Summary of LA JOLLA PHARMACEUTICAL CO

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements
The forward-looking statements in this report involve significant risks, assumptions and uncertainties, and a number of factors, both foreseen and unforeseen, could cause actual results to differ materially from our current expectations. Forward-looking statements include those that express a plan, belief, expectation, estimation, anticipation, intent, contingency, future development or similar expression. The analyses of clinical results of Riquent®(abetimus sodium), previously known as LJP 394, our drug candidate for the treatment of systemic lupus erythematosus (lupus), and any other drug candidate that we may develop, including the results of any trials or models that are ongoing or that we may initiate in the future, could result in a finding that these drug candidates are not effective in large patient populations, do not provide a meaningful clinical benefit, or may reveal a potential safety issue requiring us to develop new candidates. The analysis of the data from our previous Phase 3 trial of Riquent showed that the trial did not reach statistical significance with respect to its primary endpoint, time to renal flare, or with respect to its secondary endpoint, time to treatment with high-dose corticosteroids or cyclophosphamide. The results from our clinical trials of Riquent, including the results of any trials that are ongoing or that we may initiate in the future, may not ultimately be sufficient to obtain regulatory clearance to market Riquent either in the United States or any other country, and we may be required to conduct additional clinical studies to demonstrate the safety and efficacy of Riquent in order to obtain marketing approval. There can be no assurance, however, that we will have the necessary resources to complete any current or future trials or that any such trials will sufficiently demonstrate the safety and

efficacy of Riquent. Our ability to develop and sell our products in the future may be adversely affected by the intellectual property rights of third parties or the validity or enforceability of our intellectual property rights. Additional risk factors include the uncertainty and timing of: our ability to raise additional capital; our ability to liquidate our auction rate securities; obtaining required regulatory approvals, including delays associated with any approvals that we may obtain; the timely supply of drug product for clinical trials; our ability to pass all necessary regulatory inspections; the increase in capacity of our manufacturing capabilities for possible commercialization; successfully marketing and selling our products; our lack of manufacturing, marketing and sales experience; our ability to make use of the orphan drug designation for Riquent; generating future revenue from product sales or other sources such as collaborative relationships; future profitability; and our dependence on patents and other proprietary rights. Accordingly, you should not rely upon forward-looking statements as predictions of future events. The outcome of the events described in these forward-looking statements are subject to the risks, uncertainties and other factors described in the "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2007, Quarterly Report on Form 10-Q for the period ended March 31, 2008, in other reports and registration statements that we file with the Securities and Exchange Commission from time to time, and as updated in Part II, Item 1.A. "Risk Factors" contained in this Quarterly Report on Form 10-Q. We expressly disclaim any intent to update forward-looking statements. Developments in 2008
Based on our recent communications with the Food and Drug Administration ("FDA"), as well as the rate of occurrence of renal flares in our Phase 3 clinical study of Riquent, we currently expect the first interim efficacy analysis to occur some time during the first quarter of 2009. The Company currently has more than 160 active sites in approximately 30 countries and more than 880 patients enrolled in the study. We expect to enroll at least 900 patients in the study and to complete the trial in the third or fourth quarter of 2009.
Previously Announced During 2008
On February 11, 2008, we announced that we had made significant progress in our current double-blind, placebo-controlled randomized Phase 3 clinical study of Riquent, referred to as the "Phase 3 ASPEN study" (Abetimus Sodium in Patients with a History of Lupus Nephritis) in that we had enrolled 607 patients and 130 clinical trial sites were open to enroll patients in 23 countries.
On April 23, 2008, we announced the following information related to our current Phase 3 ASPEN study:
• Positive 12-month interim antibody data - analyses of 12-month interim antibody data in the first 125 patients randomized in the study indicated that for all patients treated with 900 mg, 300 mg, or 100 mg of Riquent per week compared with placebo, there were significantly greater reductions in antibodies to double-stranded DNA (p < 0.0001);

• Interim efficacy analyses - two interim efficacy analyses are planned, each with target p values of p < 0.001 and a final p value of p < 0.05 at the end of the study. A futility analysis was added to each interim efficacy analysis. The first analysis was expected to occur around the fourth quarter of 2008 and the second is expected to occur about midway between the first analysis and the expected end of the study;

• Progression of the trial - more than 140 sites were active and more than 670 patients had been enrolled;

• Extension of treatment period - the treatment period was extended beyond 12 months until the required number of renal flares is achieved, which is 128 renal flares;

• Increase in patient enrollment - we estimated that at least 800 patients would be enrolled in the study and that the trial would be completed in the second half of 2009; and

• Independent Data Monitoring Board ("DMB") review - the DMB had completed three reviews of the safety data and had not indicated any safety issues.

On May 12, 2008, we sold 15.6 million Units (the "Units," where each Unit consists of one share of common stock, $0.01 par value per share and a warrant to purchase 0.25 shares of Common Stock) in an underwritten public offering at a price per Unit of $1.92125, for net proceeds totalling approximately $28.0 million. The warrants, which represent the right to acquire a total of 3.9 million shares of common stock, will be exercisable at a price of $2.15 per share and have a five-year term. Certain of our principal stockholders, including affiliates of certain of our directors, purchased an aggregate of approximately $24.3 million, or approximately 81%, of the Units sold. Overview
Since our inception in May 1989, we have devoted substantially all of our resources to the research and development of technology and potential drugs to treat antibody-mediated diseases. We have never generated any revenue from product sales and have relied on public and private offerings of securities, revenue from collaborative agreements, equipment financings and interest income on invested cash balances for our working capital. We expect that our research and development expenses will increase significantly in the future. For example, we are conducting and expanding a Phase 3 clinical trial of Riquent, which the FDA has indicated appears to satisfy the requirement that we conduct an additional randomized, double-blind study. This study is an event-driven trial requiring us to accrue a specified number of renal flares to complete the study. We currently target enrolling at least 900 patients to achieve the required number of renal flares and the trial could take one to two years to complete. Therefore, we expect to expend substantial amounts of capital resources for the clinical development and manufacturing of Riquent. We may also devote substantial additional capital resources to establish commercial-scale manufacturing capabilities and to market and sell potential products. These expenses may be incurred prior to or after any regulatory approvals that we may receive. In addition, our research and development expenses may increase if we initiate any additional clinical studies of Riquent or if we increase our activities related to any other drug candidates. We will need additional funds to finance our future operations. Our activities to date are not as broad in depth or scope as the activities we may undertake in the future, and our historical operations and the financial information included in this report are not necessarily indicative of our future operating results or financial condition.
We expect our net loss to fluctuate from quarter to quarter as a result of the timing of expenses incurred and the revenues earned from any potential collaborative arrangements that we may establish, if any. Some of these fluctuations may be significant. As of September 30, 2008, our accumulated deficit was approximately $398.5 million.
Our business is subject to significant risks, including, but not limited to, the need for additional financing or a collaborative partner to continue our clinical activities and continue to operate, the risks inherent in research and development efforts, including clinical trials, the lengthy, expensive and uncertain process of seeking regulatory approvals, uncertainties associated with both obtaining and enforcing patents, the potential enforcement of the patent rights of others against us, uncertainties regarding government reforms regarding product pricing and reimbursement levels, technological change, competition, manufacturing uncertainties, our lack of marketing experience, the uncertainty of receiving future revenue from product sales or other sources such as collaborative relationships, and the uncertainty of future profitability. Even if our product candidates appear promising at an early stage of development, they may not reach the market for numerous reasons, including the possibilities that the products will be ineffective or unsafe during clinical trials, will fail to receive necessary regulatory approvals, will be difficult to manufacture on a large scale, will be uneconomical to market or will be precluded from commercialization by the proprietary rights of third parties or competing products.
Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles ("GAAP"). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to patent costs, clinical/regulatory expenses and, effective January 1, 2008, the fair value of our financial instruments. We base our

estimates on historical experience and on 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 materially from these estimates under different assumptions or conditions.
We believe the following critical accounting policies involve significant judgments and estimates used in the preparation of our condensed consolidated financial statements (see also Note 1 to our unaudited condensed consolidated financial statements included in Part I). Impairment and useful lives of long-lived assets We regularly review our long-lived assets for impairment. Our long-lived assets include costs incurred to file our patent applications. We evaluate the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. The estimation of the undiscounted future cash flows associated with long-lived assets requires judgment and assumptions that could differ materially from the actual results. While we believe our current and historical operating and cash flow losses are indicators of impairment, we believe the future cash flows to be received from the long-lived assets will exceed the assets' carrying value. There were no impairment losses recognized on our long-lived assets for the nine-month periods ended September 30, 2008 and 2007.
Costs related to successful patent applications are amortized using the straight-line method over the lesser of the remaining useful life of the related technology or the remaining patent life, commencing on the date the patent is issued. Legal costs and expenses incurred in connection with pending patent applications have been capitalized. We expense all costs related to abandoned patent applications. If we elect to abandon any of our currently issued or unissued patents, the related expense could be material to our results of operations for the period of abandonment. The estimation of useful lives for long-lived assets requires judgment and assumptions that could differ materially from the actual results. In addition, our results of operations could be materially impacted if we begin amortizing the costs related to unissued patents.
Accrued clinical/regulatory expenses
We review and accrue clinical trial and regulatory-related expenses based on work performed, which relies on estimates of total costs incurred based on patient enrollment, sites activated and other events. We follow this method because reasonably dependable estimates of the costs applicable to various stages of a clinical trial can be made. Accrued clinical/regulatory costs are subject to revisions as trials progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known. Historically, revisions have not resulted in material changes to research and development costs; however a modification in the protocol of a clinical trial or cancellation of a trial could result in a charge to our results of operations.
Share-Based Compensation
We adopted Statement of Financial Accounting Standard ("SFAS") No. 123R, Share-Based Payments("SFAS 123R"), using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006. Share-based compensation expense recognized under SFAS 123R was approximately $3.4 million and $3.7 million for the nine-month periods ended September 30, 2008 and 2007, respectively. As of September 30, 2008, there was approximately $5.7 million of total unrecognized compensation cost related to non-vested share-based payment awards granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We currently expect to recognize the remaining unrecognized compensation cost over a weighted-average period of 1.4 years. Additional share-based compensation expense for any new share-based payment awards granted after September 30, 2008 under all equity compensation plans cannot be predicted at this time because it will depend on, among other matters, the amounts of share-based payment awards granted in the future.

Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the employee and director stock options granted by us have characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in our opinion the existing valuation models may not provide an accurate measure of the fair value of the employee and director stock options granted by us. Although the fair value of the employee and director stock options granted by us is determined in accordance with SFAS 123R using an option-pricing model, that value may not be indicative of the fair value observed in a willing-buyer/willing-seller market transaction. Fair Value of Financial Instruments
Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements. In February 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") No. SFAS 157-2, Effective Date of FASB Statement No. 157, which provides a one-year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we have adopted the provisions of SFAS 157 with respect to financial assets and liabilities only.
SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
• Level 1 - Quoted prices in active markets for identical assets or liabilities.

• Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The adoption of this statement impacted our calculation of fair value associated with our investments, specifically our auction rate securities, which became illiquid during the first quarter of 2008. In accordance with SFAS 157, we valued these securities using Level 3 hierarchical inputs due to the lack of actively traded market data. These inputs include management's assumptions of pricing by market participants, including assumptions about risk. We based our fair value determination on estimated discounted future cash flows of interest income over a projected period reflective of the length of time we anticipate it will take the securities to become liquid. We considered any impairment on these investments to be other-than-temporary, thus any changes in fair value were recorded to the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2008. Because we were required to value those securities using only Level 3 inputs, our valuation determinations are somewhat subjective and the actual fair values as determined at a later date or by a third party may be different than the fair values we have determined. Subsequent to September 30, 2008, we executed a written agreement with our broker-dealer giving us the right to sell our auction rate securities to our broker-dealer at par value beginning in January 2009 (see Note 7 to our unaudited condensed consolidated financial statements included in Part I). Recent Accounting Pronouncements
On January 1, 2008, we adopted the provisions of SFAS 157. SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS 157 relate to the definition of fair value,

the methods used to measure fair value, and the expanded disclosures about fair value measurements. See Note 3 to our unaudited condensed consolidated financial statements included in Part I for further details on the impact of the adoption of SFAS 157 on our unaudited condensed consolidated results of operations and financial condition for the three and nine months ended September 30, 2008.
On January 1, 2008, we adopted the provisions of FASB SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115("SFAS 159"). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. At this time, we have not elected to account for any of our financial assets or liabilities using the provisions of SFAS 159. As such, the adoption of SFAS 159 did not have an impact on our unaudited condensed consolidated results of operations and financial condition for the three and nine months ended September 30, 2008.
In June 2007, FASB ratified the consensus reached by the Emerging Issues Task Force ("EITF") on EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities ("EITF 07-3"). EITF 07-3 addresses the diversity that exists with respect to the accounting for the non-refundable portion of a payment made by a research and development entity for future research and development activities. Under EITF 07-3, an entity would defer and capitalize non-refundable advance payments made for research and development activities until the related goods are delivered or the related services are performed. EITF 07-3 is effective for fiscal years beginning after December 15, 2007. On January 1, 2008 we adopted the provisions of EITF 07-3, which did not have an impact on our unaudited condensed consolidated results of operations and financial condition for the three and nine months ended September 30, 2008. Results of Operations
For the three and nine months ended September 30, 2008, research and development expenses increased to $14.1 million and $38.2 million, respectively, from $11.4 million and $34.0 million, respectively, for the same periods in 2007. Due to expansion of the Phase 3 clinical trial of Riquent®, shipping costs for drug and lab specimens and fees for clinical research organizations, investigators and labs increased by approximately $1.6 million and $6.6 million for the three and nine months ended September 30, 2008, respectively, as compared to the same periods in 2007. The increase in expenses for the nine months ended September 30, 2008 was offset by a decrease of approximately $3.3 million for expenses associated with the manufacture of Riquent® for the nine months ended September 30, 2008 as compared to the same period in 2007. Adequate supplies of Riquent® were on hand for the first nine months of 2008, thereby reducing manufacturing expenses incurred for this period.
Subject to obtaining additional capital, we expect that our research and development expense will increase significantly in the future as our Phase 3 trial continues to expand and we initiate manufacturing scale-up activities. As patient enrollment expands, we may be required to manufacture more Riquent and our manufacturing expenses may increase. Additionally, our research and development expenses may increase significantly if we initiate any additional clinical studies of Riquent or if we increase our activities related to the development of additional drug candidates.
For the three and nine months ended September 30, 2008, general and administrative expenses increased slightly to $2.8 million and $6.8 million, respectively, from $2.6 million and $6.7 million, respectively, for the same periods in 2007. We expect that our general and administrative expense will increase in the future to support our ongoing clinical trials as patient enrollment increases and the manufacturing of Riquent for clinical trials and scale-up increases. Additionally, general and administrative expense may increase in the future if there is an increase in research and development or commercialization activities.
Interest income, net of interest expense, decreased to $0.2 million for the three months ended September 30, 2008 from $0.7 million for the same period in 2007 and decreased to $0.6 million for the nine months ended September 30, 2008 from $2.0 million for the same period in 2007. The decreases for the three and nine months ended September 30, 2008 were due primarily to lower average balances of cash, cash equivalents and short-term investments and lower average interest rates as compared to the same periods in 2007.

Realized loss on investments, net, of $0.4 million and $1.4 million for the three and nine months ended September 30, 2008, respectively, consisted of the other-than-temporary impairment loss on our auction rate securities recorded in 2008, in connection with the adoption of SFAS 157. See Note 3 to our unaudited condensed consolidated financial statements included in Part I for further details.
Liquidity and Capital Resources
From inception through September 30, 2008, we have incurred a cumulative net loss of approximately $398.5 million and have financed our operations through public and private offerings of securities, revenues from collaborative agreements, equipment financings and interest income on invested cash balances. From inception through September 30, 2008, we have raised approximately $403.9 million in net proceeds from sales of equity securities.
On May 12, 2008, we sold 15.6 million Units (the "Units," where each Unit consists of one share of common stock, $0.01 par value per share and a warrant to purchase 0.25 shares of Common Stock) in an underwritten public offering at a price per Unit of $1.92125, for net proceeds totalling approximately $28.0 million. The warrants, which represent the right to acquire a total of 3.9 million shares of common stock, are exercisable at a price of $2.15 per share and have a five-year term. Certain of our principal stockholders, including affiliates of certain of our directors, purchased an aggregate of approximately $24.3 million, or approximately 81%, of the Units sold.
At September 30, 2008, we had $26.1 million in cash, cash equivalents and short-term investments, as compared to $39.4 million at December 31, 2007. Our working capital at September 30, 2008 was $16.0 million, as compared to $29.9 million at December 31, 2007. The decrease in cash, cash equivalents and short-term investments is the result of our use of financial resources to fund our clinical trial and manufacturing activities and for other general corporate purposes as well as the $1.4 million realized impairment loss on our auction rate securities recorded in 2008. This decrease is partially offset by net proceeds of approximately $28.0 million from the sale of 15.6 million Units. We invest our cash in U.S. Treasury bills, money market funds invested in U.S. Treasury bills, and AAA rated asset-backed student loan auction rate securities. As of September 30, 2008, we classified all of our student loan auction rate securities as short-term available-for-sale securities as we will need additional cash in the near term and may be required to liquidate these auction rate securities in order to continue our operations. In the event we need to access the funds that are in an illiquid state, we will not be able to do so without a loss of principal until a future auction on these auction rate . . .