Caution: This discussion and analysis may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed in Item 1A "Risk Factors." This outlook represents our current judgment on the future direction of our business. These statements include those related to our AVINZA royalty revenues, product returns, and product development. Actual events or results may differ materially from our expectations. For example, there can be no assurance that our revenues or expenses will meet any expectations or follow any trend(s), that we will be able to retain our key employees or that we will be able to enter into any strategic partnerships or other transactions. We cannot assure you that we will receive expected AVINZA royalties to support our ongoing business or that our internal or partnered pipeline products will progress in their development, gain marketing approval or achieve success in the market. In addition, our ongoing SEC investigation, ongoing or future arbitration, or litigation or disputes with third parties may have a material adverse effect on us. Such risks and uncertainties, and others, could cause actual results to differ materially from any future performance suggested. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this quarterly report. This caution is made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended.

Our trademarks, trade names and service marks referenced herein include Ligand. Each other trademark, trade name or service mark appearing in this quarterly report belongs to its owner.

References to Ligand Pharmaceuticals Incorporated ("Ligand," the "Company," "we" or "our") include our wholly owned subsidiaries - Ligand Pharmaceuticals (Canada) Incorporated; Ligand Pharmaceuticals International, Inc.; Seragen, Inc. ("Seragen"); and Nexus Equity VI LLC ("Nexus").

Overview

We are a biotechnology company that focuses on discovering and developing new drugs that address critical unmet medical needs in the areas of thrombocytopenia, anemia, cancer, hormone related diseases, osteoporosis and inflammatory diseases. We aim to develop drugs that are more effective and/or safer than existing therapies, that are more convenient to administer and that are cost effective. We plan to build a profitable company by generating income from research, milestone and royalty and co-promotion revenues resulting from our collaborations with pharmaceutical partners.

In September 2008, we announced that we had entered into a definitive merger agreement under which we will acquire Pharmacopeia, Inc., or Pharmacopeia, in a primarily stock-for-stock merger intended to be tax-free. Under the terms of the Merger Agreement, the Company would issue approximately 0.58 of a share of common stock for each outstanding Pharmacopeia share of common stock, subject to certain adjustments for cancelled stock options, such that current stockholders of the Company would own approximately 84% of the combined company and Pharmacopeia stockholders would own approximately 16%. This exchange ratio is applicable if the average closing price of the Company's common stock falls in the range of $3.00 and $3.75 during a specified period prior to the closing date. If the at prices are between $3.75 and $4.50, the value is fixed at $66 million, and the exchange ratio would decrease as prices increase within that range. At prices above $4.50, the exchange ratio would be fixed at 0.49 for one. At prices between $3.00 and $2.38, the value is fixed at $52.8 million, and the exchange ratio would increase as prices decrease within the range, subject to limitations set forth in the Merger Agreement. Pharmacopeia stockholders would receive some cash consideration in addition to shares of the Company's common stock at prices below $2.93 and above $2.38. Below $2.38, the consideration would be comprised of shares of the Company's common stock at a 0.60 for one exchange ratio plus the right to receive a proportionate share of $10 million in cash. At prices below $1.65, Pharmacopeia has the right to terminate the Merger Agreement. Securityholders of Pharmacopeia will also be entitled to receive contingent value rights, under which they could receive an aggregate $15 million cash payment upon the occurrence of a specified trigger event. Pharmacopeia is a clinical development stage biopharmaceutical company dedicated to discovering and developing novel small molecule therapeutics to address significant medical needs. Pharmacopeia's strategy has been to retain the rights to product candidates at least to clinical validation, and to continue development on its own to New Drug Application (NDA) filing and commercialization for selected indications. Pharmacopeia has a broad portfolio of clinical and preclinical candidates under development internally or by partners. The Merger is subject to customary closing conditions, including obtaining the approval of Pharmacopeia's stockholders and termination or expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

On September 7, 2006, we announced the sale of ONTAK, Targretin capsules, Targretin gel, and Panretin gel to Eisai, Inc., or Eisai, and the sale of AVINZA to King Pharmaceuticals, Inc., or King. The Eisai sales transaction subsequently closed on October 25, 2006. The AVINZA sale transaction subsequently closed on February 26, 2007. Accordingly, the results for the AVINZA product line have been presented in our condensed consolidated statements of operations for the three and nine months ended September 30, 2008 and 2007 as "Discontinued Operations."

We are a party to a number of collaboration arrangements that are in the development phase, including collaborations with GlaxoSmithKline, Pfizer, Abbott (formerly TAP), and Wyeth. We received funding during the research phase of the arrangements, and receive milestone and royalty payments as products are developed and marketed by our corporate partners. In addition, in connection with some of these collaborations, we received non-refundable up-front payments.

Ligand Product Development Programs

We are developing several proprietary products for which we have worldwide rights for a variety of cancers, thrombocytopenia and inflammation and hormonal disorders as discussed below.

Thrombopoietin (TPO) Research Programs

In our TPO program, we seek to develop our own drug candidates that mimic the activity of thrombopoietin for use in the treatment or prophylaxis of thrombocytopenia with indications in a variety of conditions including Idiopathic Thrombocytopenic Purpura (ITP), cancer, hepatitis C and other disorders of blood cell formation. These are large markets with unmet medical needs. For example, the U.S. prevalence of a few target diseases with thrombocytopenia is 200,000 patients with ITP, 1.3 million cancer patients receiving chemotherapy and 2.7 million patients with hepatitis C.

Thrombocytopenia can be caused by insufficient platelet production, splenic sequestration of platelets or increased destruction of platelets predominantly by a patient's own immune system. Thrombocytopenia in cancer patients can be treatment-related (chemotherapy) or cancer-related. Platelet transfusion is the standard of care for thrombocytopenia. However, repeated transfusions can result in the development of platelet alloantibodies that could significantly reduce the effectiveness of transfusions. In addition, patients are at increased risk of infections and allergic reactions. Currently, there is only one approved drug (Neumega) for the prevention of severe thrombocytopenia and the reduction of the need for platelet transfusions in patients with nonmyeloid malignancies. We believe that there is a substantial medical need for improved platelet enhancing agents for use in the treatment of thrombocytopenia due to the significant side effects seen with current therapies. Thus, a small molecule TPO mimetic with no apparent immunogenic potential and oral activity that may facilitate dosing may provide an attractive therapeutic profile for a major unmet medical need.

In February 2004, we began to research and then selected a TPO mimetic, LGD-4665, as a clinical candidate and completed preclinical studies in 2006. We completed single and multi-dose Phase I safety and efficacy studies in the fourth quarter of 2007. In 2008, we conducted an additional study evaluating once a week administration, for six weeks, to healthy volunteers. The results demonstrated that the molecule was safe and well tolerated at all dose levels and daily as well as weekly regimen and displayed reliable absorption with dose proportional pharmacokinetics. Phase I clinical results were presented at the American Society of Hematology meeting in December 2007 and at a meeting of the European Hematology Association in June 2008. We plan to present results of multiple Phase I pharmacology studies at ASH 2008.

Additional Phase I studies, evaluating drug-to-drug interaction, as well as liver impairment and food impact on absorption have also been completed. A Phase II clinical trial with LGD-4665 in ITP was initiated in April 2008. This 24-patient, double-blind placebo-controlled trial is designed to evaluate the safety and efficacy of LGD-4665 in adult patients. An IND for evaluation of LGD-4665 in MDS patients was filed to the FDA in September 2008.

We may pursue the therapeutic specialty applications emerging from our TPO mimetics internally, but may seek collaborations with major pharmaceutical companies to exploit broader clinical applications.

Selective Androgen Receptor Modulators (SARM) Research and Development Programs

We are pioneering the development of tissue selective SARMs, a novel class of non-steroidal, orally active molecules that selectively modulate the activity of the androgen receptor in different tissues, providing a wide range of opportunities for the treatment of many diseases and disorders in both men and women. Tissue-selective androgen receptor agonists may provide utility in the treatment of patients with frailty, cachexia, osteoporosis, sexual dysfunction and hypogonadism.

As part of our joint development and research alliance with TAP (now Abbott), we exercised an option to select for development one compound and a back-up, LGD-3303 and LGD-3129, respectively, out of a pool of compounds available for development. Preclinical studies we have conducted with LGD-3303 indicate that the compound may have utility for osteoporosis, sexual dysfunction, frailty and hypogonadism. In vivo studies in rodents indicate a favorable profile with anabolic effects on bone, but an absence of the prostatic hypertrophy that occurs with the currently marketed androgens.

After the conclusion of our research alliance with TAP, we discovered SARM compounds with androgen effects in bone and skeletal muscle, but with little or no activity in the prostate, oil-secreting glands in the skin, or female genitalia. Preclinical studies conducted on one of these compounds, LGD-4033, suggest that the compound may have favorable activity in the treatment of cachexia, frailty, osteoporosis, hypogonadism as well as other disorders. We expect to file an Investigational New Drug (IND) application for LGD-4033 in the fourth quarter of 2008.

Erythropoiein (EPO) Research Program

We are developing small molecule agonists for the EPO receptor. EPO stimulates the differentiation of bone marrow stem cells to form red blood cells. Various recombinant human EPO derivatives are marketed for the treatment of anemia due to renal failure or cancer chemotherapy (e.g., Aranesp, Epogen, Eprex, and Procrit). We believe that a small molecule agonist for the EPO receptor would provide additional benefit in the treatment of anemia and the convenience of oral administration compared to recombinant human protein therapeutics. EPO and TPO act on the same bone marrow hematopoietic stem cell to guide the development of blood cells. We expect that our prior experience in developing small molecule TPO mimetic drugs will lead to increased efficiency in discovering small molecule EPO mimetic drugs.

Selective Glucocorticoid Receptor Modulators (SGRM) Research and Development Program

We are developing SGRMs for inflammation, cancer indications and other therapeutic applications. We have a library of compounds that we are optimizing with the goal to identify one or more compounds to enter human trials. Our most advanced compound, LGD-5552, was on track to enter clinical trials in 2007; however Good Laboratory Practice studies failed to demonstrate the desired preclinical safety characteristics for a drug to treat rheumatoid arthritis. We decided in the first quarter of 2007 not to proceed with the development of LGD-5552. We have identified SGRM compounds that are chemically distinct from LGD-5552. Our studies of these compounds are in the research stage.

Androgen-Independent Prostate Cancer (AiPC) program

AIPC typically occurs within 2 years of initiation of hormonal therapy and no targeted treatment is currently available. Docetaxel is current standard of care which extends survival by approx. 6 months (from 12 to 18 months). Most prostate-derived tumors are initially androgen dependent and they regress in response to androgen ablation therapy. On average, regression lasts about 2 years, followed by break-through growth of androgen-independent tumors. There is experimental evidence that these androgen-independent tumors require the androgen receptor (AR) for continued proliferation (i.e. tumors are receptor dependent). The AIPC program goal is to identify compounds that specifically inhibit and degrade AR. Our studies of these compounds are in the research stage.

Collaborative Research and Development Programs

We may receive royalties on product candidates resulting from our research and development collaboration arrangements with third party pharmaceutical companies if and to the extent any such product candidate is ultimately approved by the FDA and successfully marketed. Our collaborations are discussed below.

Eltrombopag is an oral, small molecule drug that mimics the activity of thrombopoietin, a protein factor that promotes growth and production of blood platelets. Eltrombopag is a product candidate that resulted from our collaboration with SmithKline Beecham (now GlaxoSmithKline). At the European Hematology Association meeting on June 15, 2008, GlaxoSmithKline announced positive Phase III data from the ongoing, open label EXTEND (Eltrombopag eXTENded Dosing) study. The results suggest that eltrombopag sustains increased platelet counts during long-term treatment for patients with Idiopathic Thrombocytopenia Purpura (ITP). GlaxoSmithKline also announced positive Phase II data from the ongoing REPEAT trial (Repeat ExPosure to Eltrombopag in Adults with Idiopathic Thrombocytopenic Purpura). A decrease in bleeding was observed in patients with chronic ITP, generating similar platelet counts with each subsequent cycle.

GlaxoSmithKline submitted a New Drug Application, or NDA, for approval to market eltrombopag (PROMACTATM/REVOLADETM ) on December 18, 2007. Two pivotal trials, one Phase III trial and one Phase II trial, were submitted to support the NDA submission. On March 3, 2008, the FDA accepted for filing and review GlaxoSmithKline's NDA and granted a priority review status for PROMACTAŽ (eltrombopag) for treatment of chronic short-term ITP. Priority review is granted by the FDA for a treatment that addresses significant unmet medical needs or has the potential to provide a significant improvement compared to marketed products, and results in a review period of six months from the date of NDA submission. On May 30, 2008, the FDA's Oncology Drugs Advisory Committee (ODAC) panel unanimously voted (16-0) that PROMACTA demonstrated a favorable risk-benefit profile for the short-term treatment of patients with chronic ITP. The FDA has extended the priority review period for GlaxoSmithKline's NDA for PROMACTA for the short-term treatment of chronic ITP. The Prescription Drug User Fee Act action date was extended to September 19, 2008 and FDA action is pending.

If approved, PROMACTA would be the first oral thrombopoietin receptor agonist therapy for the short-term treatment of previously treated patients with chronic ITP to increase platelet counts and reduce or prevent bleeding. Eltrombopag is currently in a Phase III trial for the long-term treatment of ITP, and expects MAA and NDA submissions for the long-term treatment of ITP in 2008. GlaxoSmithKline reported positive Phase II data in patients with thrombocytopenia associated with hepatitis C and initiated two Phase III trials in patients with hepatitis C in the fourth quarter of 2007. A Phase II study in patients with chemotherapy-induced thrombocytopenia has been completed, a Phase III study is ongoing in chronic liver disease and a Phase I study is ongoing in patients with sarcoma receiving the adriamycin and ifosfamide regimen.

If annual net sales of eltrombopag are less than $100.0 million, we will earn a royalty of 5% on such net sales. If eltrombopag's annual net sales are between $100.0 million and $200.0 million, we will earn a royalty of 7% on the portion of net sales between $100.0 million and $200.0 million, and if annual net sales are between $200.0 million and $400.0 million, we will earn a royalty of 8% on the portion of net sales between $200.0 million and $400.0 million. If annual sales exceed $400.0 million, we will earn a royalty of 10% on the portion of net sales exceeding $400.0 million. Our right to receive all of the royalty payments from GlaxoSmithKline will be subject to the outcome of the ongoing lawsuit between us and Rockefeller University, or Rockefeller. On March 4, 2008, Rockefeller filed suit against us alleging, among other things, that Rockefeller is entitled to 25% of payments to be received by us in the future related to Promacta. We have filed an answer and counterclaims seeking, among other things, a judicial determination that we are not liable for any additional payments under our September 30, 1992 license agreement with Rockefeller beyond any payments that we have already made. Intellectual property license disputes are subject to inherent uncertainties and there can be no assurance this litigation will be resolved favorably to us or that it will not have a material adverse effect on us.

Wyeth Collaboration - bazedoxifene and bazedoxifene in combination with PREMARIN

Bazedoxifene (Viviant) is a product candidate that resulted from our collaboration with Wyeth. Bazedoxifene is a synthetic drug that was specifically designed to reduce the risk of osteoporotic fractures while at the same time protecting breast and uterine tissue. In June 2006, Wyeth submitted an NDA for bazedoxifene to the FDA for the prevention of postmenopausal osteoporosis. The FDA issued an approvable letter for bazedoxifene for this indication in April 2007. Wyeth received a second approvable letter in December 2007 and plans to have further discussions with the FDA to discuss the issues raised for the prevention indication. Wyeth also submitted a second NDA for bazedoxifene in the U.S. in July 2007 for the treatment of osteoporosis and an MAA to EMEA in September 2007 for the prevention and treatment of osteoporosis. Wyeth received a third approvable letter in the second quarter for Viviant for the treatment of osteoporosis. In the letter, the FDA requested information similar to that outlined in its approvable letter for bazedoxifene's NDA for the prevention of postmenopausal osteoporosis issued in December 2007. This included further analyses concerning the incidence of stroke and venous thrombotic events. Wyeth expects that an FDA Advisory Committee meeting will be scheduled following submission of its complete response to the approvable letters with respect to the prevention and treatment indications, which Wyeth plans to file in the first half of 2009.

We previously sold to Royalty Pharma AG, or Royalty Pharma, the rights to a total of 3.0% of net sales of bazedoxifene for a period of ten years following the first commercial sale of each product. After giving effect to the royalty sale, we will receive 0.5% of the first $400.0 million in net annual sales. If net annual sales are between $400.0 million and $1.0 billion, we will receive a net royalty of 1.5% on the portion of net sales between $400.0 million and $1.0 billion, and if annual sales exceed $1.0 billion, we will receive a net royalty of 2.5% on the portion of net sales exceeding $1.0 billion. Additionally, the royalty owed to Royalty Pharma may be reduced by one third if net product sales exceed certain thresholds across all indications.

Pfizer Collaboration - Lasofoxifene

Lasofoxifene is a product candidate that resulted from our collaboration with Pfizer. In August 2004, Pfizer submitted an NDA to the FDA for lasofoxifene for the prevention of osteoporosis in postmenopausal women. In September 2005, Pfizer announced the receipt of a non-approvable letter from the FDA for the prevention of osteoporosis. In December 2004, Pfizer filed a supplemental NDA for the use of lasofoxifene for the treatment of vaginal atrophy. In February 2006, Pfizer announced the receipt of a non-approvable letter from the FDA for vaginal atrophy. Pfizer has also announced that lasofoxifene is being developed for the treatment of osteoporosis. In April 2007, Pfizer announced completion of the Postmenopausal Evaluation and Risk Reduction with lasofoxifene (PEARL) Phase III study with favorable efficacy and safety. Pfizer submitted an NDA and an MAA for osteoporosis treatment in December 2007 and January 2008, respectively. The FDA Advisory Committee in early September 2008 voted 9-3 in favor of this drug approved and the final FDA decision is pending. In October 2008, the FDA extended the review period through January 2009.

Under the terms of our agreement with Pfizer, we are entitled to receive royalty payments equal to 6% of net sales of lasofoxifene worldwide for any indication. We previously sold to Royalty Pharma the rights to a total of 3% of net sales of lasofoxifene for a period of ten years following the first commercial sale of lasofoxifene. Accordingly, we will receive approximately 3% of worldwide net annual sales of lasofoxifene.

Abbott (formerly TAP) Collaboration - LGD-2941

LGD-2941, a selective androgen receptor modulator, or SARM, was selected as a clinical candidate during our collaboration with TAP. TAP assigned the current SARM agreement to Abbott in the second quarter of 2008 upon the closing of the transaction between Takeda and Abbott to separate portions of the TAP business between the two parties. SARMs, such as LGD-2941, may contribute to the treatment of diseases including hypogonadism (low testosterone), sexual dysfunction, osteoporosis, frailty and cancer cachexia. Phase I clinical trials were completed in the fourth quarter of 2007. The agreement further provides for milestones moving through the development stage and royalties ranging from 6.0% to 12.0% on annual net sales of drugs resulting from the collaboration.

Results of Operations

Total revenues for the three and nine months ended September 30, 2008 were $5.2 million and $14.9 million, respectively, compared to $5.5 million and $7.1 million for the same 2007 periods. Operating loss from continuing operations for the three and nine months ended September 30, 2008 was $6.4 million and $23.9 million, respectively, compared to $8.7 million and $52.1 million for the same 2007 periods.

AVINZA Royalty Revenue

In connection with the sale of AVINZA, King is required to pay us a royalty on net sales of AVINZA (see Note 2 to the condensed consolidated financial statements). In accordance with the AVINZA Purchase Agreement, royalties are required to be paid to us quarterly and beginning in October 2008, King is required to make royalty payments based upon calendar year net sales of AVINZA. Such royalties are recognized in the quarter reported. Since there is a one quarter lag from when King recognizes AVINZA

Collaborative Research and Development and Other Revenues

We recorded no collaborative research and development and other revenues for the three and nine months ended September 30, 2008. We recorded collaborative research and development and other revenues of $0.3 million and $0.5 million, respectively, for the three and nine months ended September 30, 2007, which were related to milestones earned from Wyeth.

Research and Development Expenses

The major components of research and development expenses are as follows (in
thousands):



                                         Three Months Ended       Nine Months Ended
                                           September 30,            September 30,
                                          2008         2007        2008        2007
      Internal research programs       $    4,463    $  4,642   $   12,315   $ 16,908
      Development                           1,702       5,196        7,392     17,283

      Total research and development   $    6,165    $  9,838   $   19,707   $ 34,191

Research and development expenses for the nine months ended September 30, 2007 include one-time severance benefits and stock compensation charges of $5.9 million incurred in connection with our restructuring (see Note 7 to the condensed consolidated financial statements) and one-time stock compensation charges of $0.8 million incurred in connection with the equitable adjustment of stock options (see Note 1 to the condensed consolidated financial statements). Research and development expenses for the three months ended September 30, 2008 decreased when compared to the same 2007 period due to lower headcount related expenses in connection with our restructuring and reduced research costs . . .