RIGEL PHARMACEUTICALS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005.

OR

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

FOR THE TRANSITION PERIOD FROM TO .

Commission File Number 0-29889

Rigel Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

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

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

(650) 624-1100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

As of April 29, 2005, there were 19,871,798 shares of the registrant’s common stock outstanding.

PART I FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

RIGEL PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands, except shares and per share amounts)

	March 31, 2005			December 31, 2004
	(unaudited)			(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	12,910		$	10,495
Available-for-sale securities	57,605			60,932
Accounts receivable	1,610			—
Other receivables	922			699
Prepaid expenses and other current assets	2,623			2,113
Total current assets	75,670			74,239

Property and equipment, net	2,986			2,813
Other assets	1,727			1,770
	$	80,383		$	78,822

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	2,323		$	1,945
Accrued compensation	1,200			1,639
Other accrued liabilities	1,484			1,555
Deferred revenue	8,494			3,728
Deferred rent	—			1,230
Capital lease obligations	1,361			1,321
Total current liabilities	14,862			11,418

Long-term portion of capital lease obligations	1,277			781
Long-term portion of deferred revenue	8,775			4,180
Long-term portion of deferred rent	10,248			9,685
Other long-term liabilities	428			457

Commitments

Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 19,865,659 and 19,661,295 shares issued and outstanding on March 31, 2005 and December 31, 2004, respectively	20			20
Additional paid-in capital	268,453			264,823
Deferred stock compensation	(45		)	(56		)
Accumulated other comprehensive loss	(205		)	(220		)
Accumulated deficit	(223,430		)	(212,266		)
Total stockholders’ equity	44,793			52,301
	$	80,383		$	78,822

Note (1) The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date included in Rigel’s Annual Report on Form 10-K, for the year ended December 31, 2004.

See accompanying notes.

RIGEL PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

	Three Months Ended March 31,
	2005			2004
	(unaudited)
Revenues:
Contract revenues from collaborations	$	2,618		$	1,487

Costs and expenses:
Research and development	11,173			11,694
General and administrative	2,874			2,913
	14,047			14,607
Loss from operations	(11,429		)	(13,120		)
Interest income	330			163
Interest expense	(65		)	(94		)
Net loss	$	(11,164	)	$	(13,051	)
Net loss per share, basic and diluted	$	(0.57	)	$	(0.81	)
Weighted-average shares used in computing net loss per common share, basic and diluted	19,713			16,047

See accompanying notes.

RIGEL PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)

	Three Months Ended March 31,
	2005			2004
	(unaudited)
Operating activities:
Net loss	$	(11,164	)	$	(13,051	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	305			573
Amortization of deferred stock compensation, net	6			41
Non-cash stock compensation (recovery)	(1,474		)	904
Changes in assets and liabilities:
Accounts receivable	(1,610		)	500
Other receivables	(223		)	(244		)
Prepaid expenses and other current assets	(510		)	(284		)
Other assets	43			63
Accounts payable	378			23
Accrued compensation	(439		)	344
Other accrued liabilities	(71		)	203
Deferred revenue	9,361			(1,068		)
Deferred rent and other long-term liabilities	(696		)	1,416
Net cash used in operating activities	(6,094		)	(10,580		)

Investing activities:
Purchase of available-for-sale securities	(16,163		)	(25,028		)
Maturities of available-for-sale securities	19,505			10,250
Capital expenditures	(478		)	(58		)
Net cash provided by/(used in) investing activities	2,864			(14,836		)

Financing activities:
Proceeds from capital lease financing	1,002			—
Payments on capital lease obligations	(466		)	(609		)
Net proceeds from issuances of common stock	5,109			58,582
Net cash provided by financing activities	5,645			57,973

Net increase (decrease) in cash and cash equivalents	2,415			32,557
Cash and cash equivalents at beginning of period	10,495			9,621
Cash and cash equivalents at end of period	$	12,910		$	42,178

See accompanying notes.

Rigel Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

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

1. Nature of Operations

We were incorporated in the state of Delaware on June 14, 1996. We are engaged in the discovery and development of a broad range of new small molecule product candidates.

2. Basis of Presentation

Our accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. In our opinion, these unaudited condensed financial statements include all adjustments, consisting only of normal recurring adjustments, which we consider necessary to fairly state our financial position and the results of our operations and cash flows. Interim-period results are not necessarily indicative of results of operations or cash flows for a full-year period. The balance sheet at December 31, 2004 has been derived from audited financial statements at that date, but does not include all disclosures required by generally accepted accounting principles for complete financial statements.

These unaudited condensed financial statements and the notes accompanying them should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2004.

Comprehensive loss did not differ materially from the net loss as reported.

3. Net Loss Per Share

Basic net loss per share is computed based on the number of weighted average shares outstanding. The calculation of diluted net loss per share excludes shares of potential common stock, consisting of stock options and warrants, because their effect is anti-dilutive.

4. Stock Award Plans

We have elected to continue to follow Accounting Principles Board Opinion No. 25, or APB 25, “Accounting for Stock Issued to Employees,” to account for employee stock options because the alternative fair value method of accounting prescribed by Statement of Financial Accounting Standards, or FAS, No. 123, as amended by FAS No. 148 “Accounting for Stock-Based Compensation,” requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, the intrinsic value method of accounting, no compensation expense is recognized because the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant.

Pro forma information regarding net loss and net loss per share has been determined as if we had accounted for our employee stock options and employee stock purchase plan under the fair value method prescribed by FAS 123, as amended by FAS 148. The fair value for these options was estimated at the date of grant using the Black-Scholes model.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options. Our pro forma information follows (in thousands, except per share amounts):

	Three months ended March 31,
	2005			2004

Net loss as reported:	$	(11,164	)	$	(13,051	)
Less: Total stock-based employee compensation (recovery)/expense determined under APB 25	(1,261		)	804
Add: Total stock-based employee compensation expense determined under the fair value based method for all awards	2,350			1,546
Pro forma net loss	$	(14,775	)	$	(13,793	)
Basic and diluted net loss per common share:
As reported	$	(0.57	)	$	(0.81	)
Pro forma	$	(0.75	)	$	(0.86	)

5. Revenue Recognition

Non-refundable, up-front payments received in connection with research and development collaboration agreements, including technology access fees, are deferred and recognized on a straight-line basis over the relevant periods of continuing involvement, generally the research term.

Revenues related to collaborative research with our corporate collaborators are recognized as research services are performed over the related development funding periods for each contract. Under these agreements, we are required to perform research and development activities as specified in each respective agreement. The payments received are not refundable and are generally based on a contractual cost per full-time equivalent employee working on the project. Research and development expenses under the collaborative research agreements, except for the Merck collaboration signed in November 2004 related to ubiquitin ligases, approximate or exceed the revenue recognized under such agreements over the term of the respective agreements. For the Merck collaboration, we are recognizing a pro-rata portion of the invoiced amounts for funding of our research scientists based on the headcount dedicated to the project. It is our policy to recognize revenue based on our level of effort expended, however, revenue recognized will not exceed amounts billable under the arrangement which corresponds to cash receipts.

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

Royalties will be recognized as earned in accordance with the contract terms when the third party results are reliably measurable and collectibility is reasonably assured.

5. CASH, CASH EQUIVALENTS, AND AVAILABLE-FOR-SALE SECURITIES

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

	Amortized Cost and Fair Value at
	March 31, 2005		December 31, 2004

Checking account	$	1,880	$	240
Money market funds	8,545		9,261
Federal agency securities	9,298		15,684
Corporate bonds and notes	50,792		46,242
	$	70,515	$	71,427

Reported as:
Cash and cash equivalents	$	12,910	$	10,495
Available-for-sale securities	57,605		60,932
	$	70,515	$		71,427

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
March 31, 2005
Federal agency securities	$	9,320	$	1	(23		)	$	9,298
Corporate bonds and notes	$	50,975	3		(186		)	50,792
Total	$	60,295	$	4	$	(209	)	$	60,090

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2004
Federal agency securities	$	15,709	$	2	$	(27	)	$	15,684
Corporate bonds and notes	46,437		6		(201		)	46,242
Total	$	62,146	$	8	$	(228	)	$	61,926

As of March 31, 2005, the contractual maturities of debt securities were (in thousands):

	Years to Maturity
	Within One year		After One year through Five Years
Federal agency securities	$	9,298	$	—
Corporate bonds and notes	46,959		3,833
Total	$	56,257	$	3,833

At March 31, 2005, the above debt securities had a weighted average maturity of approximately 119 days. There were no material gross realized gains or losses from sales of securities in the periods presented. We intend to hold all investments as of March 31, 2005 to maturity.

The following table shows the gross unrealized losses and fair values of our investments in individual securities that have been in a continuous unrealized loss position deemed to be temporary for less than twelve months aggregated by investment category, (in thousands):

	Fair Value		Unrealized (Losses)/gains
*March 31, 2005*
Federal agency securities	$	6,464	$	(23	)
Corporate bonds and notes	44,591		(186		)
Total	$	51,055	$	(209	)
*December 31, 2004*
Federal agency securities	$	11,706	$	(27	)
Corporate bonds and notes	37,294		(201		)
Total	$	49,000	$	(228	)

At March 31, 2005, we did not have any investments in individual securities that have been in a continuous unrealized loss position deemed to be other than temporary for more than twelve months. As of March 31, 2005 28 individual securities were in an unrealized loss position. As of December 31, 2004, 32 individual securities were in an unrealized loss position.

Investment Grade Debt Securities. Our investments in investment grade debt securities consist primarily of investments in federal agency securities and corporate bonds and notes. The unrealized losses on our investments in investment grade debt securities were caused by interest rate increases. Due to the fact that the decline in market value is attributable to changes in interest rates and not credit quality, and because the severity and duration of the unrealized losses were not significant, we considered these unrealized losses to be temporary at March 31, 2005.

5. MERCK COLLABORATION

In November 2004, we entered into a broad collaboration agreement with Merck & Co., Inc. to investigate ubiquitin ligases, a new class of drug target, to find treatments for cancer and potentially other diseases. At the time we entered into the agreement, we received an initial cash payment of $7.6 million and funding for our research scientists for two and a half years. We are recognizing the upfront payment ratably over the two and a half year term of the research agreement. We are recognizing a pro-rata portion of the invoiced amounts for funding of our research scientists based on the headcount dedicated to the project. The amount that is deferred is currently anticipated to be recognized as revenue at the end of the research phase of the agreement when all of our obligations have been fulfilled under the terms of the contract, May 2007. As of March 31, 2005, $846,000 has been deferred which represents amounts invoiced to Merck from the initiation of the research term in excess of the required headcount to be allocated to the project through the balance sheet date. We are also eligible to receive milestone payments for preclinical and clinical events in the future. Merck is responsible for worldwide development and commercialization of any resulting compounds and will pay Rigel royalties on future product sales, if any. The collaboration is based on a number of new targets delivered by Merck and does not include our current ligase targets. In addition, we may nominate our own targets for potential inclusion in the collaboration.

6. PFIZER COLLABORATION

On January 18, 2005 we signed a collaborative research and license agreement with Pfizer for the development of intrapulmonary products for the treatment of allergic asthma and chronic obstructive pulmonary disease (COPD). The collaboration is focused on our preclinical small molecule compounds, which inhibit IgE receptor signaling in respiratory tract mast cells by blocking the signaling enzyme Syk kinase. The goal of the collaboration is for Pfizer to nominate two of the licensed compounds in order to commence advanced preclinical development with our assistance. We will earn milestone payments upon the selection of each of the two compounds, as well as in connection with other clinical events and royalties from sales of the resulting products upon marketing approval. Pfizer is responsible for the manufacture of all preclinical and clinical materials for each compound/product and all costs associated with development and commercialization.

In connection with this collaboration, Pfizer paid us $10.0 million upfront and purchased $5.0 million of our common stock at a premium. We will be amortizing the upfront amount into revenue over 24 months which we consider to be the overall amount of time it will take Pfizer to nominate two of our compounds for advanced pre-clinical development.

Report of Independent Registered Public Accounting Firm

The Board of Directors
Rigel Pharmaceuticals, Inc.

We have reviewed the condensed balance sheet of Rigel Pharmaceuticals, Inc. as of March 31, 2005, and the related condensed statements of operations and cash flows for the three-month periods ended March 31, 2005 and 2004. These financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheet of Rigel Pharmaceuticals, Inc. as of December 31, 2004, and the related statements of operations, stockholders’ equity, and cash flows for the year then ended and in our report dated March 10, 2005, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 2004, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

	/s/ Ernst & Young LLP
Palo Alto, California
April 19, 2005

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

This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this report and the 2004 audited financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2004. Operating results for the three months ended March 31, 2005 are not necessarily indicative of results that may occur in future periods.

Except for the historical information contained herein, the following discussion contains forward-looking statements that are based upon current expectations. Forward-looking statements involve risks and uncertainties and include statements related to:

• our strategy;

• the progress of our research programs, including clinical testing;

• sufficiency of our cash resources;

• revenues from existing and new collaborations;

• product development; and

• our research and development and other expenses.

Words such as “believe,” “anticipate,” “expect,” “estimate,” “plan” and similar expressions are intended to identify such forward-looking statements. There can be no assurance that these statements will prove to be correct. Our actual results and the timing of events could differ significantly from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors,” as well as those discussed elsewhere in this quarterly report. You should consider our forward-looking statements in light of the risks discussed in “Risk Factors,” as well as our financial statements, related notes, and the other financial information appearing elsewhere in this report. Rigel undertakes no obligation to update any of the forward- looking statements contained herein to reflect any future events or developments.

Overview

Rigel Pharmaceuticals, Inc. discovers and develops novel, small-molecule compounds for the treatment of large, unmet medical needs. Our objective is to create a portfolio of product candidates that can be developed for our own proprietary programs and with potential collaborative partners. Our productive discovery engine enables us to move one product candidate into the clinic each year. Currently, we have product development programs for the indications of allergy/asthma, rheumatoid arthritis, cancer, and hepatitis C.

Our objective is creating a portfolio of product candidates that can be developed into small molecule therapeutics for our own proprietary programs and with potential collaborative partners. We believe that producing a portfolio of many product candidates and working in conjunction with pharmaceutical companies increases our probability of commercial success. The product development process is one that is subject to both high costs and high risk of failure. We believe that this approach allows us to minimize the risk of failure, while concurrently strategically placing us in a position to help fill the continuing product pipeline gap at major pharmaceutical companies.

Over the last couple of years, we have matured into a drug development company with multiple product candidates in various stages of development.

• R112—Product Candidate for Allergic Rhinitis. In April 2004, we initiated a Phase II “park study” clinical trial in which we measured allergic symptom improvement. On August 2, 2004, we announced the results of this trial, which demonstrate R112 can reduce certain symptoms of allergic rhinitis in a statistically significant manner compared to placebo, has a favorable safety profile, and has a rapid onset of action in symptom improvement. Based on these results we plan to move R112 forward in clinical development with an additional Phase II trial in 2005. This trial is expected to take place in late summer with top line data planned for late 2005.

• R406—Product Candidate for Rheumatoid Arthritis. In January 2004, we selected R406 as our lead product candidate to treat rheumatoid arthritis. Phase I clinical trials were initiated in December 2004 and we announced the preliminary results of the trial in March 2005. Based on the preliminary results of this escalating single-dose and multiple-dose, placebo-controlled study, R406 was well tolerated at the dose levels that we plan to use moving forward. The study also generated pharmacokinetic/pharmacodynamic data establishing a correlation between R406 plasma levels and the inhibition of its target. These results will allow us to enter broader, longer-term safety and pharmacokinetic studies in 2005. These studies will then lay the groundwork for our efficacy studies in 2006.

• R763—Product Candidate for Oncology. In July 2004, we selected R763 as our lead product candidate for initial clinical trials in oncology and expect to file and IND in the second half of 2005.

• R803—Anti-Hepatitis C Virus Product Candidate. We completed our initial Phase I clinical trial of R803 in January 2004. We commenced a Phase I/II clinical trial of R803 in the United States in mid 2004 and in November 2004, we reported that R803 did not achieve the desired viral titer reduction. We are currently examining various alternatives and expect to determine our next steps with our hepatitis C program in the next few months.

In addition to the above mentioned product candidates, we have ongoing research programs involving back-up candidates for the four product candidates above as well as drug discovery efforts in our immunology, virology, and oncology programs.

Corporate Collaborations

In addition to the preceding programs in which we retain all commercial and economic rights, we also carry on research and development programs in connection with our corporate collaborations. As of March 31, 2005, we have collaborations with five major pharmaceutical companies, including one with Janssen Pharmaceutica N.V., a division of Johnson & Johnson, relating to oncology therapeutics and diagnostics, two with Pfizer Inc., one initiated in 1999 and the other in Q1 2005, relating to asthma and allergy therapeutics, one with Novartis Pharma AG with respect to four different programs relating to immunology, oncology and chronic bronchitis, one with Daiichi Pharmaceuticals Co., Ltd. in the area of oncology, and one with Merck, also in the area of oncology. All of these collaborations, excluding the recent Pfizer collaboration, have a research phase during which we receive or received funding based on the level of headcount allocated to a program. In all of these collaborations if certain conditions are met, we are entitled to receive future milestone payments and royalties. We cannot guarantee that these conditions will be met or that research and development efforts will be successful. As a result, we may be precluded from receiving any milestone payments or royalties under these agreements. Only the Daiichi and Merck programs provide for regular research reimbursement payments. The research phase of the Daiichi collaboration will end in August 2005.

We are exploring new opportunities with existing and potential collaborators. Our earliest partnerships focused on the early stages of drug discovery, specifically on target discovery and validation. Our collaborations with Daiichi and recently with Merck are both later stage focusing on drug discovery and development. Our 2005 collaboration with Pfizer covers compounds at the preclinical and lead designation stages. We currently anticipate that in order to support our current research programs we will need to self-fund our own research programs, which involve an increased rate of spending, to later stages of development prior to partnering with collaborative partners. Therefore, it is expected that future collaborations may have an expanded focus and could include HTS, combinatorial and medicinal chemistry, preclinical evaluations and/or clinical development of compounds we have discovered. In addition, we believe these future collaborations could be structured to consist of upfront payments, the purchase of our common stock, milestone payments upon meeting certain conditions, research reimbursement payments and/or royalties upon commercialization of products resulting from the collaboration.

Critical Accounting Policies and the Use of Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to terms of the research collaborations, investments, stock compensation, impairment issues, the estimated useful life of assets and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

We believe that there have been no significant changes in our critical accounting policies during the period ended March 31, 2005 as compared to those previously disclosed in our Annual 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 divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The consideration we receive is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. Advance payments received in excess of amounts earned are classified as deferred revenue until earned.

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

Royalties will be recognized as earned in accordance with the contract terms when the third party results are reliably measurable and collectibility is reasonably assured.

Stock-based Compensation

	Three Months Ended March 31,					Aggregate Change
	2005			2004		2005 from 2004
	(in thousands)
Stock-based compensation from:
*Re-priced options*	$	(1,266	)	$	763	$	(2,029	)
*Consultant options*	(207		)	142		$	(349	)
*Other employee options*	5			41		$	(36	)
*Total*	$	(1,468	)	$	946	$	(2,414	)

We record charges associated with the stock options 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 not surrendered under the original offer to exchange, are being treated for financial reporting purposes as variable awards. Therefore, we are recording a non-cash charge (recovery), generally for the intrinsic value of the options as they vest, utilizing the graded vesting method, reflecting increases and decreases (down to, but not below, the exercise price) in the price of our common stock as compensation expense (recovery) in connection with the replacement options and the eligible options that were not exchanged. We expect to continue to reflect increases and decreases in the price of our common stock in our statement of operations with respect to these options until they are exercised, forfeited or terminated. The higher the market value of our common stock, the greater the compensation expense. For the three-month period ended March 31, 2005, we recorded a non-cash compensation recovery of $1.3 million related to all options eligible for replacement options. This recovery resulted from the decrease in the market price of our common stock during this period. For the three-month period ended March 31, 2004, we

recorded a non-cash compensation charge of $0.8 million related to all options eligible for the replacement. This charge resulted from the increase in the market price of our common stock during this period. We are currently evaluating option valuation methodologies and assumptions in light of SFAS 123R related to our employee stock option and employee stock purchase plans.

We also record charges associated with options granted to consultants reflecting the periodic revaluation of outstanding consultant options based upon the current market value of our common stock and other assumptions, including the expected future volatility of our stock price. For the three-month period ended March 31 2005, we recorded a non-cash compensation recovery of $207,000 for revaluation of consultant options. For the three-month period ended March 31 2004, we recorded a non-cash compensation charge of $142,000 for revaluation of consultant options. We expect to see continued fluctuations in the future as a portion of these options are revalued based on the changes in the current market price of our common stock through the application of the graded vesting method.

Three Months Ended March 31, 2005 and 2004

Revenues

	Three Months Ended March 31,				Aggregate Change
	2005		2004		2005 from 2004
	(in thousands)

Contract revenues from collaborations	$	2,618	$	1,487	$	1,131

Revenues by collaborator were:

	Three Months Ended March 31,				Aggregate Change
	2005		2004		2005 from 2004
	(in thousands)

*Merck*	$	1,465	$	—	$	1,465
*Daiichi*	662		654		8
*Pfizer*	491		—		491
*Novartis*	—		833		(833		)
*Total*	$	2,618	$	1,487	$	1,131

Contract revenues from collaborations for the three-month periods ended March 31, 2005 and 2004 consisted of research support and amortization of upfront fees from our collaborations with Merck, Daiichi, Pfizer and, in 2004 only, Novartis. The increase in 2005 revenues of $1.1 million was primarily due to the initiation of the Merck and Pfizer collaborations offset by the termination of the research phase of the Novartis oncology program in 2004. We have deferred approximately $846,000 of research reimbursement revenue from Merck in order to only account for the headcount effort expended by us for the time period invoiced which covers the period from the initiation of the collaboration through March 31, 2005. We expect this amount will be recognized as revenue no later than at the end of the research phase of the collaboration which will be May 2007. We expect contract revenues from collaborations to be the significant component of our total revenues for the foreseeable future.

Research and Development Expenses

	Three Months Ended March 31,					Aggregate Change
	2005			2004		2005 from 2004
	(in thousands)

*Research and development expenses*	$	11,173		$	11,694	$	(521	)

Stock based (recovery)/compensation expenses included in research and development expenses	$	(1,027	)	$	785	$	(1,812	)

The decrease in research and development expenses of $521,000 in 2005 was primarily attributable to the recovery of stock-based compensation expense related to the re-priced stock options subject to variable accounting, as discussed previously

under “Stock-Based Compensation” in the “Critical Accounting Policies and the Use of Estimates” section offset by an increase in our preclinical and clinical costs and personnel expenses. The increase in our preclinical and clinical costs in 2005 was attributable to costs associated with our Phase I clinical trial for R406, the production of drug substance for our planned Phase I clinical trial of R763, and initiation site costs for our planned Phase II clinical trial for R112.

The scope and magnitude of future research and development expenses are difficult to predict at this time given the number of studies that will need to be conducted for any of our potential products, as well as our limited capital resources. In general, biopharmaceutical-development involves a series of steps—beginning with identification of a potential target and including, among others, proof of concept in animals and Phase I, II and III clinical studies in humans—each of which is typically more expensive than the previous step. Success in development, therefore, results in increasing expenditures. Our research and development expenditures currently include costs for scientific personnel, supplies, equipment, consultants, sponsored research, allocated facility costs, costs related to preclinical and clinical trials, and stock-based compensation.

Because of the number of research projects we have ongoing at any one time, and the ability to utilize resources across several projects, the majority of our research and development costs are not directly tied to any individual project and are allocated among multiple projects. Our project management is based primarily on scientific data and supplemented by these cost allocations, which are based primarily on human resource time incurred on each project. As a result, the costs allocated to a project do not necessarily reflect the actual costs of the project.

General and Administrative Expenses

	Three Months Ended March 31,					Aggregate Change
	2005			2004		2005 from 2004
	(in thousands)

*General and administrative expenses*	$	2,874		$	2,913	$	(39	)

Stock based (recovery)/compensation expenses included in general and administrative expenses	$	(441	)	$	161	$	(602	)

The decrease in general and administrative expenses of $39,000 in 2005 was primarily attributable to the recovery of stock-based compensation expense related to the re-priced stock options subject to variable accounting, as discussed previously under “Stock-Based Compensation” in the “Critical Accounting Policies and the Use of Estimates” section offset by increased legal costs associated with the expansion of our patent estate.

Net Interest Income

	Three Months Ended March 31,				Aggregate Change
	2005		2004		2005 from 2004
	(in thousands)

*Net interest income*	$	265	$	69	$	196

Interest income results from our interest-bearing cash and investment balances, whereas interest expense is the result of our capital lease obligations associated with fixed asset purchases. The increase in net interest income in 2005 is primarily attributable to an increase in the overall interest rates earned on our investment balances.

Liquidity and Capital Resources

Cash Requirements

We have financed our operations from inception primarily through sales of equity securities, contract payments payable to us under our collaboration agreements and equipment financing arrangements. We believe that our existing capital resources and anticipated proceeds from current collaborations will be sufficient to support our current operating plan through at least the next twelve months. Our operations will require significant additional funding in large part due to our research and development expenses, future preclinical and clinical-testing costs, our facility lease commitments and the absence of any meaningful revenues for the foreseeable future. The amount of future funds needed will depend largely on the timing and structure of

potential future collaborations. We do not know whether additional financing will be available when needed, or that, if available, we will obtain financing on terms favorable to our stockholders or us. We have consumed substantial amounts of capital to date, and operating expenditures are expected to increase over the next several years as we expand our research and development activities.

On October 15, 2004, we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission for the proposed offering, from time to time, of up to $150.0 million of our common stock, preferred stock, debt securities and/or warrants.

To the extent we raise additional capital by issuing equity securities, our stockholders could at that time experience substantial dilution. To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us. Our future funding requirements will depend upon many factors, including, but not limited to:

• the progress and success of preclinical studies and clinical trials of our product candidates conducted by us or our collaborative partners or licensees;

• our ability to establish new collaborations and to maintain our existing collaboration partnerships;

• the progress of research programs carried out at Rigel;

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

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

• the progress of the research and development efforts of our collaborators;

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

• our ability to manage our growth;

• competing technological and market developments;

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

• the costs and timing of regulatory approvals; and

• expenses associated with unforeseen litigation.

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

As of March 31, 2005, we had $70.5 million in cash, cash equivalents and available-for-sale securities, as compared to $71.4 million as of December 31, 2004, a decrease of $0.9 million. We were able to offset the majority of our operating spending for the three months ended March 31, 2005 by the receipt of $15.0 million from Pfizer per our recently signed collaboration agreement. We also received $1.0 million under our equipment financing arrangements which was offset by $0.5 million in debt service payments. For the three months ended March 31, 2005 and 2004, we maintained an investment portfolio primarily in depository accounts and corporate commercial paper. Cash in excess of immediate requirements is invested with regard to liquidity and capital preservation. Wherever possible, we seek to minimize the potential effects of concentration and degrees of risk.

Contractual Obligations

The following are our contractual commitments (by fiscal year) as of March 31, 2005 associated with debt obligations, contracted research obligations, and lease obligations:

	Total		2005		2006 -2008		2009 -2010		2011-2018
	(in thousands)
Debt obligations (1)	$	2,749	$	1,087	$	1,662	$	—	$	—
Facilities leases, net of sublease (2)(3)	176,869		7,586		40,253		26,878		102,152
Total	$	179,618	$	8,673	$	41,915	$	26,878	$	102,152

(1) As of March 31, 2005, we had $2.6 million in debt obligations associated with our equipment additions. All existing debt agreements as of March 31, 2005 are secured by the equipment financed 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 to a tenant for a period of two years. The facilities lease obligations above are reflective of the new sublease income stream.

(3) The payments above reflect the fifteen years of the lease term of our facility through January 2018.

Risk Factors

In evaluating our business, you should carefully consider the following risks, as well as the other information contained in this quarterly report on Form 10-Q. If any of the following risks actually occurs, our business could be harmed. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also harm our business.

We will need additional capital in the future to sufficiently fund our operations and research.

We have consumed substantial amounts of capital to date, and operating expenditures are expected to increase over the next several years. We believe that our existing capital resources and anticipated proceeds from current collaborations will be sufficient to support our current operating plan through at least the next twelve months. Our operations will require significant additional funding in large part due to our research and development expenses, future preclinical and clinical-testing costs, and the absence of any meaningful revenues for the foreseeable future. The amount of future funds needed will depend largely on the timing and structure of potential future collaborations. We do not know whether additional financing will be available when needed, or that, if available, we will obtain financing on terms favorable to our stockholders or us. We have consumed substantial amounts of capital to date, and operating expenditures are expected to increase over the next several years as we expand our infrastructure and research and development activities.

Our future funding requirements will depend on many uncertain factors.

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

• the progress and success of preclinical studies and clinical trials of our product candidates conducted by us or our collaborative partners or licensees;

• our ability to establish new collaborations and to maintain our existing collaboration partnerships;

• the progress of research programs carried out at Rigel;

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

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

• the progress of the research and development efforts of our collaborative partners;

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

• our ability to manage our growth;

• competing technological and market developments;

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

• the costs and timing of regulatory approvals; and

• expenses associated with unforeseen litigation.

development or on less favorable terms than we would otherwise choose or may adversely affect our ability to operate as a going concern.

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

Due in large part to the significant research and development expenditures required to identify and validate new product candidates and pursue our development efforts, we have not been profitable and have incurred operating losses since we were incorporated in June 1996. The extent of our future losses and the timing of potential profitability are highly uncertain, and we may never achieve profitable operations. We incurred net losses of $11.2 million for the first three months of 2005, $56.3 million in 2004, and $41.2 million in 2003. Currently, our revenues are generated solely from research payments pursuant to our collaboration agreements and licenses and are insufficient to generate profitable operations. As of March 31, 2005, we had an accumulated deficit of approximately $223.4 million. We expect to incur losses for at least the next several years and expect that these losses could increase as we expand our research and development activities and incur significant clinical and testing costs.

There is a high risk that early-stage drug discovery and development might not successfully generate good product candidates.

At the present time, the majority of our operations are in the early stages of drug identification and development. To date, three of our product compounds have made it to the clinical testing stage. In our industry, it is statistically unlikely that the limited number of compounds that we have identified as potential product candidates will actually lead to successful product development efforts, and we do not expect any drugs resulting from our research to be commercially available for several years, if at all. Our product compounds in the clinic and our future leads for potential drug compounds are subject to the risks and failures inherent in the development of pharmaceutical products based on new technologies. These risks include, but are not limited to, the inherent difficulty in selecting the right drug target and avoiding unwanted side effects as well as unanticipated problems relating to product development, testing, regulatory compliance, manufacturing, marketing, competition and costs and expenses that may exceed current estimates. The results of preliminary studies do not necessarily predict clinical or commercial success, and larger later-stage clinical trials may fail to confirm the results observed in the preliminary studies. With respect to our own compounds in development, we have established anticipated timelines for clinical development based on existing knowledge of the compound. However, we cannot provide assurance that we will meet any of these timelines with respect to the initiation or completion of clinical studies.

We expect to initiate clinical trials of R763 in the second half of 2005. Because of the uncertainty of whether the accumulated preclinical evidence (pharmacokinetic, pharmacodynamic, safety and/or other factors) or early clinical results will be observed in later clinical trials, we can make no assurance regarding the likely results from our future clinical trials or the impact of those results on our business.

We might not be able to commercialize our product candidates successfully if problems arise in the clinical testing and approval process.

Commercialization of our product candidates depends upon successful completion of preclinical studies and clinical trials. Preclinical testing and clinical development are long, expensive and uncertain processes. We do not know whether we, or any of our collaborative partners, will be permitted to undertake clinical trials of potential products beyond the trials already concluded and the trials currently in process. It may take us or our collaborative partners several years to complete any such testing, and failure can occur at any stage of testing. Interim results of trials do not necessarily predict final results, and acceptable results in early trials may not be repeated in later trials. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after achieving promising results in earlier trials. Moreover, as our projects reach clinical trials, we or our collaborative partners or regulators may decide to discontinue development of any or all of these projects at any time for commercial, scientific or other reasons. For example, if patients experience undesirable side effects, we may be required to halt or suspend a clinical trial.

Delays in clinical testing could result in increased costs to us.

Significant delays in clinical testing could materially impact our product development costs. We do not know whether planned clinical trials will begin on time, will need to be revamped or will be completed on schedule, or at all. Clinical trials can be delayed for a variety of reasons, including delays in obtaining regulatory approval to commence a study, delays in reaching agreement on acceptable clinical study agreement terms with prospective clinical sites, delays in obtaining institutional review board approval to conduct a study at a prospective clinical site or delays in recruiting subjects to participate in a study. Environmental conditions may impact the execution of some clinical trials, particularly in the allergy area.

In addition, we typically rely on third-party clinical investigators to conduct our clinical trials and other third-party organizations to oversee the operations of such trials and to perform data collection and analysis. As a result, we may face additional delaying factors outside our control if these parties do not perform their obligations in a timely fashion. While we have not yet experienced delays that have materially impacted our clinical trials or product development costs, delays of this sort could occur for the reasons identified above or other reasons. If we have delays in testing or approvals, our product development costs will increase. For example, we may need to make additional payments to third-party investigators and organizations to retain their services or we may need to pay recruitment incentives. If the delays are significant, our financial results and the commercial prospects for our product candidates will be harmed, and our ability to become profitable will be delayed.

We lack the capability to manufacture compounds for development and rely on third parties to manufacture our product candidates, and we may be unable to obtain required material in a timely manner, at an acceptable cost or at a quality level required to receive regulatory approval.

We currently do not have manufacturing capabilities or experience necessary to produce materials, including R112, R406, and R763 for preclinical testing and clinical trials. We rely on a single third-party contractor to produce R112 and R406 bulk drug substance. We also rely on different single manufacturers for finished R112 and R406 product for preclinical and clinical testing. We will rely on manufacturers to deliver materials on a timely basis and to comply with applicable regulatory requirements, including the FDA’s current Good Manufacturing Practices, or GMP. These outsourcing efforts with respect to manufacturing preclinical and clinical supplies will result in a dependence on our suppliers to timely manufacture and deliver sufficient quantities of materials produced under GMP conditions to enable us to conduct planned preclinical studies, clinical trials and, if possible, to bring products to market in a timely manner.

Our current and anticipated future dependence upon these third-party manufacturers may adversely affect our ability to develop and commercialize product candidates on a timely and competitive basis. These manufacturers may not be able to produce material on a timely basis or manufacture material at the quality level or in the quantity required to meet our development timelines and applicable regulatory requirements. We may not be able to maintain or renew our existing third-party manufacturing arrangements, or enter into new arrangements, on acceptable terms, or at all. Our third-party manufacturers could terminate or decline to renew our manufacturing arrangements based on their own business priorities, at a time that is costly or inconvenient for us. If we are unable to contract for the production of materials in sufficient quantity and of sufficient quality on acceptable terms, our planned clinical trials may be delayed. Delays in preclinical or clinical testing could delay the filing of our IND applications and/or the initiation of clinical trials that we have currently planned.

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

Because most of our expected future cash proceeds are contingent upon collaborative and license agreements, we might not meet our strategic objectives.

Our ability to generate cash proceeds in the near term depends on our ability to enter into additional collaborative agreements with third parties and to maintain the agreements we currently have in place. Our ability to enter into new collaborations and the cash proceeds, if any, that may be earned under these collaborations is highly uncertain. If we are unable to enter into new collaborations, our business prospects could be harmed, which could have an immediate adverse effect on the trading price of our stock.

To date, most of our cash proceeds have been related to the research phase of each of our collaborative agreements. Such cash proceeds are for specified periods, and the impact of such cash proceeds on our results of operations is partially offset by corresponding research costs. Following the completion of the research phase of each collaborative agreement, additional cash proceeds may come only from milestone payments and royalties, which may not be paid, if at all, until some time well into the future. The risk is heightened due to the fact that unsuccessful research efforts may preclude us from receiving any milestone payments under these agreements. Our receipt of cash proceeds from collaborative arrangements is also significantly affected by the timing of efforts expended by us and our collaborators and the timing of lead compound identification. In late 2001, we earned the first cash proceed from achievement of milestones in both the Pfizer and Johnson & Johnson collaborations. During

2002, we earned our first milestone for both Novartis and Daiichi. Under many agreements, however, milestone payments may not be earned until the collaborator has advanced products into clinical testing, which may never occur or may not occur until some time well into the future. If we are not able to generate cash proceeds under our collaborations when and in accordance with our expectations or the expectations of industry analysts, this failure could harm our business and have an immediate adverse effect on the trading price of our stock.

Our business requires us to generate meaningful cash proceeds from royalties and licensing agreements. To date, we have not received any cash proceeds from royalties for the commercial sale of drugs, and we do not know when we will receive any such cash proceeds, if at all. Likewise, we have not licensed any lead compounds or drug development candidates to third parties, and we do not know whether any such license will be entered into on acceptable terms in the future, if at all.

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

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

The research phase of our collaboration with Johnson & Johnson ended in December 2003 and the research phases conducted at our facilities under our broad collaboration with Novartis ended in July 2004. The research phase of our corporate collaboration agreement with Daiichi will end in August 2005. In November 2004 we signed a new corporate collaboration with Merck and in January 2005 we signed an additional collaboration with Pfizer. We may not be able to renew these collaborations on acceptable terms, if at all, or negotiate additional corporate collaborations on acceptable terms, if at all.

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

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

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

If conflicts arise between us and our corporate collaborators or scientific advisors, the other party may act in its self-interest and not in the interest of our stockholders. Some of our corporate collaborators are conducting multiple product development efforts within each disease area that is the subject of the collaboration with us. In some of our collaborations, we have agreed not to conduct, independently or with any third party, any research that is competitive with the research conducted under our collaborations. Our collaborators, however, may develop, either alone or with others, products in related fields that are competitive with the products or potential products that are the subject of these collaborations. Competing products, either developed by our collaborators or to which our collaborators have rights, may result in their withdrawal of support for our product candidates.

If any of our corporate collaborators were to breach or terminate its agreement with us or otherwise fail to conduct the collaborative activities successfully and in a timely manner, the preclinical or clinical development or commercialization of the affected product candidates or research programs could be delayed or terminated. We generally do not control the amount and timing of resources that our corporate collaborators devote to our programs or potential products. We do not know whether current or future collaborative partners, if any, might pursue alternative technologies or develop alternative products either on

their own or in collaboration with others, including our competitors, as a means for developing treatments for the diseases targeted by collaborative arrangements with us.

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

Our success will depend to a large part on our own, our licensees’ and our licensors’ ability to obtain and defend patents for each party’s respective technologies and the compounds and other products, if any, resulting from the application of such technologies. We have over 150 pending patent applications and over 50 issued patents in the United States that are owned or exclusively licensed in our field as well as pending corresponding foreign patent applications. In the future, our patent position might be highly uncertain and involve complex legal and factual questions. Additional uncertainty may result because no consistent policy regarding the breadth of legal claims allowed in biotechnology patents has emerged to date. Accordingly, we cannot predict the breadth of claims allowed in our or other companies’ patents.

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

• we were the first to make the inventions covered by each of our pending patent applications;

• we were the first to file patent applications for these inventions;

• others will not independently develop similar or alternative technologies or duplicate any of our technologies;

• any of our pending patent applications will result in issued patents;

• any patents issued to us or our collaborators will provide a basis for commercially-viable products or will provide us with any competitive advantages or will not be challenged by third parties;

• we will develop additional proprietary technologies that are patentable; or

• the patents of others will not have a negative effect on our ability to do business.

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

We are a party to certain in-license agreements that are important to our business, and we generally do not control the prosecution of in-licensed technology. Accordingly, we are unable to exercise the same degree of control over this intellectual property as we exercise over our internally-developed technology. Moreover, some of our academic institution licensors, research collaborators and scientific advisors have rights to publish data and information in which we have rights. If we cannot maintain the confidentiality of our technology and other confidential information in connection with our collaborations, then our ability to receive patent protection or protect our proprietary information will be impaired. In addition, some of the technology we have licensed relies on patented inventions developed using U.S. government resources. The U.S. government retains certain rights, as defined by law, in such patents, and may choose to exercise such rights. Certain of our in-licenses may be terminated if we fail to meet specified obligations. If we fail to meet such obligations and any of our licensors exercise their termination rights, we could lose our rights under those agreements. If we lose any of our rights, it may affect the way we do business. In addition, because certain of our licenses are sublicenses, the actions of our licensors may affect our rights under those licenses.

If a dispute arises regarding the infringement or misappropriation of the proprietary rights of others, such dispute could be costly and result in delays in our research and development activities and partnering.

Our success will also depend, in part, on our ability to operate without infringing or misappropriating the proprietary rights of others. There are many issued patents and patent applications filed by third parties relating to products or processes that are similar or identical to ours or our licensors, and others may be filed in the future. There can be no assurance that our activities, or those of our licensors, will not infringe patents owned by others. We believe that there may be significant litigation in the industry regarding patent and other intellectual property rights, and we do not know if we or our collaborators would be successful in any such litigation. Any legal action against our collaborators or us claiming damages or seeking to enjoin commercial activities relating to the affected products, our methods or processes could:

• require our collaborators or us to obtain a license to continue to use, manufacture or market the affected products, methods or processes, which may not be available on commercially reasonable terms, if at all;

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

• subject us to potential liability for damages;

• consume a substantial portion of our managerial and financial resources; and

• result in litigation or administrative proceedings that may be costly, whether we win or lose.

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

Due, in part, to the early stage of our product candidate research and development process, we cannot predict whether regulatory clearance will be obtained for any product that we, or our collaborative partners, hope to develop. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity and novelty of the product and requires the expenditure of substantial resources. Of particular significance to us are the requirements relating to research and development and testing.

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

• must be conducted in conformance with the FDA’s good clinical practices and other applicable regulations;

• must meet requirements for institutional review board oversight;

• must meet requirements for informed consent;

• are subject to continuing FDA oversight;

• may require large numbers of test subjects; and

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

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

Before receiving FDA clearance to market a product, we must demonstrate that the product is safe and effective on the patient population that will be treated. Data obtained from preclinical and clinical activities are susceptible to varying interpretations that could delay, limit or prevent regulatory clearances. In addition, delays or rejections may be encountered based upon additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure 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 the clinical trials necessary to obtain regulatory approval.

If regulatory clearance of a product is granted, this clearance will be limited to those disease states and conditions for which the product is demonstrated through clinical trials to be safe and efficacious. We cannot ensure that any compound developed by us, alone or with others, will prove to be safe and efficacious in clinical trials and will meet all of the applicable regulatory requirements needed to receive marketing clearance.

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

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

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Many of the drugs that we are attempting to discover will be competing with existing therapies. In addition, a number of companies are pursuing the development of pharmaceuticals that target the same diseases and conditions that we are targeting. We face competition from pharmaceutical and biotechnology companies both in the United States and abroad.

Our competitors may utilize discovery technologies and techniques or partner with collaborators in order to develop products more rapidly or successfully than we, or our collaborators, are able to do. Many of our competitors, particularly large pharmaceutical companies, have substantially greater financial, technical and human resources than we do. In addition, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products or technologies and may establish exclusive collaborative or licensing relationships with our competitors.

We believe that our ability to compete is dependent, in part, upon our ability to create, maintain and license scientifically-advanced technology and upon our and our collaborators’ ability to develop and commercialize pharmaceutical products based on this technology, as well as our ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary technology or processes and secure sufficient capital resources for the expected substantial time period between technological conception and commercial sales of products based upon our technology. The failure by us or any of our collaborators in any of those areas may prevent the successful commercialization of our potential drug targets.

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

Our ability to generate revenues will be diminished if our collaborative partners fail to obtain acceptable prices or an adequate level of reimbursement for products from third-party payors or government agencies.

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

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

• government and health administration authorities;

• private health insurers; and

• other third-party payors.

Significant uncertainty exists as to the reimbursement status of newly-approved healthcare products. Third-party payors, including Medicare, are challenging the prices charged for medical products and services. Government and other third-party payors increasingly are attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new drugs and by refusing, in some cases, to provide coverage for uses of approved products for disease

indications for which the FDA has not granted labeling approval. Third-party insurance coverage may not be available to patients for any products we discover and develop, alone or with collaborators. If government and other third-party payors do not provide adequate coverage and reimbursement levels for our products, the market acceptance of these products may be reduced.

If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit commercialization of our products.

The testing and marketing of medical products entail an inherent risk of product liability. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products although we are not currently aware of any specific causes for concern with respect to clinical liability claims. We currently do not have product liability insurance, and our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of pharmaceutical products we develop, alone or with corporate collaborators. We, or our corporate collaborators, might not be able to obtain insurance at a reasonable cost, if at all. While under various circumstances we are entitled to be indemnified against losses by our corporate collaborators, indemnification may not be available or adequate should any claim arise.

Our research and development efforts will be seriously jeopardized, if we are unable to attract and retain key employees and relationships.

As a small company with only 140 employees as of March 31, 2005, our success depends on the continued contributions of our principal management and scientific personnel and on our ability to develop and maintain important relationships with leading academic institutions, scientists and companies in the face of intense competition for such personnel. In particular, our research programs depend on our ability to attract and retain highly skilled chemists, other scientists, and regulatory and clinical personnel. If we lose the services of any of our personnel, our research and development efforts could be seriously and adversely affected. Our employees can terminate their employment with us at any time.

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

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

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

Our research and development activities involve the controlled use of potentially harmful biological materials as well as hazardous materials, chemicals and various radioactive compounds. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for damages that result, and such liability could exceed our resources. We are also subject 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 regulations could be significant.

Our facilities are located near known earthquake fault zones, and the occurrence of an earthquake or other catastrophic disaster could cause damage to our facilities and equipment, which could require us to cease or curtail operations.

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

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

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

• the receipt or failure to receive the additional funding necessary to conduct our business;

• the progress and success of preclinical studies and clinical trials of our product candidates conducted by us or our collaborative partners or licensees;

• selling by large institutional stockholders;

• announcements of technological innovations or new commercial products by our competitors or us;

• developments concerning proprietary rights, including patents;

• developments concerning our collaborations;

• publicity regarding actual or potential medical results relating to products under development by our competitors or us;

• regulatory developments in the United States and foreign countries;

• litigation;

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

• period-to-period fluctuations in financial results.

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

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

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

• authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;

• limit who may call a special meeting of stockholders;

• prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;

• establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings;

• provide for a board of directors with staggered terms; and

• provide that the authorized number of directors may be changed only by a resolution of our board of directors.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities in which we invest may have market risk. This means that a change in prevailing interest rates may cause the fair value amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the market value amount of our investment will decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents, short-term investments and other long-term investments in a variety of securities, including commercial paper, money market funds and government and non-government debt securities For the three months ended March 31, 2005 and 2004, we maintained an investment portfolio primarily in depository accounts and corporate commercial paper. Due to the short-term nature of the majority of these investments, we believe we do not have a material exposure to interest rate risk arising from our investments. Therefore, no quantitative tabular disclosure is provided.

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Based on our management’s evaluation (with the participation of our chief executive officer and chief financial officer), our chief executive officer and chief financial officer have concluded that, subject to limitations described below, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), were effective as of March 31, 2005 to ensure that information required to be disclosed by us in this quarterly report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Controls. There were no changes in our internal controls over financial reporting during the quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our chief executive officer and chief financial officer have concluded, based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, that our disclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met.

INDEX TO EXHIBITS

Exhibit Number		Description of Document
3.1		Amended and Restated Certificate of Incorporation. (1)
3.2		Amended and Restated Bylaws. (2)
4.1		Specimen Common Stock Certificate. (1)
4.2		Amended and Restated Investor Rights Agreement, between Rigel and holders of Rigel’s Series B, Series C, Series D and Series E preferred stock, dated February 3, 2000. (2)
4.3		Form of warrant to purchase shares of common stock. (2)
4.7		Amended and Restated Warrant issued to Kwacker Limited for the purchase of shares of common stock. (3)
4.8		Warrant issued to TBCC Funding Trust II for the purchase of shares of common stock. (4)
4.10		Warrant issued to Kwacker Limited for the purchase of shares of common stock. (3)
4.23		Second Investor Rights Agreement between Rigel and certain investors, dated June 26, 2003. (5)
4.24		Common Stock Purchase Agreement by and between Rigel and Pfizer Inc., dated March 10,2005 (6)
10.30		Collaborative Research and License Agreement by and between Rigel and Pfizer Inc., dated January 18, 2005 (7)
10.31		2005 Base Salaries for Named Executive Officers (8)(9)
10.32		2005 Cash Incentive Plan (8)(9)
15.1		Letter re: unaudited interim financial information.
31.1		Certification required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
31.2		Certification required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
32.1		Certification required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

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

(2) Filed as an exhibit to Rigel’s Registration Statement on Form S-1, as amended, and incorporated herein by reference.

(3) Filed as an exhibit to Rigel’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 and incorporated herein by reference.

(4) Filed as an exhibit to Rigel’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference.

(5) Filed as an exhibit to Rigel’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference.

(6) Filed as Exhibit B to the Collaborative Research and License Agreement by and between Rigel and Pfizer Inc., dated January 18, 2005 (Exhibit 10.30 to this Quarterly Report on Form 10-Q) and incorporated herein by reference.

(7) Confidential Treatment requested as to specific portions, which portions are omitted and filed separately with the Securities and Exchange Commission.

(8) Filed as an exhibit to Rigel’s Current Report on Form 8-K filed on February 2, 2005 and incorporated herein by reference.

(9) Management contract or compensation plan.

PART I	FINANCIAL INFORMATION
Item 1.	Condensed Financial Statements (unaudited)
	Condensed Balance Sheets—March 31, 2005 and December 31, 2004
	Condensed Statement of Operations—three months ended March 31, 2005 and 2004
	Condensed Statements of Cash Flows—three months ended March 31, 2005 and 2004
	Notes to Condensed Financial Statements
	Independent Accountants’ Review Report
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.	Exhibits

Signatures
Certifications

	RIGEL PHARMACEUTICALS, INC.
	By:	/s/ JAMES M. GOWER
		James M. Gower
		Chief Executive Officer
	Date:	May 6, 2005
	By:	/s/ JAMES H. WELCH
		James H. Welch
		Vice President, Chief Financial Officer and Corporate
		Secretary
		(Principal Financial and Accounting Officer)
	Date:	May 6, 2005