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 or close our announced merger 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. 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 with (i) development on its own New Drug Application, or NDA, filings and (ii) commercialization for selected indications. Pharmacopeia had a broad portfolio of clinical and preclinical candidates under development internally or by partners.

On August 23, 2009, we entered into a definitive merger agreement with Neurogen Corporation, or Neurogen. Pursuant to the terms of the merger agreement, we would acquire Neurogen and in exchange we would issue to Neurogen stockholders a number of shares of our common stock equal to approximately $11 million based on the twenty-day volume weighted average closing price of our common stock shortly prior to the Neurogen stockholders meeting with respect to the merger, but not to exceed a total of 4.2 million shares of our common stock. In connection with the merger, Neurogen's stockholders would also receive contingent value rights that entitle them to cash and/or shares of third-party stock under certain circumstances. The merger is subject to customary closing conditions, including obtaining the approval of Neurogen's stockholders. Neurogen is a drug development company historically focusing on small-molecule drugs to improve the lives of patients suffering from psychiatric and neurological disorders with significant unmet medical need.

On October 26, 2009, we entered into a definitive merger agreement under which we would acquire all of the outstanding shares of Metabasis Therapeutics, Inc., or Metabasis. Under the transaction, Metabasis stockholders would receive a cash payment at the closing of the transaction of approximately $3.2 million, less Metabasis' estimated net liabilities at closing and an amount to be deposited in the stockholders' representative's fund. In addition, Metabasis stockholders would receive for each Metabasis share four tradable Contingent Value Rights ("CVRs") that would be registered on a Form S-4 registration statement to be filed by us with the Securities and Exchange Commission. The CVRs would entitle Metabasis stockholders to cash payments as frequently as every six months as cash is received by us from proceeds from the sale or partnering of any of the Metabasis drug

development programs, among other triggering events. We also committed to spend at least $8 million in new research and development funding on the Metabasis programs within 42 months following the closing of the transaction. The merger is subject to customary closing conditions, including obtaining the approval of Metabasis' stockholders. Metabasis is a biopharmaceutical company with a product pipeline for metabolic diseases such as diabetes and hyperlipidemia, and for the treatment of liver diseases such as hepatitis and primary liver cancer.

Our business strategy includes 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, typically 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, recognized on a quarterly basis. 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 are entitled to receive tiered royalties 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. Accordingly, after paying Rockefeller, we are entitled to retain tiered royalties in the range of 4.7%-9.3% on annual net sales of PROMACTA.

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 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 from Pfizer on future sales, which pursuant to the 1996 settlement agreement, Pfizer may elect to pay by returning up to 674,230 shares of stock it owns in Ligand. Pfizer also submitted an NDA for osteoporosis treatment in December 2007. In September 2008, the FDA Advisory Committee 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 AG, or Royalty Pharma, the rights to 3% of net sales of lasofoxifene for a period of ten years following the first commercial sale of lasofoxifene. Accordingly, after paying Royalty Pharma, we are entitled to retain approximately 3% of worldwide net annual sales of lasofoxifene.

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. EU action is anticipated in late 2009/early 2010. PROMACTA was recognized as "Best Biotechnology Product" by the Prix Galien USA committee on October 1, 2009.

Bazedoxifene 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 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. 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.

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 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.

Results of Operations

Total revenues for the three and nine months ended September 30, 2009 were $7.9 million and $25.0 million, respectively, compared to $5.2 million and $14.9 million for the same 2008 periods. We reported income from continuing operations of $1.1 million and a loss from continuing operations of $10.9 million for the three and nine months ended September 30, 2009, respectively, compared to losses from continuing operations of $9.1 million and $23.7 million for the same 2008 periods.

Royalty Revenue

Royalty revenues were $1.7 million and $6.4 million for the three and nine months ended September 30, 2009, respectively, compared to $5.2 million and $14.9 million for the same periods in 2008. The decreases in royalty revenues of $3.6 million and $8.5 million, respectively, for the three and nine months ended September 30, 2009, compared to the same periods in 2008, are primarily due to a reduction in the contractual royalty rate from 15% to 5% under our agreement with King for AVINZA sales, partially offset by PROMACTA royalties.

Collaborative Research and Development and Other Revenues

We recorded collaborative research and development and other revenues of $6.3 million and $18.6 million for the three and nine months ended September 30, 2009, respectively, compared to zero for the same periods in 2008. The increase of $6.3 million for the three months ended September 30, 2009, compared to the same period in 2008, is primarily due to collaboration revenues resulting from agreements acquired from Pharmacopeia. The increase of $18.6 million for the nine months ended September 30, 2009, compared to the same period in 2008, is primarily due to $14.3 million in collaboration revenues resulting from agreements acquired in the merger with Pharmacopeia, $3.9 million of milestones earned from GlaxoSmithKline, Pfizer, Schering-Plough and Wyeth and a $0.4 million license fee.

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,
                                         2009         2008         2009        2008
     Internal research programs       $    2,418    $   4,463   $    9,304   $  12,315
     Collaborative research                6,754           -        14,822          -
     Development                             749        1,702        5,618       7,392

     Total research and development   $    9,921    $   6,165   $   29,744   $  19,707

Research and development expenses were $9.9 million and $29.7 million for the three and nine months ended September 30, 2009, respectively, compared to $6.2 million and $19.7 million for the same 2008 periods. The increase of $3.7 million for the three months ended September 30, 2009, compared to the same period in 2008, is primarily due to $6.8 million of costs associated with servicing our collaboration agreements partially offset by a $1.0 million reduction in clinical trial costs as we completed our ongoing LGD 4665 clinical trials, $1.0 million in reduced consulting and outside service costs associated with internal research programs and $1.0 million of litigation settlement costs related to The Rockefeller University that were recorded in the third quarter of 2008. The increase of $10.0 million for the nine months ended September 30, 2009, compared to the same period in 2008, is primarily due to $14.8 million of costs associated with servicing our collaboration agreements partially offset by $2.3 million in reduced consulting and outside service costs associated with internal research programs as well as $1.8 million reduction in drug supply costs associated with clinical trials.

A summary of our significant internal research and development programs as of September 30, 2009 is as follows:

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

Selective Androgen                 Muscle wasting and               Phase I
Receptor Modulators                frailty
(SARMs) (agonists)

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

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

* 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 $2.4 million and $12.2 million for the three and nine months ended September 30, 2009, respectively, compared to $5.9 million and $20.6 million for the same periods in 2008. The decrease of $3.5 million for the three months ended September 30, 2009, compared to the same period in 2008, is primarily due to $2.9 million of reduced legal expenses as settlements were reached with Rockefeller University and the Securities and Exchange Commission (SEC) in the first quarter of 2009 and $0.8 million of lower headcount costs as a result of staff reductions. The decrease of $8.4 million for the nine months ended September 30, 2009, compared to the same period in 2008, is primarily due to $4.1 million of expenses incurred during the first quarter of 2008 as a result of exiting a facility, reduced legal expenses of $4.0 million, lower headcount costs of $1.0 million and $0.8 million of costs associated with asset disposals in the third quarter of 2008. These decreases were partially offset by $1.9 million of costs associated with operating our New Jersey facility incurred as a result of our acquisition of Pharmacopeia in December 2008.

Lease Termination Costs

In August 2009, we entered into a lease termination agreement for our corporate facility in San Diego. Under the terms of the agreement, we will pay a termination fee of $14.3 million as follows: $4.5 million was paid upon signing, $4.5 million in July 2010 and $5.3 million in April 2011. As a result, during the third quarter of 2009, we recorded lease termination costs of $15.2 million, which includes the net present value of the lease termination payments of $14.3 million and $0.9 million of other costs associated with the lease termination.

Write-off of acquired in-process research and development

For acquisitions prior to January 1, 2009, the fair value of acquired In-Process Research and Development (IPR&D) projects, which have no alternative future use and which have not reached technological feasibility at the date of acquisition, were immediately expensed. As a result of adjustments to our purchase price allocation related to our acquisition of Pharmacopeia, Inc. in December 2008, we wrote-off an additional $0.4 million of acquired in-process research and development during the quarter ended June 30, 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. 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 was being recognized on a straight-line basis over the 15 year term of the lease at a rate of approximately $2.0 million per year. In August 2009, we entered into a lease termination agreement for this building. As a result, we recognized $20.4 million of accretion of deferred gain during the quarter ended September 30, 2009, and will recognize the remaining balance of the deferred gain through the term of our new building lease, which expires in December 2011. The amount of the deferred gain recognized for the three and nine months ended September 30, 2009 was $20.4 million and $21.4 million, respectively, compared to $0.5 million and $1.0 million, respectively, for the same periods in 2008.

Interest Income

Interest income was $0.2 million and $0.4 million for the three and nine months ended September 30, 2009, respectively, compared to $0.4 million and $1.9 million for the same periods in 2008. The decrease in interest income in 2009 compared to 2008 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 and nine months ended September 30, 2009 as we did not realize any taxable income from either continuing or discontinued operations.

We recorded income tax expense related to continuing operations of $3.0 million and $0.2 million for the three and nine months ended September 30, 2008, respectively. The income tax expense for the three months ended September 30, 2008 was recorded to offset income tax benefits recorded during the first half of 2008. The income tax expense for the nine months ended September 30, 2008 relates to the filing of amended state tax returns from previous years.

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 and nine months ended September 30, 2009, we recognized a $0.1 million and a $0.6 million of pre-tax gain, respectively, due to subsequent changes in certain estimates and liabilities recorded as of the sale date. During the three and nine months ended September 30, 2008, we recognized $12.8 million and $12.6 million of pre-tax losses, respectively, due to $13.0 million of litigation settlement costs related to the Salk Institute for Biological Studies in addition to subsequent changes in certain estimates and liabilities recorded as of the sale date.

AVINZA Product Line

On September 6, 2006, we and 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.

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 . . .