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 JUNE 30, 2003.

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 August 1, 2003, there were 14,785,300 shares of the registrant’s common stock outstanding.

RIGEL PHARMACEUTICALS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

INDEX

PART I	FINANCIAL INFORMATION
Item 1.	Condensed Financial Statements (unaudited)
	Condensed Balance Sheets-June 30, 2003 and December 31, 2002
	Condensed Statement of Operations-three and six months ended June 30, 2003 and 2002
	Condensed Statements of Cash Flows-three and six months ended June 30, 2003 and 2002
	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.	Changes in Securities and Use of Proceeds
Item 4.	Submission of Matters to a Vote of Security Holders
Item 6.	Exhibits and Reports on Form 8-K

Signatures
Certifications

PART I FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

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

	June 30, 2003			December 31, 2002
	(unaudited)			(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	58,092		$	26,535
Available-for-sale securities	—			756
Accounts receivable	717			1,503
Receivable from landlord	—			6,175
Prepaid expenses and other current assets	1,796			1,894
Total current assets	60,605			36,863

Property and equipment, net	4,500			5,206
Other assets	2,150			2,273
	$	67,255		$	44,342

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,031		$	3,460
Accrued compensation	860			799
Accrued liabilities	1,104			2,662
Deferred revenue	3,525			4,061
Capital lease obligations	2,760			3,388
Total current liabilities	9,280			14,370

Capital lease obligations	1,902			2,313
Long-term portion of deferred revenue	1,013			2,147
Deferred rent	2,408			71
Other long-term liabilities	400			—

Commitments

Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 13,167,556 and 5,078,025 shares issued and outstanding on June 30, 2003 and December 31, 2002, respectively	13			5
Additional paid-in capital	185,690			141,023
Deferred stock compensation	(338		)	(772		)
Accumulated other comprehensive income	—			(1		)
Accumulated deficit	(133,080		)	(114,814		)
	52,285			25,441
Less treasury stock, at cost: 4,525 and no shares at June 30, 2003 and December 31, 2002, respectively	(33		)	—
Total stockholders’ equity	52,252			25,441
	$	67,255		$	44,342

Note (1) The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date included in Rigel’s Form 10-K, for the fiscal year ended December 31, 2002, as amended.

See accompanying notes.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(unaudited)						(unaudited)
Revenues:
Contract revenues from collaborations	$	2,349		$	4,337		$	6,846		$	8,435

Costs and expenses:
Research and development	10,698			12,066			20,708			22,157
General and administrative	2,012			2,761			4,046			5,205
	12,710			14,827			24,754			27,362
Loss from operations	(10,361		)	(10,490		)	(17,908		)	(18,927		)
Loss on sale of property and equipment	—			—			(169		)	—
Interest income	46			266			118			560
Interest expense	(151		)	(222		)	(307		)	(451		)
Net loss	$	(10,466	)	$	(10,446	)	$	(18,266	)	$	(18,818	)
Net loss per share, basic and diluted	$	(1.90	)	$	(2.07	)	$	(3.45	)	$	(3.81	)
Weighted average shares used in computing net loss per common share, basic and diluted	5,496			5,038			5,296			4,933

See accompanying notes.

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

	Six Months Ended June 30,
	2003			2002
	(unaudited)
Operating activities:
Net loss	$	(18,266	)	$	(18,818	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,449			2,453
Amortization of deferred stock compensation	377			734
Non-cash stock compensation recovery	(599		)	(10		)
Issuances of equity instruments for non-cash benefits	24			9
Loss on sale of property and equipment	169
Changes in assets and liabilities:
Accounts receivable	786			(610		)
Prepaid expenses and other current assets, including receivable from landlord	6,273			88
Other assets	123			(136		)
Accounts payable	(2,429		)	754
Accrued compensation	61			165
Accrued liabilities	(1,558		)	556
Deferred revenue	(1,670		)	(393		)
Deferred rent	2,337			(431		)
Net cash used in operating activities	(12,923		)	(15,639		)

Investing activities:
Purchase of available-for-sale securities	—			(23,001		)
Maturities of available-for-sale securities	757			19,325
Proceeds from the sale of property and equipment	71			—
Capital expenditures	(984		)	(3,536		)
Net cash used in investing activities	(156		)	(7,212		)

Financing activities:
Proceeds from capital lease financing	867			1,564
Principal payments on capital lease obligations	(1,906		)	(1,809		)
Advance from landlord	400			—
Net proceeds from issuances of common stock and warrants	45,275			31,685
Net cash provided by financing activities	44,636			31,440

Net increase in cash and cash equivalents	31,557			8,589
Cash and cash equivalents at beginning of period	26,535			11,488
Cash and cash equivalents at end of period	$	58,092		$	20,077

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

Rigel Pharmaceuticals, Inc. (“Rigel” or the “Company”) was incorporated in the state of Delaware on June 14, 1996. The Company is engaged in the discovery and development of a broad range of new, small-molecule drug 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 the opinion of Rigel’s management, 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, 2002 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.

On June 24, 2003, we effected a 1-for-9 reverse stock split of our outstanding common stock, after our stockholders approved the proposal for a reverse split at our annual meeting of stockholders held on June 20, 2003. As a result of the reverse stock split, each outstanding share of common stock automatically converted into one-ninth of a share of common stock, with the par value of each share of common stock remaining at one tenth of one cent ($.001) per share. Accordingly, common stock share and per share amounts for all periods presented have been adjusted to reflect the impact of the reverse stock split.

These unaudited condensed financial statements and the notes accompanying them should be read in conjunction with our Annual Report on Form 10-K, as amended, for the year ended December 31, 2002.

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

3. 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, “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 SFAS 123. 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 June 30,						Six Months Ended June 30,
	2003			2002			2003			2002

Net loss–as reported:	$	(10,466	)	$	(10,446	)	$	(18,266	)	$	(18,818	)
Add back: Total stock-based employee compensation determined under APB 25	(8		)	(290		)	203			(723		)
Less: Total stock-based employee compensation expense determined under the fair value based method for all awards	660			979			1,265			1,773
Pro forma net loss	(11,118		)	(11,135		)	(19,734		)	(19,868		)
Basic and diluted net loss per common share:
As reported	$	(1.90	)	$	(2.07	)	$	(3.45	)	$	(3.81	)
Pro forma	$	(2.04	)	$	(2.21	)	$	(3.73	)	$	(4.03	)

4. Net Loss Per Share

Basic earnings per share excludes any dilutive effects of options or warrants. The calculation of diluted net loss per share excludes shares of potential common stock if the effect is anti-dilutive.

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 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 approximate or exceed the revenue recognized under such agreements over the term of the respective agreements. Deferred revenue may result if we were not to incur the required level of effort during a specific period in comparison to funds received under the respective contracts.

Milestone payments are recognized pursuant to collaborative agreements upon the achievement of these specified at-risk milestones and upon acknowledgement by the collaborator.

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.

6. Reduction in Force

On January 31, 2003, we implemented a restructuring plan to reduce the rate of our cash consumption and better align our operating structure with current and expected future economic conditions. The restructuring plan included an immediate reduction in force of approximately 16%, or 25 employees, to 135 employees, with reductions occurring in all functional areas. Two of our officers were included in this reduction in force. All employees were given severance payments based on length of service at Rigel. All severance payments were made prior to March 31, 2003 except for one payment which was made in April 2003. During the six months ended June 30, 2003, we recognized approximately $599,000 of stock-based compensation recovery associated with the unvested options of the terminated employees that were cancelled which had previously been recognized under the graded vesting method of deferred compensation amortization.

7. Equipment Financing Amendment

On March 17, 2003, we amended a certain equipment lease agreement to allow for the buyout provision to be paid over a period of months rather than in a lump sum. The buyout provision of this amendment relates to approximately $2.9 million of original equipment and tenant improvement purchases. As a result of this amendment, we are committed to an additional $370,000 of payments through January 2004.

8. Equity Financing

On June 26, 2003, we completed a private placement with net proceeds of $45.0 million led by MPM Capital that included Frazier Healthcare, Alta Partners and HBM BioVentures. In the private placement, we issued 7,986,110 shares of our common stock at a price of $5.76 per share and warrants to purchase an additional 1,597,221 shares of our common stock at an exercise price of $5.76 per share. The fair value of these warrants, as determined by the Black-Scholes valuation model, was approximately $11.0 million. This amount has been allocated within “Additional paid-in capital” in our financial statements. For so long as MPM Capital holds at least 10% of the outstanding shares of our common stock, we will use our commercially reasonable best efforts to (i) cause two designees of MPM Capital to be nominated and elected to our board of directors; (ii) appoint one designee to serve on the nominating committee of our board of directors; and (iii) appoint one designee to serve on the compensation committee of our board of directors. These board appointments were completed in conjunction with the closing of the financing on June 26, 2003.

9. Subsequent Events

Offer to Exchange

On June 27, 2003 we initiated an offer to exchange options to purchase shares of our common stock with exercise prices equal to or greater than $9.00 per share currently outstanding under our 2000 Equity Incentive Plan (or 2000 Plan), 2001 Non-Officer Equity Incentive Plan and 2000 Non-Employee Directors’ Stock Option Plan, for replacement options to purchase shares of our common stock to be granted under the 2000 Plan. There were outstanding eligible options to purchase an aggregate of 367,961 shares of our common stock as of June 26, 2003. Only officers, employees not on certain leaves of absence, consultants, and non-employee members of Rigel’s board of directors as of June 27, 2003, who continued to be employed through the offer expiration date of July 25, 2003, were eligible to participate in the offer. We offered to conduct the exchange with respect to eligible options on a one-for-one (1:1) basis. Our option exchange offer expired at 11:59 PM, Pacific Daylight Time, on Friday, July 25, 2003. On July 28, 2003, we accepted for cancellation options to 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 shares of our common stock at an exercise price of $9.20 per share, the fair market value on the date of the grant. Subject to the continuation of the optionholders’ employment, service as a consultant or service as a non-employee member of our board of directors, the replacement options will vest as follows: one-fifth (1/5th) of the shares covered by the replacement options will vest on the six-month anniversary of the date of grant; one-fifth (1/5th) of the shares covered by the replacement options will vest on the twelve-month anniversary of the date of grant; and three-fifths (3/5ths) of the shares covered by the replacement options will vest in twenty-four (24) equal monthly installments over the following two (2) years. The replacement options will expire, at the latest, on the day three (3) years and five (5) business days after the date of grant (if it has not expired earlier due to the optionholders’ termination of employment, service as a consultant or service as a non-employee member of our board of directors). All replacement options, as well as the eligible options that were not surrendered under the original offer to exchange, will be treated for financial reporting purposes as variable awards. Therefore, we will record a non-cash charge reflecting increases and decreases (down to, but not below, the exercise price) in the price of our common stock in compensation expense in connection with the replacement options and the eligible options that were not exchanged. We will continue to reflect decreases and increases 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.

Rights Offering

On June 27, 2003, we initiated a rights offering pursuant to which non-transferable rights to purchase up to an aggregate of 1,736,111 shares of our common stock at a purchase price of $5.76 per share were offered to our stockholders of record as of April 29, 2003, other than certain stockholders affiliated with the investors in the private placement completed on June 26, 2003. Each such stockholder of record received one basic subscription right to purchase 0.4508 of a share of Rigel common 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 had elected to purchase an aggregate of 1.6 million shares of our common stock for aggregate gross proceeds to us of $9.3 million. The shares were issued to the participating stockholders on July 31, 2003.

Independent Accountants’ Review Report

The Board of Directors
Rigel Pharmaceuticals, Inc.

We have reviewed the accompanying condensed balance sheet of Rigel Pharmaceuticals, Inc. as of June 30, 2003, and the related condensed statements of operations for the three and six-month periods ended June 30, 2003 and 2002, and the condensed statements of cash flows for the six-month periods ended June 30, 2003 and 2002. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. 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 auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing 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 accompanying condensed financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.

We have previously audited, in accordance with auditing standards generally accepted in the United States, the balance sheet of Rigel Pharmaceuticals, Inc. as of December 31, 2002, and the related statements of operations, stockholders’ equity, and cash flows for the year then ended and in our report dated January 24, 2003 (except for note 9, as to which the date is January 31, 2003), 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, 2002, 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
July 22, 2003

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 2002 audited financial statements and accompanying notes included in our 2002 Annual Report on Form 10-K, as amended. Operating results for the three and six months ended June 30, 2003 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. When used herein, the words “believe,” “anticipate,” “expect,” “estimate” 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 report and in our 2002 Annual Report on Form 10-K, as amended, as filed with the SEC. Rigel undertakes no obligation to update any of the forward-looking statements contained herein to reflect any future events or developments.

Overview

Rigel’s mission is to become a source of novel, small-molecule drugs to meet large, unmet medical needs. Our business model is to develop a portfolio of drug candidates and to take these through Phase II clinical trials, after which we intend to seek partners for completion of clinical trials, regulatory approval and marketing. We have identified three lead product development programs: mast cell inhibition to treat immunologic diseases such as asthma/allergy and autoimmune disorders, antiviral agents to treat Hepatitis C and ubiquitin ligases, a new class of cancer drug targets. Rigel has begun clinical testing of its first product candidate, R112, for allergic rhinitis, and plans to begin clinical trials of three additional drug candidates for the treatment of hepatitis C, rheumatoid arthritis and asthma through the end of 2004. We have incurred net losses since inception and expect to incur substantial and increasing losses for the next several years as we continue to move drug candidates into and through preclinical and clinical stages of drug development and expand our research and development activities. To date, we have funded our operations primarily through the sale of equity securities, non-equity payments from collaborative partners and capital asset lease financings. We received our first funding from our collaborative partners in December 1998. As of June 30, 2003, our accumulated deficit was approximately $133.0 million.

We expect our sources of revenue for the next several years to consist primarily of payments under our current and future corporate collaborations. Under these arrangements, sources of revenue may include up-front payments, funded research, milestone payments and royalties. The process of carrying out our research programs for our collaborative partners and the development of our own non-partnered products to the later stages of development will require significant additional research and development expenditures, including preclinical testing and clinical trials. These activities, together with our general and administrative expenses, are expected to result in substantial operating losses for the foreseeable future. We will not receive product revenue unless we or our collaborative partners complete clinical trials, obtain regulatory approval and successfully commercialize one or more of our products.

To date, we have entered into collaborations with four major pharmaceutical companies: Johnson & Johnson, Pfizer, Inc., Novartis Pharma AG, and Daiichi Pharmaceuticals Co. Ltd. Johnson & Johnson, Pfizer and Novartis have provided all of our revenues over the last three years. The Daiichi collaboration was entered into in the last half of 2002.

A summary of these partnerships is as follows:

Partner	Research Program	Commencement Date	Research Phase Termination Date

Johnson & Johnson	Tumor Growth—Cell Cycle Inhibition	December 4, 1998	December 2003
Pfizer	Asthma/Allergy—IgE Production in B Cells	January 31, 1999	February 2002
Novartis	Transplant Rejection—T Cell Activation	May 26, 1999	November 2002
Novartis	Autoimmunity Disease—B Cell Activation	August 1, 1999	February 2003
Novartis	Chronic Bronchitis (conducted at Novartis)	January 1, 2000	Ongoing at Novartis
Novartis	Tumor Growth—Inhibition of Tumor Angiogenesis	July 6, 2001	July 2004
Daiichi	Tumor Growth—Protein Degradation Oncology Target	August 1, 2002	August 2005

Under the terms of these collaborations, Johnson & Johnson, Novartis and Daiichi have agreed to provide up to approximately $6.1 million in future research funding over the next three years, none of which is cancelable at the option of these partners. In addition, both during the research phase and subsequent to the termination of the research phase, we may receive additional payments upon the achievement of specific research and development milestones and royalties upon commercialization of any products.

During March 2003, we recognized a milestone with Daiichi for approximately $1.9 million associated with the completion of a

certain research phase of our ongoing collaboration. The full amount was collected during March 2003.

In order to maintain and increase proceeds from collaborations, we are exploring new opportunities with existing and new potential collaborators. Our earliest partnerships focused on the early stages of drug discovery, specifically on target discovery and validation, while our collaboration with Johnson & Johnson has been expanded to also include both chemistry and compound high-throughput screening (or HTS), and our recent collaboration with Daiichi focuses on drug discovery and development. We currently anticipate that in order to support our current research programs we will need to self-fund, at an increased rate of spending, our own research programs to later stages of development prior to partnering with collaborative partners. Therefore, it is expected that future collaborative partnerships may have an expanded focus and could include HTS, combinatorial and medicinal chemistry, preclinical evaluations and/or clinical development. For some programs, we may also seek to enter into collaborations for the development of compounds that we have discovered. The timing, the amount of funds received and the scope of any new collaborations are uncertain, and any compound collaboration will depend on the successful progress of clinical trials. New, expanded or larger collaborations will also be necessary to offset any decrease in proceeds as collaborations come to the end of their terms. Our remaining Novartis program focuses on angiogenesis and is a multiple-year agreement with the research phase terminating in 2004, the Johnson & Johnson collaboration concludes its research phase at the end of 2003 and the Daiichi collaboration concludes its research phase in August 2005. As each collaboration reaches the conclusion of its research phase, the parties may evaluate the status of the collaboration and, if appropriate, seek to extend the research phase of the collaboration agreement or negotiate alternative terms.

Recent Developments

On June 24, 2003, we effected a 1-for-9 reverse stock split of our outstanding common stock, after our stockholders approved the proposal for a reverse split at our annual meeting of stockholders held on June 20, 2003. Immediately following the reverse split we had a total of 5,159,519 shares of common stock outstanding.

On June 26, 2003, we completed a private placement with net proceeds of $45.0 million led by MPM Capital that included Frazier Healthcare, Alta Partners and HBM BioVentures. In the private placement, we issued 7,986,110 shares of our common stock at a price of $5.76 per share and warrants to purchase an additional 1,597,221 shares of our common stock at an exercise price of $5.76 per share. As a result of their combined approximate 70.5% ownership (without giving effect to the exercise of the warrants and based on 13,167,556 shares outstanding as of June 30, 2003), the investors obtained control over Rigel. The investors hold the requisite percentage of our outstanding shares so as to permit them, if they choose to act in concert, to take actions requiring stockholder approval without obtaining the approval of our other stockholders. For so long as MPM Capital holds at least 10% of the outstanding shares of our common stock, we will use our commercially reasonable best efforts to (i) cause two designees of MPM Capital to be nominated and elected to our board of directors; (ii) appoint one designee to serve on the nominating committee of our board of directors; and (iii) appoint one designee to serve on the compensation committee of our board of directors. These board appointments were completed in conjunction with the closing of the financing on June 26, 2003.

On June 27, 2003 we initiated an offer to exchange options to purchase shares of our common stock with exercise prices equal to or greater than $9.00 per share currently outstanding under our 2000 Equity Incentive Plan (or 2000 Plan), 2001 Non-Officer Equity Incentive Plan and 2000 Non-Employee Directors’ Stock Option Plan, for replacement options to purchase shares of our common stock to be granted under the 2000 Plan. There were outstanding eligible options to purchase an aggregate of 367,961 shares of our common stock as of June 26, 2003. Only officers, employees not on certain leaves of absence, consultants, and non-employee members of Rigel’s board of directors as of June 27, 2003, who continued to be employed through the offer expiration date of July 25, 2003, were eligible to participate in the offer. We offered to conduct the exchange with respect to eligible options on a one-for-one (1:1) basis. Our option exchange offer expired at 11:59 PM, Pacific Daylight Time, on Friday, July 25, 2003. On July 28, 2003, we accepted for cancellation options to 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 shares of our common stock at an exercise price of $9.20 per share, the fair market value on the date of grant. Subject to the continuation of the optionholders’ employment, service as a consultant or service as a non-employee member of our board of directors, the replacement options will vest as follows: one-fifth (1/5th) of the shares covered by the replacement options will vest on the six-month anniversary of the date of grant; one-fifth (1/5th) of the shares covered by the replacement options will vest on the twelve-month anniversary of the date of grant; and three-fifths (3/5ths) of the shares covered by the replacement options will vest in twenty-four (24) equal monthly installments over the following two (2) years. The replacement options will expire, at the latest, on the day three (3) years and five (5) business days after the date of grant (if it has not expired earlier due to the optionholders’ termination of employment, service as a consultant or service as a non-employee member of our board of directors). All replacement options, as well as the eligible options that were not surrendered under the original offer to exchange, will be treated for financial reporting purposes as variable awards. Therefore, we will record a non-cash charge reflecting increases and decreases (down to, but not below, the exercise price) in the price of our common stock in compensation expense in connection with the replacement options and the eligible options that were not exchanged. We will continue to reflect decreases and increases 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.

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 accounting principles generally accepted in the United States. 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.

Revenue Recognition

respective contracts.

Milestone payments are recognized pursuant to collaborative agreements upon the achievement of specified 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

As a result of our reduction in force on January 31, 2003, we recognized approximately $599,000 of stock-based compensation recovery associated with the unvested and cancelled options of the terminated employees which had previously been recognized under the graded vesting method of deferred compensation amortization. We amortized deferred stock compensation of $0.4 million and $0.7 million for the six months ended June 30, 2003 and 2002, respectively. At June 30, 2003, we had a total of $0.3 million remaining to be amortized over the remaining vesting periods of the stock options.

Three Months Ended June 30, 2003 and 2002

Revenues. Contract revenues from collaborations were $2.3 million and $4.3 million for the three months ended June 30, 2003 and 2002, respectively. Revenues in both three-month periods consisted primarily of research support and amortization of upfront fees from the continuation of our collaborations with Johnson & Johnson, Novartis and, in 2003 only, Daiichi. In the three months ended June 30, 2002, revenues included a $500,000 milestone payment for a target accepted in accordance with our transplant rejection research program with Novartis and a $100,000 milestone payment for target accepted in accordance with our Pfizer collaboration The decrease in 2003 revenues of $2.0 million was primarily due to the termination of the research phase of the Novartis T-Cell and B-Cell programs as well as the milestones that were recognized in the three months ended June 30, 2002. We expect contract revenues from collaborations, for at least the third quarter of 2003, will be in-line with the revenues for the second quarter of 2003 as revenue is expected to be comprised of only research support and the amortization of upfront fees associated with our Novartis angiogenesis, Johnson & Johnson and Daiichi collaborations.

Research and Development. Research and development expenses were $10.7 million and $12.1 million for the three months ended June 30, 2003 and 2002, respectively. The decrease in 2003 research and development expenses of $1.4 million was primarily due to a reduction in contract chemistry, lab supplies, costs associated with our intellectual property and employee costs offset by an increase in pre-clinical and clinical costs and facility costs. In September 2002, we began the Phase I clinical trial of our lead compound, R112, in the United Kingdom and subsequently filed an investigational new drug (or IND) application for this compound with the United States Food and Drug Administration (or FDA) for the clinical indication of allergic rhinitis. Approval to proceed was received from the FDA in December 2002, and a Phase I/II clinical trial was recently completed at National Jewish Medical Center in Denver, Colorado. The clinical trial evaluated the safety and effectiveness of R112 in patients with documented allergies. We believe that preliminary initial results of this clinical trial, announced on July 20, 2003, indicate that the mechanism of action of this compounds is to comprehensively inhibit the chemical mediators associated with mast cell activation as well as validate R112’s potential as a therapeutic for allergy. We expect research and development expenses to increase in the future, particularly as we continue to move our solely-owned drug candidates through preclinical activities and into clinical trials.

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, patent filings, sponsored research, allocated facility costs and costs related to clinical trials.

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. Accordingly, we do not maintain actual cost incurred information for our projects on a project-by-project basis.

General and Administrative Expenses. General and administrative expenses were $2.0 million and $2.8 million for the three months ended June 30, 2003 and 2002, respectively. The decrease of $0.8 million in 2003 was primarily attributable to a reduction in employee costs as a result of cost-cutting measures that were initiated in September 2002 and January 2003. We expect that general and administrative expenses will remain relatively flat for the remainder of 2003.

Net Interest Expense. Net interest expense was $105,000 for the three months ended June 30, 2003, compared with net interest income of $44,000 for the three months ended June 30, 2002. Interest income is earned from our interest-bearing cash and investment balances, whereas we incur interest expense on our capital lease obligations associated with capital asset purchases. In 2003, interest expense exceeded interest income due primarily to a reduction in interest rates on our owned securities coupled with a decrease in the average balances of those securities.

Six Months Ended June 30, 2003 and 2002

Revenues. Contract revenues from collaborations were $6.8 million and $8.4 million for the six months ended June 30, 2003 and 2002, respectively. Revenues in both six-month periods consisted primarily of research support and amortization of upfront fees from the continuation of our collaborations with Johnson & Johnson, Novartis and, in 2003 only, Daiichi. In the six months ended June 30, 2003, revenues included a $1.9 million milestone payment from Daiichi for the completion of a certain screening phase of the collaboration. In the six months ended June 30, 2002, revenues included $600,000 of milestone payments for targets delivered and accepted in accordance with our Pfizer collaboration and a $500,000 milestone payment for a target accepted in accordance with our transplant rejection research program with Novartis. The decrease in 2003 revenues of $1.6 million was primarily due to the termination of the research phase of the Novartis T-Cell and B-Cell programs as well as the termination of the research phase of the Pfizer program offset by the increased milestone payment associated with Daiichi.

Research and Development. Research and development expenses were $20.7 million and $22.2 million for the six months ended June 30, 2003 and 2002, respectively. The decrease in 2003 research and development expenses of $1.5 million was primarily due to a reduction in contract chemistry, lab supplies, costs associated with our intellectual property, and employee costs offset by an increase in pre-clinical and clinical costs and facility costs.

General and Administrative Expenses. General and administrative expenses were $4.0 million and $5.2 million for the six months ended June 30, 2003 and 2002, respectively. The decrease of $1.2 million in 2003 was primarily attributable to a reduction in employee costs as a result of cost-cutting measures that were initiated in September 2002 and January 2003.

Loss on Sale of Property and Equipment. In conjunction with our move to our new facilities in February 2003, we sold to the

new tenant of our previous facility certain furniture and equipment that would no longer be needed at our new location. This sale resulted in cash proceeds of approximately $71,000 and a loss on sale of $169,000. The loss represents the remaining net book value of those assets less the cash received on the sale.

Net Interest Expense. Net interest expense was $189,000 for the six months ended June 30, 2003, compared with net interest income of $109,000 for the six months ended June 30, 2002.

Liquidity and Capital Resources

We have financed our research and development operations from inception primarily through sales of equity securities, contract payments payable to us under our collaboration agreements and equipment financing arrangements. As of June 30, 2003, we had received $172.1 million in gross proceeds from the sale of equity securities, including $20.0 million from collaborators, and had received $63.7 million in research funding from collaborators. In addition, as of June 30, 2003, we had financed, through leases and loans, the purchase of equipment and leasehold improvements totaling approximately $18.0 million.

As of June 30, 2003, we had $58.1 million in cash, cash equivalents and available-for-sale securities, as compared to $27.3 million as of December 31, 2002, an increase of $30.8 million. The increase was attributable to net proceeds of $45.0 million, after deducting offering costs, from the sale of 7,986,110 shares of our common stock and warrants to purchase 1,597,221 shares of our common stock to MPM Capital, Frazier Healthcare, Alta Partners and HBM BioVentures in a private placement completed in June 2003. We also invested $1.0 million in capital equipment and had debt service payments of $1.9 million in conjunction with our equipment financing arrangements. These payments were offset by $0.9 million of proceeds from a lease financing and $0.4 million from a cash advance from our landlord. For the three and six months ended June 30, 2003 and 2002, 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.

As of June 30, 2003, we had $4.7 million in capital lease obligations associated with our financed purchase of equipment and leasehold improvements. All existing equipment financing agreements as of June 30, 2003 are secured by the equipment financed, bear interest rates in a range of 7% to 15% and are due in monthly installments through 2006. In addition, three of these agreements have balloon payments at the end of each loan term, while the fourth agreement allows us to purchase the assets financed at the fair market value or 20% of the original acquisition cost at the end of the financing term. On March 17, 2003, we amended an equipment lease agreement to allow for the buyout provision to be paid over a period of months rather than in a lump sum. The buyout provision of this amendment relates to approximately $2.9 million of original equipment and tenant improvement purchases. As a result of this amendment, we are committed to an additional $370,000 of payments through January 2004. As of June 30, 2003, we had a total of $1.1 million available for draw down under all financing agreements.

During 2002, our office and research facility located at 240 East Grand in South San Francisco was leased under an operating lease that terminated in conjunction with a 15-year lease, signed in May 2001, for our current office and research facilities located at 1180 Veterans Blvd. in South San Francisco. Under the terms of the lease signed in 2001, we were to occupy our new facilities in late 2002 and were to concurrently terminate the lease of our former facility at 240 East Grand in South San Francisco. We determined that the 2001 lease for our current facility was an operating lease in accordance with FAS 13. In connection with the termination of the current 240 East Grand lease, we accelerated the amortization of tenant improvements and accrued rent charges over the expected remaining life of the lease and incurred minimal costs in connection with the terminated lease. The 1180 Veterans Blvd. research and office facilities were constructed as a build-to-suit facility. Under the original lease, we were obligated to fund approximately $18.0 million of the total tenant improvement obligations. In October 2002, we amended this original lease to provide for a delay of the rent commencement date until February 1, 2003 and an increase in the tenant improvement allowance to cover all of the expected remaining construction obligations on the facility. The lease was also amended to increase the future rental commitments to compensate for the delay of the rent commencement and the increase in the tenant improvement allowance. Since the amendment was considered a material change to the original lease, we reviewed the accounting treatment for this amended lease and again determined the lease to be an operating lease. We moved into the new facility during February 2003.

Prior to the signing of the amendment, we had been directly paying a portion of the pre-construction and construction costs related to the new facility. These costs were being capitalized on our balance sheet as construction-in progress. Per the terms of the amendment, we have estimated that the landlord will be responsible for reimbursing to us all of the costs that we had previously capitalized. Therefore, we have reclassified these costs into a short-term asset “Receivable from Landlord” in our financial statements. This receivable has been fully paid as of June 30, 2003.

The following are our contractual commitments (by fiscal year,) as of June 30, 2003 associated with debt obligations and lease obligations (note that 2003 only includes commitments for the last six months of the year):

	Total		2003		2004 - 2005		2006 - 2007		2008 - 2018
	(in thousands)

Capital leases	$	5,518	$	2,022	$	3,370	$	126	$	—
Facilities leases	194,661		3,702		21,438		26,546		142,975
Total	$	200,179	$	5,724	$	24,808	$	26,672	$	142,975

We believe that our existing capital resources, together with the anticipated proceeds from current collaborations will be sufficient to support our current operating plan for at least the next 12 months. We will require additional financing in the future to fund our research and development operations. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risk and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong. Our future funding requirements will depend on many factors, including, but not limited to:

• our ability to maintain our existing collaboration partnerships;

• our ability to establish, and the scope of, new collaborations;

• the progress and scope of research programs carried out at Rigel;

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

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

• our ability to maintain and establish new corporate relationships and research collaborations;

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

• our ability to acquire or license other technologies or compounds, if any;

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

• 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.

In addition, we are constantly reviewing potential opportunities to expand our technologies or add to our portfolio of drug candidates. In the future, we may need further capital in order to acquire or invest in technologies, products or businesses. For the next several years, we do not expect the cash generated from our operations to generate the amount of cash required by our future cash needs. We expect to finance future cash needs through the sale of equity securities, strategic collaborations and debt financing. We cannot assure you that additional financing or collaboration and licensing arrangements will be available when needed or that, if available, such financing will be obtained on terms favorable to us or our stockholders. 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.

RISK FACTORS

An investment in our securities is risky. Prior to making a decision about investing in our securities you should carefully consider the following risks, as well as the other information contained in this quarterly report on Form 10Q. If any of the following risks actually occurs, our business could be harmed. In that case, the trading price of our common stock could decline, and you might lose all or part of your investment. 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. If any of these additional risks or uncertainties occurs, the trading price of our common stock could decline, and you might lose all or part of your investment.

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

Our operations will require significant additional funding in large part due to our research and development expenses, future preclinical and clinical-testing costs, the expansion of our facilities and the absence of any meaningful revenues for the foreseeable future. The amount of future funds needed will depend largely on the success of our collaborations and our research activities, and 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.

To the extent we raise additional capital by issuing equity securities, our stockholders would at that time would 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 on many uncertain factors.

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