Rigel Pharmaceuticals, Inc. Annual Report 2016

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FY2016 Annual Report · Rigel Pharmaceuticals, Inc.

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(Mark One)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2016
or



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

Commission file number 0-29889
RIGEL PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of
incorporation or organization)

1180 Veterans Blvd.

South San Francisco, California
(Address of principal executive offices)

94-3248524
(IRS Employer
Identification No.)

94080
(Zip Code)

(650) 624-1100
(Registrant’s telephone number, including area code)

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

Title of each class:
Common Stock, par value $.001 per share

Name of each exchange on which registered:
The Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No 
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  No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes  No 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained

herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. 

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting

company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 
(Do not check if a
smaller reporting company)

Smaller reporting company 

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No 
The approximate aggregate market value of the Common Stock held by non- affiliates of the registrant, based upon the closing price of the

registrant’s Common Stock as reported on the Nasdaq Global Market on June 30, 2016, the last business day of the registrant’s most recently completed
second fiscal quarter, was $210,660,442. Shares of the registrant’s outstanding Common Stock held by each executive officer, director and affiliates of the
registrant’s outstanding Common Stock have been excluded. The determination of affiliate status for the purposes of this calculation is not necessarily a
conclusive determination for other purposes.

As of March 1, 2017, there were 122,285,861 shares of the registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K incorporate information by reference from the definitive proxy

statement for the registrant’s 2017 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

TABLE OF CONTENTS

PART I

Business

Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures

Properties
Legal Proceedings

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases

of Equity Securities
Selected Financial Data

Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information

Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

PART III

Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services

PART IV

Item 15. Exhibits and Financial Statement Schedules

Signatures

Page

3
18
36
36
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36

37
39
40
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83

84
85

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains statements indicating expectations about future performance and

other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
Securities Act), Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and the Private
Securities Litigation Reform Act of 1995, that involve risks and uncertainties. We usually use words such as “may,”
“will,” “should,” “could,” “expect,” “plan,” “anticipate,” “might,” “believe,” “estimate,” “predict,” “intend” or the
negative of these terms or similar expressions to identify these forward- looking statements. These statements appear
throughout this Annual Report on Form 10-K and are statements regarding our current intent, belief or expectation,
primarily with respect to our operations and related industry developments. Examples of these statements include, but are
not limited to, statements regarding the following: our business and scientific strategies; the progress of our product
development programs, including clinical testing, and the timing of commencement and results thereof; our corporate
collaborations, and revenues that may be received from collaborations and the timing of those potential payments; our
drug discovery technologies; our research and development expenses; protection of our intellectual property; and
sufficiency of our cash resources and need for additional capital. You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking
statements for many reasons, including as a result of the risks and uncertainties discussed under the heading “Risk
Factors” in Part I, Item 1A of this Annual Report on Form 10-K. A forward- looking statement speaks only as of the date
on which it is made, and, except as required by law, we undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will
arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statements.

Item 1. Business

Overview

PART I

Rigel Pharmaceuticals, Inc. was incorporated in Delaware in June 1996, and is based in South San Francisco,

California. We are a clinical-stage biotechnology company dedicated to the discovery and development of novel,
targeted drugs in the therapeutic areas of immunology, oncology and immuno-oncology. Our pioneering research focuses
on signaling pathways that are critical to disease mechanisms. Our current clinical programs include clinical studies of
fostamatinib, an oral spleen tyrosine kinase (SYK) inhibitor in a number of indications. We completed and reported
results from the FIT Phase 3 clinical program of fostamatinib in chronic immune thrombocytopenia (ITP). We are also
conducting a Phase 2 clinical study with fostamatinib in autoimmune hemolytic anemia (AIHA) and a Phase 2 clinical
study for IgA nephropathy (IgAN). In addition, we have two oncology product candidates in development with partners
BerGenBio AS (BerGenBio) (Phase 2) and Daiichi Sankyo (Daiichi) (Phase 1).

Since the beginning of 2016, we have experienced the following significant business events:



In February 2017, we completed an underwritten public offering in which we sold 23,000,000 shares of our
common stock pursuant to an effective registration statement at a price to the public of $2.00 per share. We
received net proceeds of approximately $43.0 million after deducting underwriting discounts and
commissions and estimated offering expenses.

In January 2017, we announced the following:
i.) we completed the first cohort in the Phase 2 study of fostamatinib in IgAN; and
ii.) we received $3.0 million from our immuno-oncology partnership with Bristol-Myers Squibb Company
(BMS) in the fourth quarter of 2016 due to BMS identifying the TGF beta-receptor kinase inhibitor
molecule for IND-enabling toxicology studies.

In August 2016, we reported results from the first Phase 3 clinical trial for ITP and in October 2016, we
reported the results for a second Phase 3 study in ITP, as well as the results for the Phase 3 open label
extension study in ITP with fostamatinib. Data from the Phase 3 studies demonstrate a consistent
fostamatinib response rate. In addition, we announced that Esteban Masuda, Ph.D. was promoted to Senior
Vice President for Research and that Joseph Lasaga rejoined the Company as Vice President, Business
Development and Alliance Management.



In September 2016, we announced the following:
i.) we reduced our workforce by 38% resulting in the elimination of 46 positions, mostly in the research

area;

ii.) Donald G. Payan, M.D. has retired from the board of directors and from his position as Executive Vice

President and President of Discovery and Research, effective September 15, 2016; and

iii.) Eldon C. Mayer III joined the Company as Executive Vice President and Chief Commercial Officer.



In April 2016, we announced we had completed enrollment for the first two studies in our Phase 3 clinical
program for forstamatinib in ITP.

In March 2016, we announced the appointment of Anne-Marie Duliege, M.D., M.S. to the role of chief
medical officer, replacing Elliott Grossbard, M.D., who retired from that position after 14 years with the
Company.

In February 2016, we announced that we initiated a Phase 2 clinical trial to evaluate fostamatinib as a
potential treatment for AIHA.



In January 2016, we announced that we completed patient enrollment of the first Phase 3 study with
fostamatinib for the treatment of ITP.

Strategy

Our research team is focused on creating a portfolio of product candidates that may be developed as
therapeutics for our own proprietary programs or for development by potential collaborative partners. We recognize that
the product development process is subject to both high costs and a high risk of failure. We believe that identifying a
variety of product candidates and working in conjunction with other pharmaceutical partners may minimize the risk of
failure, fill the product pipeline gap at major pharmaceutical companies, and ultimately increase the likelihood of
advancing clinical development and potential commercialization of the product candidates.

The key elements to our business and scientific strategy are to:



develop and commercialize fostamatinib in the United States where we believe a company our size can
successfully compete;

outlicense European and Asian rights to fostamatinib;

develop and commercialize fostamatinib for possible additional indications;

develop a diverse portfolio of drug candidates that address a focused brand of therapeutic indications or
that represent significant market opportunities;

utilize our discovery engine to discover and validate new product candidates in a focused range of
therapeutic indications; and

develop drug candidates and establish strategic collaborations with pharmaceutical and biotechnology
companies to further develop and market our product candidates.

Product Development Programs

Our product development portfolio features multiple novel, targeted drug candidates in the therapeutic areas of

immunology, oncology and immuno-oncology.

Pipeline
Fostamatinib—Oral SYK Inhibitor

Current Stage

Status

Immune Thrombocytopenic Purpura

Phase 3

(ITP)

IgA Nephropathy (IgAN)

Phase 2

We completed and reported results from the two Phase 3
clinical studies in August 2016 and October 2016. We are
also conducting a long-term open-label extension study of
certain patients from the first two Phase 3 clinical studies
and who opted to receive treatment with fostamatinib.

We plan to submit the New Drug Application (NDA) with
the U.S. Food and Drug Administration (FDA) in the first
quarter of 2017 and would expect to receive a decision on
approval from the FDA in the first quarter of 2018, with a
potential commercial launch in the U.S. in the first half of
2018.
In January 2017, we announced that we completed the first
cohort in the Phase 2 study of fostamatinib in IgAN. The
Phase 2 study for the second cohort is currently enrolling
patients and we expect to have data in the first part of 2018.

Autoimmune Hemolytic Anemia

Phase 2

The Phase 2 clinical trial continues to enroll patients with

(AIHA)

AIHA. The trial is a two-stage study and we expect to have
results of the Stage 1 segment of the trial in 2017. With
this data, we will evaluate the best way forward and
potentially an expedited path for pursuing AIHA.

Clinical Stage Programs

Fostamatinib—Immune Thrombocytopenic Purpura

Disease background. Chronic ITP affects an estimated 60,000 to 125,000 people in the U.S. In patients with

ITP, the immune system attacks and destroys the body’s own blood platelets, which play an active role in blood clotting
and healing. ITP patients can suffer extraordinary bruising, bleeding and fatigue as a result of low platelet counts.
Current therapies for ITP include steroids, blood platelet production boosters that imitate thrombopoietin (TPOs) and
splenectomy.

Orally-available SYK inhibitor program. Taken in tablet form, fostamatinib blocks the activation of SYK

inside immune cells. ITP is typically characterized by the body producing antibodies that attach to healthy platelets in the
blood stream. Immune cells recognize these antibodies and affix to them, which activates the SYK enzyme inside the
immune cell, and triggers the destruction of the antibody and the attached platelet. When SYK is inhibited by
fostamatinib, it interrupts this immune cell function and allows the platelets to escape destruction. The results of our
Phase 2 clinical trial, in which fostamatinib was orally administered to sixteen adults with chronic ITP, published in
Blood, showed that fostamatinib significantly increased the platelet counts of certain ITP patients, including those who
had failed other currently available agents.

In October 2013, we met with the FDA for an end-of-Phase 2 meeting for fostamatinib in ITP. Based on that

meeting, we designed a Phase 3 clinical program, called fostamatinib in thrombocytopenia (FIT), in which a total of 150
ITP patients were randomized into two identical multi-center, double-blind, placebo-controlled clinical trials. The
patients will have been diagnosed with persistent or chronic ITP, and have blood platelet counts consistently below
30,000 per microliter of blood. Two-thirds of the subjects will receive fostamatinib orally at 100 mg bid (twice daily)
and the other third will receive placebo on the same schedule. Subjects were expected to remain on treatment for 24
weeks. At week four of treatment, subjects who failed to meet certain platelet count and met certain tolerability
thresholds could have their dosage of fostamatinib (or corresponding placebo) increased to 150 mg bid. The primary
efficacy endpoint of this program is a stable platelet response by week 24 with platelet counts at or above 50,000 per
microliter of blood for at least four of the final six qualifying blood draws. In August 2015, the FDA granted our request
for Orphan Drug designation to fostamatinib, our oral SYK inhibitor, for the treatment of ITP. On April 1, 2016, we
announced that we completed enrollment for these two studies in the FIT Phase 3 clinical program of fostamatinib in
ITP.

On August 30, 2016, we announced the results of the first study, reporting that fostamatinib met the study’s

primary efficacy endpoint. The study showed that 18% of patients receiving fostamatinib achieved a stable platelet
response compared to none receiving a placebo control (p=0.0261). On October 20, 2016, we announced the results of
the second study, reporting that the response rate was 18%, consistent with the first study. However, one patient in the
placebo group (4%) achieved a stable platelet response, therefore the difference between those on treatment and those on
placebo did not reach statistical significance (p=0.152) and the study did not meet its primary endpoint. When the data
from both studies are combined, however, this difference is statistically significant (p=0.007). In the combined datasets
for the first two Phase 3 studies, patients who met the primary endpoint had their platelet counts increase from a median
of 18,500/uL of blood at baseline to more than 100,000/uL at week 24 of treatment. These patients benefited
substantially and typically did so within weeks of initiating treatment, providing early feedback as to whether
fostamatinib may be a viable option for treating their ITP. In the combined datasets, the frequency of patients who
achieved a stable platelet response was statistically superior in the fostamatinib group versus the placebo group in the
following subgroups: prior splenectomy or not; prior exposure to TPO agents or not; platelet counts below or above
15,000/uL of blood at baseline, demonstrating that the effect of fostamatinib is consistent across various clinical and
treatment backgrounds.

Patients from the first two Phase 3 studies were given the option to enroll in a long-term open-label extension

study and receive treatment with fostamatinib, also a Phase 3 trial. As of September 2016, 124 patients had been enrolled
in this study. All the patients who responded to fostamatinib in the parent studies and enrolled in the long-term open-
label extension study had maintained a median platelet count of 106,500/uL at a median of 16 months. In addition, there
were 44 placebo non-responders that enrolled in the long-term open-label extension study. 41 of these patients had at
least 12 weeks of follow-up. Of those, 9 patients (22%) have achieved a prospectively defined stable platelet response,
which is statistically significant (p=0.0078) and similar to the response rate fostamatinib achieved in the parent studies.

In the combined dataset of both stable and intermediate responders for the first two Phase 3 studies, the

response rate was 29% (29/101), compared to 2% (1/49) for placebo (p=<0.0001). A stable response was defined as a
patient achieving platelet counts of greater than 50,000/uL on more than 4 of the 6 visits between weeks 14 and 24. In
the post-study analysis performed by the Company, an intermediate response was defined to include patients achieving at
least two consecutive median platelet counts over 50,000/uL during the trial without rescue, but who did not otherwise
meet the stable response criteria.

The most frequent adverse events were gastrointestinal-related, and the safety profile of the product was
consistent with prior clinical experience, with no new or unusual safety issues uncovered. Data from the first two Phase 3
studies as well as our ongoing open-label extension study demonstrates the consistent benefit of fostamatinib in ITP. We
plan to submit an NDA for fostamatinib in ITP in the first quarter of 2017 and would expect to receive a decision on
approval from the FDA in the first quarter of 2018, with a potential commercial launch in the U.S. in the first half of
2018.

Fostamatinib—IgAN

Disease background. IgAN is an autoimmune disease that severely affects the functioning of the kidneys. An

estimated 12,000 Americans are diagnosed with this type of glomerulonephritis each year, with 25% of its victims
eventually requiring dialysis and/or kidney transplantation over time. IgAN is characterized by the deposition of IgA
immune complexes in the glomeruli of the kidneys leading to an inflammatory response and subsequent tissue damage
that ultimately disrupts the normal filtering function of the kidneys. By inhibiting SYK in kidney cells, fostamatinib may
block the signaling of IgA immune complex receptors and arrest or slow destruction of the glomeruli.

Orally-available SYK inhibitor program. Our Phase 2 clinical trial in patients with IgAN, called SIGN (SYK

Inhibition for Glomerulonephritis) completed enrollment for the first cohort and is currently enrolling patients for the
second cohort. In January 2017, we announced that the first cohort in the Phase 2 study of fostamatinib in IgAN was
completed in various centers throughout Asia, the U.S. and Europe. This cohort evaluated the efficacy, safety, and
tolerability of a low dose of fostamatinib (100mg BID, n=26; placebo n=12) as measured by change in proteinuria, renal
function, and histology (comparing the pre- and post-study renal biopsies). The primary efficacy endpoint was the mean
change in proteinuria from baseline at 24 weeks. The study found that at 24 weeks fostamatinib was well tolerated with a
good safety profile. The initial data suggest a trend towards a greater reduction in proteinuria in fostamatinib treated
patients relative to placebo. We are performing further analysis of data from the first cohort, particularly the histology
review of the renal biopsies, as well as other secondary efficacy endpoints, which we will present later in 2017. The
Phase 2 study for the second cohort is currently enrolling patients. We expect that the second cohort, evaluating a higher
dose of fostamatinib (150 mg BID) for IgAN, will finish enrollment in 2017, with results in 2018.

Fostamatinib—AIHA

Disease background. AIHA is a rare, serious blood disorder where the immune system produces antibodies that

result in the destruction of the body's own red blood cells. Symptoms can include fatigue, shortness of breath, rapid
heartbeat, jaundice or enlarged spleen. While no medical treatments are currently approved for AIHA, physicians
generally treat acute and chronic cases of the disorder with corticosteroids, other immuno-suppressants, or splenectomy.
Research has shown that inhibiting SYK with fostamatinib may reduce the destruction of red blood cells. This disorder
affects an estimated 40,000 Americans, for whom no approved treatment options currently exist.

Orally available SYK inhibitor program. We initiated a Phase 2 clinical trial in patients with AIHA in February
2016. The trial is an open-label, multi-center, two-stage study that will evaluate the efficacy and safety of fostamatinib in
patients with warm antibody AIHA who have previously received treatment for the disorder, but have relapsed. Stage 1
will enroll 17 patients who will receive 150 mg of fostamatinib orally twice a day for a period of 12 weeks. The patients
will return to the clinic every two weeks for blood draws and medical assessment. The primary efficacy endpoint of this
study is to achieve increased hemoglobin levels by week 12 of greater than 10 g/dL, and greater than or equal to 2 g/dL
higher than baseline. Stage 2 will include an additional 20 patients who will receive the same treatment protocol as
Stage 1. We expect to have results of the Stage 1 segment of the trial in 2017. With this data, we will evaluate the best
way forward and potentially an expedited path for pursuing AIHA.

R348—Dry Eye in Patients with Ocular Graft-Versus-Host Disease (GvHD)

Disease background. According to an article published by the American Academy of Ophthalmology, a

significant number (22% to 80%) of patients with acute or chronic GvHD develop a secondary incidence of dry eye
(keratoconjunctivitis sicca). In general, these patients are severely ill and have a great medical need for a topical therapy
that may better manage their symptoms.

Topical Ophthalmic JAK/SYK inhibitor program. We recently completed our Phase 2 study of patients with

ocular GvHD to determine if R348, an ophthalmic JAK/SYK inhibitor, reduces inflammation and limits the damage to
the eye tissue caused by the disease. The study was comprised of 35 patients that were randomized to receive either
R348 at 0.2%, 0.5% or a placebo eye drops for 12 weeks. The primary endpoint was a mean change from baseline at 12
weeks in total fluorescein staining score (CFS) of all corneal regions, a measure of corneal epithelial damage. In the “per
protocol” population which is the pre-specified efficacy analysis population, the mean change from baseline at 12 weeks
in CFS scores was -2.11 for the placebo group, -4.14 in the R348 0.2% group (p= 0.186 versus placebo group), and -6.00
in the R348 0.5% group (p=0.053 versus placebo, using nonparametric testing). As such, the primary endpoint was not
met based on the results of the study. R348 was well tolerated by patients at both doses. In light of the overall findings,
we have decided not to pursue this program.

Research/Preclinical Programs

We are conducting proprietary research in the broad disease areas of inflammation/immunology, immuno-

oncology, cancers and muscle wasting/muscle endurance. Within each disease area, our researchers are investigating
mechanisms of action as well as screening compounds against potential novel targets and optimizing those leads that
appear to have the greatest potential.

We are conducting preclinical studies to identify a lead molecule for our IRAK program. Inhibitors of IRAK

activity represent valuable therapeutic tools to treat cytokine-driven autoimmune and inflammatory diseases. We plan on
selecting a molecule from our IRAK program for preclinical development in 2017. It is expected that the program will
include clinical evaluation in immunology areas, such as for lupus, gout and/or psoriasis.

Sponsored Research and License Agreements

We conduct research and development programs independently and in connection with our corporate

product candidate under each agreement). Of this amount, up to $148.8 million relates to the achievement of
development events, up to $345.6 million relates to the achievement of regulatory events and up to $37.5 million relates
to the achievement of certain commercial or launch events. This estimated future contingent amount does not include any
estimated royalties that could be due to us if the partners successfully commercialize any of the licensed products.
Future events that may trigger payments to us under the agreements are based solely on our partners’ future efforts and
achievements of specified development, regulatory and/or commercial events. Because we do not control the research,
development or commercialization of the product candidates generated under these agreements, we are not able to
reasonably estimate when, if at all, any contingent payments would become payable to us. As such, the contingent
payments we could receive thereunder involve a substantial degree of risk to achieve and may never be received in the
next 12 months or thereafter. Accordingly, we do not expect, and investors should not assume, that we will receive all of
the potential contingent payments provided for under these agreements and it is possible that we may never receive any
additional significant contingent payments or royalties under these agreements.

In October 2015, we entered into a non-exclusive license agreement with a third party, pursuant to which we

received a payment in the single-digit millions in exchange for granting a non-exclusive license to certain limited
intellectual property rights. We concluded that the granting of the license, which was fully delivered to such third party
in the fourth quarter of 2015, represents the sole deliverable under this agreement. Accordingly, we recognized the
payment as revenue during the year ended December 31, 2015.

In August 2015, we entered into a license agreement with Aclaris, pursuant to which Aclaris will have exclusive

rights and will assume responsibility for the continued development of certain JAK inhibitor compounds for the
treatment of alopecia areata and other dermatological conditions. Under the license agreement, we received a
noncreditable and non-refundable upfront payment of $8.0 million in September 2015. We are also entitled to receive
development and regulatory contingent fees that could exceed $80.0 million for a successful compound approved in
certain indications. In addition, we are also eligible to receive tiered royalties on the net sales of any products under the
agreement. We concluded that the granting of the license, which has been fully delivered to Aclaris in the third quarter of
2015, represents the sole deliverable under this agreement. Accordingly, we recognized the $8.0 million payment as
revenue during the year ended December 31, 2015.

In February 2015, we entered into a collaboration agreement with BMS for the discovery, development and
commercialization of cancer immunotherapies based on our extensive portfolio of small molecule TGF beta receptor
kinase inhibitors. Under the collaboration agreement, BMS will have exclusive rights and will be solely responsible for
the clinical development and commercialization of any products. Pursuant to the collaboration agreement with BMS, we
received a noncreditable and non-refundable upfront payment of $30.0 million in March 2015. We are also entitled to
receive development and regulatory contingent fees that could exceed $309.0 million for a successful compound
approved in certain indications. In addition, we are also eligible to receive tiered royalties on the net sales of any
products from the collaboration. BMS shall also reimburse us for agreed upon costs based on a contractual cost per full-
time equivalent employee in connection with the performance of research activities during the research term. Under the
collaboration agreement, we were obligated to provide the following deliverables: (i) granting of license rights to our
program, (ii) participation in the Joint Research Committee, and (iii) performance of research activities. We concluded
that these deliverables were a single unit of accounting as the license did not have stand-alone value apart from the other
deliverables. Accordingly, the $30.0 million upfront payment was recognized ratably as revenue from the effective date
of the agreement through September 2016, the end of the research term. We believed that straight-line recognition of this
revenue was appropriate as the research was performed ratably over the research period. At the end of the initial research
term, we were not notified by BMS of its intention to extend the initial research term under which we would perform
research activities. However, BMS does continue to evaluate compounds from the extensive portfolio under the
agreement, on its own. During the years ended December 31, 2016 and 2015, we recognized revenue of $13.4 million
and $16.6 million, respectively, relating to the upfront payment, and $290,000 and $822,000, respectively, relating to the
research activities we performed. We do not have any deferred revenue as of December 31, 2016.

BMS is responsible for evaluating the compounds from the extensive portfolio under the agreement, on its own,

for designation of a compound as an early candidate nomination. In November 2016, we were notified by BMS that it
has designated one compound as an early drug candidate and received $3.0 million in December 2016, triggered by this
development event. All deliverables under the agreement had been previously delivered, as such, the above payment

was recognized as revenue during the fourth quarter of 2016.

In June 2011, we entered into an exclusive license agreement with BerGenBio for the development and

commercialization of an oncology program. BerGenBio is responsible for all activities it wishes to perform under the
license we granted to it. In June 2016, we received contingent payments of $1.7 million relating to a time-based non-
refundable fee and $2.0 million relating to BerGenBio’s exercise of certain option rights before the prescription period to
exercise the rights expired. All deliverables under the agreement had been previously delivered, as such, the above
payments of $3.7 million triggered by the above time-based and contingent events were recognized as revenue in the
second quarter of 2016.

Our Discovery Engine

The approaches that we use in connection with both our proprietary product development programs and our
corporate collaborations are designed to identify protein targets for compound screening and validate the role of those
targets in the disease process. Unlike genomics-based approaches, which begin by identifying genes and then searching
for their functions, our approach identifies proteins that are demonstrated to have an important role in a specific disease
pathway. By understanding the disease pathway, we attempt to avoid studying genes that will not make good drug
targets and focus only on the subset of expressed proteins of genes that we believe are specifically implicated in the
disease process.

We begin by developing assays that model the key events in a disease process at the cellular level. We then

identify potential protein targets. In addition, we identify the proteins involved in the intracellular process and prepare a
map of their interactions, thus giving us a comprehensive picture of the intracellular disease pathway. We believe that
our approach has a number of advantages, including:



improved target identification: it focuses only on the subset of expressed proteins of genes believed to be
specifically implicated in the disease process;

rapid validation of protein targets: it produces validated protein targets quickly because it uses key events
in the disease process as the basis to design the functional, disease-based screen;

improved disease pathway mapping: it produces a comprehensive map of the intracellular disease
pathway, enabling the identification of a large number of potential protein targets;

informed target selection: it provides a variety of different types of targets and information concerning the
role each plays in their endogenous state to better select targets more susceptible to pharmaceutical
intervention;

efficient compound screening: it increases the probability and speed with which compound screening will
identify “hits” because it provides detailed knowledge of the target that can be used to guide the design of
the compound screen; and

risk reduction: it may reduce the risk of failure in the product development process due to serious side
effects, including toxicity or other reasons, by selecting only targets that are specific to the disease in
question and that have no apparent role in other cell types or signaling pathways.

Because of the very large numbers of screens employed, our technology is labor intensive. The complexity of
our technology requires a high degree of skill and diligence to perform successfully. We believe we have been and will
continue to be able to meet these challenges successfully and increase our ability to identify targets for drug discovery.

Pharmacology and Preclinical Development

We believe that the rapid characterization and optimization of compounds identified in high-throughput

screening (HTS) will generate high quality preclinical development candidates. Our pharmacology and preclinical
development group facilitates lead optimization by characterizing lead compounds with respect to pharmacokinetics,
potency, efficacy and selectivity. The generation of proof-of-principle data in animals and the establishment of standard
pharmacological models with which to assess lead compounds represent integral components of lead optimization. As
programs move through the lead optimization stage, our pharmacology and preclinical development groups support our
chemists and biologists by performing the necessary studies, including toxicology, for IND application submissions.

Clinical Development

We have assembled a team of experts in drug development to design and implement clinical trials and to

analyze the data derived from these trials. The clinical development group possesses expertise in project management
and regulatory affairs. We work with external clinical research organizations with expertise in managing clinical trials,
drug formulation, and the manufacture of clinical trial supplies to support our drug development efforts.

Intellectual Property

We are able to protect our technology from unauthorized use by third parties only to the extent that it is covered
by valid and enforceable patents or is effectively maintained as a trade secret. Accordingly, patents and other proprietary
rights are an essential element of our business. As of December 31, 2016, we had 67 pending patent applications and 341
issued and active patents in the United States, as well as corresponding pending foreign patent applications and issued
foreign patents. Our policy is to file patent applications to protect technology, inventions and improvements to
inventions that are commercially important to the development of our business. We seek U.S. and international patent
protection for a variety of technologies, including new screening methodologies and other research tools, target
molecules that are associated with disease states identified in our screens, and lead compounds that can affect disease
pathways. We also intend to seek patent protection or rely upon trade secret rights to protect other technologies that may
be used to discover and validate targets and that may be used to identify and develop novel drugs. We seek protection, in
part, through confidentiality and proprietary information agreements. We are a party to various license agreements that
give us rights to use technologies in our research and development.

Our patents extend for varying periods according to the date of patent filing or grant and the legal term of
patents in the various countries where patent protection is obtained. Our material patents relate to compositions of matter
covering specific drug candidates in clinical trials that target SYK. These patents will expire, excluding patent term
extensions, in 2023, 2024 and 2026. Several of these patents will have patent term extensions, depending on the length of
time required to conduct clinical trials.

We currently hold a number of issued patents in the United States, as well as corresponding applications that
allow us to pursue patents in other countries, some of which have been allowed and/or granted and others of which we
expect to be granted. Specifically, in most cases where we hold a U.S. issued patent, the subject matter is covered at least
by an application filed under the Patent Cooperation Treaty (PCT), which is then used or has been used to pursue
protection in certain countries that are members of the treaty. Our material patents relate to fostamatinib, an oral SYK
inhibitor, and R406, the active metabolite of fostamatinib.

Fostamatinib. Fostamatinib is covered as a composition of matter in a U.S. issued patent that has an expiration
date in September 2026, after taking into account a patent term adjustment, and may be granted further protection under
the patent term extension rules related to conducting clinical trials. Fostamatinib is also covered under broader
composition of matter claims in a U.S. issued patent that has an expiration date in March 2026, after taking into account
a patent term adjustment. Methods of using fostamatinib to treat various indications, methods of making fostamatinib,
and compositions of matter covering certain intermediates used to make fostamatinib are also covered, respectively, in
three U.S. issued patents; the earliest expiration date of any of these patents is in April 2023 and the latest expiration date
is in June 2026, after taking into account patent term adjustments. Corresponding applications have been filed in foreign
jurisdictions under the PCT, and are at various stages of prosecution. Of note, a patent covering fostamatinib as a

composition of matter and in compositions for use treating various diseases has been granted by the European Patent
Office.

R406. R406 is covered as a composition of matter in a U.S. issued patent and, with a patent term adjustment,

has an expiration date in February 2025. R406 is also covered under two broader composition of matter patents issued in
the U.S. expiring in February 2023 and July 2024. Methods of using R406 to treat various indications and compositions
of matter covering certain intermediates used to make R406 are also covered under patents described above.
Corresponding applications have been filed in foreign jurisdictions under the PCT and are at various stages of
prosecution.

Competition

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. For example, there are existing therapies and drug candidates in development for the
treatment of ITP that may be alternative therapies to fostamatinib, if it is ultimately approved for commercialization. We
face, and will continue to face, intense competition from pharmaceutical and biotechnology companies, as well as from
academic and research institutions and government agencies, both in the United States and abroad. Some of these
competitors are pursuing the development of pharmaceuticals that target the same diseases and conditions as our research
programs. Our major competitors include fully integrated pharmaceutical companies that have extensive drug discovery
efforts and are developing novel small molecule pharmaceuticals. We also face significant competition from
organizations that are pursuing the same or similar technologies, including the discovery of targets that are useful in
compound screening, as the technologies used by us in our drug discovery efforts.

Competition may also arise from:



new or better methods of target identification or validation;

other drug development technologies and methods of preventing or reducing the incidence of disease;

new small molecules; or

other classes of therapeutic agents.

Our competitors or their collaborative partners 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 and larger research and development staffs 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 any of our collaborators or us in any of those areas may prevent the successful
commercialization of our potential drug targets.

Many of our competitors, either alone or together with their collaborative partners, have significantly greater

experience than we do in:



identifying and validating targets;

screening compounds against targets; and

undertaking preclinical testing and clinical trials.

Accordingly, our competitors may succeed in obtaining patent protection, identifying or validating new targets

or discovering new drug compounds before we do.

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 product candidates 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 us 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.

We face and will continue to face intense competition from other companies for collaborative arrangements

with pharmaceutical and biotechnology companies, for establishing relationships with academic and research institutions
and for licenses to additional technologies. These competitors, either alone or with their collaborative partners, may
succeed in developing technologies or products that are more effective than ours.

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



identify and validate targets;

discover candidate drug compounds that interact with the targets we identify;

attract and retain scientific and product development personnel;

obtain patent or other proprietary protection for our new drug compounds and technologies; and

enter commercialization agreements for our new drug compounds.

Research and Development Expenses

A significant portion of our operating expenses is related to research and development and we intend to

maintain our strong commitment to research and development. See “Item 8. Financial Statements and Supplementary
Data” of this Annual Report on Form 10-K for costs and expenses related to research and development, and other
financial information for each of the fiscal years 2016, 2015 and 2014.

Government Regulation

Government authorities in the United States, at the federal, state and local level, and in other countries and
jurisdictions, extensively regulate, among other things, the research, development, testing, manufacture, quality control,
approval, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, sales, post-
approval monitoring and reporting, and import and export of pharmaceutical products. The processes for obtaining
regulatory approvals in the United States and in foreign countries and jurisdictions, along with subsequent compliance
with applicable statutes and regulations, require the expenditure of substantial time and financial resources.

Review and Approval of Drugs in the United States

In the United States, the FDA approves and regulates drugs under the Federal Food, Drug, and Cosmetic Act, or
FDCA, and implementing regulations. The failure to comply with requirements under the FDCA and other applicable
laws at any time during the product development process, approval process or after approval may subject an applicant
and/or sponsor to a variety of administrative or judicial sanctions, including refusal by the FDA to approve pending
applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters and other types of
letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines,
refusals of government contracts, restitution, disgorgement of profits, or civil or criminal investigations and penalties.

A drug product candidate must be approved by the FDA through the new drug application, or NDA. An applicant

seeking approval to market and distribute a new drug product in the United States must typically undertake the
following:



completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the
FDA’s good laboratory practice, or GLP, regulations;

submission to the FDA of an IND, which must take effect before human clinical trials may begin;

approval by an independent institutional review board, or IRB, for each clinical site before each clinical
trial may be initiated;

performance of adequate and well-controlled human clinical trials in accordance with good clinical
practices, or GCP, to establish the safety and efficacy of the proposed drug product for each indication;

preparation and submission to the FDA of an NDA requesting marketing for one or more proposed
indications;

review by an FDA advisory committee, if requested by the FDA;

satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which
the product, or components thereof, are produced to assess compliance with current Good Manufacturing
Practices, or cGMP, requirements and to assure that the facilities, methods and controls are adequate to
preserve the product’s identity, strength, quality and purity;

satisfactory completion of FDA audits of clinical trial sites to assure compliance with GCPs and the
integrity of the clinical data;

payment of user fees and securing FDA approval of the NDA; and

compliance with any post-approval requirements, including the potential requirement to implement a Risk
Evaluation and Mitigation Strategy, or REMS, and potentially post-market requirement, or PMR, and
commitment, or PMC, studies.

Before an applicant begins testing a compound with potential therapeutic value in humans, the drug candidate
enters the preclinical testing stage. Preclinical studies include laboratory evaluation as well as in vitro and animal studies
to assess the safety and activity of the drug for initial testing in humans and to establish a rationale for therapeutic use.
The results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data
or literature and plans for clinical studies, among other things, are submitted to the FDA as part of an IND. Some long-
term preclinical testing, such as animal tests of reproductive adverse events and carcinogenicity, and long term toxicity
studies, may continue after the IND is submitted.

In support of the IND, applicants must submit a protocol for each clinical trial and any subsequent protocol
amendments. In addition, the results of the preclinical tests, together with manufacturing information, analytical data,
any available clinical data or literature, among other things, are submitted to the FDA as part of an IND. The FDA
requires a 30-day waiting period after the submission of each IND before clinical trials may begin. At any time during
this 30-day period, or thereafter, the FDA may raise concerns or questions about the conduct of the trials as outlined in
the IND and impose a clinical hold or partial clinical hold. In this case, the IND sponsor and the FDA must resolve any

outstanding concerns before clinical trials can begin or resume. An IRB representing each institution participating in the
clinical trial must review and approve the plan for any clinical trial before it commences at that institution, and the IRB
must conduct continuing review and reapprove the study at least annually. An IRB can suspend or terminate approval of
a clinical trial.

Clinical trials involve the administration of the investigational product to human subjects under the supervision of
qualified investigators in accordance with GCP requirements, which include, among other things, the requirement that all
research subjects provide their informed consent in writing before their participation in any clinical trial. Human clinical
trials are typically conducted in sequential phases, which may overlap or be combined:

 Phase 1. The drug is initially introduced into a small number of healthy human subjects or, in certain

indications such as cancer, patients with the target disease or condition and tested for safety, dosage
tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its
effectiveness and to determine optimal dosage.

 Phase 2. The drug is administered to a limited patient population to identify possible adverse effects and
safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to
determine dosage tolerance and optimal dosage.

 Phase 3. These clinical trials are commonly referred to as “pivotal” studies, which denote a study that

presents the data that the FDA or other relevant regulatory agency will use to determine whether or not to
approve a drug. The drug is administered to an expanded patient population, generally at geographically
dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate
the efficacy and safety of the product for approval, identify adverse effects, establish the overall risk-
benefit profile of the product and to provide adequate information for the labeling of the product.

 Phase 4. Post-approval studies may be conducted after initial marketing approval. These studies are used to

gain additional experience from the treatment of patients in the intended therapeutic indication.

The FDA or the sponsor or the data monitoring committee may suspend or terminate a clinical trial at any time on

various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk.

Review of an NDA by the FDA

If clinical trials are successful, the next step in the drug development process is the preparation and submission to

the FDA of a NDA. The NDA is the vehicle through which drug applicants formally propose that the FDA approve a
new drug for marketing and sale in the United States for one or more indications. The NDA must contain a description of
the manufacturing process and quality control methods, as well as results of preclinical tests, toxicology studies, clinical
trials and proposed labeling, among other things. The submission of most NDAs is subject to an application user fee and
the sponsor of an approved NDA is also subject to annual product and establishment user fees. These fees are typically
increased annually.

Following submission of an NDA, the FDA conducts a preliminary review of an NDA to determine whether the
application is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA
begins an in-depth substantive review. The FDA has agreed to goals to review and act within ten months from filing for
standard review NDAs and within six months for NDAs that have been designated for “priority review”.

Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is or will be

manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and
facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within
required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites
to assure compliance with GCP. In addition, as a condition of approval, the FDA may require an applicant to develop a
REMS. REMS use risk minimization strategies beyond the professional labeling to ensure that the benefits of the product
outweigh the potential risks. To determine whether a REMS is needed, the FDA will consider the size of the population
likely to use the product, seriousness of the disease, expected benefit of the product, expected duration of treatment,
seriousness of known or potential adverse events, and whether the product is a new molecular entity.

The FDA is required to refer an application for a novel drug to an advisory committee or explain why such referral

was not made. Typically, an advisory committee is a panel of independent experts, including clinicians and other
scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be
approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it
considers such recommendations carefully when making decisions.

On the basis of the FDA’s evaluation of the NDA and accompanying information, including the results of the

inspection of the manufacturing facilities, the FDA may issue an approval letter or a complete response letter. An
approval letter authorizes commercial marketing of the product with specific prescribing information for specific
indications. A complete response letter generally outlines the deficiencies in the submission and may require substantial
additional testing or information in order for the FDA to reconsider the application. If and when those deficiencies have
been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter.

If the FDA approves a product, it may limit the approved indications for use for the product, require that

contraindications, warnings or precautions be included in the product labeling, require that post-approval studies,
including Phase 4 clinical trials, be conducted to further assess the drug’s safety after approval, require testing and
surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution
restrictions or other risk management mechanisms, including REMS, which can materially affect the potential market
and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of
post-market studies or surveillance programs. After approval, many types of changes to the approved product, such as
adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements
and FDA review and approval.

Post-Approval Requirements

Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation

by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling
and distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most
changes to the approved product, such as adding new indications or other labeling claims, are subject to prior FDA
review and approval. In addition, drug manufacturers and other entities involved in the manufacture and distribution of
approved drugs are required to register their establishments with the FDA and state agencies, and are subject to periodic
unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the
manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA
regulations also require investigation and correction of any deviations from cGMP and impose reporting and
documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use.
Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality
control to maintain cGMP compliance.

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and

standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously
unknown problems with a product, including adverse events of unanticipated severity or frequency, or with
manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved
labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or
imposition of distribution or other restrictions under a REMS program.

The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the
market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved
label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses,
and a company that is found to have improperly promoted off-label uses may be subject to significant liability.

In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing

Act, or PDMA, and its implementing regulations, as well as the Drug Supply Chain Security Act, or DSCA, which
regulate the distribution and tracing of prescription drugs and prescription drug samples at the federal level, and set
minimum standards for the regulation of drug distributors by the states. The PDMA, its implementing regulations and
state laws limit the distribution of prescription pharmaceutical product samples, and the DSCA imposes requirements to

ensure accountability in distribution and to identify and remove counterfeit and other illegitimate products from the
market.

Orphan Drug Designation and Exclusivity

Under the Orphan Drug Act, the FDA may designate a drug product as an “orphan drug” if it is intended to treat a
rare disease or condition, generally meaning that it affects fewer than 200,000 individuals in the United States, or more
in cases in which there is no reasonable expectation that the cost of developing and making a drug product available in
the United States for treatment of the disease or condition will be recovered from sales of the product. A company must
request orphan drug designation before submitting an NDA for the drug and rare disease or condition. Orphan drug
designation does not shorten the goal dates for the regulatory review and approval process, although it does convey
certain advantages such as tax benefits and exemption from the application fee.

If a product with orphan designation receives the first FDA approval for the disease or condition for which it has

such designation, the product generally will receive orphan drug exclusivity. Orphan drug exclusivity means that the
FDA may not approve another sponsor’s marketing application for the same drug for the same indication for seven years,
except in certain limited circumstances. Orphan exclusivity does not block the approval of a different drug for the same
rare disease or condition, nor does it block the approval of the same drug for different indications. If a drug designated as
an orphan drug ultimately receives marketing approval for an indication broader than what was designated in its orphan
drug application, it may not be entitled to exclusivity. Orphan exclusivity will not bar approval of another product under
certain circumstances, including if a subsequent product with the same drug for the same indication is shown to be
clinically superior to the approved product on the basis of greater efficacy or safety, or providing a major contribution to
patient care, or if the company with orphan drug exclusivity is not able to meet market demand.

Pharmaceutical Coverage, Pricing and Reimbursement

In the United States and markets in other countries, patients who are prescribed treatments for their conditions and

providers performing the prescribed services generally rely on third-party payors to reimburse all or part of the
associated healthcare costs. Significant uncertainty exists as to the coverage and reimbursement status of products
approved by the FDA and other government authorities. Thus, even if a product candidate is approved, sales of the
product will depend, in part, on the extent to which third-party payors, including government health programs in the
United States such as Medicare and Medicaid, commercial health insurers and managed care organizations, provide
coverage, and establish adequate reimbursement levels for, the product. The process for determining whether a payor
will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the
payor will pay for the product once coverage is approved. Third-party payors are increasingly challenging the prices
charged, examining the medical necessity, and reviewing the cost-effectiveness of medical products and services and
imposing controls to manage costs. Third-party payors may limit coverage to specific products on an approved list, also
known as a formulary, which might not include all of the approved products for a particular indication.

In order to secure coverage and reimbursement for any product that might be approved for sale, a company may

need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-
effectiveness of the product, in addition to the costs required to obtain FDA or other comparable marketing approvals.
Nonetheless, product candidates may not be considered medically necessary or cost effective. A decision by a third-party
payor not to cover a product candidate could reduce physician utilization once the product is approved and have a
material adverse effect on sales, results of operations and financial condition. Additionally, a payor’s decision to provide
coverage for a product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s
determination to provide coverage for a drug product does not assure that other payors will also provide coverage and
reimbursement for the product, and the level of coverage and reimbursement can differ significantly from payor to payor.

The containment of healthcare costs also has become a priority of federal, state and foreign governments and the

prices of drugs have been a focus in this effort. Governments have shown significant interest in implementing cost-
containment programs, including price controls, restrictions on reimbursement and requirements for substitution of
generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in
jurisdictions with existing controls and measures, could further limit a company’s revenue generated from the sale of any
approved products. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable
coverage and reimbursement status is attained for one or more products for which a company or its collaborators receive
marketing approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

Healthcare Law and Regulation

Healthcare providers and third-party payors play a primary role in the recommendation and prescription of drug

products that are granted marketing approval. Arrangements with providers, consultants, third-party payors and
customers are subject to broadly applicable fraud and abuse, anti-kickback, false claims laws, reporting of payments to
physicians and teaching physicians and patient privacy laws and regulations and other healthcare laws and regulations
that may constrain business and/or financial arrangements. Restrictions under applicable federal and state healthcare
laws and regulations, include the following:

•

the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly
and willfully soliciting, offering, paying, receiving or providing remuneration, directly or indirectly, in cash
or in kind, to induce or reward either the referral of an individual for, or the purchase, order or
recommendation of, any good or service, for which payment may be made, in whole or in part, under a
federal healthcare program such as Medicare and Medicaid;
the federal civil and criminal false claims laws, including the civil False Claims Act, and civil monetary
penalties laws, which prohibit individuals or entities from, among other things, knowingly presenting, or
causing to be presented, to the federal government, claims for payment that are false, fictitious or fraudulent
or knowingly making, using or causing to made or used a false record or statement to avoid, decrease or
conceal an obligation to pay money to the federal government.
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the
Health Information Technology for Economic and Clinical Health Act, and their respective implementing
regulations, which impose obligations, including mandatory contractual terms, with respect to safeguarding
the privacy, security and transmission of individually identifiable health information;
the federal transparency requirements known as the federal Physician Payments Sunshine Act, which
requires certain manufacturers of drugs, devices, biologics and medical supplies to report annually to the
Centers for Medicare & Medicaid Services, or CMS, within the United States Department of Health and
Human Services, information related to payments and other transfers of value made by that entity to
physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their
immediate family members; and
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which
may apply to healthcare items or services that are reimbursed by non-governmental third-party payors,
including private insurers.

Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary

compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to
requiring drug manufacturers to report information related to payments to physicians and other health care providers or
marketing expenditures.

Healthcare Reform

A primary trend in the United States healthcare industry and elsewhere is cost containment. There have been a

number of federal and state proposals during the last few years regarding the pricing of pharmaceutical and
biopharmaceutical products, limiting coverage and reimbursement for drugs and other medical products, government
control and other changes to the healthcare system in the United States.

With the new Administration and Congress, there will likely be additional legislative changes, including repeal and

replacement of certain provisions of the Affordable Care Act. It remains to be seen, however, precisely what the new
legislation will provide, when it will be enacted and what impact it will have on the availability of healthcare and
containing or lowering the cost of healthcare. Such reforms could have an adverse effect on anticipated revenue from
product candidates that we may successfully develop and for which we may obtain marketing approval and may affect
our overall financial condition and ability to develop product candidates.

Manufacturing and Raw Materials

We currently rely on, and will continue to rely on, third party contract manufacturers to produce sufficient

quantities of our product candidates for use in our preclinical and clinical trials.

Employees

As of December 31, 2016, we had 77 employees. None of our employees are represented by a collective

bargaining arrangement, and we believe our relationship with our employees is good. Recruiting and retaining qualified
scientific personnel to perform research and development work in the future will be critical to our success. We may not
be able to attract and retain personnel on acceptable terms given the competition among pharmaceutical and
biotechnology companies, academic and research institutions and government agencies for experienced scientists.

Scientific and Medical Advisors

We utilize scientists and physicians to advise us on scientific and medical matters as part of our ongoing
research and product development efforts, including experts in clinical trial design, preclinical development work,
chemistry, biology, immunology, muscle wasting and metabolism, general metabolism and oncology. Certain of our
consultants receive non-employee options to purchase our common stock and certain of our scientific and medical
advisors receive honorarium for time spent assisting us.

Available Information

Our website is located at www.rigel.com. The information found on our website is not part of or incorporated by

reference into this Annual Report on Form 10-K. We electronically file with the Securities and Exchange Commission
(SEC) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to the reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make available
free of charge on or through our website copies of these reports as soon as reasonably practicable after we electronically
file these reports with, or furnish them to, the SEC. Further, copies of these reports are available at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference
Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains
reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at
www.sec.gov.

Item 1A. Risk Factors

In evaluating our business, you should carefully consider the following risks, as well as the other information

contained in this Annual Report on Form 10-K. These risk factors could cause our actual results to differ materially
from those contained in forward-looking statements we have made in this Annual Report on Form 10-K and those we
may make from time to time. If any of the following risks actually occurs, our business, financial condition and operating
results 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.

If we are unable to submit the NDA or if we submit the NDA but it is not accepted or not approved for ITP by the
FDA, this would have a material adverse effect on our business, financial performance and results of operations.

In August 2016, we announced the results of the first Phase 3 study of fostamatinib in ITP, reporting that
fostamatinib met its primary efficacy endpoint. The study showed that 18% of patients receiving fostamatinib achieved a
stable platelet response compared to none receiving a placebo control. In October 2016, we announced the results of the
second study, reporting that the response rate was 18% consistent with the first study. However, one patient in the
placebo group achieved a stable platelet response, therefore the difference between groups did not reach statistical
significance. Additionally, we have announced updates on the results of the third Phase 3 study of fostamatinib in ITP,
an open label long term extension study. We plan to submit an NDA for fostamatinib in ITP in the first quarter of 2017.
Our NDA submission may include, among others, data on all three studies, a number of post-study analyses including an

overall response rate for the first and second Phase 3 studies, which combines stable and intermediate responders, and a
large legacy of safety data from previous trials. Given that one of the three studies did not meet its primary endpoint,
there is a risk that the FDA will not accept the submission, or that the submission is accepted but not approved for any
reason, including that meeting the primary end-points in the first and third studies is found by the FDA to be insufficient
for approval, which would have a material adverse effect on our ability to generate revenue from the sales of
fostamatinib in ITP. An inability to generate such revenue would have a material adverse effect on our business,
financial performance and results of operations. In addition, the FDA may suggest that we need to conduct additional
trials at significant costs before we seek regulatory approval of our product candidates. Any such requirement for
additional trials would most likely result in our inability to commercialize fostamatinib in the United States for a
significant period of time, which would have a material adverse effect on our ability to generate revenue from the sales
of fostamatinib in ITP.

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

We have consumed substantial amounts of capital to date as we continue our research and development
activities, including preclinical studies and clinical trials. We may seek another collaborator or licensee in the future for
further clinical development and commercialization of fostamatinib, as well as our other clinical programs, which we
may not be able to obtain on commercially reasonable terms or at all. We also continue to evaluate ex-U.S. partnerships
for fostamatinib and other partnering opportunities across our pipeline. We believe that our existing capital resources
will be sufficient to support our current and projected funding requirements, including the preparation for potential
commercial launch of fostamatinib in ITP in the U.S., through at least the next 12 months. We have based this estimate
on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently
expect. Because of the numerous risks and uncertainties associated with the development of our product candidates and
other research and development activities, including risks and uncertainties that could impact the rate of progress of our
development activities, we are unable to estimate with certainty the amounts of increased capital outlays and operating
expenditures associated with our current and anticipated clinical trials and other research and development activities.

We will continue to need additional capital and the amount of future capital needed will depend largely on the
success of our internally developed programs as they proceed in later and more expensive clinical trials, including any
additional clinical trials that we may decide to conduct with respect to fostamatinib. Unless and until we are able to
generate a sufficient amount of product, royalty or milestone revenue, which may never occur, we expect to finance
future cash needs through public and/or private offerings of equity securities, debt financings or collaboration and
licensing arrangements, as well as through interest income earned on the investment of our cash balances and short-term
investments. With the exception of contingent and royalty payments that we may receive under our existing
collaborations, we do not currently have any commitments for future funding. We do not know whether additional
financing will be available when needed, or that, if available, we will obtain financing on reasonable terms. To the extent
we raise additional capital by issuing equity securities in the future, our stockholders could at that time experience
substantial dilution. In addition, we have a significant number of stock options outstanding. To the extent that
outstanding stock options have been or may be exercised or other shares issued, our stockholders may experience further
dilution. Further, we may choose to raise additional capital due to market conditions or strategic considerations even if
we believe we have sufficient funds for our current or future operating plans including through our "at-the-market"
equity offering programs. Any debt financing that we are able to obtain may involve operating covenants that restrict our
business. To the extent that we raise additional funds through any new 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, many of which are beyond our control,

including, but not limited to:



the FDA’s acceptance of our NDA, or the successful regulatory approval of such NDA;

the outcome of any potential FDA advisory committee meetings held for any of our product candidates;



the progress and success of clinical trials and preclinical activities (including studies and manufacture of
materials) of our product candidates conducted by us;

the progress of research and development programs carried out by us and our collaborative partners;

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

the costs to build and expand our sales, marketing and distribution capabilities;

the costs to commercialize fostamatinib or any other future product candidates, if any such candidate
receives regulatory approval for commercial sale;

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

the ability to achieve the events identified in our collaborative agreements that may trigger payments to us
from our collaboration partners;

our ability to acquire or license other technologies or compounds that we may 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 other intellectual property rights;
and



expenses associated with any unforeseen litigation, including any securities class action lawsuits.

Insufficient funds may require us to delay, scale back or eliminate some or all of our research and development
programs, to reduce personnel and operating expenses, 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.

There is a high risk that drug discovery and development efforts might not generate successful product candidates.

At the present time, the majority of our operations are focused on various stages of drug identification and

development. We currently have various product candidates in 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. We have invested a significant portion of our efforts and financial resources
into the development of fostamatinib. Our ability to generate product revenue, which will not occur until after regulatory
approval, if ever, will depend on the successful development, regulatory approval and eventual commercialization of one
of our product candidates.

Our compounds in clinical trials and our future leads for potential drug compounds are subject to the risks and
failures inherent in the development of pharmaceutical products. These risks include, but are not limited to, the inherent
difficulty in selecting the right drug and drug target and avoiding unwanted side effects, as well as unanticipated
problems relating to product development, testing, enrollment, obtaining regulatory approvals, maintaining regulatory
compliance, manufacturing, competition and costs and expenses that may exceed current estimates. In future clinical
trials, we or our partners may discover additional side effects and/or higher frequency of side effects than those observed
in previously completed clinical trials. The results of preliminary and mid-stage clinical trials do not necessarily predict
clinical or commercial success, and larger later-stage clinical trials may fail to confirm the results observed in the
previous clinical trials. Similarly, a clinical trial may show that a product candidate is safe and effective for certain
patient populations in a particular indication, but other clinical trials may fail to confirm those results in a subset of that

population or in a different patient population, which may limit the potential market for that product candidate. With
respect to our own compounds in development, we have established anticipated timelines with respect to the initiation of
clinical trials based on existing knowledge of the compounds. However, we cannot provide assurance that we will meet
any of these timelines for clinical development. Additionally, the initial results of a completed earlier clinical trial of a
product candidate do not necessarily predict final results and the results may not be repeated in later clinical trials.

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 assurances regarding the likely results from our future clinical trials or the impact of those results on our
business. If our clinical trials fail to meet the primary efficacy endpoints, the commercial prospects of our business may
be harmed, our ability to generate product revenues may be delayed or eliminated or we may be forced to undertake
other strategic alternatives that are in our shareholders’ best interests, including cost reduction measures. If we are unable
to obtain adequate financing or engage in a strategic transaction on commercially reasonable terms or at all, we may be
required to implement further cost reduction strategies which could significantly impact activities related to our research
and development of our future product candidates, and could significantly harm our business, financial condition and
results of operations. In addition, these cost reduction strategies could cause us to further curtail our operations or take
other actions that would adversely impact our shareholders.

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 extensive preclinical

studies and clinical trials to demonstrate their safety and efficacy for humans. Preclinical testing and clinical
development are long, expensive and uncertain processes.

In connection with clinical trials of our product candidates, we face the risks that:



the product candidate may not prove to be effective;

the product candidate may cause harmful side effects;

the clinical results may not replicate the results of earlier, smaller trials;

 we, or the FDA or similar foreign regulatory authorities, may terminate or suspend the trials;



our results may not be statistically significant;

patient recruitment and enrollment may be slower than expected;

patients may drop out of the trials; and

regulatory and clinical trial requirements, interpretations or guidance may change.

We do not know whether we will be permitted to undertake clinical trials of potential products beyond the trials

already concluded and the trials currently in process. It will 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. For example, in October 2016, we announced that our
second Phase 3 study in our FIT Phase 3 clinical program did not meet its primary endpoint. Moreover, 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, in August 2014, we discontinued our indirect AMPK activator
program, R118, due to its side-effect profile in Phase 1 clinical trials, and in July 2016, we discontinued our topical
ophthalmic JAK/SYK inhibitor program, R348, due to our Phase 2 study of patients with ocular GvHD not meeting its
primary endpoint.

We cannot assure you that we will be able to successfully complete the clinical development of our product

candidates or receive regulatory approval to ultimately commercialize any of our other product candidates. For example,
if we are unable to ultimately commercialize fostamatinib, our business will be harmed.

If we are unable to obtain regulatory approval to market products in the United States and foreign jurisdictions, we
will not be permitted to commercialize products we or our collaborative partners may develop.

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 and regulatory oversight;

 may require large numbers of test subjects; and

 may be suspended by us, our collaborators 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 for future product candidates, 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 we or our collaborative partners may submit in a timely manner, or at all.

Before receiving FDA approval to market a product, we must demonstrate with substantial clinical evidence

that the product is safe and effective in the patient population and the indication that will be treated. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations that could delay, limit or prevent regulatory
approvals. 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, adverse publicity, 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 approval of a product is granted, this approval will be limited to those indications or disease states
and conditions for which the product is demonstrated through clinical trials to be safe and efficacious. We cannot assure
you 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 approval.

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 and costs associated with FDA approval described above and may also include
additional risks and costs, such as the risk that such foreign regulatory authorities, which often have different regulatory
and clinical trial requirements, interpretations and guidance from the FDA, may require additional clinical trials or

results for approval of a product candidate, any of which could result in delays, significant additional costs or failure to
obtain such regulatory approval. For example, there can be no assurance that we or our collaborative partners will not
have to provide additional information or analysis, or conduct additional clinical trials, before receiving approval to
market product candidates.

Enacted or future legislation may increase the difficulty and cost for us to obtain marketing approval of and
commercialize our product candidates and may affect the prices we may set.

Third-party payors, whether domestic or foreign, or governmental or commercial, are developing increasingly
sophisticated methods of controlling healthcare costs. In both the United States and certain foreign jurisdictions, there
have been, and we expect there will continue to be, a number of legislative and regulatory changes to the health care
system that could impact our ability to sell our products profitably. In particular, in March 2010, the Patient Protection
and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively, the Affordable
Care Act, was enacted.

The Affordable Care Act and its implementing regulations, among other things, substantially change the way
healthcare is financed by both governmental and private insurers in the U.S. Among the provisions of the Affordable
Care Act, those of the greatest impact on the pharmaceutical and biotechnology industry include a new methodology by
which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for certain drugs that are
inhaled, infused, instilled, implanted or injected; increased the minimum Medicaid rebates owed by manufacturers under
the Medicaid Drug Rebate Program; extended the Medicaid Drug Rebate Program to utilization of prescriptions of
individuals enrolled in Medicaid managed care organizations; subjected manufacturers to new annual fees and taxes for
certain branded prescription drugs; provided incentives to programs that increase the federal government’s comparative
effectiveness research and established a new Medicare Part D coverage gap discount program, in which manufacturers
must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries
during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare
Part D.

Other legislative changes have been proposed and adopted in the U.S. since the Affordable Care Act was
enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions
by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction,
was unable to reach its required goals, thereby triggering the legislation’s automatic reduction to several government
programs. This includes aggregate reductions of Medicare payments to providers of 2% per fiscal year, which went into
effect in April 2013, and will remain in effect through 2024 unless additional Congressional action is taken. In January
2013, former President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things,
further reduced Medicare payments to several providers, including hospitals and cancer treatment centers, and increased
the statute of limitations period for the government to recover overpayments to providers from three to five years.

Legislative changes to the Affordable Care Act remain possible and appear likely in the 115th U.S. Congress

and under the Trump Administration. We expect that the Affordable Care Act, as currently enacted or as it may be
amended or repealed in the future, and other healthcare reform measures that may be adopted in the future, could have a
material adverse effect on our industry generally and on our ability to successfully commercialize our product
candidates, if approved. We cannot predict the likelihood, nature or extent of government regulation that may arise from
future legislation or administrative action, either in the United States or abroad. If we or our collaborators are slow or
unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we or our
collaborators are not able to maintain regulatory compliance, our product candidates may lose any regulatory approval
that may have been obtained and we may not achieve or sustain profitability, which would adversely affect our business.

Even if our product candidates receive regulatory approval, they may fail to achieve the degree of market acceptance
by physicians, patients, healthcare payors and others in the medical community necessary for commercial success.

If any of our product candidates receive regulatory approval, they may nonetheless fail to gain sufficient market
acceptance by physicians, hospital administrators, patients, healthcare payors and others in the medical community. The
degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of

factors, including the following:



relative convenience and ease of administration;

the willingness of the target patient population to try new therapies and of physicians to prescribe these
therapies;

the willingness of physicians to change their current treatment practices;

the willingness of hospitals and hospital systems to include our product candidates as treatment options;

demonstration of efficacy and safety in clinical trials;

the prevalence and severity of any side effects;

the ability to offer product candidates for sale at competitive prices;

the price we charge for our product candidates;

the strength of marketing and distribution support; and

the availability of third-party coverage or reimbursement.

If any of our product candidates are approved, if at all, but do not achieve an adequate level of acceptance, we

may not generate significant product revenue and we may not become profitable on a sustained basis.

We are in the initial stages of developing our sales, marketing and distribution capabilities. If we are unable to
develop effective sales, marketing and distribution capabilities on our own or through collaborations or other
marketing partners, we will not be successful in commercializing one or more of our product candidates.

We are in the early stages of developing our sales and marketing infrastructure and have never sold, marketed
or distributed therapeutic products. To achieve commercial success for any of our product candidates, if at all approved,
we must either develop a sales and marketing organization or outsource these functions to third parties. There are risks
involved with establishing our own sales and marketing capabilities, as well as entering into arrangements with third
parties to perform these services. Developing an internal sales force is expensive and time-consuming and could delay
any product launch. If the commercial launch of one or more of our product candidates for which we recruit a sales force
and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or
unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we
cannot retain or reposition our sales and marketing personnel. On the other hand, if we enter into arrangements with third
parties to perform sales, marketing and distribution services, our product revenues will be lower than if we market and
sell any products that we develop ourselves.

We also may not be successful entering into arrangements with third parties to sell and market one or more of

our product candidates or may be unable to do so on terms that are favorable to us. We likely will have little control over
such third parties, and any of them may fail to devote the necessary resources and attention to sell and market one or
more of our product candidates effectively, which could damage our reputation. If we do not establish sales and
marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in
commercializing our product candidates.

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

We may not be able to initiate or continue clinical studies or trials for our product candidates if we are unable to

locate and enroll a sufficient number of eligible patients to participate in these clinical trials as required by the FDA or
other regulatory authorities. Even if we are able to enroll a sufficient number of patients in our clinical trials, if the pace
of enrollment is slower than we expect, the development costs for our product candidates may increase and the

completion of our clinical trials may be delayed or our clinical trials could become too expensive to complete.
Significant delays in clinical testing could materially impact our product development costs and timing. Our estimates
regarding timing are based on a number of assumptions, including assumptions based on past experience with our other
clinical programs. If we are unable to enroll the patients in these trials at the projected rate, the completion of the clinical
program could be delayed and the costs of conducting the program could increase, either of which could harm our
business.

Clinical trials can be delayed for a variety of reasons, including delays in obtaining regulatory approval to
commence a study, delays from scaling up of a study, delays in reaching agreement on acceptable clinical trial 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. 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. The clinical investigators are not our employees, and we cannot
control the amount or timing of resources that they devote to our programs. Failure of the third-party organizations to
meet their obligations could adversely affect clinical development of our products. As a result, we may face additional
delaying factors outside our control if these parties do not perform their obligations in a timely fashion. For example, any
number of those issues could arise with our clinical trials causing a delay. Delays of this sort could occur for the reasons
identified above or other reasons. If we have delays in conducting the clinical trials or obtaining regulatory 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. Moreover, these third-party investigators and organizations may also have
relationships with other commercial entities, some of which may compete with us. If these third-party investigators and
organizations assist our competitors at our expense, it could harm our competitive position.

We lack the capability to manufacture compounds for clinical 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 the manufacturing capabilities or experience necessary to produce our product

candidates for clinical trials, including fostamatinib in ITP, AIHA and IgAN. We currently use one manufacturer of
fostamatinib. For each clinical trial of our unpartnered product candidates, we rely on third-party manufacturers for the
active pharmaceutical ingredients, as well as various manufacturers to manufacture starting components, excipients and
formulated drug products. We rely on manufacturers to produce and deliver all of the materials required for our clinical
trials, and many of our preclinical efforts, on a timely basis and to comply with applicable regulatory requirements,
including the FDA’s current Good Manufacturing Practices (cGMP). In addition, we rely on our third-party suppliers to
deliver sufficient quantities of materials produced under cGMP conditions to enable us to conduct planned preclinical
studies and clinical trials.

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, which could have a material
adverse effect on sales, results of operations and financial condition. If we were required to transfer manufacturing
processes to other third-party manufacturers and we were able to identify an alternative manufacturer, we would still
need to satisfy various regulatory requirements. Satisfaction of these requirements could cause us to experience
significant delays in receiving an adequate supply of our products and products in development and could be costly.
Moreover, we may not be able to transfer processes that are proprietary to the manufacturer, if any. 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 and may also experience a shortage
in qualified personnel. 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 significantly delayed. Manufacturing delays could postpone the
filing of our IND applications and/or the initiation or completion of clinical trials that we have currently planned or may

plan in the future.

Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the Drug
Enforcement Administration, and other federal and state agencies to ensure strict compliance with cGMP and other
government regulations and corresponding foreign standards. We do not have control over third-party manufacturers’
compliance with these regulations and standards and they may not be able to comply. Switching manufacturers may be
difficult because the number of potential manufacturers is limited. It may be difficult or impossible for us to find a
replacement manufacturer quickly on acceptable terms, or at all. 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 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.

We have obtained orphan drug designation from the FDA for fostamatinib for the treatment of ITP, but we may be
unable to maintain the benefits associated with orphan drug designation, including the potential for market
exclusivity.

Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug or biologic intended to treat
a rare disease or condition, which is defined as one occurring in a patient population of fewer than 200,000 in the United
States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the
cost of developing the drug will be recovered from sales in the United States. In the United States, orphan drug
designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax
advantages and user-fee waivers. In addition, if a product that has orphan drug designation subsequently receives the first
FDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusivity, which
means that the FDA may not approve any other applications, including a full NDA, to market the same drug for the same
indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with
orphan drug exclusivity or where the manufacturer is unable to assure sufficient product quantity.

Even though we have received orphan drug designation for fostamatinib for the treatment of ITP, we may not

be the first to obtain marketing approval for the orphan-designated indication due to the uncertainties associated with
developing pharmaceutical products. In addition, exclusive marketing rights in the United States may be limited if we
seek approval for an indication broader than the orphan-designated indication or may be lost if the FDA later determines
that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities of
the product to meet the needs of patients with the rare disease or condition. Further, even if we obtain orphan drug
exclusivity for a product, that exclusivity may not effectively protect the product from competition because different
drugs with different active moieties can be approved for the same condition. Even after an orphan product is approved,
the FDA can subsequently approve the same drug with the same active moiety for the same condition if the FDA
concludes that the later drug is safer, more effective, or makes a major contribution to patient care. Orphan drug
designation neither shortens the development time or regulatory review time of a drug nor gives the drug any advantage
in the regulatory review or approval process.

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, 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 development, regulatory
and clinical personnel. If we lose the services of any of our key personnel, our research and development efforts could be
seriously and adversely affected. Our employees can terminate their employment with us at any time.

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

We incurred a loss from operations of approximately $69.7 million for the year ended December 31, 2016.

Other than for 2010, we have historically incurred losses from operations each year since we were incorporated in
June 1996, 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 expect to continue to incur losses from operations and
there can be no assurance that we will generate operating income in the foreseeable future. Currently, our only potential
sources of revenues are upfront payments, research and development contingent payments and royalty payments
pursuant to our collaboration arrangements, which may never materialize if our collaborators do not achieve certain
events or generate net sales to which these contingent payments are dependent on. If our drug candidates fail or do not
gain regulatory approval, or if our drugs do not achieve market acceptance, we may not be profitable. As of
December 31, 2016, we had an accumulated deficit of approximately $1.1 billion. The extent of our future losses or
profitability, if any, is highly uncertain.

If our corporate collaborations or license agreements are unsuccessful, or if we fail to form new corporate
collaborations or license agreements, 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 now and in the future. We rely on these arrangements for not only financial resources, but
also for expertise we need now and 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 these collaborations or additional collaborations with third parties, if any, will dedicate
sufficient resources or if any development or commercialization efforts by third parties will be successful. In addition,
our corporate collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a
clinical trial or abandon a drug candidate or development program. Should a collaborative partner fail to develop or
commercialize a compound or product to which it has rights from us for any reason, including corporate restructuring,
such failure might delay our ongoing research and development efforts, because we might not receive any future
payments, and we would not receive any royalties associated with such compound or product. We conducted a Phase 3
clinical program to study fostamatinib in ITP on our own. We may seek another collaborator or licensee in the future for
clinical development and commercialization of fostamatinib, as well as our other clinical programs, which we may not
be able to obtain on commercially reasonable terms or at all. If we are unable to form new collaborations or enter into
new license agreements, our research and development efforts could be delayed. 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.

Each of our collaborations could be terminated by the other party at any time, and 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. If these collaborations terminate or are not renewed, any resultant loss of revenues from these collaborations or
loss of the resources and expertise of our collaborative partners could adversely affect our business.

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. Additionally, the management teams of our collaborators may change for various reasons
including due to being acquired. Different management teams or an acquiring company of our collaborators may have
different priorities which may have adverse results on the collaboration with us.

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 or
otherwise adversely affected.

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 or may be acquired
or merged with a company having a competing program. 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. As of December 31, 2016, we had 67 pending patent applications and 341 issued and
active patents in the United States, as well as corresponding pending foreign patent applications and issued foreign
patents. In the future, our patent position might be highly uncertain and involve complex legal and factual questions. For
example, we may be involved in post-grant proceedings before the United States Patent and Trademark Office. Post-
grant proceedings are complex and expensive legal proceedings and there is no assurance we will be successful in any
such proceedings. A post-grant proceeding could result in our losing our patent rights and/or our freedom to operate
and/or require us to pay significant royalties. 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 assure you 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, our ability to receive patent protection or protect our proprietary information may
otherwise 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 adversely affect the way we conduct our 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 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 our licensors or ours, and others may be filed in the future. There may also be
copyrights or trademarks that third parties hold. There can be no assurance that our activities, or those of our licensors,
will not violate intellectual property rights of 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 our collaborators or we 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.

Our ability to use net operating losses and certain other tax attributes is uncertain and may be limited.

Our ability to use our federal and state net operating losses to offset potential future taxable income and related

income taxes that would otherwise be due is dependent upon our generation of future taxable income before the
expiration dates of the net operating losses, and we cannot predict with certainty when, or whether, we will generate
sufficient taxable income to use all of our net operating losses. In addition, utilization of net operating losses to offset
potential future taxable income and related income taxes that would otherwise be due is subject to annual limitations
under the “ownership change” provisions of Sections 382 and 383 of the Internal Revenue Code of 1986, as amended
(Internal Revenue Code) and similar state provisions, which may result in the expiration of net operating losses before
future utilization. In general, under the Code, if a corporation undergoes an “ownership change,” generally defined as a
greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its
pre-change net operating losses and other pre-change tax attributes (such as research and development credit
carryforwards) to offset its post-change taxable income or taxes may be limited. Our equity offerings and other changes
in our stock ownership, some of which are outside of our control, may have resulted or could in the future result in an
ownership change. Although we have completed studies to provide reasonable assurance that an ownership change
limitation would not apply, we cannot be certain that a taxing authority would reach the same conclusion. If, after a
review or audit, an ownership change limitation were to apply, utilization of our domestic net operating losses and tax
credit carryforwards could be limited in future periods and a portion of the carryforwards could expire before being
available to reduce future income tax liabilities.

Because we expect to be dependent upon collaborative and license agreements, we might not meet our strategic
objectives.

Our ability to generate revenue in the near term depends on the timing of recognition of certain upfront
payments, achievement of certain payment triggering events with our existing collaboration agreements and our ability to
enter into additional collaborative agreements with third parties. Our ability to enter into new collaborations and the
revenue, if any, that may be recognized under these collaborations is highly uncertain. If we are unable to enter into one
or more new collaborations, our business prospects could be harmed, which could have an immediate adverse effect on
our ability to continue to develop our compounds and on the trading price of our stock. Our ability to enter into a
collaboration may be dependent on many factors, such as the results of our clinical trials, competitive factors and the fit
of one of our programs with another company’s risk tolerance, including toward regulatory issues, patent portfolio,
clinical pipeline, the stage of the available data, particularly if it is early, overall corporate goals and financial position.

To date, a portion of our revenues have been related to the research or transition phase of each of our

collaborative agreements. Such revenues are for specified periods, and the impact of such revenues on our results of
operations is at least partially offset by corresponding research costs. Following the completion of the research or
transition phase of each collaborative agreement, additional revenues may come only from payments triggered by
milestones and/or the achievement of other contingent events, and royalties, which may not be paid, if at all, until certain
conditions are met. This risk is heightened due to the fact that unsuccessful research efforts may preclude us from
receiving any contingent payments under these agreements. Our receipt of revenues 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. We have received payments from our collaborations with Aclaris, BMS, AZ, BerGenBio, Janssen
Pharmaceutica N.V., a division of Johnson & Johnson, Novartis Pharma A.G., Daiichi, Merck & Co., Inc., Merck Serono

and Pfizer. Under many agreements, future payments may not be earned until the collaborator has advanced product
candidates 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 revenue 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 common stock.

Our business requires us to generate meaningful revenue from royalties and licensing agreements. To date, we

have not received any revenue from royalties for the commercial sale of drugs, and we do not know when we will
receive any such revenue, if at all.

Securities class action lawsuits or other litigation could result in substantial damages and may divert management’s
time and attention from our business.

We have been subject to class action lawsuits in the past, including a securities class action lawsuit commenced
in the United States District Court for the Northern District of California in February 2009, that was ultimately dismissed
in November 2012. However, we may be subject to similar or completely unrelated claims in the future, such as those
that might occur if there was to be a change in our corporate strategy. These and other lawsuits are subject to inherent
uncertainties, and the actual costs to be incurred relating to the lawsuit will depend upon many unknown factors. The
outcome of litigation is necessarily uncertain, and we could be forced to expend significant resources in the defense of
such suits, and we may not prevail. Monitoring and defending against legal actions is time-consuming for our
management and detracts from our ability to fully focus our internal resources on our business activities. In addition, we
may incur substantial legal fees and costs in connection with any such litigation. We have not established any reserves
for any potential liability relating to any such potential lawsuits. It is possible that we could, in the future, incur
judgments or enter into settlements of claims for monetary damages. A decision adverse to our interests on any such
actions could result in the payment of substantial damages, or possibly fines, and could have a material adverse effect on
our cash flow, results of operations and financial position.

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. For example, there are existing therapies and drug candidates in development for the
treatment of ITP that may be alternative therapies to fostamatinib, if it is ultimately approved for commercialization. We
face, and will continue to face, intense competition from pharmaceutical and biotechnology companies, as well as from
academic and research institutions and government agencies, both in the United States and abroad. Some of these
competitors are pursuing the development of pharmaceuticals that target the same diseases and conditions as our research
programs. Our major competitors include fully integrated pharmaceutical companies that have extensive drug discovery
efforts and are developing novel small-molecule pharmaceuticals. We also face significant competition from
organizations that are pursuing the same or similar technologies, including the discovery of targets that are useful in
compound screening, as the technologies used by us in our drug discovery efforts.

Competition may also arise from:



new or better methods of target identification or validation;

other drug development technologies and methods of preventing or reducing the incidence of disease;

new small molecules; or

other classes of therapeutic agents.

Our competitors or their collaborative partners 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 and larger research and development staffs 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 any of our collaborators or us in any of those areas may prevent the successful
commercialization of our potential drug targets.

Many of our competitors, either alone or together with their collaborative partners, have significantly greater

experience than we do in:



identifying and validating targets;

screening compounds against targets; and

undertaking preclinical testing and clinical trials.

Accordingly, our competitors may succeed in obtaining patent protection, identifying or validating new targets

or discovering new drug compounds before we do.

Our competitors might develop technologies and drugs that are more effective or less costly than any that are

We face and will continue to face intense competition from other companies for collaborative arrangements

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

The market prices for our common stock and the securities 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 progress and success of our clinical trials and preclinical activities (including studies and manufacture
of materials) of our product candidates conducted by us;

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

selling by large stockholders;

presentations of detailed clinical trial data at medical and scientific conferences and investor perception

thereof;

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 or arbitration;

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

period-to-period fluctuations in financial results.



If we fail to continue to meet the listing standards of NASDAQ, our common stock may be delisted, which could have
a material adverse effect on the liquidity of our common stock.

Our common stock is currently listed on the Nasdaq Global Market. The NASDAQ Stock Market LLC has

requirements that a company must meet in order to remain listed on NASDAQ. In particular, NASDAQ rules require us
to maintain a minimum bid price of $1.00 per share of our common stock. If the closing bid price of our common stock
were to fall below $1.00 per share for 30 consecutive trading days or we do not meet other listing requirements, we
would fail to be in compliance with NASDAQ’s listing standards. There can be no assurance that we will continue to
meet the minimum bid price requirement, or any other requirement in the future. If we fail to meet the minimum bid
price requirement, The NASDAQ Stock Market LLC may initiate the delisting process with a notification letter. If we
were to receive such a notification, we would be afforded a grace period of 180 calendar days to regain compliance with
the minimum bid price requirement. In order to regain compliance, shares of our common stock would need to maintain
a minimum closing bid price of at least $1.00 per share for a minimum of 10 consecutive trading days. In addition, we
may be unable to meet other applicable NASDAQ listing requirements, including maintaining minimum levels of
stockholders’ equity or market values of our common stock in which case, our common stock could be delisted. If our
common stock were to be delisted, the liquidity of our common stock would be adversely affected and the market price
of our common stock could decrease.

The vote by the United Kingdom (U.K.) electorate in favor of the U.K.’s exit from the European Union (E.U.) could
adversely impact our business, results of operations and financial condition.

The passage of the referendum on the U.K.’s membership in the E.U., referred to as “Brexit,” in June 2016

resulted in a determination that the U.K. should exit the E.U. Such an exit from the E.U. could cause uncertainty in the
credit markets and financial services industry which could result to lower interest paid on certain of our investments and
the value of certain securities we hold may decline in the future, which could negatively affect our financial condition,
results of operations and cash flow, as well as limit our future access to the capital markets. The Brexit could also cause
disruptions to and create uncertainty surrounding the business environment in which we operate. For example, we
conduct clinical trials in the U.K. and other E.U. member states. Although the terms of U.K.’s exit from and its future
relationship with E.U. are unknown, it is possible that there will be increased regulatory complexities which can disrupt
the timing of our clinical trials and regulatory approvals, if any, of our current and future product candidates.

Our ability to generate revenues will be diminished if we or our collaborative partners fail to obtain acceptable prices
or an adequate level of reimbursement for products from third-party payers 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 payers
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 we or any of our collaborators would
receive for any products in the future. Further, cost control initiatives could adversely affect our and 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 payers.

Significant uncertainty exists as to the reimbursement status of newly-approved healthcare products. Third-

party payers, including Medicare, are challenging the prices charged for medical products and services. Government and
other third-party payers 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 payers 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. We carry product liability insurance that is limited in scope and amount and may not
be adequate to fully protect us against product liability claims. 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.

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, penalties or fines.

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 or for penalties or fines that may be imposed,
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 internal computer systems, or those used by our contract research organizations or other contractors or
consultants, may fail or suffer security breaches.

Despite the implementation of security measures, our internal computer systems and those of our contract

research organizations and other contractors and consultants are vulnerable to damage from computer viruses,
unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not
experienced any such system failure, accident or security breach to date, if such an event were to occur and cause
interruptions in our operations, it could result in a disruption of our drug development programs. For example, the loss of
clinical trial data from completed or ongoing clinical trials for a product candidate could result in delays in our
regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any
disruption or security breach were to result in a loss of or damage to our data or applications, or inappropriate disclosure
of confidential or proprietary information, we could incur liability and the further development of any product candidates
could be delayed.

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.

Future equity issuances or a sale of a substantial number of shares of our common stock may cause the price of our
common stock to decline.

Because we will continue to need additional capital in the future to continue to expand our business and our

research and development activities, among other things, we may conduct additional equity offerings. For example,
under the universal shelf registration statement filed by us in May 2015 and declared effective by the SEC in July 2015,
we may offer and sell any combination of common stock, preferred stock, debt securities and warrants in one or more
offerings, up to a cumulative value of $150 million. To date, we have $74 million remaining under such universal shelf
registration statement. If we or our stockholders sell, or if it is perceived that we or they will sell, substantial amounts of
our common stock (including shares issued upon the exercise of options and warrants) in the public market, the market
price of our common stock could fall. A decline in the market price of our common stock could make it more difficult
for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. In addition,
future sales by us of our common stock may be dilutive to existing stockholders. Furthermore, if we obtain funds through
a credit facility or through the issuance of debt or preferred securities, these securities would likely have rights senior to
the rights of our common stockholders, which could impair the value of our common stock.

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 1B. Unresolved Staff Comments

None.

Item 2. Properties

We currently lease facilities consisting of approximately 147,000 square feet of research and office space

located at 1180 Veterans Boulevard, South San Francisco, California, of which, commencing in December 2014, we
sublet approximately 57,000 square feet of our research and office space to an unrelated third party. Both the lease and
the sublease expire in January 2018. We believe our facilities are in good operating condition and that the leased real
property that we still occupy is adequate for all present and near term uses.

Item 3. Legal Proceedings

None.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities

Our common stock commenced trading publicly under the symbol “RIGL” on December 7, 2000. The

following table sets forth, for the periods indicated, the high and low intraday sales prices of our common stock as
reported on the Nasdaq Global Market:

Year Ended December 31, 2015

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Year Ended December 31, 2016

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High Low

$ 3.91 $ 2.02
$ 5.20 $ 2.95
$ 3.39 $ 2.32
$ 3.68 $ 2.42

$ 2.97 $ 1.94
$ 2.93 $ 2.16
$ 3.93 $ 2.13
$ 4.01 $ 2.38

On March 1, 2017, the last reported sale price for our common stock on the Nasdaq Global Market was $2.85

per share.

Holders

As of March 1, 2017, there were approximately 95 stockholders of record of our common stock.

Dividends

We have not paid any cash dividends on our common stock and currently do not plan to pay any cash dividends

in the foreseeable future.

Performance Measurement Comparison

The graph below shows the cumulative total stockholder return of an investment of $100 (and the reinvestment

of any dividends thereafter) on December 31, 2011 in (i) our common stock, (ii) the Nasdaq Composite Index and
(iii) the Nasdaq Biotechnology Index. The Nasdaq Biotechnology Index is a modified-capitalization weighted index that
includes securities of Nasdaq-listed companies classified according to the Industry Classification Benchmark as either
Biotechnology or Pharmaceuticals and which also meet other eligibility criteria. Our stock price performance shown in
the graph below is based upon historical data and is not indicative of future stock price performance.

The following graph and related information shall not be deemed “soliciting material” or be deemed to be

“filed” with the SEC, nor shall such information be incorporated by reference into any future filing, except to the extent
that we specifically incorporate it by reference into such filing.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Rigel Pharmaceuticals, Inc., the NASDAQ Composite Index
and the NASDAQ Biotechnology Index

$100 invested on December 31, 2011 in stock or index-including reinvestment of dividends at fiscal year ending
December 31.

Item 6. Selected Financial Data

The following selected financial data have been derived from our audited financial statements. The information

set forth below is not necessarily indicative of our results of future operations and should be read in conjunction with
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8.
Financial Statements and Supplementary Data” included elsewhere in this Annual Report on Form 10- K.

Statements of Operations Data:
Contract revenues from collaborations
Costs and expenses:

Research and development
General and administrative
Restructuring charges
Loss on sublease
Total costs and expenses

Loss from operations
Interest income
Gain on disposal of assets
Net loss
Net loss per share, basic and diluted
Weighted average shares used in computing net loss per

2016

Fiscal Year Ended December 31,
2013
2014
2015
(in thousands, except per share amounts)

2012

$ 20,383 $ 28,895 $

8,250 $

7,150 $

2,250

62,825
17,813
—
—
80,638
(51,743)
222
57

63,446
20,908
5,770
—
90,124
(69,741)
437
88

78,778
22,849
—
—
101,627
(99,377)
520
17
$ (69,216) $ (51,464) $ (90,908) $ (89,027) $ (98,840)
(1.32)
$

75,328
19,612
1,679
—
96,619
(89,469)
426
16

67,696
22,501
—
9,302
99,499
(91,249)
243
98

(0.58) $

(1.04) $

(0.73) $

(1.02) $

share, basic and diluted

94,387

88,434

87,662

87,288

74,967

2016

2015

As of December 31,
2014
(in thousands)

2013

2012

Balance Sheet Data:
Cash, cash equivalents and short-term

investments
Working capital
Total assets
Accumulated deficit
Total stockholders’ equity

74,766 $ 126,276 $ 143,159 $ 211,975 $ 298,241
290,254
53,626
310,043
78,134
(760,247)
(1,060,862)
289,096
55,027

209,781
226,058
(849,274)
208,251

95,228
131,747
(991,646)
91,381

136,512
154,135
(940,182)
128,246

See Note 1 to the Financial Statements for description of the number of shares used in the computation of basic

and diluted loss per share.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a clinical-stage biotechnology company dedicated to the discovery and development of novel, targeted

drugs in the therapeutic areas of immunology, oncology and immuno-oncology. Our pioneering research focuses on
signaling pathways that are critical to disease mechanisms. Our current clinical programs include clinical studies of
fostamatinib, an oral spleen tyrosine kinase (SYK) inhibitor in a number of indications. We completed and reported
results from the FIT Phase 3 clinical program of fostamatinib in chronic immune thrombocytopenia (ITP). We are also
conducting a Phase 2 clinical study with fostamatinib in autoimmune hemolytic anemia (AIHA) and a Phase 2 clinical
study for IgA nephropathy (IgAN). In addition, we have two oncology product candidates in development with partners
BerGenBio AS (BerGenBio) (Phase 2) and Daiichi Sankyo (Daiichi) (Phase 1).

Since inception, we have financed our operations primarily through the sale of equity securities, and contract

payments under our collaboration agreements. Our research and development activities, including preclinical studies and
clinical trials, consume substantial amounts of capital. As of December 31, 2016, we had approximately $74.8 million in
cash, cash equivalents and short term investments. During the year ended December 31, 2016, we received an aggregate
proceeds of $24.3 million under the Controlled Equity OfferingSM Sales Agreement, an aggregate of $6.7 million
payments pursuant to our agreements with our collaborative partners, and approximately $4.5 million of sublease income
and reimbursements under a sublease agreement with an unrelated third party. In February 2017, we completed an
underwritten public offering in which we sold 23,000,000 shares of our common stock pursuant to an effective
registration statement at a price to the public of $2.00 per share. We received net proceeds of approximately $43.0
million after deducting underwriting discounts and commissions and estimated offering expenses. We believe that our
existing capital resources will be sufficient to support our current and projected funding requirements, including the
preparation for potential commercial launch of fostamatinib in ITP in the U.S., through at least the next 12 months. We
also continue to evaluate ex-U.S. partnerships for fostamatinib and other partnering opportunities across our pipelines.

Our revenues have consisted primarily of revenues from sponsored research and license agreements with our

corporate collaborators. We earned contract revenues from collaborations of $20.4 million in 2016 comprised of the
amortization of the $30.0 million upfront payment from BMS of $13.4 million, contingent payment of $3.0 million, and
the FTE fees we earned from BMS of $290,000, as well as the contingent payment we received from BerGenBio of
$3.7 million.

Within our product development portfolio, our most advance program is fostamatinib in ITP. Data from the first
two Phase 3 studies, as well as our ongoing open-label extension study demonstrate the consistent benefit of fostamatinib
in ITP. We plan to submit an NDA for fostamatinib in ITP in the first quarter of 2017 and would expect to receive a
decision on approval from the FDA in the first quarter of 2018, with a potential commercial launch in the U.S. in the first
half of 2018.

Product Development Programs

Our product development portfolio features multiple novel, targeted drug candidates in the therapeutic areas of

immunology, oncology and immuno-oncology. Please refer to “Part I. Item 1. Business—Product Development
Programs” for a detailed discussion of our multiple product candidates in development.

Corporate Collaborations

We conduct research and development programs independently and in connection with our corporate

collaborators. Please refer to “Part I. Item 1. Business—Corporate Collaborations” for a detailed discussion of our
corporate collaborations.

Recent Developments

Changes in Board of Directors

On February 22, 2017, Stephen A. Sherwin, M.D. notified the Company of his decision to resign as a member

of the Board of Directors of the Company (the “Board”), effective as of May 11, 2017, the anticipated date of the
Company’s 2017 Annual Meeting of Stockholders.

Effective upon Dr. Sherwin’s resignation, the Board also appointed Gary A. Lyons, a current member of the

Board, to the Audit Committee of the Board (the “Audit Committee”). Mr. Lyons’s appointment to the Audit Committee
fills the vacancy created by the resignation of Dr. Sherwin.

Effective February 24, 2017, and solely in order to provide for an equal apportionment of the members among

the three classes of the Company’s classified Board, Raul R. Rodriguez, resigned from the Board as a director continuing
in office until the Company’s 2018 Annual Meeting of Stockholders and was immediately reappointed by the Board as a
director continuing in office until the Company’s 2017 Annual Meeting of Stockholders. The reallocation of Mr.
Rodriguez as a director continuing in office until the Company’s 2017 Annual Meeting of Stockholders had no effect on
any aspect of Mr. Rodriguez’s compensatory arrangements with the Company.

In connection with these actions and in accordance with the Company’s amended and restated certificate of

incorporation and amended and restated bylaws, the Board eliminated the vacancy created from Dr. Sherwin’s
resignation from the Board by reducing the total number of authorized directors to six (6) members, effective upon Dr.
Sherwin’s resignation.

Research and Development Expenses

Our research and development expenditures include costs related to preclinical and clinical trials, scientific

personnel, supplies, equipment, consultants, sponsored research, stock-based compensation, and allocated facility costs.

We do not track fully-burdened research and development costs separately for each of our drug candidates. We

review our research and development expenses by focusing on three categories: research, development, and other. Our
research team is focused on creating a portfolio of product candidates that can be developed into small-molecule
therapeutics in our own proprietary programs or with potential collaborative partners and utilizes our discovery engine to
discover and validate new product candidates in our focused range of therapeutic indications. “Research” expenses relate
primarily to personnel expenses, lab supplies, fees to third party research consultants and compounds. Our development
group leads the implementation of our clinical and regulatory strategies and prioritizes disease indications in which our
compounds may be studied in clinical trials. “Development” expenses relate primarily to clinical trials, personnel
expenses, lab supplies and fees to third party research consultants. “Other” expenses primarily consist of allocated
facilities costs and allocated stock-based compensation expense relating to personnel in research and development
groups.

In addition to reviewing the three categories of research and development expenses described in the preceding

paragraph, we principally consider qualitative factors in making decisions regarding our research and development
programs, which include enrollment in clinical trials and the results thereof, the clinical and commercial potential for our
drug candidates and competitive dynamics. We also make our research and development decisions in the context of our
overall business strategy, which includes the evaluation of potential collaborations for the development of our drug
candidates.

The following table presents our total research and development expenses by category.

Categories:
Research
Development
Other

Year Ended December 31,
2015

2014

2016

From January 1, 2007*
to December 31, 2016

(in thousands)

$ 19,909
30,951
12,586
$ 63,446

$ 21,904
25,988
14,933
$ 62,825

$ 18,388 $
27,727
21,581
$ 67,696 $

216,408
314,233
221,951
752,592

We started tracking research and development expenses by category on January 1, 2007.

“Other” expenses mainly represent allocated facilities costs of approximately $9.5 million, $10.8 million and

$16.9 million for the years ended December 31, 2016, 2015 and 2014, respectively, and allocated stock-based
compensation expenses of approximately $3.1 million, $4.1 million and $4.7 million for the years ended December 31,
2016, 2015 and 2014, respectively.

For the year ended December 31, 2016, a major portion of our total research and development expense was

associated with research and development expense for our ITP, IgAN and AIHA programs, salaries of our research and
development personnel, allocated facilities costs, and research and development expense for our ITP, IgAN and AIHA
programs. For the years ended December 31, 2015 and 2014, a major portion of our total research and development
expense was associated with salaries of our research and development personnel, allocated facilities costs, and research
and development expense for our ITP and IgAN programs.

We do not have reliable estimates regarding the timing of our clinical trials. Preclinical testing and clinical

development are long, expensive and uncertain processes. 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 1, 2 and 3 clinical trials in humans. Significant delays in clinical testing could materially impact our product
development costs and timing of completion of the clinical trials. We do not know whether planned clinical trials will
begin on time, will need to be halted or 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 trial, delays from scale
up, delays in reaching agreement on acceptable clinical trial agreement terms with prospective clinical sites, delays in
obtaining institutional review board approval to conduct a clinical trial at a prospective clinical site or delays in
recruiting subjects to participate in a clinical trial.

We currently do not have reliable estimates of total costs for a particular drug candidate to reach the market.

Our potential products are subject to a lengthy and uncertain regulatory process that may involve unanticipated
additional clinical trials and may not result in receipt of the necessary regulatory approvals. Failure to receive the
necessary regulatory approvals would prevent us from commercializing the product candidates affected. In addition,
clinical trials of our potential products may fail to demonstrate safety and efficacy, which could prevent or significantly
delay regulatory approval.

For further discussion on research and development activities, see “Research and Development Expense” under

“Results of Operations” below.

Critical Accounting Policies and the Use of Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our financial

statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP).
The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. We evaluate our estimates, including those related to our
stock based compensation and the probability of achievement of corporate performance-based milestone for our

performance-based stock option awards, impairment issues, the estimated useful life of assets, and estimated accruals,
particularly research and development accruals, on an ongoing basis. 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 that there
were no significant changes in our critical accounting policies during the year ended December 31, 2016 as compared to
those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015. We believe the
following critical accounting policies affect our more significant judgments and estimates used in the preparation of our
financial statements:

Revenue Recognition

We present revenue from our collaboration arrangements under the FASB ASC 808, Collaboration
Arrangements. The terms of these agreements generally contain multiple elements, or deliverables, which may include
(i) granting of license rights to our program, (ii) participation in a joint research committee, (iii) performance of research
activities, and (iv) clinical supply and materials. The payments we receive under these arrangements typically include
one or more of the following: non-refundable, up-front fees; funding of research and/or development efforts; contingent
fees due upon the achievement of specified triggering events; and/or royalties on future product sales. We recognize
revenue for the performance of services or the delivery of products when each of the following four criteria is met: (i)
persuasive evidence of an arrangement exists; (ii) products are delivered or as services are rendered; (iii) the sales price
is fixed or determinable; and (iv) collectability is reasonably assured.

Our revenue arrangements with multiple elements are evaluated under FASB ASC 605-25, Multiple Element

Arrangements, and are divided into separate units of accounting if certain criteria are met, including whether the
deliverables have stand-alone value, based on the relevant facts and circumstances for each arrangement. The
consideration we receive under collaboration arrangements is allocated among the separate units of accounting based on
the selling price hierarchy, and the applicable revenue recognition criteria is applied to each of the separate units. We
make significant judgments and estimates in the allocation of the consideration among the deliverables under the
agreement, as well as the determination of the periods the units will be delivered to our collaborators. If there are
deliverables in an arrangement that are not separable from other aspects of the contractual relationship, they are treated
as a combined unit of accounting, with the allocated revenue for the combined unit recognized in a manner consistent
with the revenue recognition applicable to the final deliverable in the combined unit. Payments received prior to
satisfying the relevant revenue recognition criteria are recorded as deferred revenue in the accompanying balance sheets
and recognized as revenue when the revenue recognition criteria are met.

We typically receive non-refundable, up-front payments when licensing our intellectual property, which often

occurs in conjunction with a research and development agreement. If we believe that the license to our intellectual
property has stand-alone value, we generally recognize revenue attributed to the license upon delivery provided that
there are no future performance requirements for use of the license. When we believe that the license to our intellectual
property does not have stand-alone value, we would recognize revenue attributed to the license ratably from the effective
date of the agreement or the delivery of the license up to the estimated completion date of the undelivered performance
obligation. Revenues related to the research services with our corporate collaborators are recognized as research services
are performed over the related research period. Under these agreements, we are required to perform research activities as
specified in the agreement. The payments received are not refundable and are based on a contractual cost per full-time
equivalent employee working on the project. Our research and development expenses under the collaborative research
agreements approximate the revenue recognized under such agreements over the research period.

Revenues associated with substantive, at-risk milestones pursuant to collaborative agreements are recognized

upon achievement of the milestones. We consider a milestone to be substantive at the inception of the arrangement if it is
commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered
item as a result of a specific outcome resulting from our performance to achieve the milestone, it relates solely to past
performance and it is reasonable relative to all of the deliverables and payment terms within the arrangement. Non-
refundable contingent future amounts receivable in connection with future events specified in collaboration agreements

that are not considered milestones such as payments contingent solely upon the passage of time or the result of our
collaborator's performance will be recognized as revenue when the recognition criteria discussed above are met.

Stock-Based Compensation

We grant options to purchase our common stock to our officers, directors and all other employees and
consultants under our stock option plans. Eligible employees can also purchase shares of our common stock at a price per
share equal to the lesser of 85% of the fair market value on the first day of the offering period or 85% of the fair market
value on the purchase date under our employee stock purchase plan (Purchase Plan). The benefits provided under these
plans are stock-based payments subject to the provisions of FASB ASC 718. We adopted the use of the straight-line
attribution method over the requisite service period for each entire stock award. In addition, we estimate the amount of
expected forfeitures when calculating compensation costs, then record actual forfeitures as they occur. We review our
forfeiture rates each quarter and make any necessary changes to our estimates.

The determination of the fair value of stock-based payment awards on the date of grant using the Black-Scholes

option-pricing model is affected by our stock price, as well as assumptions regarding a number of complex and
subjective variables. These variables include, but are not limited to, volatility, expected term, risk-free interest rate and
dividends. We estimate volatility over the expected term of the option using historical share price performance. For
expected term, among other things, we take into consideration our historical data of options exercised, cancelled and
expired. The risk-free rate is based on the U.S. Treasury constant maturity rate. We have not paid and do not expect to
pay dividends in the foreseeable future. In order to calculate stock-based compensation expense, we also estimate the
forfeiture rate using our historical experience with options that cancel before they vest.

We granted performance-based stock options to purchase shares of our common stock which will vest upon the

achievement of certain corporate performance-based milestones. We determined the fair values of these performance-
based stock options using the Black-Scholes option pricing model at the date of grant. For the portion of the
performance-based stock options of which the performance condition is considered probable of achievement, we
recognize stock-based compensation expense on the related estimated fair value of such options on a straight-line basis
from the date of grant up to the date when we expect the performance condition will be achieved. For the performance
conditions that are not considered probable of achievement at the grant date or upon quarterly re-evaluation, prior to the
event actually occurring, we recognize the related stock-based compensation expense when the event occurs or when we
can determine that the performance condition is probable of achievement. In those cases, we recognize the change in
estimate at the time we determine the condition is probable of achievement (by recognizing stock-based compensation
expense as cumulative catch-up adjustment as if we had estimated at the grant date that the performance condition would
have been achieved) and recognize the remaining compensation cost up to the date when we expect the performance
condition will be achieved, if any. During the year ended December 31, 2016, we recognized $1.8 million of stock-
based compensation expense relating to certain performance-based stock options granted in 2014, 2015 and 2016 in
which the corresponding corporate performance-based milestones have been achieved or were considered probable of
achievement as of December 31, 2016. At December 31, 2016, total unrecognized compensation cost related to certain
performance-based stock options, with various performance conditions, was $458,000.

Research and Development Accruals

We have various contracts with third parties related to our research and development activities. Costs that are

incurred for services rendered, but not billed to us, as of the end of the period are estimated and accrued. We make
estimates of the amounts incurred in each period based on the information available to us and our knowledge of the
nature of the contractual activities generating such costs. Expenses related to other research and development contracts,
such as research contracts, toxicology study contracts and manufacturing contracts are estimated to be incurred generally
on a straight-line basis over the duration of the contracts. Raw materials and study materials purchased for us by third
parties are expensed at the time of purchase. Many of our estimates are based significantly or in part on information
provided for us by third parties. If such information were not reported properly, our research and development expense
amounts could be misstated.

Leases

We currently lease our research and office space under a noncancelable lease agreement with our landlord

through January 2018. In December 2014, we entered into a sublease agreement with an unrelated third party to occupy a
portion of our research and office space. In connection with this sublease, we recognized a loss on the sublease of
$9.3 million during the fourth quarter of 2014. We record rent expense on a straight-line basis for our lease, net of
sublease income, wherein such arrangements contain scheduled rent increases over the term of the lease and sublease,
respectively. For our sublease arrangement which we classified as an operating lease, our loss on the sublease is
comprised of the present value of our future payments to our landlord less the present value of our future rent payments
expected from our subtenant over the term of the sublease. The present value factor, which also affects the level of
accreted interest expense that we will recognize as additional charges over the term of the lease, is based on our estimate
of our credit-risk adjusted borrowing rate at the time the initial sublease liability is calculated. Our estimate of our
credit-risk adjusted borrowing rate was based on our comparison of the rates used by other companies of our size, our
financial condition at the time we entered into such sublease agreement, as well as other factors that would affect our
credit worthiness.

Results of Operations

Year Ended December 31, 2016, 2015 and 2014

Revenues

Contract revenues from collaborations

Year Ended December 31,
2015

2016

2014
(in thousands)
$ 20,383 $ 28,895 $ 8,250 $

Aggregate
Change

2016 from 2015 2015 from 2014

(8,512) $

20,645

Contract revenues from collaborations of $20.4 million in 2016 were comprised of the amortization of the

$30.0 million upfront payment of $13.4 million, contingent payment of $3.0 million, and the FTE fees we earned from
BMS of $290,000, as well as the contingent payment of $3.7 million we received from BerGenBio. Contract revenues
from collaborations of $28.9 million in 2015 were comprised of the amortization of the $30.0 million upfront payment
from BMS of $16.6 million and the FTE fees we earned from BMS of $822,000 as well as the upfront payments received
from our other collaborative partners in the aggregate of $11.5 million. Contract revenues from collaborations of
$8.3 million in 2014 consisted of $5.8 million associated with the non-refundable time-based payment and $2.5 million
payment from AZ for their continued development of R256 in asthma.

We do not have any deferred revenue as of December 31, 2016. Our potential future revenues may include

payments from our current partners and from new partners with whom we enter into agreements in the future, if any, the
timing and amount of which is unknown at this time.

Research and Development Expenses

Research and development expense
Stock-based compensation expense included in

Year Ended December 31,
2015

2016

2014
(in thousands)
$ 63,446 $ 62,825 $ 67,696 $

Aggregate
Change

2016 from 2015 2015 from 2014

621 $

(4,871)

research and development expense

$ 3,103 $ 4,100 $ 4,674 $

(997) $

(574)

The increase in research and development expense for the year ended December 31, 2016, compared to the

same period in 2015, was primarily due to the increase in research and development costs related to our fostamatinib in
ITP and AIHA programs, partially offset by the decreases in personnel costs and stock based compensation due to the
reduction in workforce in September 2016. The decrease in research and development expense for the year ended

December 31, 2015, compared to the same period in 2014, was primarily due to the decrease in facilities costs resulting
from the sublease agreement executed in December 2014, the completion in 2014 of a Phase 2 study of R348 in dry eye
and the discontinuation of our indirect AMPK activator program, R118, in 2014, partially offset by the increases in
bonus compensation expense and research and development costs related to our Phase 3 clinical program in ITP.

We expect our research and development expense in 2017 to decrease as a result of the reduction in workforce

in September 2016, as well as the completion of the pivotal Phase 3 clinical trials in ITP in 2016.

General and Administrative Expense

General and administrative expense
Stock-based compensation expense included in

Year Ended December 31,
2015

2016

2014
(in thousands)
$ 20,908 $ 17,813 $ 22,501 $

Aggregate
Change

2016 from 2015 2015 from 2014

3,095 $

(4,688)

general and administrative expense

$ 4,230 $ 3,303 $ 5,113 $

927 $

(1,810)

The increase in general and administrative expense for the year ended December 31, 2016, compared to the

same period in 2015, was primarily due to the commercial launch costs incurred in preparation for a potential
commercial launch of fostamatinib in ITP, as well as the recognition of stock-based compensation expense relating to
certain performance-based stock options granted in 2016, 2015 and 2014 in which the corresponding corporate
performance-based milestones have been achieved or were considered probable of achievement as of December 31,
2016. The decrease in general and administrative expense for the year ended December 31, 2015, compared to the same
period in 2014, was primarily due to the decreases in personnel costs due to the retirement of our former Chief Executive
Officer (CEO) in December 2014, as discussed below, and facilities costs as a result of the sublease agreement executed
in December 2014.

In December 2014, we entered into a severance agreement with our former CEO. The severance agreement
provides for cash severance payments payable in installments over a duration of 18 months beginning on January 1,
2015. As part of the severance arrangement we offered, we extended the date to which our former CEO had the right to
exercise his vested options within 90 days from his termination date as was stipulated under his option agreement to the
end of the contractual term of the options, of which the remaining contractual term for the most recently granted options
is nine years. In addition, we also accelerated the vesting period of certain of his unvested stock options. As a result of
these modifications, we recorded incremental stock-based compensation expense in the fourth quarter of 2014.

We expect our general and administrative expense in 2017 to increase as we as continue our efforts in

preparation for potential commercial launch of fostamatinib in ITP in the U.S in 2018.

Loss on Sublease

Loss on sublease

Year Ended
December 31,
2015

2014

Aggregate
Change

2016 from 2015 2015 from 2014

2016

$ — $ — $ 9,302 $

— $

(9,302)

(in thousands)

In December 2014, we entered into a sublease arrangement whereby we sublet 56,750 square feet or
approximately 39% of our research and office space and recorded a loss on sublease of $9.3 million. The loss on the
sublease is derived from the present value of the excess of our future remaining payments to our landlord associated with
the applicable subleased space over our contractual sublease income from our subtenant over the term of the sublease.

Restructuring Charges

Year Ended
December 31,
2015

2014

2016

Aggregate
Change

2016 from 2015 2015 from 2014

Restructuring charges
Stock-based compensation expense included

in restructuring charges

$ 5,770 $ — $ — $

5,770 $

(in thousands)

$ 499 $ — $ — $

499 $

—

In September 2016, we announced that we had reduced our workforce by 46 positions, mostly in the research

area. We also announced that effective September 15, 2016, Donald G. Payan, M.D, has retired from the board of
directors and from his position as Executive Vice President and President of Discovery and Research. We recorded
restructuring charges during the year ended December 31, 2016 of approximately $5.8 million within Restructuring
Charges in the accompanying Statement of Operations, which included $5.0 million of severance costs paid in cash,
$319,000 impairment of certain property and equipment, and $499,000 of non-cash stock-based compensation expense
as a result of the modification of our former executive’s stock options. At December 31, 2016, the remaining accrued
restructuring cost was $712,000 related to COBRA benefits and outplacement costs and is classified under Accrued
Compensation in the Balance Sheet.

Interest income

Year Ended
December 31,
2015

2014

Aggregate
Change
2016 from 2015

Aggregate
Change
2015 from 2014

2016

(in thousands)

Interest income

$ 437 $ 222 $ 243 $

215 $

(21)

Interest income results from our interest-bearing cash and investment balances. The increase in interest income
for the year ended December 31, 2016, as compared to the same period in 2015, was primarily due to the higher yield on
our investments. The decrease in interest income for the year ended December 31, 2015, as compared to the same period
in 2014, was primarily due to lower average cash balance of our short-term investments.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09—Revenue from Contracts with Customers, which supersedes
the revenue recognition requirements under ASC Topic 605, Revenue Recognition, and most industry-specific guidance
under the ASC. The core principle of ASU No. 2014-09 is that an entity should recognize revenue when it transfers
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. ASU No. 2014-09 defines a five step process to achieve this core
principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition
process than required under existing U.S. GAAP including identifying performance obligations in the contract,
estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to
each separate performance obligation. ASU No. 2014-09 also requires additional disclosures to enable users of financial
statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption. In July 2015, the
FASB deferred by one year the effective date of ASU No. 2014-09 with the new effective date beginning after December
15, 2017, and the interim periods within that year and will allow early adoption for all entities as of the original effective
date for public business entities, which was annual reporting periods beginning after December 15, 2016. We plan to
adopt this new standard on January 1, 2018 using the modified retrospective approach. The adoption of ASU No. 2014-
09 may have a material effect on our financial statements. To date, our revenues have been derived from license and
collaboration agreements. The consideration we are eligible to receive under these agreements includes upfront
payments, progress dependent contingent payments on events achieved by our collaboration partners, and royalties on
net sales of products sold by such partners under the agreements. Each license and collaboration agreement is unique and
will need to be assessed separately under the five-step process of the new standard. We have performed a preliminary

assessment for our active license and collaboration agreements. Based on our preliminary assessment, we expect that the
timing of recognition for certain contingent payments relating to our active license and collaboration agreements may be
impacted by adoption of the new standard. ASU No. 2014-09 differs from the current accounting standard in many
respects, such as in the accounting for variable consideration, including milestone payments or contingent payments.
Under our current accounting policy, we recognize contingent payments as revenue in the period that the payment-
triggering event occurred or is achieved. However, under the new accounting standard, it is possible to start to recognize
contingent payments before the payment-triggering event is completely achieved, subject to management’s assessment of
whether it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the
uncertainty associated with the variable consideration is subsequently resolved.

In February 2016, the FASB issued ASU No. 2016-02—Leases, which is aimed at making leasing activities
more transparent, and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use
asset and corresponding lease liability, including leases currently accounted for as operating leases. The guidance is
effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted.
We plan to adopt this new standard on January 1, 2019. We are currently evaluating the potential impact of the adoption
of ASU No. 2016-02 on our financial statements and cannot estimate the impact of adoption at this time.

In March 2016, the FASB issued ASU No. 2016-09—Improvements to Employee Share-Based Payment
Accounting, which is intended to simplify several aspects of the accounting for share-based payment award transactions,
including the income tax consequences, an option to recognize gross stock compensation expense with actual forfeitures
recognized as they occur, as well as certain classifications on the statement of cash flows. The guidance will be effective
for the fiscal year beginning after December 15, 2016, including interim periods within that year. We plan to adopt this
new standard on January 1, 2017 and do not expect a material impact on our financial statements.

Liquidity and Capital Resources

Cash Requirements

From inception, we have financed our operations primarily through sales of equity securities, and contract

payments under our collaboration agreements. We have consumed substantial amounts of capital to date as we continue
our research and development activities, including preclinical studies and clinical trials.

As of December 31, 2016, we had approximately $74.8 million in cash, cash equivalents and short-term
investments, as compared to approximately $126.3 million as of December 31, 2015, a decrease of approximately
$51.5 million. The decrease was primarily attributable to the payments associated with funding our operating expenses
for the year ended December 31, 2016. In December 2016, we received $3.0 million payment from BMS pursuant to our
collaboration agreement entered into in February 2015. In June 2016, we received payments from BerGenBio amounting
to $3.7 million pursuant to our exclusive license agreement which we signed in June 2011. In August 2015, we entered
into a Controlled Equity Offering SM Sales Agreement with Cantor, as sales agent, pursuant to which we may sell,
through Cantor, up to an aggregate of $30.0 million in shares of our common stock. During the year ended December 31,
2016, 7,895,563 shares of common stock were sold under the Sales Agreement, with an aggregate proceeds of
$24.3 million. In December 2014, we entered into a sublease agreement with an unrelated third party to occupy a
portion of our research and office space. We expect to receive approximately $3.1 million in future sublease income
(excluding our subtenant’s share of facility’s operating expenses) over the remaining term of the sublease through
January 2018. During the year ended December 31, 2016, we received approximately $4.5 million of sublease income
and reimbursements. In February 2017, we completed an underwritten public offering in which we sold 23,000,000
shares of our common stock pursuant to an effective registration statement at a price to the public of $2.00 per share. We
received net proceeds of approximately $43.0 million after deducting underwriting discounts and commissions and
estimated offering expenses. We believe that our existing capital resources will be sufficient to support our current and
projected funding requirements, including the preparation for potential commercial launch of fostamatinib in ITP in the
U.S., through at least the next 12 months. We also continue to evaluate ex-U.S. partnerships for fostamatinib and other
partnering opportunities across our pipelines. We have based this estimate on assumptions that may prove to be wrong,
and we could utilize our available capital resources sooner than we currently expect. Because of the numerous risks and
uncertainties associated with the development of our product candidates and other research and development activities,

including risks and uncertainties that could impact the rate of progress of our development activities, we are unable to
estimate with certainty the amounts of increased capital outlays and operating expenditures associated with our current
and anticipated clinical trials and other research and development activities.

Our operations will require significant additional funding for the foreseeable future. Unless and until we are
able to generate a sufficient amount of product, royalty or milestone revenue, we expect to finance future cash needs
through public and/or private offerings of equity securities, debt financings and/or collaboration and licensing
arrangements, and to a much lesser extent through interest income earned on the investment of our excess cash balances
and short term investments. With the exception of contingent and royalty payments that we may receive under our
existing collaborations, we do not currently have any committed future funding. To the extent we raise additional capital
by issuing equity securities, our stockholders could at that time experience substantial dilution. Any debt financing that
we are able to obtain may involve operating covenants that restrict our business. To the extent that we raise additional
funds through collaboration and licensing arrangements, we may be required to relinquish some of our 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: