |       |
| 2009                                        |       | —      |       | 14,399        |       |
| 2010                                        |       | —      |       | 12,479        |       |
| 2011 and thereafter                         |       | —      |       | 102,152       |       |
| Total minimum payments  required            |       | 2,453       |       | $             | 167,625    |   |
| Less amount representing  interest          |       | (251        | )          |          |       |
| Present value of future  lease payments     |       | 2,202       |       |          |       |
| Less current portion                        |       | (1,070      | )          |          |       |
| Noncurrent obligations under capital leases |       | $           | 1,132      |          |       |   |

** **

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

**6. LONG-TERMOBLIGATIONS (Continued)**

Our current facilities were constructed as abuild-to-suit facility. Under the original lease for this new facility we wereobligated to fund approximately $18.0 million of the total tenantimprovements. In October 2002 we amended this original lease agreement,prior to the completion of the construction of the facility and commencement ofthe lease to provide for a delay of the rent commencement date until February 1,2003 and an increase in the tenant improvement allowance from the lessor tocover all the tenant improvement construction obligations on the facility. Thelandlord owns 100% of these tenantimprovements. The lease was also amended to increase the future rentalcommitments to compensate for the delay of the rent commencement and theincrease in the tenant improvement allowance. Since the amendment wasconsidered a material change to the original lease, we revisited the properaccounting treatment for this lease per Statement of Financial AccountingStandards (“SFAS”) No. 13, *Accountingfor Leases* and again determined the lease to be an operating lease.We moved into the new facilities during February 2003. On January 31,2005 we entered into another amendment with the landlord to decrease thecontractual rental commitments in 2005 by approximately $1.0 million.During May 2004, we initiated a sublease of approximately 15,000 squarefeet of our premises to a tenant for a period of two years. The sublease wasamended in September 2005 to extend the term for an additional year. Theoperating minimum lease payments above are reflective of the new sublease incomestream of approximately $900,000 thru 2007.

Rent expense net of sublease income under alloperating leases amounted to approximately $13.5 million,$14.0 million and $13.5 million for the years ended December 31,2005, 2004 and 2003, respectively.

In December 2002, we entered into an additionalequipment lease line agreement for an aggregate total of $2.0 million. Weoriginally had the ability to draw down on this line until December 2003,but this date was extended to March 2004 through an agreement reached in2003. Only $1.4 million of this line was utilized before the drawdownperiod expired. The lease period is for three years. The interest on the leaseis fixed at the time of any draw down and equates to approximately 10%. Thisline has a buyout provision of either the fair-market value of the equipment or10% of the original utilized line amount. As of December 31, 2005, theremaining principal balance was approximately $286,000.

In April 2004, our equipment credit line under anoriginal master agreement originally signed in August 2000 was extended tocreate an additional total borrowing limit of $2.0 million for which wedrew down $1.9 million. In June 2005, our equipment credit line under themaster agreement above was extended to create an additional borrowing limit of$1.5 million. We have the ability to draw down on this line through June 2006.The lease period will be for three years with the interest rate on the leasefixed at drawdown and equates approximately to 9.4%. At December 31, 2005,we utilized approximately $465,000 of the 2005 extended line. Each line has abargain purchase buyout provision of $101. As of December 31, 2005, theremaining principal balance under both lines was approximately $1.8 million.

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

**7. STOCKHOLDERS’EQUITY**

**Common stock**

In June 2003, we completed a private placementwith net proceeds of $45.0 million led by MPM Capital and included FrazierHealthcare, Alta Partners and HBM BioVentures. In the private placement, weissued 7,986,110 shares of our common stock at a price of $5.76 per share pluswarrants (described below).

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

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

In June 2003, we initiated a rights offeringpursuant to which non-transferable rights to purchase up to an aggregate of1,736,111 shares of our common stock at a purchase price of $5.76 per sharewere offered to our stockholders of record as of April 29, 2003, otherthan certain stockholders affiliated with the investors in the privateplacement completed on June 26, 2003. Each such stockholder of recordreceived one basic subscription right to purchase 0.4508 of a share of Rigelcommon stock at $5.76 per share for each share owned as of the record date. By July 25,2003, the expiration of the rights offering period, our stockholders hadelected to purchase an aggregate of 1,616,705 shares of our common stock fornet proceeds to us of $9.1 million. The shares were issued to the participatingstockholders on July 31, 2003.

In February 2004, we completed a follow-onoffering in which we sold 2,850,000 shares and selling stockholders sold315,000 shares of our common stock at a price to the public of $20.00 pershare. In March 2004, the underwriters of the follow-on offering exercisedtheir option to purchase an additional 316,750 shares of our common stock, tocover over-allotments. A total of 3,481,750 shares of our common stock weresold in the offering, of which 3,135,075 were sold by us and 346,675 were soldby selling stockholders. We received net proceeds of approximately$58.3 million from the sale of shares offered by us, net of underwritingdiscounts and commissions and related expenses. We did not receive any proceedsfrom the sale of shares by the selling stockholders.

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, 333 of these warrants were netexercised for the issuance of 155 shares of common stock. As of December 31,2005, 16,333 of the warrants are outstanding and are exercisable at any time upto December 4, 2007, the seventh anniversary of the closing of our initialpublic offering.

In conjunction with the facilities lease entered intoin May 2001, we issued a warrant to the lessor to purchase 16,666 sharesof our common stock at an exercise price of $80.21 per share, a 15% premium tomarket at the time of issuance. This warrant was outstanding as of December 31,2005 and will expire on May 15, 2006. The fair market value of thiswarrant, as determined by the Black-Scholes valuation model, wasapproximately $683,000. This amount has been capitalized in other long-termassets and is being amortized into expense over the life of the lease. As of December 31,2005, approximately $550,000 remained to be amortized over the life of thelease.

In conjunction with the equipment lease line executedin January 2002, we issued a warrant to the lender to purchase 2,645shares of our common stock at an exercise price of $37.80 per share. Thiswarrant was outstanding as of December 31, 2005 and will expire on January 31,2007. The fair market value of this warrant, as determined by the Black-Scholesvaluation model, was approximately $66,000. This amount has been capitalized inother long-term assets and is being amortized into expense over the payment period of the equipment lease line. Asof December 31, 2005, approximately $3,800 remained to be amortized overthe life of the lease.

54

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

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

**Stock option plans**

In January 2000, we adopted, and our stockholderssubsequently approved, the 2000 Equity Incentive Plan (the “2000 Plan”), whichis an amendment and restatement of our 1997 Stock Option Plan. Under the 2000Plan, incentive stock options, nonstatutory stock options and shares of commonstock may be granted to our employees, directors and consultants. In July 2001,we adopted the 2001 Non-Officer Equity Incentive Plan (the “2001 Plan”). Underthe 2001 Plan, which was not approved by our stockholders, nonstatutory stockoptions may be granted to our employees and consultants. In April 2003, anamendment to the 2000 Plan was approved to (i) merge the 2001 Plan intothe 2000 Plan and to terminate the 2001 Plan, (ii) increase the number ofshares authorized for issuance under the 2000 Plan (including the availablereserve from the merging of the 2001 Plan) by 1,600,000 shares of common stock,and (iii) add an evergreen feature that provides for automatic annualincreases in the total number of shares reserved for issuance under the 2000Plan. Options originally granted under our 2000 Plan and 2001 Plan expire nolater than ten years from the date of grant. The option price of each incentivestock option shall be at least 100% of the fair value on the date of grant, andthe option price for each nonstatutory stock option shall be not less than 85%of the fair value on the date of grant, as determined by the board ofdirectors. Options may be granted with different vesting terms from time totime, not to exceed five years from the date of grant. 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 commonstock; (ii) prohibit the board of directors from repricing stock optionswithout stockholder approval; and (iii) eliminate the “evergreen”provision feature that provides for automatic annual increases in the totalnumber of shares reserved for issuance. As of December 31, 2005, a totalof 1,487,142 shares of common stock are authorized for issuance under the 2000Plan.

In 2000, we adopted the 2000 Non-Employee DirectorsStock Option Plan (the “Directors’ Plan”) to (i) increase the number ofshares authorized for issuance under the Directors’ Plan by 66,667 shares ofcommon stock, (ii) increase the size of the initial grants to 6,667 sharesof common stock, and (iii) increase the size of the annual grant to 1,667shares of common stock. The exercise price of options under the Directors’ Planwill be equal to the fair market value of the common stock on the date ofgrant. The maximum term of the options granted under the Directors’ Plan is tenyears. All grants under the Directors’ Plan will vest monthly over two yearsfrom date of grant. The Directors’ Plan will terminate in September 2009,unless terminated earlier in accordance with the provisions of the Directors’Plan. In 2005, the Directors’ Plan was amended to primarily: (i) increasethe number of shares of common stock authorized for issuance under theDirectors’ Plan by 225,000 shares; (ii) increase the number of shares ofcommon stock subject to the annual option grant to each non-employee directorby 8,333 shares to 10,000 shares; (iii) increase the number of shares ofcommon stock subject to the initial option grant to each new non-employeedirector under the plan by 13,333 to 20,000 shares; (iv) eliminate theboard of directors’ ability to reprice stock options; and (v) amend thevesting schedule for future options grants, including annual option grants madethe day following the Annual Meeting. As of December 31, 2005, a total of207,692 shares of common stock are authorized for issuance under the Directors’Plan.

In June 2003, we initiated an offer to exchangeoptions to purchase shares of our common stock with exercise prices equal to orgreater than $9.00 per share currently outstanding under the 2000 Plan, the2001 Plan and the Directors’ Plan, for replacement options to purchase sharesof our common stock to be granted under the 2000 Plan. There were outstandingeligible options to purchase an aggregate of 367,961 shares of our common stockas of June 26, 2003. Only officers, employees not on certain leaves ofabsence, 

55

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

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

consultants andnon-employee members of our board of directors as of June 27, 2003, whocontinued to be employed or providing services through the offer expirationdate of July 25, 2003, were eligible to participate in the offer. Weoffered to conduct the exchange with respect to eligible options on aone-for-one basis. On July 28, 2003, we accepted for cancellation optionsto purchase an aggregate of 344,207 shares of our common stock. On July 28,2003, we granted replacement options to purchase an aggregate of 344,207 sharesof our common stock at an exercise price of $9.20 per share, the fair marketvalue on the date of the grant. Subject to the continuation of theoptionholders’ employment, service as a consultant or service as a non-employeemember of our board of directors, the replacement options will vest as follows:one-fifth of the shares covered by the replacement options will vest on thesix-month anniversary of the date of grant; one-fifth of the shares covered bythe replacement options will vest on the twelve-month anniversary of thedate of grant; and three-fifths of the shares covered by the replacementoptions will vest in 24 equal monthly installments over the following twoyears. The replacement options will expire on August 2, 2006 (if they havenot been forfeited earlier due to the optionholders’ termination of employment,service as a consultant or service as a non-employee member of our board ofdirectors). All replacement options, as well as the eligible options that werenot surrendered under the original offer to exchange have been treated forfinancial reporting purposes as variable awards. Therefore, we recorded anon-cash charge, generally for the intrinsic value of the options as they vestusing the graded vesting method, reflecting increases and decreases (down to,but not below, the exercise price) in the price of our common stock incompensation expense in connection with the replacement options and theeligible options that were not exchanged. We are currently finalizing themethodology for implementing FAS 123(R) and expect the adoption ofSFAS 123(R), SAB 107 and related pronouncements will have a material impact onour results of operation. The higher the market value of our common stock, thegreater the compensation expense; however a decrease in the market valuecreates a recovery of stock compensation expense. For the year ended December 31,2005, we recorded a non-cash compensation recovery of $1.9 million relatedto all options eligible for the replacement until the options are exercised,forfeited, or terminated. For the year ended December 31, 2004 and 2003,we recorded a non-cash compensation charges of $1.9 and $1.1 millionrelated to all options eligible for the replacement.

56

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

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

Activity under all of theoption plans through December 31, 2005 was as follows:

| ** **                                                  | ** ** | **Shares Available** | ** ** | **Number of** | ** ** | **Weighted-Average**    | ** ** |
|-------------------------------------------------------------|------------|---------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                                  | ** ** | **For Grant**        | ** ** | **Options**        | ** ** | **Exercise Price** | ** ** |
| Outstanding at  January 1, 2003                        |       |                      | 406,057    |               |       | 718,344                 |       |   | $ | 31.23 |   |   |
| Authorized for  grant                                       |       |                      | 1,962,689  |               |       | —                  |       |   |   |   |   |
| Granted                                                     |       |                      | (1,991,162 | )                  |       | 1,991,162               |       |   | $ | 8.56 |   |   |
| Exercised                                                   |       |                      | —     |               |       | (111,692                | )          |   | $ | 2.02 |   |   |
| Cancelled                                                   |       |                      | 516,595    |               |       | (516,595                | )          |   | $ | 42.53 |   |   |
| Outstanding at  December 31, 2003                      |       |                      | 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 |   |   |
| Exercisable at  December 31, 2005                      |       |                      |       |               |       | 1,786,133               |       |   | $ | 13.25 |   |   |
| Exercisable at  December 31, 2004                      |       |                      |       |               |       | 954,412                 |       |   | $ | 10.72 |   |   |
| Exercisable at  December 31, 2003                      |       |                      |       |               |       | 293,164                 |       |   | $ | 6.77 |   |   |
| Weighted average  fair value of options granted during 2005 |       |                      |       |               |       |                    |       |   | $ | 12.42 |   |   |
| Weighted average  fair value of options granted during 2004 |       |                      |       |               |       |                    |       |   | $ | 11.12 |   |   |
| Weighted average fair  value of options granted during 2003 |       |                      |       |               |       |                    |       |   | $ | 5.44 |   |   |

 

Details of our stockoptions by exercise price is as follows:

| ** **              | ** ** | **Options Outstanding** | ** ** | ** **                | ** ** | ** **                   | ** ** | ** **              | ** ** |
|-------------------------|------------|------------------------------|------------|---------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **              | ** ** | **Number of**           | ** ** | **Weighted Average** | ** ** | **Options Exercisable** | ** ** |
| ** **              | ** ** | **Outstanding**              | ** ** | **Remaining**             | ** ** | **Weighted Average**    | ** ** | **Number of**      | ** ** | **Weighted Average** | ** ** |
| **Exercise Price** | ** ** | ** **                   | ** ** | **Options**               | ** ** | **Contractual Life**    | ** ** | **Exercise Price** | ** ** | **Options** | ** ** | **Exercise Price** | ** ** |
| $0.90 - $8.15           |       |                         | 400,210    |                      |       |                         | 6.57       |                    |       |   | $ | 6.74 |   |   | 245,448 |   |   | $ | 5.86 |   |   |
| $8.25 - $9.20           |       |                         | 1,293,775  |                      |       |                         | 6.41       |                    |       |   | 8.41 |   |   | 812,619 |   |   | 8.44 |   |   |
| $14.22 - $17.66         |       |                         | 504,258    |                      |       |                         | 8.51       |                    |       |   | 17.25 |   |   | 232,349 |   |   | 17.04 |   |   |
| $17.89 - $19.30         |       |                         | 42,903     |                      |       |                         | 8.77       |                    |       |   | 18.72 |   |   | 16,626 |   |   | 18.78 |   |   |
| $22.17 - $23.32         |       |                         | 949,559    |                      |       |                         | 8.99       |                    |       |   | 22.92 |   |   | 415,125 |   |   | 22.61 |   |   |
| $24.08 - $24.56         |       |                         | 681,573    |                      |       |                         | 9.69       |                    |       |   | 24.53 |   |   | 52,077 |   |   | 24.41 |   |   |
| $25.36 - $40.50         |       |                         | 19,791     |                      |       |                         | 7.54       |                    |       |   | 29.53 |   |   | 10,739 |   |   | 33.05 |   |   |
| $73.53 - $82.13         |       |                         | 1,150      |                      |       |                         | 5.53       |                    |       |   | 73.82 |   |   | 1,150 |   |   | 73.82 |   |   |
| $0.90 - $82.13          |       |                         | 3,893,219  |                      |       |                         | 7.93       |                    |       |   | $ | 15.98 |   |   | 1,786,133 |   |   | $ | 13.25 |   |   |
|                         |            |                              |            |                           |            |                              |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We granted 21,000, 30,000 and 100 shares of commonstock options to consultants in exchange for services in 2005, 2004 and 2003.We also cancelled and regranted 16,636 common stock options to 

57

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

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

consultants in associationwith the repricing on July 28, 2003. We recognized stock-basedcompensation recovery for revaluation of consultant options of$0.2 million for the year ended December 31, 2005 and stock-basedcompensation expense of $0.4 million and $0.2 million for the years ended December 31,2004 and 2003, respectively.

We recorded no deferred stock compensation for theyear ended December 31, 2005. We recorded deferred stock compensation with respect to options granted to employeesof $58,000 for the year ended December 31, 2004 and no deferred stockcompensation for the year ended December 2003. The amount recorded in 2004related to an option grant to a certain executive officer that was modified toreduce the vesting term. This amount has been reflected as a component ofstockholders’ equity, and the deferred expense is being amortized to operationsover the remaining vesting period of the options using the graded vestingmethod. As a result of our reduction in force on January 31, 2003, werecognized approximately $599,000 of stock-based compensation recoveryassociated with the unvested and cancelled options of the terminated employees,which had previously been recognized under the graded vesting method ofdeferred compensation amortization. We amortized deferred stock compensation of$30,000, $0.1 million and $0.6 million for the years ended December 31,2005, 2004 and 2003, respectively. At December 31, 2005, we had a total of$26,000 remaining to be amortized over the remaining vesting periods of thestock options.

**2000 employee stock purchase plan**

In August 2000, we adoptedthe 2000 Employee Stock 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 lower 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 73,868, 93,529 and37,112 shares of common stock during 2005, 2004 and 2003, respectively,pursuant to the Purchase Plan at an average price of $10.07 per share, $8.76per share, and $8.45 per share in 2005, 2004 and 2003, respectively. For 2005,2004 and 2003, the weighted average fair value of stock issued under thePurchase Plan was $8.56, $6.71 and $4.33, respectively. The Purchase Planprovides for annual increases in the number of shares available for issuanceunder the Purchase Plan on each anniversary date of the effective date of theoffering. The number of shares reserved for future issuance under the PurchasePlan was increased by 88,888, 88,888 and 66,667 during 2005, 2004 and 2003,respectively.

58

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

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

**Reserved shares**

As of December 31,2005, we had reserved shares of common stock for future issuance as follows:

| ** **             | ** ** | **December 31,** | ** ** |
|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2005**              | ** ** |
| Warrants               |       |                  | 91,199     |   |   |
| Incentive stock  plans |       |                  | 1,694,834  |   |   |
| Purchase Plan          |       |                  | 138,092    |   |   |
| Total                  |       |                  | 1,924,125  |   |   |

 

**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,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Deferred tax  assets                          |       |                  |       |   |   |
| Net operating loss carryforwards              |       | $                     | 81,184     |   | $ | 60,462 |   |
| Research and development credits              |       | 10,224                |       | 7,637 |   |
| Capitalized research and development expenses |       | 9,004                 |       | 9,749 |   |
| Other, net                                    |       | 7,599                 |       | 9,140 |   |
| Total deferred  tax assets                    |       | 108,011               |       | 86,988 |   |
| Valuation  allowance                          |       | (108,011              | )          | (86,988 | ) |
| Net deferred tax assets                       |       | $                     | —     |   | $ | — |   |

 

No federal or state income tax expense or benefit wasrecorded for the years ended December 31, 2005, 2004 and 2003, as we incurrednet operating losses during these periods. Realization of deferred tax assetsis dependent upon future earnings, if any, the timing and amount of which areuncertain. Accordingly, the net deferred tax assets have been fully offset by avaluation allowance. The valuation allowance increased by $21.0 million,$24.1 million and $18.5 million during 2005, 2004 and 2003,respectively.

Included in the valuation allowance balance at December 31,2005 is $2.5 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, 2005, we had net operatingloss carryforwards for federal income tax purposes of approximately$226.0 million, which expire beginning in the year 2011 and state netoperating loss carryforwards of approximately $74.0 million, which expirebeginning in the year 2013.

The Company also has federal research and developmenttax credits of $6.4 million, which begin to expire in the year 2012 and stateresearch and development tax credits of approximately $6.0 million, whichhave no expiration date.

59

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

**8. INCOMETAXES (Continued)**

Utilization of the netoperating loss and credit may be subject to a substantial annual limitation dueto the ownership change limitations by the Internal Revenue Code and similarstate provisions. Such an annual limitation could result in the expiration ofthe net operating loss before utilization.

**9.SELECTED QUARTERLY FINANCIAL DATA (unaudited, in thousands, except per shareamounts)**

| ** **                                                                                   | ** ** | **Year Ended December 31, 2005** | ** ** | **Year Ended December 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **Q1**                                               | ** ** | **Q2**                                               | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| Revenue                                                                                      |       | $                                                    | 2,618      |                                                 | $          | 4,606 |   | $ | 3,282 |   | $ | 6,020 |   | $ | 1,487 |   | $ | 1,487 |   | $ | 659 |   | $ | 1,100 |   |
| Net loss                                                                                     |       | $                                                    | (11,164    | )                                                    | $          | (12,293 | ) | $ | (12,906 | ) | $ | (8,893 | ) | $ | (13,051 | ) | $ | (12,342 | ) | $ | (16,136 | ) | $ | (14,726 | ) |
| Net loss per  common share, basic and diluted                                           |       | $                                                    | (0.57      | )                                                    | $          | (0.62 | ) | $ | (0.56 | ) | $ | (0.36 | ) | $ | (0.81 | ) | $ | (0.68 | ) | $ | (0.88 | ) | $ | (0.75 | ) |
| Weighted average  shares used in computing net loss per common share, basic and diluted |       | 19,713                                               |       | 19,887                                               |       | 23,235 |   | 24,524 |   | 16,047 |   | 18,215 |   | 18,386 |   | 19,544 |   |

 

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**Item 9. Changes in and Disagreements with Accountantson Accounting and Financial Disclosure**

None.

**Item 9A. Controls and 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’sReport on 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, 2005. Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2005 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.

**Changesin Internal Controls 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. Other Information**

None.

61

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**PART III**

**Item 10. Directors and Executive Officers of theRegistrant**

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 April 25, 2006.

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. Executive Compensation**

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 April 25, 2006.

**Item 12. Security Ownership of Certain BeneficialOwners 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 April 25,2006.

**Item 13. Certain Relationships and RelatedTransactions**

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 April 25, 2006.

**Item 14. Principal Accounting 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 April 25, 2006.

62

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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 on Form 10-Kand selected quarterly financial data for the last two years in Note 10

2.                FinancialStatement Schedules—None—As all required disclosures have been made in thefootnotes to the 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 Registration Statement on Form S-1 (No. 333-45864),  as amended, and incorporated herein by reference).                                                                                                                  |
| 4.1   |   | 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).                                                                                                       |
| 4.3   |   | 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).                                                                                      |
| 4.7   |   | 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). |
| 4.8   |   | 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).                                  |
| 4.10  |   | 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).                       |
| 4.23  |   | Second Investor Rights Agreement between Rigel and  certain investors, dated June 26, 2003 (filed as an exhibit to Rigel’s  Annual Report on Form 10-K for the fiscal year ended December 31,  2003 (No. 000-29889) and incorporated herein by reference).                  |
| 10.1  |   | 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).                                                                                                             |
| 10.3+ |   | 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).                                                                  |
| 10.4+ |   | 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).                                                                               |
| 10.6  |   | 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).                                           |
| 10.7  |   | 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).                                     |
| 10.8  |   | 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).                                                       |

63

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| 10.9*  |   | 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).                                                                                                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10  |   | Collaborative Research and Development Agreement  between Rigel and Neurocrine Biosciences, Inc., dated December 1997  (filed as an exhibit to Rigel’s Registration Statement on Form S-1  (No. 333-45864), as amended, and incorporated herein by reference).                                                                                           |
| 10.11+ |   | 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).                                                                                                                                         |
| 10.13  |   | 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).                                                                                                       |
| 10.14* |   | 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). |
| 10.15  |   | Lease termination agreement between Rigel and  Britannia Pointe Grand Limited Partnership, dated May 6, 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).                                                                                 |
| 10.16  |   | 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).                                                                                                                    |
| 10.17  |   | 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).                                                                                     |
| 10.18* |   | 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).                                                                               |
| 10.19* |   | 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).                                                                         |
| 10.22  |   | 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).                                                               |
| 10.23  |   | 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).                                                           |
| 10.24  |   | 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).                                                                                       |
| 10.25* |   | 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).                                                                                        |
| 10.26* |   | 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).                                                                                |

64

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| 10.27      |   | 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). |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.28+     |   | 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).                |
| 10.29+     |   | 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).           |
| 10.30*     |   | 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).               |
| 10.32+     |   | 2000 Equity Incentive 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).                                                                                                                  |
| 10.33+     |   | 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).                                                                                         |
| 10.34+     |   | 2006 Base Salaries for Named Executive Officers  (filed as an exhibit to Rigel’s Current on Form 8-K (No. 000-29889)  filed on January 30, 2006 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.

°                       The certification attached as Exhibit 32.1accompanies the Annual Report on Form 10-K pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by theCompany for purposes of Section 18 of the Securities Exchange Act of 1934,as amended.

65

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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, 2006.

|        | Rigel Pharmaceuticals, Inc. |
|--------|----------------------------------|
|   | By:                              | /s/  JAMES M. GOWER |
|   |                             | James M. Gower*Chairman of the Board and Chief Executive Officer* |
|   | By:                              | /s/  JAMES H. WELCH |
|   |                             | James H. Welch*Vice President, Chief Financial Officer and  Secretary* |

 

**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints James M. Gower and JamesH. Welch, 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, 2006 |
| James  M. Gower      |          | Officer  and Director                    |       |               |
|                 |          | *(Principal Executive Officer)*          |       |               |
| /s/ JAMES H.  WELCH  |          | Vice President, Chief Financial Officer, |       | March 8, 2006 |
| James  H. Welch      |          | and  Secretary                           |       |               |
|                 |          | *(Principal Finance and Accounting*      |       |               |
|                 |          | *Officer)*                               |       |               |
| /s/ DONALD G.  PAYAN |          | Executive Vice President, Chief          |       | March 8, 2006 |
| Donald  G. Payan     |          | Scientific  Officer and Director         |       |               |
| /s/ JEAN  DELEAGE    |          | Director                                 |       | March 8, 2006 |
| Jean Deleage         |          |                                     |       |               |

 

66

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|                         | **Signature** | ** ** | ** ** |                     | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|-------------------------|---------------|------------|------------|---------------------|-----------|------------|------------|--|----------|------------|
| /s/ ALAN D.  FRAZIER    |          | Director   |       | March 8,  2006 |
| Alan D. Frazier         |          |       |       |                |
| /s/ GARY A.  LYONS      |          | Director   |       | March 8,  2006 |
| Gary A. Lyons           |          |       |       |                |
| /s/ WALTER H.  MOOS     |          | Director   |       | March 8,  2006 |
| Walter H. Moos          |          |       |       |                |
| /s/ HOLLINGS  C. RENTON |          | Director   |       | March 8,  2006 |
| Hollings C.  Renton     |          |       |       |                |
| /s/ PETER S.  RINGROSE  |          | Director   |       | March 8,  2006 |
| Peter S. Ringrose       |          |       |       |                |
| /s/ STEPHEN A.  SHERWIN |          | Director   |       | March 8,  2006 |
| Stephen A.  Sherwin     |          |       |       |                |

 

 

67

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**EXHIBIT INDEX**

| 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 Registration Statement on Form S-1 (No. 333-45864),  as amended, and incorporated herein by reference).                                                                                                                  |
| 4.1    |   | 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).                                                                                                       |
| 4.3    |   | 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).                                                                                     |
| 4.7    |   | 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). |
| 4.8    |   | 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).                                  |
| 4.10   |   | 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).                       |
| 4.23   |   | Second Investor Rights Agreement between Rigel and  certain investors, dated June 26, 2003 (filed as an exhibit to Rigel’s  Annual Report on Form 10-K for the fiscal year ended  December 31, 2003 (No. 000-29889) and incorporated herein by  reference).                 |
| 10.1   |   | 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).                                                                                                            |
| 10.3+  |   | 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).                                                                  |
| 10.4+  |   | 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).                                                                               |
| 10.6   |   | 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).                                           |
| 10.7   |   | 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).                                     |
| 10.8   |   | 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).                                                       |
| 10.9*  |   | 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).                                      |
| 10.10  |   | Collaborative Research and Development Agreement  between Rigel and Neurocrine Biosciences, Inc., dated December 1997  (filed as an exhibit to Rigel’s Registration Statement on Form S-1  (No. 333-45864), as amended, and incorporated herein by  reference).             |
| 10.11+ |   | 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).                                                            |

68

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| 10.13  |   | 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).                                                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.14* |   | 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). |
| 10.15  |   | Lease termination agreement between Rigel and  Britannia Pointe Grand Limited Partnership, dated May 6, 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).                                                                                 |
| 10.16  |   | 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).                                                                                                                    |
| 10.17  |   | 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).                                                                                     |
| 10.18* |   | 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).                                                                               |
| 10.19* |   | 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).                                                                         |
| 10.22  |   | 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).                                                               |
| 10.23  |   | 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).                                                           |
| 10.24  |   | 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).                                                                                       |
| 10.25* |   | 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).                                                                                       |
| 10.26* |   | 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).                                                                                |
| 10.27  |   | 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).                                                                    |
| 10.28+ |   | 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).                                                                                   |
| 10.29+ |   | 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).                                                                              |

69

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| 10.30*     |   | 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). |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.32+     |   | 2000 Equity Incentive 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).                                                                                                    |
| 10.33+     |   | 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).                                                                          |
| 10.34+     |   | 2006 Base Salaries for Named Executive Officers  (filed as an exhibit to Rigel’s Current on Form 8-K (No. 000-29889)  filed on January 30, 2006 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.

70

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