UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Mark One

[X] Quarterly Report Pursuant to Section 13 or 15(D) of the
Securities Exchange Act of 1934

For the quarterly period ended June 30, 2004 or

[ ] Transition Report Pursuant to Section 13 or 15(D) of the
Securities Exchange Act of 1934

For the Transition Period From ___ to ___. Commission file number 0-20720

LIGAND PHARMACEUTICALS INCORPORATED
(Exact Name of Registrant as Specified in its Charter)

Delaware
(State or Other Jurisdiciton of Incorporation or Organization)

77-0160744
(I. R. S. Employer Identification No.)

10275 Science Center Drive San Diego, CA
(Address of Principal Executive Offices)

92121-1117
(Zip Code)

Registrant's Telephone Number, Including Area Code: (858) 550-7500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

As of July 31, 2004, the registrant had 73,911,051 shares of common stock outstanding.

LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT

FORM 10-Q

TABLE OF CONTENTS

COVER PAGE	1
TABLE OF CONTENTS	2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003	3
Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003	4
Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003	5
Notes to Consolidated Financial Statements	6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	30
ITEM 4. Controls and Procedures	31
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings	*
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	*
ITEM 3. Defaults upon Senior Securities	*
ITEM 4. Submission of Matters to a Vote of Security Holders	32
ITEM 5. Other Information	*
ITEM 6. Exhibits and Reports on Form 8-K	33
SIGNATURE	35

*No information provided due to inapplicability of item.

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)

		June 30, 2004			December 31, 2003

ASSETS
Current assets:
	Cash and cash equivalents	$	41,920		$	59,030
	Short-term investments; $4,623 and $9,204 restricted at June 30, 2004 and December 31, 2003, respectively		43,958			40,004
	Accounts receivable, net (Note 2)		17,936			19,051
	Inventories		11,752			8,262
	Other current assets		3,245			3,810

Total current assets			118,811			130,157
Restricted investments			1,656			1,656
Property and equipment, net			23,910			23,501
Acquired technology and product rights, net			132,520			137,857
Other assets			8,420			8,084

Total assets		$	285,317		$	301,255

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable	$	20,225		$	18,691
	Accrued liabilities (Note 1)		36,108			30,315
	Current portion of deferred revenue		2,381			2,564
	Current portion of equipment financing obligations		2,453			2,184
	Current portion of long-term debt		303			295

Total current liabilities			61,470			54,049
Long-term debt			167,256			167,408
Long-term portion of deferred revenue			2,120			2,275
Long-term portion of equipment financing obligations			3,547			2,644
Other long-term liabilities			2,925			4,151

Total liabilities			237,318			230,527

Commitments and contingencies (Note 9)
Stockholders’ equity:
	Convertible preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued		—			—
	Common stock, $0.001 par value; 200,000,000 shares and 130,000,000 shares authorized at June 30, 2004 and December 31, 2003 respectively; 73,909,393 and 73,264,785 shares issued at June 30, 2004 and December 31, 2003, respectively		74			73
	Additional paid-in capital		732,096			727,410
	Accumulated other comprehensive loss		(127	)		(66	)
	Accumulated deficit		(683,133	)		(655,778	)

			48,910			71,639
	Treasury stock, at cost; 73,842 shares		(911	)		(911	)

Total stockholders’ equity			47,999			70,728

		$	285,317		$	301,255

See accompaning notes.

LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)

		Three months ended June 30,						Six months ended June 30,
			2004			2003			2004			2003

Revenues:
Product sales		$	37,485		$	25,187		$	71,621		$	44,115
Collaborative research and development and other revenues			2,975			3,939			5,451			8,135

	Total revenues		40,460			29,126			77,072			52,250

Operating costs and expenses:
Cost of products sold			9,926			7,766			18,749			14,386
Research and development			18,174			16,859			35,026			33,499
Selling, general and administrative			16,625			13,571			31,097			25,998
Co-promotion (Note 4)			7,000			—			13,731			—

	Total operating costs and expenses		51,725			38,196			98,603			73,883

Loss from operations			(11,265	)		(9,070	)		(21,531	)		(21,633	)

Other income (expense):
Interest income			208			140			439			383
Interest expense			(3,140	)		(2,688	)		(6,231	)		(5,370	)
Other, net			(19	)		(379	)		(32	)		(5,697	)

	Total other expense, net		(2,951	)		(2,927	)		(5,824	)		(10,684	)

Net loss		$	(14,216	)	$	(11,997	)	$	(27,355	)	$	(32,317	)


Basic and diluted per share amounts:
Net loss		$	(.19	)	$	(.17	)	$	(.37	)	$	(.46	)

Weighted average number of common shares			73,754,146			69,275,323			73,528,581			69,754,200

See accompaning notes.

LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

		Six Months Ended June 30,
		2004			2003

Operating activities
Net loss		$	(27,355	)	$	(32,317	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Amortization of acquired technology and license rights		5,473			5,488
	Depreciation and amortization of property and equipment		1,509			1,274
	Amortization of debt discount and issuance costs		478			405
	Write-off of X-Ceptor purchase right		—			5,000
	Equity in loss of affiliate		—			572
	Other		64			547
Changes in operating assets and liabilities:
	Accounts receivable, net (Note 2)		1,115			4,487
	Inventories		(3,490	)		35
	Other current assets		565			4,673
	Accounts payable and accrued liabilities		7,327			4,686
	Other liabilities		(600	)		—
	Deferred revenue		(338	)		(1,141	)

Net cash used in operating activities			(15,252	)		(6,291	)

Investing activities
Purchases of short-term investments			(25,880	)		(499	)
Proceeds from sale of short-term investments			17,345			5,004
Purchases of property and equipment			(2,021	)		(445	)
Payment for AVINZA^® royalty rights			—			(4,133	)
Payment for lasofoxifene royalty rights (Note 1)			(1,120	)		—
Other, net			(406	)		150

Net cash (used in) provided by investing activities			(12,082	)		77

Financing activities
Principal payments on equipment financing obligations			(1,297	)		(1,140	)
Proceeds from equipment financing arrangements			2,469			251
Decrease in restricted investments			4,581			4,167
Repurchase of common stock			—			(15,867	)
Net proceeds from issuance of common stock			4,615			690
Decrease in other long-term liabilities			—			(62	)
Other			(144	)		—

Net cash provided by (used in) financing activities			10,224			(11,961	)

Net decrease in cash and cash equivalents			(17,110	)		(18,175	)
Cash and cash equivalents at beginning of period			59,030			42,423

Cash and cash equivalents at end of period		$	41,920		$	24,248

Supplemental disclosure of cash flow information
Interest paid		$	5,301		$	4,664

See accompaning notes.

LIGAND PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements

1. Basis of Presentation

The consolidated financial statements of Ligand Pharmaceuticals Incorporated (“Ligand” or the “Company”) for the three and six months ended June 30, 2004 and 2003 are unaudited. These financial statements reflect all adjustments, consisting of only normal recurring adjustments which, in the opinion of management, are necessary to fairly present the consolidated financial position as of June 30, 2004 and the consolidated results of operations for the three and six months ended June 30, 2004 and 2003. The results of operations for the period ended June 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004. For more complete financial information, these financial statements, and the notes thereto, should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2003 included in the Company’s Annual Report on Form 10-K filed with the SEC.

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Actual results could differ from those estimates.

Recent Accounting Pronouncements. In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, which was subsequently revised prior to implementation in December 2003. The revised Interpretation, known as “FIN 46(R)", requires the consolidation of certain variable interest entities by the primary beneficiary of the entity if the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or if the equity investors lack the characteristics of a controlling financial interest. Ligand adopted FIN 46(R) effective December 31, 2003 (Note 6).

In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance for identifying impaired investments and new disclosure requirements for investments that are deemed to be temporarily impaired. The accounting provisions of EITF 03-1 are effective for all reporting periods beginning after June 15, 2004, while the disclosure requirements are effective only for annual periods ending after June 15, 2004. The Company does not believe the impact of adopting EITF 03-1 will be significant to its overall results of operations or financial position.

Loss Per Share. Net loss per share is computed using the weighted average number of common shares outstanding. Basic and diluted net loss per share amounts are equivalent for the periods presented as the inclusion of potential common shares in the number of shares used for the diluted computation would be anti-dilutive.

Accounting for Stock-Based Compensation. The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation.

Pro forma information regarding net loss and net loss per share is required by SFAS No. 123, Accounting for Stock-based Compensation, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information is as follows (in thousands, except for net loss per share information):

	Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003

Net loss as reported	$	(14,216	)	$	(11,997	)	$	(27,355	)	$	(32,317	)
Stock-based employee compensation expense included in reported net loss		—			405			—			405
Less total stock-based compensation expense determined under fair value based method for all awards		(1,741	)		(1,913	)		(3,359	)		(3,472	)

Net loss pro forma	$	(15,957	)	$	(13,505	)	$	(30,714	)	$	(35,384	)


Basic and diluted per share amounts:
Net loss per share as reported	$	(.19	)	$	(.17	)	$	(.37	)	$	(.46	)

Net loss per share pro forma	$	(.22	)	$	(.19	)	$	(.42	)	$	(.51	)

The fair value for these options was estimated at the dates of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:

	Three Months Ended June 30,			Six Months Ended June 30,
		2004	2003		2004	2003

Risk free interest rate		3.77%	2.41%		3.77%	2.41%
Dividend yield		—	—		—	—
Volatility		60%	76%		60%	76%
Weighted average expected life		5 years	5 years		5 years	5 years

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Inventories consist of the following (in thousands):

	June 30, 2004		December 31, 2003

Raw materials	$	359	$	101
Work-in-process		3,943		4,261
Finished goods		7,450		3,900

	$	11,752	$	8,262

Other Assets. Other assets consist of the following (in thousands):

	June 30, 2004		December 31, 2003

Debt issue costs, net	$	3,726	$	4,205
Royalty buyout, net (1)		3,840		2,856
Other		854		1,023

	$	8,420	$	8,084

(1) In March 2004, Ligand paid the Salk Institute $1.1 million to exercise an option to buy out milestone payments, other payment-sharing obligations and royalty payments due on future sales of lasofoxifene, a product under development by Pfizer.

Acquired Technology and Product Rights

Acquired technology and product rights represent payments related to the Company’s acquisition of ONTAK^® and license and royalty rights for AVINZA^®. Acquired technology and product rights are amortized on a straight-line basis over 15 years, the period estimated to be benefited, and consist of the following (in thousands):

	June 30, 2004			December 31, 2003

AVINZA^®	$	114,437		$	114,437
ONTAK^®		45,312			45,312
Less accumulated amortization		(27,229	)		(21,892	)

	$	132,520		$	137,857

Amortization of acquired technology and product rights was $2.7 million for the three months ended June 30, 2004 and 2003, and $5.3 million for the six months ended June 30, 2004 and 2003. Estimated annual amortization for these assets in each of the years in the period from 2004 to 2008 is $10.7 million.

Accrued Liabilities. Accrued liabilities consist of the following (in thousands):

	June 30, 2004		December 31, 2003

Allowances for product returns, sales incentives, rebates and chargebacks	$	18,019	$	10,347
Amount due co-promote partner (Note 4)		6,936		9,360
Compensation		4,475		3,888
Royalties		4,168		3,833
Interest		1,138		1,138
Other		1,372		1,749

	$	36,108	$	30,315

Long-term Debt. Long-term debt consists of the following (in thousands):

	June 30, 2004			December 31, 2003

6% Convertible Subordinated Notes	$	155,250		$	155,250
Note payable to bank		12,309			12,453

		167,559			167,703
Less current portion		(303	)		(295	)

Long-term debt	$	167,256		$	167,408

Comprehensive Loss. Comprehensive Loss represents net loss adjusted for the change during the periods presented in unrealized gains and losses on available-for-sale securities less reclassification adjustments for realized gains or losses included in net loss, as well as foreign currency translation adjustments. The accumulated unrealized gains or losses and cumulative foreign currency translation adjustments are reported as accumulated other comprehensive loss as a separate component of stockholders’ equity. Comprehensive loss is as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003

Net loss as reported	$	(14,216	)	$	(11,997	)	$	(27,355	)	$	(32,317	)
Unrealized losses on available-for sale securities		(62	)		(1	)		(53	)		(12	)
Foreign currency translation adjustments		(11	)		16			(7	)		9

Comprehensive loss	$	(14,289	)	$	(11,982	)	$	(27,415	)	$	(32,320	)

The components of accumulated other comprehensive loss are as follows (in thousands):

	June 30, 2004			December 31, 2003

Net unrealized holding (loss) gain on available-for-sale securities	$	(24	)	$	29
Net unrealized loss on foreign currency translation		(103	)		(95	)

	$	(127	)	$	(66	)

2. Accounts Receivable Factoring Arrangement

During the second quarter of 2003, the Company entered into a one-year accounts receivable factoring arrangement under which eligible accounts receivable are sold without recourse to a financing company. The factoring arrangement was extended for an additional one-year period in the second quarter of 2004. Commissions on factored receivables are paid to the finance company based on the gross receivables sold, subject to a minimum annual commission. Additionally, the Company pays interest on the net outstanding balance of the uncollected factored accounts receivable at an interest rate equal to the JPMorgan Chase Bank prime rate. The Company continues to service the factored receivables, the expenses of which are not material to the consolidated financial statements. The Company accounts for the sale of receivables under this arrangement in accordance with the requirements of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. During the three months ended June 30, 2004, cash in the amount of $32.0 million was received through the factoring arrangement. Interest expense and fees related to the factoring arrangement for the three and six months ended June 30, 2004 and 2003 were not material to the consolidated financial statements.

Receivables due from the financing company under the accounts receivable factoring arrangement represent the Company’s most significant credit risk. As of June 30, 2004, the gross amount due from the financing company was $11.0 million, which represents approximately 62% of the Company’s accounts receivable.

3. Repurchase of Elan Shares

In connection with the November 2002 restructuring of the Company’s AVINZA^® license and supply agreement with Elan Corporation, plc (“Elan”), the Company agreed to repurchase approximately 2.2 million Ligand common shares held by an affiliate of Elan for $9.00 a share. The difference between the $9.00 purchase price and the public price of the shares at the time the agreement was signed, approximately $4.1 million, was treated as an additional component of the price paid for the reduced AVINZA^® royalty rate under the restructured license and supply agreement. The shares were repurchased and retired in February 2003.

4. AVINZA^® Co-promotion

In February 2003, Ligand and Organon Pharmaceuticals USA Inc. (“Organon”) entered into an agreement for the co-promotion of AVINZA^®. Under the terms of the agreement, Organon committed to a specified minimum number of primary and secondary product calls delivered to certain high prescribing physicians and hospitals beginning in March 2003. In exchange, Ligand pays Organon a percentage of AVINZA^® net sales based on the following schedule:

Annual Net Sales of AVINZA^®		% of Incremental Net Sales Paid to Organon by Ligand
$0-35 million (2003 only)		0% (2003 only)
$0-150 million		30%
$150-300 million		40%
$300-425 million		50%
>$425 million		45%

For the three and six months ended June 30, 2004, Ligand recognized co-promotion expense of $7.0 million and $13.7 million, respectively.

Additionally, Ligand and Organon agreed to equally share all costs for AVINZA^® advertising and promotion, medical affairs and clinical trials. Each company is responsible for its own sales force costs and other expenses. The initial term of the co-promotion agreement is ten years. Organon has the option any time prior to January 1, 2008 to extend the agreement to 2017 by making a $75.0 million payment to Ligand.

5. Option to Acquire X-Ceptor Therapeutics, Inc.

In connection with a 1999 investment in X-Ceptor Therapeutics, Inc. (“X-Ceptor”), Ligand maintained the right to acquire all of the outstanding stock of X-Ceptor not held by Ligand at June 30, 2002, or to extend the purchase right for 12 months by providing additional funding of $5.0 million. In April 2002, Ligand informed X-Ceptor that it was extending its purchase right. The $5.0 million paid to X-Ceptor in July 2002 was carried as an asset until March 2003, when Ligand informed X-Ceptor that it would not exercise the purchase right. The $5.0 million purchase right was written-off in March 2003 and is included in “Other, net” expense in the accompanying Consolidated Statements of Operations.

6. Purchase of Nexus Equity VI LLC

As of March 31, 2004, the Company leased one of its corporate office buildings from Nexus Equity VI LLC (“Nexus”), a limited liability company in which Ligand held a 1% ownership interest. Nexus had been first consolidated as of December 31, 2003 by the Company in accordance with FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51.

In April 2004, the Company exercised its right to acquire the portion of Nexus that it did not own. The acquisition resulted in Ligand’s assumption of the existing loan against the property and payment to Nexus’ other shareholder of approximately $0.6 million.

7. Manufacturing Arrangement

In March 2004, Ligand entered into a five-year manufacturing and packaging agreement with Cardinal Health PTS, LLC (“Cardinal”) under which Cardinal will manufacture AVINZA® at its Winchester, Kentucky facility. Under the terms of the agreement, Ligand committed to certain minimum annual purchases ranging from approximately $1.6 million to $2.3 million. In addition, if regulatory approval for the manufacture of AVINZA® at the Kentucky facility has not been obtained within 30 months of the agreement’s effective date, Ligand will pay Cardinal $50,000 per month until such approval is obtained or through the initial term of the contract. The technology transfer and regulatory approval is expected to be complete in 2005 after which commercial product manufacturing may commence.

8. Stockholders' Equity

At its annual meeting of stockholders held on June 11, 2004, the Company’s stockholders approved an increase in the authorized number of shares of Common Stock from 130,000,000 to 200,000,000.

9. Litigation

Seragen, Inc., a wholly-owned subsidiary, and Ligand, were named parties to Sergio M. Oliver, et al. v. Boston University, et al., a putative shareholder class action filed on December 17, 1998 in the Court of Chancery in the State of Delaware in and for New Castle County, C.A. No. 16570NC, by Sergio M. Oliver and others against Boston University and others, including Seragen, its subsidiary Seragen Technology, Inc. and former officers and directors of Seragen. The complaint, as amended, alleged that Ligand aided and abetted purported breaches of fiduciary duty by the Seragen related defendants in connection with the acquisition of Seragen by Ligand and made certain misrepresentations in related proxy materials and seeks compensatory and punitive damages of an unspecified amount. On July 25, 2000, the Delaware Chancery Court granted in part and denied in part defendants’ motions to dismiss. Seragen, Ligand, Seragen Technology, Inc. and the Company’s acquisition subsidiary, Knight Acquisition Corporation, were dismissed from the action. Claims of breach of fiduciary duty remain against the remaining defendants, including the former officers and directors of Seragen. The hearing on the plaintiffs’ motion for class certification took place on February 26, 2001. The court certified a class consisting of shareholders as of the date of the acquisition and on the date of an earlier business unit sale by Seragen. The litigation is currently in the discovery phase. While Ligand and Seragen have been dismissed from the action, such dismissal is subject to a possible subsequent appeal upon judgment in the action against the remaining parties.

On December 11, 2001, a lawsuit was filed in the United States District Court for the District of Massachusetts against Ligand by the Trustees of Boston University and other former stakeholders of Seragen. The suit was subsequently transferred to federal district court in Delaware. The complaint alleges breach of contract, breach of the implied covenants of good faith and fair dealing and unfair and deceptive trade practices based on, among other things, allegations that Ligand wrongfully withheld approximately $2.1 million in consideration due the plaintiffs under the Seragen acquisition agreement. This amount had been previously accrued for in the Company’s financial statements. The complaint seeks payment of the withheld consideration and treble damages. Ligand filed a motion to dismiss the unfair and deceptive trade practices claim (i.e. the treble damages claim). The court subsequently granted Ligand’s motion to dismiss the unfair and deceptive trade practices claim, granted Boston University’s motion for summary judgment, and in November 2003 entered judgment for Boston University. In January 2004, the district court issued an amended judgment awarding interest of approximately $739,000 to the plaintiffs in addition to the $2.1 million withheld. Ligand has appealed the judgment in this case as well as the award of interest and the calculation of damages.

The Company believes that each of these lawsuits is without merit and intends to vigorously defend against each of such lawsuits. Due to the uncertainty of the ultimate outcome of these matters, the impact on future financial results is not subject to reasonable estimates.

10. Subsequent Events

On August 3, 2004, Ligand filed a Report on Form 8-K announcing the resignation of Deloitte & Touche LLP as the Company’s independent auditors, effective with the filing of this Form 10-Q. Ligand has been informed by Deloitte & Touche LLP that the reasons for its action are not related to any disagreements between Ligand and Deloitte & Touche LLP on matters of accounting principles and practices, financial statement disclosure or auditing scope or procedures. The Audit Committee of Ligand’s Board of Directors is in the process of selecting a new independent registered public accounting firm.

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

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 at “Risks and Uncertainties”. This outlook represents our current judgment on the future direction of our business. Such risks and uncertainties 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 the Private Securities Litigation Reform Act of 1995.

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

Overview

We discover, develop and market drugs that address patients’ critical unmet medical needs in the areas of cancer, pain, men’s and women’s health or hormone-related health issues, skin diseases, osteoporosis, blood disorders and metabolic, cardiovascular and inflammatory diseases. Our drug discovery and development programs are based on our proprietary gene transcription technology, primarily related to Intracellular Receptors, also known as IRs, a type of sensor or switch inside cells that turns genes on and off, and Signal Transducers and Activators of Transcription, also known as STATs, which are another type of gene switch.

We currently market five products in the United States: AVINZA^®, for the relief of chronic, moderate to severe pain; ONTAK^®, for the treatment of patients with persistent or recurrent cutaneous T-cell lymphoma (or CTCL); Targretin^® capsules, for the treatment of CTCL in patients who are refractory to at least one prior systemic therapy; Targretin^® gel, for the topical treatment of cutaneous lesions in patients with early stage CTCL; and Panretin^® gel, for the treatment of Kaposi’s sarcoma in AIDS patients. In Europe, we have marketing authorizations for Panretin^® gel and Targretin^® capsules and are currently marketing these products under arrangements with local distributors. In April 2003, we withdrew our ONZAR™ (ONTAK^® in the U.S.) marketing authorization application in Europe for our first generation product. It was our assessment that the cost of the additional clinical and technical information requested by the European Agency for the Evaluation of Medicinal Products (or EMEA) for the first generation product would be better spent on acceleration of the second generation ONTAK^® development. We expect to resubmit the ONZAR™ application with the second generation product in 2005.

In February 2003, we entered into an agreement for the co-promotion of AVINZA^® with Organon Pharmaceuticals USA Inc. (or Organon). Under the terms of the agreement, Organon committed to specified numbers of primary and secondary product calls delivered to high prescribing physicians and hospitals beginning in March 2003. In exchange, we pay Organon a percentage of AVINZA^® net sales based on the following schedule:

Annual Net Sales of AVINZA^®		% of Incremental Net Sales Paid to Organon by Ligand
$0-35 million (2003 only)		0% (2003 only)
$0-150 million		30%
$150-300 million		40%
$300-425 million		50%
>$425 million		45%

During the three and six months ended June 30, 2004, we recognized co-promotion expense of $7.0 million and $13.7 million, respectively, with no such expenses incurred in the same periods during 2003. Additionally, both companies agreed to share equally all costs for AVINZA^® advertising and promotion, medical affairs and clinical trials. Each company is responsible for its own sales force costs and other expenses. The initial term of the co-promotion agreement is 10 years. Organon has the option any time prior to January 1, 2008 to extend the agreement to 2017 by making a $75.0 million payment to us.

We are currently involved in the research phase of research and development collaborations with Eli Lilly and Company (or Lilly) and TAP Pharmaceutical Products Inc. (or TAP). Collaborations in the development phase are being pursued by GlaxoSmithKline, Lilly, Organon, Pfizer, TAP and Wyeth. We receive funding during the research phase of the arrangements and milestone and royalty payments as products are developed and marketed by our corporate partners.

We have been unprofitable since our inception on an annual basis. We achieved quarterly net income for the first time in our corporate history during the fourth quarter of fiscal 2003. To consistently be profitable, we must successfully develop, clinically test, market and sell our products. Even if we consistently achieve profitability, we cannot predict the level of that profitability or whether we will be able to sustain profitability. We expect that our operating results will fluctuate from period to period as a result of differences in the timing of revenues earned from product sales, expenses incurred, collaborative arrangements and other sources. Some of these fluctuations may be significant.

Recent Developments

In March 2004, Ligand and Organon announced plans to increase sales calls to primary care physicians and the long-term care and hospice market segments. We plan to achieve this through an additional 36 Ligand specialty sales representatives, most of whom were hired at the end of the second quarter of 2004, calling on top decile primary care physicians in a mirrored activity to Organon’s sales representatives. The long-term care and hospice efforts are expected to be achieved through an additional focus of the Organon hospital sales force and a specific call plan on key long-term care and hospice physicians and pain treatment staff. This effort also started at the end of the second quarter of 2004.

Results of Operations

Total revenues for the second quarter of 2004 were $40.5 million compared to $29.1 million for the second quarter of 2003. Loss from operations for the second quarter of 2004 was $11.3 million compared to $9.1 million for the 2003 period. Net loss for the second quarter of 2004 was $14.2 million, or $0.19 per share, compared to net loss of $12.0 million, or $0.17 per share, for the second quarter of 2003.

For the six months ended June 30, 2004, total revenues were $77.1 million, compared to $52.3 million for 2003. Loss from operations for the six months ended June 30, 2004 of $21.5 million compares to $21.6 million for 2003. Net loss for the same period in 2004 was $27.4 million or $0.37 per share compared to a net loss of $32.3 million or $0.46 per share for the 2003 period.

Product Sales

Net product sales for the second quarter of 2004 were $37.5 million compared to $25.2 million for the second quarter of 2003. Product sales for the six months ended June 30, 2004 were $71.6 million compared to $44.1 million for the six months ended June 30, 2003. A comparison of sales by product is as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
		2004		2003		2004		2003

AVINZA^®	$	23,335	$	11,642	$	45,771	$	18,289
ONTAK^®		8,727		9,222		16,035		16,353
Targretin^® capsules		4,155		2,836		7,661		6,432
Targretin^® gel and Panretin ^®gel		1,268		1,487		2,154		3,041

Total net product sales	$	37,485	$	25,187	$	71,621	$	44,115

AVINZA^®

The increase in sales of AVINZA^® is due to higher prescriptions as a result of the increased level of marketing and sales activity under our co-promotion agreement with Organon which started in March 2003. As a result of the co-promotion arrangement, AVINZA^® is now promoted by more than 800 sales representatives compared to approximately 50 representatives in 2003 prior to co-promotion. Sales in 2004 also benefited from a price increase of 9.9% effective January 1, 2004. AVINZA^® sales were negatively impacted, however, in both the first and second quarters of 2004 by a higher level of Medicaid prescriptions in states where 1) AVINZA^® obtained preferred formulary status relative to competing products and 2) came onto the state formulary but not in a preferred position. Through the end of the second quarter of 2004, the level of Medicaid prescriptions significantly exceeded the amounts previously experienced in 2003 as a result of the rapid uptake of AVINZA^® prescriptions in several states where Medicaid preferred status was recently achieved. As a result, we increased our AVINZA^® rebate accrual by $3.0 million and $2.6 million during the first and second quarters of 2004, respectively. We expect that the current level of Medicaid rebates will remain consistent throughout the remainder of 2004. Any changes in Medicaid prescription activity, however, may have an impact on our rebate liability and a corresponding impact on AVINZA^® net product sales.

AVINZA^® sales for the six months ended June 30, 2004 were also negatively impacted by approximately $4.9 million from higher than estimated actual product returns and a higher estimate of future returns primarily from development stage batches with shorter than normal expiry dates and excess wholesaler inventories in certain sales territories where prescriptions did not increase at anticipated rates. We expect that as AVINZA^® prescriptions continue to increase and given that there are no more returnable development stage batches in the wholesale channel, product returns will normalize to a more predictable level across all geographic territories. Any variances to our assumptions, however, with respect to prescriptions (including state Medicaid, managed care, and long-term care and hospice activity), wholesaler inventory levels, or actions taken by our competitors, could have an impact on AVINZA^® product returns and net sales. For example, a 20% variance to our estimated return rates for AVINZA^® could result in an adjustment to our returns provision and net product sales of approximately $1.5 million.

ONTAK^®

The decrease in ONTAK^® sales in the second quarter of 2004 compared to the second quarter of 2003 reflects increased chargebacks and rebates due to our patient mix and evolving reimbursement rates as well as a lower level of inventory stocking by certain wholesalers. This was partially offset, however, by increasing use (impacted in part by expanded clinical data) in cutaneous T-cell lymphoma (or CTCL), chronic lymphocytic leukemia (or CLL), and non-Hodgkins lymphoma (or NHL). Demand for ONTAK^® as measured by shipments to end users increased by 37% in the second quarter of 2004 and 29% for the first half of 2004 compared to the same periods in 2003.

Targretin^® capsules

The increase in sales of Targretin^® capsules in 2004 compared to 2003 reflect a 7% price increase effective January 1, 2004, and the full six-month period impact of a 15% price increase effective April 1, 2003. In June 2004, the Centers for Medicare and Medicaid Services (CMS) announced formal implementation of the Section 641 Demonstration Program under the Medicare Modernization Act of 2003 including reimbursement under Medicare for Targretin^® for patients with CTCL. As a result, we continue to expect improved patient access for Targretin^® in the second half of 2004.

Our product sales for any individual quarter can be influenced by a number of factors including changes in demand for a particular product, competitive products, the level and nature of promotional activity, the timing of announced price increases, wholesaler inventory practices and the level of prescriptions subject to rebates and chargebacks. According to IMS Health National Prescription Audit (or IMS NPA) weekly data, AVINZA^® ended the second quarter of 2004 with a market share of prescriptions in the sustained-release opioid market of 4.5% compared to 1.1% at the end of the second quarter of 2003. Quarterly prescription market share for the second quarter of 2004 was 3.8% compared to less than 1% for the second quarter of 2003. We expect that AVINZA^® prescription market share will continue to increase as a result of a higher level of sales and marketing activity compared to 2003. We expect that total product sales will continue to increase in 2004 due primarily to higher sales of AVINZA^®,

which will benefit from the expansion of the Ligand and Organon AVINZA^® sales force and sales efforts discussed under the “Recent Developments” section above and a 9% price increase effective July 1, 2004. We also continue to expect that demand for and sales of ONTAK^® will increase as further data is obtained from ongoing expanded-use clinical trials and the initiation of new expanded-use trials. The level and timing of any such increases, however, are influenced by a number of factors outside our control, including the accrual of patients and overall progress of clinical trials that are managed by third parties.

Excluding AVINZA^®, our products are small-volume specialty pharmaceutical products that address the needs of cancer patients in relatively small niche markets with substantial geographical fluctuations in demand. To ensure patient access to our drugs, we maintain broad distribution capabilities with inventories held at approximately 150 locations throughout the United States. The purchasing and stocking patterns of our wholesaler customers for all our products are influenced by a number of factors that vary from product to product. These factors include, but are not limited to, overall level of demand, periodic promotions, required minimum shipping quantities and wholesaler competitive initiatives. As a result, the level of product in the distribution channel may average from two to six months’ worth of projected inventory usage. If any or all of our major distributors decide to substantially reduce the inventory they carry in a given period, our sales for that period could be substantially lower than historical levels.

In August 2004, we entered into fee-for-service agreements for ONTAK^® with several of our wholesaler customers. In exchange for a set fee, the wholesalers have agreed to provide us with certain information regarding product stocking and out-movement; inventory handling, stocking and management services; and certain other services surrounding the administration of returns and chargebacks. In connection with implementation of the fee-for-service agreements, we will no longer offer these wholesalers promotional discounts or incentives and as a result, we expect a net improvement in average selling prices and product gross margins. Additionally, we believe these arrangements will provide lower variability in wholesaler inventory levels and improved management of inventories within and between individual wholesaler distribution centers that we believe will result in a lower level of product returns compared to prior periods. We are in the process of negotiating similar agreements for our other products and expect that these will be in place later in the third quarter or early fourth quarter of 2004.

Collaborative Research and Development and Other Revenues

Collaborative research and development and other revenues for the quarter ended June 30, 2004 were $3.0 million compared to $3.9 million for the quarter ended June 30, 2003. For the six months ended June 30, 2004, collaborative research and development and other revenues were $5.5 million compared to $8.1 million in the prior year period. A comparison of collaborative research and development and other revenues is as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
		2004		2003		2004		2003

Collaborative research and development	$	2,898	$	3,862	$	5,296	$	7,980
Other		77		77		155		155

	$	2,975	$	3,939	$	5,451	$	8,135

Collaborative research and development revenue includes reimbursement for ongoing research activities, earned development milestones and recognition of prior years’ up-front fees previously deferred in accordance with Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements.

The decrease in ongoing research activities reimbursement revenue for the 2004 periods compared to the 2003 periods is due to the contractually agreed lower level of research activity and funding under our collaboration arrangement with TAP, which contributed $1.7 million to revenue for the six months ended June 30, 2004 compared to $2.5 million for the 2003 period. The TAP collaboration was extended in December 2003 for an additional year at the current level of funding. Additionally, the decrease is due to lower funding from our research arrangement with Lilly, which contributed $2.2 million to revenue for the six months ended June 30, 2004 compared to $2.9 million for the six months ended June 30, 2003. The research term of the Lilly collaboration was extended for an additional year effective November 2003 at a lower level of funding. Revenue for the second quarter of 2004 and 2003 each include a net development milestone of $0.8 million earned from GlaxoSmithKline while revenue for the first quarter of 2003 includes a $1.1 million milestone earned from Lilly.

Gross Margin

Gross margin on product sales was 73.5% for the second quarter of 2004 compared to 69.2% for the second quarter of 2003. Gross margin on product sales for the six months ended June 30, 2004 was 73.8% compared to 67.4% for the prior year period. The increase in the margin in 2004 is due to the relative increase of sales of AVINZA^® compared to 2003. AVINZA^®, which represented 64% of net product sales in 2004 compared to 41% in the prior year, has significantly better margins than ONTAK^® for which we pay third party royalties totaling 28.0% of product sales. For both AVINZA^® and ONTAK^® we have capitalized license, royalty and technology rights recorded in connection with the acquisition of the rights to those products. These rights are amortized to cost of products sold on a straight-line basis over 15 years. Gross margin in 2004 compared to 2003 was negatively impacted, however, by a higher proportionate level of AVINZA^® Medicaid rebates and product returns as further discussed under “Product Sales”. Overall, given the fixed level of amortization of the capitalized AVINZA^® license and royalty rights and the ONTAK^® acquired technology, we expect the AVINZA^® and ONTAK^® gross margin percentages to continue to increase as sales of AVINZA^® and ONTAK^® increase.

Research and Development Expenses

Research and development expenses were $18.2 million in the second quarter of 2004 compared to $16.9 million for the second quarter of 2003. For the six months ended June 30, 2004, research and development expenses were $35.0 million compared to $33.5 million for the six months ended June 30, 2003. The components of research and development expenses are as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
		2004		2003		2004		2003

Research
Research performed under collaboration agreements	$	1,883	$	3,061	$	3,876	$	5,974
Internal research programs		3,775		2,676		7,520		5,538

Total research		5,658		5,737		11,396		11,512


Development
New product/indications development		8,456		7,285		16,860		16,048
Existing product support (1)		4,060		3,837		6,770		5,939

Total development		12,516		11,122		23,630		21,987


Total research and development	$	18,174	$	16,859	$	35,026	$	33,499

(1) Includes costs incurred to comply with U.S. post-marketing regulatory commitments.

Overall, spending for research expenses remained relatively constant for the first six months of 2004 compared to the 2003 period, with increases in expenses for internal research programs offset by decreases in expenses for research performed under collaboration agreements. The decrease in expenses for research performed under collaboration agreements was due primarily to a lower contractual level of research funding under our agreement with TAP and a lower level of research funding agreed to with Lilly in connection with the November 2003 extension of our collaboration agreement through November 2004. The increase in internal research program expenses in 2004 compared to the 2003 period reflects an increased level of effort in the areas of selective glucocorticoid receptor-modulators (SGRMs), selective androgen receptor modulators (SARMs), and thrombopoietin (TPO) agonists.

The increase in development expenses in the 2004 periods compared to 2003 is due to increased activity on the development of our ONTAK^® second generation product and expenses incurred in connection with the development of an alternate source of supply (Cardinal Health PTS LLC or “Cardinal”) for AVINZA^®. See further discussion of agreement with Cardinal under “Liquidity – Contractual Obligations”.

We expect development expenses to continue to increase in the second half of 2004 due to increased expenses on AVINZA^® post-marketing regulatory commitments, increased activity on the development of our ONTAK^® second generation product, expanded ONTAK^® trials for indications other than CTCL, ongoing expenses on the Phase III clinical trials for Targretin^® capsules in NSCLC, and initiation of additional clinical trials for AVINZA^® and Targretin^® gel.

A summary of our significant internal research and development programs is as follows:

Program	Disease/Indication	Development Phase
AVINZA^®	Chronic, moderate-to-severe pain	Marketed in U.S. Phase IIIB/IV
ONTAK^®	CTCL CLL Peripheral T-cell lymphoma B-cell NHL Psoriasis (severe) NSCLC third line	Marketed in U.S. Phase II Phase II Phase II Phase II Phase II
Targretin^®capsules	CTCL NSCLC first-line NSCLC third-line monotherapy NSCLC second/third-line Advanced breast cancer Psoriasis (moderate to severe) Renal cell cancer	Marketed in U.S. Phase III Phase II Phase II Phase II Phase II Phase II
Targretin^® gel	CTCL Hand dermatitis (eczema) Psoriasis	Marketed in U.S. Phase II/III Phase II
Panretin^® gel	KS	Marketed in U.S.
LGD1550 (RAR agonist)	Advanced cancers Acne Psoriasis	Phase II Pre-clinical Pre-clinical
Selective androgen receptor modulators (agonist/antagonist)	Male hypogonadism, female & male osteoporosis, male & female sexual dysfunction, frailty. Prostate cancer, hirsutism, acne, androgenetic alopecia.	Pre-clinical
LGD5552 (Selective glucocorticoid receptor modulator)	Inflammation, cancer	Pre-clinical
Thrombopoietin oral mimic	Chemotherapy-induced thrombocytopenias (TCP), other TCPs	Pre-clinical

We do not provide forward-looking estimates of costs and time to complete ongoing research and development projects, as such estimates would involve a high degree of uncertainty. We currently estimate our total research and development expenditures over the next three years to range between $250 million and $325 million. Uncertainties include, but are not limited to, our ability to predict the outcome of complex research, our ability to predict the results of clinical studies, requirements placed upon us by regulatory authorities such as the FDA and the EMEA, our ability 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 and development. Refer to the “Risks and Uncertainties” section for additional discussion of the uncertainties surrounding our research and development initiatives.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $16.6 million for the second quarter of 2004 compared to $13.6 million for the second quarter of 2003. Selling, general and administrative expenses for the six months ended June 30, 2004 were $31.1 million compared to $26.0 million for the six months ended June 30, 2003. The increase in 2004 is primarily due to costs associated with additional Ligand sales representatives hired to promote AVINZA^® and higher advertising and promotion expenses for AVINZA^® in connection with our co-promotion arrangement with Organon which started in March 2003. Additionally, marketing expenses increased in 2004 as a result of our increased emphasis on physician-attended product information and advisory meetings for AVINZA^®. Selling, general and administrative expenses are expected to continue to increase in 2004 due to increased marketing activities for AVINZA^® and due to the hiring of an additional 36 pain specialist sales representatives as further discussed under “Recent Developments”. Under the co-promotion agreement, we and Organon share equally all costs for AVINZA^® advertising and promotion, medical affairs and clinical trials.

Co-promotion Expense

Co-promotion expense payable to Organon amounted to $7.0 million and $13.7 million in the three and six months ended June 30, 2004, respectively. Co-promotion expense is based on net sales of AVINZA^® which totaled $23.3 million for the second quarter of 2004 and $45.8 million for the six months ended June 30, 2004. As further discussed under “Overview”, we pay Organon, under the terms of our co-promotion agreement, 30% of net AVINZA^®sales up to $150.0 million. We expect this expense to continue to increase in 2004 as sales of AVINZA^® increase.

Other Expenses, Net

Interest expense increased to $3.1 million for the second quarter of 2004 compared to $2.7 million for the second quarter of 2003 and increased to $6.2 million for the six months ended June 30, 2004 compared to $5.4 million for the six months ended June 30, 2003. The increase in interest expense is due primarily to interest on a note payable secured by one of our corporate office buildings. Effective December 31, 2003, the entity from which we leased the building (Nexus Equity VI LLC or “Nexus”) was consolidated in connection with the implementation of FIN 46(R) “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51". Prior to that, the lease arrangement with Nexus was treated as an operating lease. We subsequently acquired the portion of Nexus we did not previously own in April 2004.

Other expenses, net were $3.0 million for the second quarter of 2004 and $2.9 million for the second quarter of 2003. Other expenses, net were $5.8 million for the six months ended June 30, 2004 compared to $10.7 million for the six months ended June 30, 2003. The decrease in the net expense for the six months ended June 30, 2004 is due to the March 2003 write-off of a $5.0 million one-time payment made in July 2002 to X-Ceptor Therapeutics, Inc. (or X-Ceptor) to extend Ligand’s right to acquire the outstanding stock of X-Ceptor not already held by Ligand. In March 2003, we informed X-Ceptor that we would not exercise the purchase right.

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, capital and operating lease transactions, accounts receivable factoring and equipment financing arrangements and investment income.

At June 30, 2004, working capital was $57.3 million compared to working capital of $76.1 million at December 31, 2003. Cash, cash equivalents, short-term investments, and restricted investments totaled $87.5 million at June 30, 2004 compared to $100.7 million at December 31, 2003. We primarily invest our excess cash in United States government and investment grade corporate debt securities.

During the second quarter of 2003, we entered into a one-year accounts receivable factoring arrangement, under which eligible accounts receivable are sold without recourse to a financing company. The factoring arrangement was extended for an additional one-year period in the second quarter of 2004. We pay commissions to the finance company based on the gross receivables sold, subject to a minimum annual commission. Additionally, we pay interest on the net outstanding balance of the uncollected factored accounts receivable. During the quarter ended June 30, 2004, cash in the amount of $32.0 million was received through the factoring arrangement.

Operating Activities

Operating activities used cash of $15.3 million for the six months ended June 30, 2004 compared to $6.3 million for the six months ended June 30, 2003. The higher use of cash in the 2004 period reflects the impact of changes in working capital primarily due to higher inventory levels at June 30, 2004 in anticipation of higher product sales, the positive impact in the 2003 period of the accounts receivable factoring agreement which was entered into in June 2003, and the positive impact on 2003 cash flows from the collection of certain milestones from collaborative partners, the revenue for which was earned at the end of 2002.

Investing Activities

Investing activities used cash of $12.1 million for the six months ended June 30, 2004 and provided cash of $0.1 million for the six months ended June 30, 2003. The use of cash in the 2004 period reflects the net purchase of short-term investments of $8.5 million, capital expenditures of $2.0 million including $0.6 million in connection with the purchase of Nexus, and $1.1 million for the exercise of an option to buy out future payments due on future sales of lasofoxifene, a product under development by Pfizer. Cash investing activities for the first six months of 2003 reflects net proceeds of $4.5 million from the sale of short-term investments partially offset by a $4.1 million payment to Elan in connection with the November 2002 restructuring of the AVINZA^® license and supply agreement.

Financing Activities

Financing activities provided cash of $10.2 million for the six months ended June 30, 2004 and used cash of $12.0 million for the six months ended June 30, 2003. Cash provided by financing activities in the first six months of 2004 includes net proceeds of $4.6 million from the exercise of employee stock options and stock purchases under our employee stock purchase plan and $1.2 million of net proceeds received under equipment financing arrangements. The use of cash in the first six months of 2003 reflects the $15.9 million repurchase of approximately 2.2 million shares of our outstanding common stock held by an affiliate of Elan in connection with a November 2002 share repurchase agreement. Financing activities for both periods reflect decreases in restricted investment due to the maturity of U.S. government securities held with a trustee under the requirements of our 6% convertible subordinated notes (the Notes). Funds from the sale of the securities were used to pay the semi-annual interest owed on the Notes.

Certain of our property and equipment is pledged as collateral under various equipment financing arrangements. As of June 30, 2004, $6.0 million was outstanding under such arrangements with $2.5 million classified as current. Our equipment financing arrangements have terms of 3 to 5 years with interest ranging from 4.73% to 10.66%.

Liquidity

We expect operating cash flows to continue to benefit in 2004 from increased product sales driven by AVINZA^®. Operating cash will be negatively impacted, however, by higher development expenses to fund clinical trials of our existing products in new indications including Phase III registration trials for Targretin^® capsules in non-small cell lung cancer, higher selling and marketing expenses on AVINZA^®, and by higher co-promotion fees to our partner Organon. Additionally, we are required to pay interest of approximately $4.7 million in November and May of each year on the $155.3 million in 6% convertible subordinated notes issued in November 2002.

We believe our available cash, cash equivalents, short-term investments and existing sources of funding will be sufficient to satisfy our anticipated operating and capital requirements through at least the next 12 months. Our future operating and capital requirements will depend on many factors, including: the effectiveness of our commercial activities; the scope and results of preclinical testing and clinical trials; the pace of scientific progress in our research and development programs; the magnitude of these programs; the time and costs involved in obtaining regulatory approvals; the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; competing technological and market developments; the efforts of our collaborators; the ability to establish additional collaborations or changes in existing collaborations; and the cost of production.

Leases and Off Balance Sheet Arrangements

We lease our office and research facilities under operating leases that generally require us to pay taxes, insurance, maintenance and minimum lease payments. Some of our leases have options to renew.

As of June 30, 2004, we are not involved in any off-balance sheet arrangements.

Contractual Obligations

As of June 30, 2004, future minimum payments due under our contractual obligations are as follows (in thousands):

	Payments Due by Period
	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Equipment financing obligations	$	6,000	$	2,436	$	2,902	$	662	$	—
Operating lease obligations		19,289		1,822		3,664		3,415		10,388
Loan payable to bank		12,309		308		688		11,313		—
6% Convertible Subordinated Notes		155,250		—		—		155,250		—
Other long-term liabilities (1)		2,925		121		2,804		—		—

Total contractual obligations	$	195,773	$	4,687	$	10,058	$	170,640	$	10,388

(1) Other long-term liabilities include merger contingencies and a liability under a royalty financing arrangement. Deferred revenues are excluded because they have no effect on future liquidity.

As of June 30, 2004, we have net open purchase orders (defined as total open purchase orders at quarter end less any accruals or invoices charged to or amounts paid against such purchase orders) totaling approximately $25.5 million. During the second half of 2004, we also plan to spend approximately $2.0 to $3.0 million on capital expenditures.

Under the terms of our AVINZA^® license and supply agreement with Elan, we are committed to purchase an annual minimum number of batches of AVINZA^® from Elan through 2005 estimated at approximately $9.2 million per year.

In March 2004, we entered into a five-year manufacturing and packaging agreement with Cardinal Health PTS, LLC (“Cardinal”) under which Cardinal will manufacture AVINZA^® at its Winchester, Kentucky facility. Under the terms of the agreement, we committed to certain minimum annual purchases ranging from approximately $1.6 million to $2.3 million. In addition, if regulatory approval for the manufacture of AVINZA^®at the Kentucky facility has not been obtained within 30 months of the agreement’s effective date, we will pay Cardinal $50,000 per month until such approval is obtained or through the initial term of the contract. The technology transfer and regulatory approval is expected to be complete in 2005 after which commercial product manufacturing may commence.

Critical Accounting Policies

Certain of our accounting policies require the application of management judgment in making estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience and various other factors deemed to be applicable and reasonable under the circumstances. The use of judgment in determining such estimates and assumptions is by nature, subject to a degree of uncertainty. Accordingly, actual results could differ from the estimates made. Management believes there have been no material changes during the quarter ended June 30, 2004 to the critical accounting policies reported in the Management’s Discussion and Analysis section of our annual report on Form 10-K for the year ended December 31, 2003.

New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 which was subsequently revised prior to implementation in December 2003. The revised interpretation, known as “FIN 46(R)", requires the consolidation of certain variable interest entities (“VIEs”) by the primary beneficiary of the entity if the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or if the equity investors lack the characteristics of a controlling financial interest. We implemented FIN 46(R) on December 31, 2003, and consolidated the entity (Nexus) from which we leased one of our two corporate office buildings as of that date, as we determined that Nexus was a VIE, as defined by FIN 46(R).

In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance for identifying impaired investments and new disclosure requirement for investments that are deemed to be temporarily impaired. The accounting provisions of EITF 03-1 are effective for all reporting periods beginning after June 15, 2004, while the disclosure requirements are effective only for annual periods ending after June 15, 2004. The Company does not believe the impact of adopting EITF 03-1 will be significant to its overall results of operations or financial position.

Risks and Uncertainties

The following is a summary description of some of the many risks we face in our business. You should carefully review these risks in evaluating our business, including the businesses of our subsidiaries. You should also consider the other information described in this report.

RISKS RELATED TO US AND OUR BUSINESS

Our product development and commercialization involves a number of uncertainties, and we may never generate sufficient revenues from the sale of products to become profitable.

We were founded in 1987. We have incurred significant losses since our inception. At June 30, 2004, our accumulated deficit was approximately $683 million. We began receiving revenues from the sale of pharmaceutical products in 1999. We achieved quarterly net income for the first time in our corporate history during the fourth quarter of fiscal 2003. To consistently be profitable, we must successfully develop, clinically test, market and sell our products. Even if we consistently achieve profitability, we cannot predict the level of that profitability or whether we will be able to sustain profitability. We expect that our operating results will fluctuate from period to period as a result of differences in when we incur expenses and receive revenues from product sales, collaborative arrangements and other sources. Some of these fluctuations may be significant.

Most of our products in development will require extensive additional development, including preclinical testing and human studies, as well as regulatory approvals, before we can market them. We cannot predict if or when any of the products we are developing or those being co-developed with our partners will be approved for marketing. There are many reasons that we or our collaborative partners may fail in our efforts to develop our other potential products, including the possibility that:

preclinical testing or human studies may show that our potential products are ineffective or cause harmful side effects;
the products may fail to receive necessary regulatory approvals from the FDA or foreign authorities in a timely manner, or at all;
the products, if approved, may not be produced in commercial quantities or at reasonable costs;
the products, once approved, may not achieve commercial acceptance;
regulatory or governmental authorities may apply restrictions to our products, which could adversely affect their commercial success; or
the proprietary rights of other parties may prevent us or our partners from marketing the products.

We are building marketing and sales capabilities in the United States and Europe which is an expensive and time-consuming process and may increase our operating losses.

Developing the sales force to market and sell products is a difficult, expensive and time-consuming process. We have developed a US sales force of about 130 people. We also rely on third-party distributors to distribute our products. The distributors are responsible for providing many marketing support services, including customer service, order entry, shipping and billing and customer reimbursement assistance. In Europe, we currently rely on other companies to distribute and market our products. We have entered into agreements for the marketing and distribution of our products in territories such as the United Kingdom, Germany, France, Spain, Portugal, Greece, Italy and Central and South America and have established a subsidiary, Ligand Pharmaceuticals International, Inc., with a branch in London, England, to coordinate our European marketing and operations. Our reliance on these third parties means our results may suffer if any of them are unsuccessful or fail to perform as expected. We may not be able to continue to expand our sales and marketing capabilities sufficiently to successfully commercialize our products in the territories where they receive marketing approval. With respect to our co-promotion or licensing arrangements, for example our co-promotion agreement for AVINZA^®, any revenues we receive will depend substantially on the marketing and sales efforts of others, which may or may not be successful.

Our small number of products means our results are vulnerable to setbacks with respect to any one product.

We currently have only five products approved for marketing and a handful of other products/indications that have made significant progress through development. Because these numbers are small, especially the number of marketed products, any significant setback with respect to any one of them could significantly impair our operating results and/or reduce the market prices for our securities. Setbacks could include problems with shipping, distribution, manufacturing, product safety, marketing, government licenses and approvals, intellectual property rights and physician or patient acceptance of the product.

In particular, AVINZA^® our pain product, now accounts for a majority and growing percentage of our revenues and we expect AVINZA^®’s revenues will continue to grow over the next several years. Thus any setback with respect to AVINZA^® could significantly impact our results and our share price. AVINZA^® was licensed from Elan Corporation which is currently its sole manufacturer. We have contracted with Cardinal to provide additional manufacturing, however we expect Elan will be the principal supplier over the next several years. Any problems with Elan’s or Cardinal’s manufacturing operations or capacity could reduce sales of AVINZA^®, as could any licensing or other contract disputes with these suppliers. Likewise, higher than expected discounts, returns and chargebacks and/or slower than expected market penetration could reduce sales. Other setbacks that AVINZA^® could face in the sustained-release opioid market include product safety and abuse issues and intellectual property disputes.

Sales of our products may significantly fluctuate each period based on the nature of our products, our promotional activities and wholesaler purchasing and stocking patterns.

As a result, the overall level of product in the distribution channel may average from two to six months’ worth of projected inventory usage. If any or all of our major distributors decide to substantially reduce the inventory they carry in a given period, our sales for that period could be substantially lower than historical levels.

Our drug development programs will require substantial additional future funding which could hurt our operational and financial condition.

Our drug development programs require substantial additional capital to successfully complete them, arising from costs to:

conduct research, preclinical testing and human studies;
establish pilot scale and commercial scale manufacturing processes and facilities; and
establish and develop quality control, regulatory, marketing, sales and administrative capabilities to support these programs.

Our future operating and capital needs will depend on many factors, including:

the pace of scientific progress in our research and development programs and the magnitude of these programs;
the scope and results of preclinical testing and human studies;
the time and costs involved in obtaining regulatory approvals;
the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
competing technological and market developments;
our ability to establish additional collaborations;
changes in our existing collaborations;
the cost of manufacturing scale-up; and
the effectiveness of our commercialization activities.

We currently estimate our research and development expenditures over the next 3 years to range between $250 million and $325 million. However, we base our outlook regarding the need for funds on many uncertain variables. Such uncertainties include regulatory approvals, the timing of events outside our direct control such as product launches by partners and the success of such product launches, negotiations with potential strategic partners and other factors. Any of these uncertain events can significantly change our cash requirements as they determine such one-time events as the receipt of major milestones and other payments.

While we expect to fund our research and development activities from cash generated from internal operations to the extent possible, if we are unable to do so we may need to complete additional equity or debt financings or seek other external means of financing. If additional funds are required to support our operations and we are unable to obtain them on terms favorable to us, we may be required to cease or reduce further development or commercialization of our products, to sell some or all of our technology or assets or to merge with another entity.

Some of our key technologies have not been used to produce marketed products and may not be capable of producing such products.

To date, we have dedicated most of our resources to the research and development of potential drugs based upon our expertise in our IR and STAT technologies. Even though there are marketed drugs that act through IRs, some aspects of our IR technologies have not been used to produce marketed products. In addition, we are not aware of any drugs that have been developed and successfully commercialized that interact directly with STATs. Much remains to be learned about the location and function of IRs and STATs. If we are unable to apply our IR and STAT technologies to the development of our potential products, we will not be successful in developing new products.

We may require additional money to run our business and may be required to raise this money on terms which are not favorable or which reduce our stock price.

We have incurred losses since our inception and may not generate positive cash flow to fund our operations for one or more years. As a result, we may need to complete additional equity or debt financings to fund our operations. Our inability to obtain additional financing could adversely affect our business. Financings may not be available at all or on favorable terms. In addition, these financings, if completed, still may not meet our capital needs and could result in substantial dilution to our stockholders. For instance, in April 2002 and September 2003 we issued an aggregate of 7.7 million shares of our common stock in a private placement. In addition, in November 2002 we issued in a private placement $155.3 million in aggregate principal amount of our 6% convertible subordinated notes due 2007, which could be converted into 25,149,025 shares of our common stock.

If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or drug development programs, or our marketing and sales initiatives. Alternatively, we may be forced to attempt to continue development by entering into arrangements with collaborative partners or others that require us to relinquish some or all of our rights to technologies or drug candidates that we would not otherwise relinquish.

Our products face significant regulatory hurdles prior to marketing which could delay or prevent sales. Even after approval, government regulation of our business is extensive.

Before we obtain the approvals necessary to sell any of our potential products, we must show through preclinical studies and human testing that each product is safe and effective. We and our partners have a number of products moving toward or currently in clinical trials, the most significant of which are our Phase III trials for Targretin^® capsules in non-small cell lung cancer and three products in Phase III trials by our partners involving bazedoxifene and lasofoxifene. Failure to show any product’s safety and effectiveness would delay or prevent regulatory approval of the product and could adversely affect our business. The clinical trials process is complex and uncertain. The results of preclinical studies and initial clinical trials may not necessarily predict the results from later large-scale clinical trials. In addition, clinical trials may not demonstrate a product’s safety and effectiveness to the satisfaction of the regulatory authorities. A number of companies have suffered significant setbacks in advanced clinical trials or in seeking regulatory approvals, despite promising results in earlier trials. The FDA may also require additional clinical trials after regulatory approvals are received, which could be expensive and time-consuming, and failure to successfully conduct those trials could jeopardize continued commercialization.

The rate at which we complete our clinical trials depends on many factors, including our ability to obtain adequate supplies of the products to be tested and patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites and the eligibility criteria for the trial. For example, each of our Phase III Targretin^®clinical trials involves approximately 600 patients and required significant time and investment to complete enrollments. Delays in patient enrollment for our other trials may result in increased costs and longer development times. In addition, our collaborative partners have rights to control product development and clinical programs for products developed under the collaborations. As a result, these collaborators may conduct these programs more slowly or in a different manner than we had expected. Even if clinical trials are completed, we or our collaborative partners still may not apply for FDA approval in a timely manner or the FDA still may not grant approval.

In addition, the manufacturing and marketing of approved products is subject to extensive government regulation, including by the FDA, DEA and state and other territorial authorities. The FDA administers processes to assure that marketed products are safe, effective, consistently of uniform, high quality and marketed only for approved indications. For example, while our products are prescribed legally by some physicians for unapproved uses, we may not market our products for such uses. Failure to comply with applicable regulatory requirements can result in sanctions up to the suspension of regulatory approval as well as civil and criminal sanctions.

We face substantial competition which may limit our revenues.

Some of the drugs that we are developing and marketing will compete with existing treatments. In addition, several companies are developing new drugs that target the same diseases that we are targeting and are taking IR-related and STAT-related approaches to drug development. The principal products competing with our products targeted at the cutaneous t-cell lymphoma market are Supergen/Abbott’s Nipent and interferon, which is marketed by a number of companies, including Schering-Plough’s Intron A. Products that compete with AVINZA^® include Purdue Pharma L.P.‘s OxyContin and MS Contin, Janssen Pharmaceutica Products, L.P.‘s Duragesic, aai Pharma’s Oramorph SR, Faulding’s Kadian, and generic sustained release morphine sulfate and oxycodone. Many of our existing or potential competitors, particularly large drug companies, have greater financial, technical and human resources than us and may be better equipped to develop, manufacture and market products. Many of these companies also have extensive experience in preclinical testing and human clinical trials, obtaining FDA and other regulatory approvals and manufacturing and marketing pharmaceutical products. In addition, academic institutions, governmental agencies and other public and private research organizations are developing products that may compete with the products we are developing. These institutions are becoming more aware of the commercial value of their findings and are seeking patent protection and licensing arrangements to collect payments for the use of their technologies. These institutions also may market competitive products on their own or through joint ventures and will compete with us in recruiting highly qualified scientific personnel.

Third-party reimbursement and health care reform policies may reduce our future sales.

Sales of prescription drugs depend significantly on access to the formularies, or lists of approved prescription drugs, of third-party payers such as government and private insurance plans, as well as the availability of reimbursement to the consumer from these third party payers. These third party payers frequently require drug companies to provide predetermined discounts from list prices, and they are increasingly challenging the prices charged for medical products and services. Our current and potential products may not be considered cost-effective, may not be added to formularies and reimbursement to the consumer may not be available or sufficient to allow us to sell our products on a competitive basis. For example, we have current and recurring discussions with insurers regarding formulary access, discounts and reimbursement rates for our drugs, including AVINZA^®. We may not be able to negotiate favorable reimbursement rates and formulary status for our products or may have to pay significant discounts to obtain favorable rates and access. Only one of our products, ONTAK^®, is currently eligible to be reimbursed by Medicare. Recently enacted changes by Medicare to the hospital outpatient payment reimbursement system may adversely affect reimbursement rates for ONTAK^®.

In addition, the efforts of governments and third-party payers to contain or reduce the cost of health care will continue to affect the business and financial condition of drug companies such as us. A number of legislative and regulatory proposals to change the health care system have been discussed in recent years, including price caps and controls for pharmaceuticals. These proposals could reduce and/or cap the prices for our products or reduce government reimbursement rates for products such as ONTAK^®. In addition, an increasing emphasis on managed care in the United States has and will continue to increase pressure on drug pricing. We cannot predict whether legislative or regulatory proposals will be adopted or what effect those proposals or managed care efforts may have on our business. The announcement and/or adoption of such proposals or efforts could adversely affect our profit margins and business.

We rely heavily on collaborative relationships and early termination of any of these programs could reduce the financial resources available to us, including research funding and milestone payments.

Our strategy for developing and commercializing many of our potential products, including products aimed at larger markets, includes entering into collaborations with corporate partners, licensors, licensees and others. These collaborations provide us with funding and research and development resources for potential products for the treatment or control of metabolic diseases, hematopoiesis, women’s health disorders, inflammation, cardiovascular disease, cancer and skin disease, and osteoporosis. These agreements also give our collaborative partners significant discretion when deciding whether or not to pursue any development program. Our collaborations may not continue or be successful.

In addition, our collaborators may develop drugs, either alone or with others, that compete with the types of drugs they currently are developing with us. This would result in less support and increased competition for our programs. If products are approved for marketing under our collaborative programs, any revenues we receive will depend on the manufacturing, marketing and sales efforts of our collaborators, who generally retain commercialization rights under the collaborative agreements. Our current collaborators also generally have the right to terminate their collaborations under specified circumstances. If any of our collaborative partners breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully, our product development under these agreements will be delayed or terminated.

We may have disputes in the future with our collaborators, including disputes concerning which of us owns the rights to any technology developed. For instance, we were involved in litigation with Pfizer, which we settled in April 1996, concerning our right to milestones and royalties based on the development and commercialization of droloxifene. These and other possible disagreements between us and our collaborators could delay our ability and the ability of our collaborators to achieve milestones or our receipt of other payments. In addition, any disagreements could delay, interrupt or terminate the collaborative research, development and commercialization of certain potential products, or could result in litigation or arbitration. The occurrence of any of these problems could be time-consuming and expensive and could adversely affect our business.

Challenges to or failure to secure patents and other proprietary rights may significantly hurt our business.

Our success will depend on our ability and the ability of our licensors to obtain and maintain patents and proprietary rights for our potential products and to avoid infringing the proprietary rights of others, both in the United States and in foreign countries. Patents may not be issued from any of these applications currently on file, or, if issued, may not provide sufficient protection. In addition, disputes with licensors under our license agreements may arise which could result in additional financial liability or loss of important technology and potential products and related revenue, if any.

Our patent position, like that of many pharmaceutical companies, is uncertain and involves complex legal and technical questions for which important legal principles are unresolved. We may not develop or obtain rights to products or processes that are patentable. Even if we do obtain patents, they may not adequately protect the technology we own or have licensed. In addition, others may challenge, seek to invalidate, infringe or circumvent any patents we own or license, and rights we receive under those patents may not provide competitive advantages to us. Further, the manufacture, use or sale of our products may infringe the patent rights of others.

Several drug companies and research and academic institutions have developed technologies, filed patent applications or received patents for technologies that may be related to our business. Others have filed patent applications and received patents that conflict with patents or patent applications we have licensed for our use, either by claiming the same methods or compounds or by claiming methods or compounds that could dominate those licensed to us. In addition, we may not be aware of all patents or patent applications that may impact our ability to make, use or sell any of our potential products. For example, US patent applications may be kept confidential while pending in the Patent and Trademark Office and patent applications filed in foreign countries are often first published six months or more after filing. Any conflicts resulting from the patent rights of others could significantly reduce the coverage of our patents and limit our ability to obtain meaningful patent protection. While we routinely receive communications or have conversations with the owners of other patents, none of these third parties have directly threatened an action or claim against us. If other companies obtain patents with conflicting claims, we may be required to obtain licenses to those patents or to develop or obtain alternative technology. We may not be able to obtain any such licenses on acceptable terms, or at all. Any failure to obtain such licenses could delay or prevent us from pursuing the development or commercialization of our potential products.

We have had and will continue to have discussions with our current and potential collaborators regarding the scope and validity of our patents and other proprietary rights. If a collaborator or other party successfully establishes that our patent rights are invalid, we may not be able to continue our existing collaborations beyond their expiration. Any determination that our patent rights are invalid also could encourage our collaborators to terminate their agreements where contractually permitted. Such a determination could also adversely affect our ability to enter into new collaborations.

We may also need to initiate litigation, which could be time-consuming and expensive, to enforce our proprietary rights or to determine the scope and validity of others’ rights. If litigation results, a court may find our patents or those of our licensors invalid or may find that we have infringed on a competitor’s rights. If any of our competitors have filed patent applications in the United States which claim technology we also have invented, the Patent and Trademark Office may require us to participate in expensive interference proceedings to determine who has the right to a patent for the technology.

Hoffmann-La Roche Inc. has received a US patent, has made patent filings and has issued patents in foreign countries that relate to our Panretin^® gel products. While we were unsuccessful in having certain claims of the US patent awarded to Ligand in interference proceedings, we continue to believe that any relevant claims in these Hoffman-La Roche patents in relevant jurisdictions are invalid and that our current commercial activities and plans relating to Panretin^® are not covered by these Hoffman-La Roche patents in the US or elsewhere. In addition, we have our own portfolio of issued and pending patents in this area which cover our commercial activities, as well as other uses of 9-cis retinoic acid, in the US, Europe and elsewhere. However, if the claims in these Hoffman-La Roche patents are not invalid and/or unenforceable, they might block the use of Panretin^® gel in specified cancers, not currently under active development or commercialization by us.

We have also learned that Novartis AG has filed an opposition to our European patent that covers the principal active ingredient of our ONTAK^® drug. We are currently investigating the scope and merits of this opposition. If the opposition is successful, we could lose our ONTAK^® patent protection in Europe which could substantially reduce our future ONTAK^® sales in that region. We could also incur substantial costs in asserting our rights in this opposition proceeding, as well as in other possible future proceedings in the United States.

We also rely on unpatented trade secrets and know-how to protect and maintain our competitive position. We require our employees, consultants, collaborators and others to sign confidentiality agreements when they begin their relationship with us. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our competitors may independently discover our trade secrets.

Reliance on third-party manufacturers to supply our products risks supply interruption or contamination and difficulty controlling costs.

We currently have no manufacturing facilities, and we rely on others for clinical or commercial production of our marketed and potential products. In addition, some raw materials necessary for the commercial manufacturing of our products are custom and must be obtained from a specific sole source. Elan manufactures AVINZA^®for us, Cambrex manufactures ONTAK^® for us and Cardinal Health and Raylo manufacture Targretin^® capsules for us. We also recently entered into contracts with Cardinal Health to manufacture and package AVINZA^® and with Hollister-Stier for the filling and finishing of ONTAK^®. Each of these recent contracts calls for manufacturing and packaging the product at a new facility. Qualification and regulatory approval for these facilities are required prior to starting commercial manufacturing. Any delays or failures of the qualification or approval process could cause inventory problems or product shortages.

To be successful, we will need to ensure continuity of the manufacture of our products, either directly or through others, in commercial quantities, in compliance with regulatory requirements at acceptable cost and in sufficient quantities to meet product growth demands. Any extended or unplanned manufacturing shutdowns, shortfalls or delays could be expensive and could result in inventory and product shortages. If we are unable to reliably manufacture our products our revenues could be adversely affected. In addition, if we are unable to supply products in development, our ability to conduct preclinical testing and human clinical trials will be adversely affected. This in turn could also delay our submission of products for regulatory approval and our initiation of new development programs. In addition, although other companies have manufactured drugs acting through IRs and STATs on a commercial scale, we may not be able to do so at costs or in quantities to make marketable products.

The manufacturing process also may be susceptible to contamination, which could cause the affected manufacturing facility to close until the contamination is identified and fixed. In addition, problems with equipment failure or operator error also could cause delays in filling our customers’ orders.

Our business exposes us to product liability risks or our products may need to be recalled, and we may not have sufficient insurance to cover any claims.

Our business exposes us to potential product liability risks. Our products also may need to be recalled to address regulatory issues. A successful product liability claim or series of claims brought against us could result in payment of significant amounts of money and divert management’s attention from running the business. Some of the compounds we are investigating may be harmful to humans. For example, retinoids as a class are known to contain compounds which can cause birth defects. We may not be able to maintain our insurance on acceptable terms, or our insurance may not provide adequate protection in the case of a product liability claim. To the extent that product liability insurance, if available, does not cover potential claims, we will be required to self-insure the risks associated with such claims. We believe that we carry reasonably adequate insurance for product liability claims.

We use hazardous materials which requires us to incur substantial costs to comply with environmental regulations.

In connection with our research and development activities, we handle hazardous materials, chemicals and various radioactive compounds. To properly dispose of these hazardous materials in compliance with environmental regulations, we are required to contract with third parties at substantial cost to us. Our annual cost of compliance with these regulations is approximately $600,000. We cannot completely eliminate the risk of accidental contamination or injury from the handling and disposing of hazardous materials, whether by us or by our third-party contractors. In the event of any accident, we could be held liable for any damages that result, which could be significant. We believe that we carry reasonably adequate insurance for toxic tort claims.

Our stock price may be adversely affected by volatility in the markets.

The market prices and trading volumes for our securities, and the securities of emerging companies like us, have historically been highly volatile and have experienced significant fluctuations unrelated to operating performance. For example, in 2003, the intraday sale price of our common stock on the Nasdaq National Market was as high as $16.59 and as low as $3.69. Future announcements concerning us or our competitors as well as other companies in our industry and other public companies may impact the market price of our common stock. These announcements might include:

the results of research or development testing of ours or our competitors' products;
technological innovations related to diseases we are studying;
new commercial products introduced by our competitors;
government regulation of our industry;
receipt of regulatory approvals by our competitors;
our failure to receive regulatory approvals for products under development;
developments concerning proprietary rights;
litigation or public concern about the safety of our products; or
intent to sell or actual sale of our stock held by our corporate partners.

Future sales of our securities may depress the price of our securities.

Sales of substantial amounts of our securities in the public market could seriously harm prevailing market prices for our securities. These sales might make it difficult or impossible for us to sell additional securities when we need to raise capital.

You may not receive a return on your securities other than through the sale of your securities.

We have not paid any cash dividends on our common stock to date. We intend to retain any earnings to support the expansion of our business, and we do not anticipate paying cash dividends on any of our securities in the foreseeable future.

Our shareholder rights plan and charter documents may hinder or prevent change of control transactions.

Our shareholder rights plan and provisions contained in our certificate of incorporation and bylaws may discourage transactions involving an actual or potential change in our ownership. In addition, our board of directors may issue shares of preferred stock without any further action by you. Such issuances may have the effect of delaying or preventing a change in our ownership. If changes in our ownership are discouraged, delayed or prevented, it would be more difficult for our current board of directors to be removed and replaced, even if you or our other stockholders believe that such actions are in the best interests of us and our stockholders.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At June 30, 2004, our investment portfolio included fixed-income securities of $39.3 million. At June 30, 2004, we held no other market risk sensitive instruments. Our fixed-income securities are subject to interest rate risk and will decline in value if interest rates increase. This risk is mitigated, however, due to the relatively short effective maturities of the debt instruments in our investment portfolio. Accordingly, an immediate 10% change in interest rates would have no material impact on our financial condition, results of operations or cash flows. Declines in interest rates over time would, however, reduce our interest income.

We do not have a significant level of transactions denominated in currencies other than U.S. dollars and as a result we have limited foreign currency exchange rate risk. The effect of an immediate 10% change in foreign exchange rates would have no material impact on our financial condition, results of operations or cash flows.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluation, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act")) are effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and is accumulated and communicated to Ligand's management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal controls over financial reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2004 that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of Stockholders was held on June 11, 2004. The following elections and proposals were approved at the Annual Meeting:

		Votes For	Votes Against	Votes Withheld	Votes Abstaining	Broker Nonvote
1.	Election of a Board of Directors. The total number of votes cast for, or withheld for each nominee was as follows:
	Henry F. Blissenbach	61,338,519	-- --	1,056,529	-- --	-- --
	Alexander D. Cross, Ph.D.	61,381,034	-- --	1,014,014	-- --	-- --
	John Groom	61,692,668	-- --	702,380	-- --	-- --
	Irving S. Johnson, Ph.D.	61,406,797	-- --	988,251	-- --	-- --
	John W. Kozarich	61,756,092	-- --	638,956	-- --	-- --
	Carl C. Peck, M.D.	61,756,414	-- --	638,634	-- --	-- --
	David E. Robinson	61,350,429	-- --	1,044,619	-- --	-- --
	Michael A. Rocca	61,665,206	-- --	729,842	-- --	-- --

2.	Amendment of the 2002 Stock Option/Stock Issuance Plan to increase the authorized number of shares of common stock available for issuance under such plan from 7,575,529 to 8,325,529.	34,913,248	6,024,901	-- --	6,901,443	14,555,456

3.	Amendment of the Amended and Restated Certificate of Incorporation to increase the authorized number of shares of common stock available from 130,000,000 to 200,000,000.	57,034,072	5,298,326	-- --	62,650	-- --

4.	Ratification of the appointment of Deloitte & Touche LLP as the independent auditors for the fiscal year ending December 31, 2004.	61,833,800	522,923	-- --	38,325	-- --

ITEM 6. (A) EXHIBITS

Exhibit 3.1 (1)	Amended and Restated Certificate of Incorporation of the Company (Filed as Exhibit 3.2).
Exhibit 3.2 (1)	Bylaws of the Company, as amended (Filed as Exhibit 3.3).
Exhibit 3.3 (2)	Amended Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of the Company.
Exhibit 3.5 (5)	Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company dated June 14, 2000.
Exhibit 3.6	Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company dated June 30, 2004.
Exhibit 4.1 (6)	Specimen stock certificate for shares of Common Stock of the Company.
Exhibit 4.8 (9)	Registration Rights Agreement dated November 26, 2002 between Ligand Pharmaceuticals Incorporated and UBS Warburg LLC. (Filed as Exhibit 4.2)
Exhibit 4.9 (9)	Indenture dated November 26, 2002, between Ligand Pharmaceuticals Incorporated and J.P. Morgan Trust Company, National Association, as trustee, with respect to the 6% convertible subordinated notes due 2007. (Filed as Exhibit 4.3).
Exhibit 4.10 (9)	Form of 6% Convertible Subordinated Note due 2007. (Filed as Exhibit 4.4).
Exhibit 4.11 (9)	Pledge Agreement dated November 26, 2002, between Ligand Pharmaceuticals Incorporated and J.P. Morgan Trust Company, National Association. (Filed as Exhibit 4.5).
Exhibit 4.12 (9)	Control Agreement dated November 26, 2002, among Ligand Pharmaceuticals Incorporated, J.P. Morgan Trust Company, National Association and JP Morgan Chase Bank. (Filed as Exhibit 4.6).
Exhibit 4.13 (10)	Amended and Restated Preferred Shares Rights Agreement dated as of March 20, 2004 which includes as Exhibit A the form of Rights Certificate and as Exhibit B the Summary of Rights.
Exhibit 31.1	Certification by Principal Executive Officer, Pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2	Certification by Principal Financial Officer, Pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1	Certification by Principal Executive Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2	Certification by Principal Financial Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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(1)	This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with the Company’s Registration Statement on Form S-4 (No. 333-58823) filed on July 9, 1998.
(2)	This exhibit was previously filed as part of, and is hereby incorporated by reference to the same numbered exhibit filed with the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 1999.
(5)	This exhibit was previously filed as part of, and is hereby incorporated by reference to the same numbered exhibit filed with the Company’s Annual Report on Form 10-K for the period ended December 31, 2000.
(6)	This exhibit was previously filed as part of, and is hereby incorporated by reference to the same numbered exhibit filed with the Company’s Registration Statement on Form S-1 (No. 33-47257) filed on April 16, 1992 as amended.

(9)	This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with the Company’s Registration Statement on Form S-3 (no. 333-102483) filed on January 13, 2003, as amended.
(10)	This exhibit was previously filed as part of, and is hereby incorporated by reference to the same numbered exhibit filed with the Company's Form 8-A12G/A on April 6, 2004.

ITEM 6. (B) REPORTS ON FORM 8-K

We filed or furnished the following reports on Form 8-K during the second quarter of 2004:

1. Ligand filed a Current Report on Form 8-K on May 5, 2004, reporting under Item 12 the issuance of a press release announcing Ligand’s first quarter earnings results.

2. Ligand filed a Current Report on Form 8-K on June 16, 2004, reporting under Item 5 the termination of a stock selling plan for Alexander D. Cross.

LIGAND PHARMACEUTICALS INCORPORATED

June 30, 2004

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 5, 2004

     Ligand Pharmaceuticals Incorporated

By:   /S/ PAUL V.MAIER
        Paul V. Maier
        Senior Vice President, Chief Financial Officer

1.	Ligand filed a Current Report on Form 8-K on May 5, 2004, reporting under Item 12 the issuance of a press release announcing Ligand’s first quarter earnings results.
2.	Ligand filed a Current Report on Form 8-K on June 16, 2004, reporting under Item 5 the termination of a stock selling plan for Alexander D. Cross.

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(D) of theSecurities Exchange Act of 1934

[ ] Transition Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934

LIGAND PHARMACEUTICALS INCORPORATEDQUARTERLY REPORT FORM 10-Q

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS

LIGAND PHARMACEUTICALS INCORPORATED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share data)

LIGAND PHARMACEUTICALS INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data)

LIGAND PHARMACEUTICALS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)

LIGAND PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements

1. Basis of Presentation

2. Accounts Receivable Factoring Arrangement

3. Repurchase of Elan Shares

4. AVINZA® Co-promotion

5. Option to Acquire X-Ceptor Therapeutics, Inc.

6. Purchase of Nexus Equity VI LLC

7. Manufacturing Arrangement

8. Stockholders' Equity

9. Litigation

10. Subsequent Events

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

Overview

Recent Developments

Results of Operations

Liquidity and Capital Resources

Critical Accounting Policies

New Accounting Pronouncements

Risks and Uncertainties

RISKS RELATED TO US AND OUR BUSINESS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II. OTHER INFORMATIONITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 6. (A) EXHIBITS

ITEM 6. (B) REPORTS ON FORM 8-K

LIGAND PHARMACEUTICALS INCORPORATED

June 30, 2004

SIGNATURE

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

[X] Quarterly Report Pursuant to Section 13 or 15(D) of the
Securities Exchange Act of 1934

[ ] Transition Report Pursuant to Section 13 or 15(D) of the
Securities Exchange Act of 1934

LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT

FORM 10-Q

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)

LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)

LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

4. AVINZA^® Co-promotion

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

PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS