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 and PROMACTA 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 and PROMACTA 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, 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"); Nexus Equity VI LLC ("Nexus"); and Pharmacopeia LLC.

Overview

We are a biotechnology company that focuses on drug discovery and early-stage development of pharmaceuticals that address critical unmet medical needs or that are more effective and/or safer than existing therapies, more convenient to administer and are cost effective. Our goal is to build a profitable company by generating income from research, milestone, and royalty revenues resulting from our collaborations with pharmaceutical partners.

On December 23, 2008, we acquired all of the outstanding common shares of Pharmacopeia, Inc., or Pharmacopeia. As consideration, we issued 18.0 million shares of our common stock to Pharmacopeia stockholders, or 0.5985 shares for each outstanding Pharmacopeia share, as well as approximately $9.3 million in cash. Security holders of Pharmacopeia also received contingent value rights, under which they could receive an aggregate cash payment of $15.0 million under certain circumstances. Pharmacopeia was a clinical development stage biopharmaceutical company dedicated to discovering and developing novel small molecule therapeutics to address significant medical needs. Pharmacopeia's strategy was to retain the rights to product candidates at least to clinical validation, and to continue development on its own New Drug Application, or NDA, filings and commercialization for selected indications. Pharmacopeia had a broad portfolio of clinical and preclinical candidates under development internally or by partners.

Our business strategy includes a targeted internal drug research and early-stage development capabilities. We also have research and development collaborations for our product candidates with numerous global pharmaceutical companies. We aim to create value for shareholders by advancing our internally developed programs through early clinical development and then entering licensing agreements with larger pharmaceutical and biotechnology companies with substantially greater development and commercialization infrastructure. In addition to advancing our R&D programs, we expect to collect licensing fees and royalties from existing and future license agreements. We aim to build a profitable company by generating income from our corporate licenses.

We currently receive royalty revenues from King Pharmaceuticals, or King, and GlaxoSmithKline, or GSK. In February 2007, we completed the sale of our AVINZA product line to King. As a result of the sale, we received the right to future royalties on the net sales of AVINZA through 2017. Through October 2008, we received a 15% royalty on AVINZA net sales. Subsequent royalty payments are to be based upon calendar year net sales. If calendar year net sales are less than $200.0 million, the royalty payment due will be 5% of all net sales. If calendar year net sales are greater than $200.0 million, the royalty payment due will be 10% of all net sales less than $250.0 million, plus 15% of net sales greater than $250.0 million.

In November 2008, the U.S. Food and Drug Administration, or FDA, granted approval of GSK's PROMACTA for the treatment of thrombocytopenia in patients with chronic immune (idiopathic) thrombocytopenic purpura, or ITP, who have had an insufficient response to corticosteroids, immunoglobulins or splenectomy. PROMACTA is the first oral thrombopoietin, or TPO, receptor agonist therapy for the treatment of adult patients with chronic ITP. As a result of the FDA's approval of PROMACTA, we will be entitled to receive tiered royalties in the range of 4.7%-9.3% on annual net sales of PROMACTA. As part of a settlement agreement and mutual release we entered into on February 11, 2009 with The Rockefeller University, or Rockefeller, we agreed to pay a share of such royalties to Rockefeller.

In March 2009, Pfizer received approval from the European Commission (EC) for FABLYN ® (lasofoxifene) Tablets, a selective estrogen receptor modulator (SERM) for the treatment of osteoporosis in post-menopausal women at increased risk of fracture. As a result, we earned a milestone which, pursuant to our 1991 research agreement and 1996 settlement agreement with Pfizer, Pfizer elected to pay by returning 323,338 shares of stock it owns in Ligand, which at the date the milestone was earned had a market value of $0.9 million. We are entitled to royalties on future sales from Pfizer, which pursuant to the 1996 settlement agreement, Pfizer may elect to pay by returning up to 665,230 shares of stock it owns in Ligand. Pfizer also submitted an NDA for osteoporosis treatment in December 2007. The FDA Advisory Committee in early September 2008 voted 9-3 in favor of approval of this drug and in January 2009, Pfizer received a complete response letter from the FDA requesting additional information for FABLYN. Pfizer is reviewing the letter and intends to work with the FDA to determine the appropriate next steps regarding its application. Pfizer has also submitted NDAs for osteoporosis prevention and vaginal atrophy, and the FDA issued non-approvable letters for both NDAs. Under the terms of our agreement with Pfizer, we are entitled to receive royalty payments equal to 6% of worldwide net sales of lasofoxifene 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.

We also have the potential to receive near-term royalties on product candidates resulting from our research and development collaboration arrangements with third party pharmaceutical companies if and when any such product candidate is ultimately approved by the FDA and successfully marketed. Our near-term product candidates are discussed below.

In addition to the approval granted for GSK's PROMACTA for the treatment of thrombocytopenia in patients with chronic ITP, the compound is also being studied for thrombocytopenia associated with chronic hepatitis C virus, chronic liver disease and oncology-related thrombocytopenia. Two Phase III studies in hepatitis C and one Phase III in chronic liver disease are ongoing. In December 2008, GSK submitted a marketing authorization application in the EU and international for Revolade (Eltrombopag) for the treatment of thrombocytopenia in patients with chronic immune (idiopathic) thrombocytopenic purpura, or ITP.

Bazedoxifene is a product candidate that resulted from a 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 United States in July 2007 for the treatment of osteoporosis and a marketing authorization application (MAA) to the European Medicines Agency (EMEA) in September 2007 for the prevention and treatment of osteoporosis. Wyeth received a third approvable letter in the second quarter of 2008 for bazedoxifene 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 indicated that it will file a complete response in 2009 and expects the FDA will convene an advisory committee to review the pending NDAs for both the treatment and prevention of postmenopausal osteoporosis with bazedoxifene. In April 2009, Wyeth received approval from the EC for CONBRIZA™ (bazefoxifene) for the treatment of post-menopausal osteoporosis in women at increased risk of fracture. As a result, we earned a $0.6 million milestone and are entitled to royalties on future sales.

Wyeth is also developing bazedoxifene in combination with PREMARIN (Aprela) for the treatment of moderate to severe menopausal vasomotor symptoms, such as hot flashes and night sweats, and for the prevention of post-menopausal osteoporosis. Two Phase III studies with bazedoxifene/conjugated estrogens (Aprela), showed reduced number and severity of hot flashes in symptomatic postmenopausal women by up to 80 percent, when compared with placebo. Wyeth expects to file an initial NDA no earlier than the first half of 2010.

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.

In December 2008, we entered into an exclusive, worldwide license agreement with SmithKline Beecham Corporation, doing business as GSK. Pursuant to the terms of the GSK agreement, we granted GSK the exclusive right to develop, manufacture and commercialize our LGD-4665 product candidate, as well as all other TPO-related molecules discovered by us. Under the terms of the GSK agreement, GSK paid us $5 million as an upfront license fee and agreed to pay us up to $158.0 million in development and commercial milestones and a royalty on net sales. In the first year of sales, royalties will be one-half of the regular royalty rate. GSK has the exclusive right to develop, manufacture and commercialize LGD-4665, as well as other TPO-related molecules discovered by us. GSK will direct all product development and commercialization and will be responsible for all costs going forward for development, patent maintenance and prosecution, and commercialization.

Results of Operations

Total revenues for the three months ended March 31, 2009 were $9.5 million, compared to $4.9 million for the same 2008 period. Our loss from continuing operations for the three months ended March 31, 2009 was $7.5 million, compared to $9.7 million for the same 2008 period.

Royalty Revenue

Royalty revenues were $2.7 million for the three months ended March 31, 2009, compared to $4.9 million for the same period in 2008. The decrease in royalty revenues of $2.2 million is primarily due to a reduction in the contractual royalty rate from 15% to 5% under our agreement with King for AVINZA sales.

Collaborative Research and Development and Other Revenues

We recorded collaborative research and development and other revenues of $6.7 million for the three months ended March 31, 2009, compared to zero for the same period in 2008. The increase of $6.7 million is due to $2.4 million of milestones earned from Pfizer, Schering-Plough and GlaxoSmithKline as well as $4.3 million in collaboration revenues resulting from agreements acquired from Pharmacopeia.

Research and Development Expenses

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



                                                  Three Months Ended
                                                      March 31,
                                                   2009         2008
               Internal research programs       $     3,434    $ 3,688
               Collaborative research                 3,504         -
               Development                            3,524      3,477

               Total research and development   $    10,462    $ 7,165

Research and development expenses were $10.5 million for the three months ended March 31, 2009, compared to $7.2 million for the same 2008 period. The increase of $3.3 million is primarily due to the costs associated with servicing our collaboration agreements that were acquired from Pharmacopeia in December 2008.

A summary of our significant internal research and development programs as of March 31, 2009 is as follows:

 Program                        Disease/Indication          Development Phase
 Dual-Acting angiotensin and    Diabetic Nephropathy*       Phase II
 endothelin Receptor
 Antagonist (DARA)

 Selective Androgen Receptor    Muscle wasting and          Pre-clinical
 Modulators (SARMs)             frailty
 (agonists)

 Chemokine Receptor (CCR1)      Inflammatory and            Pre-clinical
                                autoimmune diseases

 Small molecule Erythropoiein   Chemotherapy-induced        Research
 (EPO) receptor agonists        anemia and anemia due to
                                kidney failure

 Selective Glucocorticoid       Inflammation and cancer     Research
 Receptor Modulators (SGRMs)

 Androgen-independent           Prostate cancer             Research
 Prostate Cancer (AiPC)

* Phase II clinical trials conducted so far have studied patients with hypertension

We do not provide forward-looking estimates of costs and time to complete our ongoing research and development projects, as such estimates would involve a high degree of uncertainty. Uncertainties include our inability to predict the outcome of complex research, our inability to predict the results of clinical studies, regulatory requirements placed upon us by regulatory authorities such as the FDA and EMEA, our inability to predict the decisions of our collaborative partners, our ability to fund research and development programs, competition from other entities of which we may become aware in future periods, predictions of market potential from products that may be derived from our research and development efforts, and our ability to recruit and retain personnel or third-party research organizations with the necessary knowledge and skills to perform certain research. Refer to "Item 1A. Risk Factors" for additional discussion of the uncertainties surrounding our research and development initiatives.

General and Administrative Expenses

General and administrative expenses were $6.8 million for the three months ended March 31, 2009, compared to $10.1 million for the same period in 2008. The decrease of $3.3 million is primarily due to $4.1 million of expenses incurred during the first quarter of 2008 as a result of exiting a facility, which was partially offset by an increase in legal expenses associated with settlements reached with Rockefeller University and the Securities and Exchange Commission (SEC) in the first quarter of 2009.

Accretion of Deferred Gain on Sale Leaseback

On November 9, 2006, we sold real property located in San Diego, California for a sale price of $47.6 million. This property includes our corporate headquarter building totaling approximately 82,500 square feet, the land on which the building is situated, and two adjacent vacant lots. As part of the sale transaction, we agreed to leaseback the building for a period of 15 years. In accordance with SFAS 13, Accounting for Leases, we recognized an immediate pre-tax gain on the sale transaction of $3.1 million and deferred a gain of $29.5 million on the sale of the building. The deferred gain is recognized on a straight-line basis over the 15 year term of the lease at a rate of approximately $2.0 million per year. The amount of the deferred gain recognized for the three months ended March 31, 2009 and 2008 was $0.5 million and $0.5 million, respectively.

Interest Income

Interest income was $0.1 million for the three months ended March 31, 2009, compared to $0.9 million for the same period in 2008. The decrease of $0.8 million is primarily due to lower yields as a result of macro-economic conditions as well as lower cash and investment balances.

Income Taxes

We recorded no provision for income taxes for the three months ended March 31, 2009 as we did not realize any taxable income from either continuing or discontinued operations.

We had losses from continuing operations and income from discontinued operations for the three months ended March 31, 2008. In accordance with SFAS No. 109, Accounting for Income Taxes, the income tax benefit generated by the loss from continuing operations for the three months ended March 31, 2008 of $1.8 million captures the deemed use of losses from continuing operations used to offset the income from our AVINZA product line that was sold on February 26, 2007.

Net income tax expense combining both continuing and discontinued operations was $1.7 million for the three months ended March 31, 2008. This expense reflects the net tax due on taxable income generated by discontinued operations for the three months ended March 31, 2008 that was not fully offset by net operating losses and research and development credit carryforwards due to federal and state alternative minimum tax requirements, and from state income taxes for certain states incurred after full utilization of state net operating loss and research and development credits.

Discontinued Operations

Oncology Product Line

On September 7, 2006, we and Eisai Inc., a Delaware corporation and Eisai Co., Ltd., a Japanese company (which we collectively refer to as Eisai), entered into a purchase agreement, or the Oncology Purchase Agreement, pursuant to which Eisai agreed to acquire all of our worldwide rights in and to our oncology products, including, among other things, all related inventory, equipment, records and intellectual property, and assume certain liabilities as set forth in the Oncology Purchase Agreement. The Oncology product line included our four marketed oncology drugs: ONTAK, Targretin capsules, Targretin gel and Panretin gel.

Prior to the Oncology sale, we recorded accruals for rebates, chargebacks, and other discounts related to Oncology products when product sales were recognized as revenue under the sell-through method. Upon the Oncology sale, we accrued for rebates, chargebacks, and other discounts related to Oncology products in the distribution channel which had not sold-through at the time of the Oncology sale and for which we retained the liability subsequent to the Oncology sale.

Additionally, and pursuant to the terms of the Oncology Purchase Agreement, we retained the liability for returns of product from wholesalers that had been sold by us prior to the close of the transaction. Accordingly, as part of the accounting for the gain on the sale of the Oncology product line, we recorded a reserve for Oncology product returns. Under the sell-through revenue recognition method, we previously did not record a reserve for returns from wholesalers.

During the three months ended March 31, 2009 and 2008, we recognized a $0.2 million and $0.9 million pre-tax gain, respectively, due to subsequent changes in certain estimates and liabilities recorded as of the sale date.

AVINZA Product Line

On September 6, 2006, we and King Pharmaceuticals, Inc., or King, entered into a purchase agreement, or the AVINZA Purchase Agreement, pursuant to which King agreed to acquire all of our rights in and to AVINZA in the United States, its territories and Canada, including, among other things, all AVINZA inventory, records and related intellectual property, and assume certain liabilities as set forth in the AVINZA Purchase Agreement, which we collectively refer to as the Transaction.

Pursuant to the AVINZA Purchase Agreement, at the closing on February 26, 2007, which we refer to as the Closing Date, we received $280.4 million in net cash proceeds, which is net of $15.0 million that was funded into an escrow account to support any potential indemnification claims made by King following the closing of the Transaction.

In connection with the sale, we agreed to indemnify King in certain cases for a period of 30 months after the closing of the Transaction, including any breach of certain of our representations, warranties or covenants contained in the Avinza Purchase Agreement. Under our agreement with King, $15.0 million of the total upfront cash payment was deposited into an escrow account to secure our indemnification obligations to King following the closing. Of the escrowed amount, $7.5 million was released to us in August 2007, and the remaining $7.5 million, plus interest of $0.6 million, was released to us in February 2008 and recorded as gain on sale of our AVINZA product line.

Prior to the AVINZA sale, we recorded accruals for rebates, chargebacks, and other discounts related to AVINZA products when product sales were recognized as revenue under the sell-through method. Upon the AVINZA sale, we accrued for rebates, chargebacks, and other discounts related to AVINZA products in the distribution channel which had not sold-through at the time of the AVINZA sale and for which we retained the liability subsequent to the sale.

Additionally, and pursuant to the terms of the AVINZA Purchase Agreement, we retained the liability for returns of product from wholesalers that had been sold by us prior to the close of the Transaction. Accordingly, as part of the accounting for the gain on the sale of AVINZA, we recorded a reserve for AVINZA product returns. Under the sell-through revenue recognition method, we previously did not record a reserve for returns from wholesalers.

During the three months ended March 31, 2009 and 2008, we recognized a gain of $2.1 million and $8.3 million, respectively. The gain for the three months ended March 31, 2009 primarily related to subsequent changes in certain estimates and liabilities recorded as of the sale date. The gain for the three months ended March 31, 2008 primarily related to the $8.1 million pre-tax gain resulting from the release of funds from an escrow account as well as changes in certain estimates and liabilities recorded as of the sale date.

Income Taxes

For the three months ended March 31, 2008 we recorded income tax expense on discontinued operations of $3.5 million. The tax expense primarily reflects the net tax due on taxable income that was generated by the release of escrow funds from the sale of our AVINZA product line.

Liquidity and Capital Resources

We have financed our operations through private and public offerings of our equity securities, collaborative research and development and other revenues, issuance of convertible notes, product sales and the subsequent sales of our commercial assets, capital and operating lease transactions, accounts receivable factoring and equipment financing arrangements and investment income. In March 2007, we announced that our board of directors had authorized a stock repurchase program under Rule 10b-18 of the Securities Exchange Act of 1934, as amended, of up to $100 million of shares of our common stock in the open market and negotiated purchases over a period of 12 months. We repurchased an aggregate of 6.5 million shares of our common stock totaling $41.2 million prior to the close of the repurchase period on March 31, 2008.

Working capital was $14.8 million at March 31, 2009 compared to $23.3 million at December 31, 2008. Available cash, cash equivalents and short-term investments totaled $52.6 million as of March 31, 2009 compared to $80.7 million as of December 31, 2007. We primarily invest our cash in United States government and investment grade corporate debt securities.

On July 19, 2007, we purchased $5.0 million of commercial paper issued by Golden Key Ltd. The investment was highly-rated and within our investment policy at the time of purchase, but during the third quarter of 2007, large credit rating agencies downgraded the quality of this security. In addition, as a result of not meeting certain liquidity covenants, the assets were assigned to a trustee who established a committee of the largest senior credit holders to determine the next steps. Subsequently, Golden Key defaulted on its obligation to settle the security on the stated maturity date of October 10, 2007. Based on available information, we currently estimate that we will be able to recover approximately $1.6 million on this security. Accordingly, we adjusted the carrying value by recording an impairment loss of $0.1 million during the three months ended March 31, 2009. Further, liquidity in the capital markets has continued to be volatile. Accordingly, we may be exposed to additional impairment for this investment until it is fully recovered.

In April 2009, we received notification from the SEC that it had completed its investigation and will not recommend enforcement action against us relating to the previously disclosed SEC investigation in connection with the restatement of our financial statements as of and for the years ended December 31, 2002 and 2003 and for the first three quarters of 2004. As a result, in April 2009, we received $10.3 million from a restricted indemnity account which had been . . .