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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 SEPTEMBER 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 JURISDICTION 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 October 29, 2004, the registrant had 73,932,315 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 September 30, 2004 and December 31, 2003..................................3

Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003.......4

Consolidated Statements of Cash Flows for the nine months ended September 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.............14

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk........................................33

ITEM 4. Controls and Procedures...........................................................................34


PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings.................................................................................35

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds....................................... *

ITEM 3. Defaults upon Senior Securities................................................................... *

ITEM 4. Submission of Matters to a Vote of Security Holders............................................... *

ITEM 5. Other Information................................................................................. *

ITEM 6. Exhibits..........................................................................................36

SIGNATURE.........................................................................................................38



* No information provided due to inapplicability of item.



2




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)




SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ---------
ASSETS

Current assets:
Cash and cash equivalents.............................................. $ 46,020 $ 59,030
Short-term investments; $4,646 and $9,204 restricted at September 30,
2004 and December 31, 2003, respectively ............................ 34,387 40,004
Accounts receivable, net............................................... 30,583 19,051
Inventories............................................................ 11,355 8,262
Other current assets................................................... 2,985 3,810
---------- ----------
Total current assets........................................... 125,330 130,157
Restricted investments................................................... 1,656 1,656
Property and equipment, net.............................................. 23,844 23,501
Acquired technology and product rights, net ............................. 129,852 137,857
Other assets............................................................. 7,977 8,084
---------- ----------
Total assets................................................... $ 288,659 $ 301,255
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 16,719 $ 18,691
Accrued liabilities.................................................... 49,527 30,315
Current portion of deferred revenue.................................... 2,352 2,564
Current portion of equipment financing obligations .................... 2,617 2,184
Current portion of long-term debt ..................................... 314 295
---------- ----------
Total current liabilities...................................... 71,529 54,049
Long-term debt .......................................................... 167,171 167,408
Long-term portion of deferred revenue ................................... 2,043 2,275
Long-term portion of equipment financing obligations .................... 4,087 2,644
Other long-term liabilities.............................................. 2,870 4,151
---------- ----------
Total liabilities.............................................. 247,700 230,527
---------- ----------
Commitments and contingencies
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 September 30, 2004 and December 31, 2003
respectively; 73,926,616 and 73,264,785 shares issued at
September 30, 2004 and December 31, 2003, respectively.............. 74 73
Additional paid-in capital............................................. 731,841 727,410
Accumulated other comprehensive loss................................... (123) (66)
Accumulated deficit.................................................... (689,922) (655,778)
----------- ----------
41,870 71,639
Treasury stock, at cost; 73,842 shares................................. (911) (911)
----------- ----------
Total stockholders' equity .................................... 40,959 70,728
---------- ----------
$ 288,659 $ 301,255
========== ==========



SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.



3



LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)



THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,

2004 2003 2004 2003
------------ ------------ ------------ ------------

Revenues:
Product sales.................................... $ 44,726 $ 28,123 $ 116,347 $ 72,238
Collaborative research and development and other
revenues ..................................... 4,771 3,160 10,222 11,294
------------ ------------ ------------ ------------
Total revenues............................ 49,497 31,283 126,569 83,532
------------ ------------ ------------ ------------
Operating costs and expenses:
Cost of products sold ............................ 11,011 8,565 29,760 22,951
Research and development.......................... 17,980 17,696 53,006 51,196
Selling, general and administrative............... 15,890 13,216 46,987 39,213
Co-promotion ..................................... 8,501 -- 22,232 --
------------ ------------- ------------ -------------
Total operating costs and expenses........ 53,382 39,477 151,985 113,360
------------ ------------- ------------ -------------
Loss from operations................................ (3,885) (8,194) (25,416) (29,828)
------------ ------------- ------------ -------------
Other income (expense):
Interest income................................. 255 136 694 519
Interest expense................................ (2,919) (2,653) (8,691) (7,992)
Other, net...................................... (240) (376) (731) (6,104)
------------ --------------- ------------ ------------
Total other expense, net................ (2,904) (2,893) (8,728) (13,577)
------------- ------------- ------------- -------------
Net loss............................................ $ (6,789) $ (11,087) $ (34,144) $ (43,405)
============ ============ ============ ============

Basic and diluted per share amounts:
Net loss......................................... $ (0.09) $ (0.16) $ (0.46) $ (0.62)
============= ============= ============= =============
Weighted average number of common shares ........ 73,845,613 70,100,280 73,635,562 69,870,785
============= ============= ============= =============


SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.


4




LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)



NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
------------- --------
OPERATING ACTIVITIES

Net loss........................................................... $ (34,144) $ (43,405)
Adjustments to reconcile net loss to net cash used in operating activities:

Amortization of acquired technology and license rights......... 8,209 8,223
Depreciation and amortization of property and equipment........ 2,397 1,841
Development milestone revenue ................................. (1,956) --
Amortization of debt discount and issuance costs............... 724 634
Write-off of X-Ceptor purchase right........................... -- 5,000
Equity in loss of affiliate ................................... -- 857
Other.......................................................... 88 575
Changes in operating assets and liabilities:
Accounts receivable, net ...................................... (11,532) 2,253
Inventories.................................................... (3,093) (1,164)
Other current assets .......................................... 825 4,120
Accounts payable and accrued liabilities....................... 17,240 14,007
Other liabilities.............................................. (600) --
Deferred revenue............................................... (444) (1,843)
---------- ----------
Net cash used in operating activities.................... (22,286) (8,902)
---------- ----------
INVESTING ACTIVITIES
Purchases of short-term investments................................ (26,178) (877)
Proceeds from sale of short-term investments....................... 27,237 9,293
Purchases of property and equipment................................ (2,843) (1,241)
Payment for AVINZA(R) royalty rights .............................. -- (4,133)
Payment for lasofoxifene royalty rights............................ (1,120) --
Other, net ........................................................ (324) 106
----------- ----------
Net cash (used in) provided by investing activities...... (3,228) 3,148
----------- ----------
FINANCING ACTIVITIES
Principal payments on equipment financing obligations.............. (1,973) (1,775)
Proceeds from equipment financing arrangements .................... 3,848 574
Decrease in restricted investments................................. 4,558 4,108
Repurchase of common stock ........................................ -- (15,867)
Net proceeds from issuance of common stock......................... 6,288 49,366
Decrease in other long-term liabilities............................ -- (73)
Other ............................................................. (217) --
---------- ----------
Net cash provided by financing activities................ 12,504 36,333
---------- ----------
Net (decrease) increase in cash and cash equivalents............... (13,010) 30,579
Cash and cash equivalents at beginning of period................... 59,030 42,423
--------- ---------
Cash and cash equivalents at end of period......................... $ 46,020 $ 73,002
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid...................................................... $ 4,936 $ 4,727
========= =========



SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.


5




LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The consolidated financial statements of Ligand Pharmaceuticals
Incorporated ("Ligand" or the "Company") for the three and nine months ended
September 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 September 30, 2004 and the consolidated results of
operations for the three and nine months ended September 30, 2004 and 2003. The
results of operations for the period ended September 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 materially differ from those
estimates.

RECLASSIFICATIONS Certain reclassifications have been made to amounts included
in the prior years' financial statements to conform to the current year
presentation.

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.

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. In September 2004,
the FASB delayed the accounting provisions of EITF 03-1; however the disclosure
requirements remain effective 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.

GUARANTEES AND INDEMNIFICATIONS. In November 2002, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 45 ("FIN 45"),
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB
STATEMENTS NO. 5, 57 AND 107 AND RESCISSION OF FIN 34. The following is a
summary of the Company's agreements that the Company has determined are within
the scope of FIN 45:

Under its bylaws, the Company has agreed to indemnify its officers and directors
for certain events or occurrences arising as a result of the officer's or
director's serving in such capacity. The term of the indemnification period is
for the officer's or director's lifetime. The maximum potential amount of future
payments the Company could be required

6




to make under these indemnification agreements is unlimited. However, the
Company has a directors and officers liability insurance policy that limits its
exposure and enables it to recover a portion of any future amounts paid. As a
result of its insurance policy coverage, the Company believes the estimated fair
value of these indemnification agreements is minimal and has no liabilities
recorded for these agreements as of September 30, 2004.

The Company enters into indemnification provisions under its agreements with
other companies in its ordinary course of business, typically with business
partners, contractors, customers and landlords. Under these provisions the
Company generally indemnifies and holds harmless the indemnified party for
direct losses suffered or incurred by the indemnified party as a result of the
Company's activities or, in some cases, as a result of the indemnified party's
activities under the agreement. The maximum potential amount of future payments
the Company could be required to make under these indemnification provisions is
unlimited. The Company has not incurred material costs to defend lawsuits or
settle claims related to these indemnification agreements. As a result, the
Company believes the estimated fair value of these agreements is minimal.
Accordingly, the Company has no liabilities recorded for these agreements as of
September 30, 2004.

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 Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION and SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION -TRANSITION AND DISCLOSURE, 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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------------- -------------- -------------- ----------

Net loss as reported...................... $ (6,789) $ (11,087) $ (34,144) $ (43,405)
Stock-based employee compensation
expense included in reported net loss... -- -- -- 405
Less total stock-based compensation
expense determined under fair value
based method for all awards............. (2,053) (1,608) (5,438) (5,063)
------------- ------------- ------------ ------------
Net loss pro forma........................ $ (8,842) $ (12,695) $ (39,582) $ (48,063)
============= ============= ============ ============

Basic and diluted per share amounts:

Net loss per share as reported ........... $ (0.09) $ (0.16) $ (0.46) $ (0.62)
============ ============ ============ ============

Net loss per share pro forma.............. $ (0.12) $ (0.18) $ (0.54) $ (0.69)
============ ============ ============ ============


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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------------- -------------- -------------- ----------

Risk free interest rate................. 3.37% 2.83% 3.37% 2.83%
Dividend yield.......................... -- -- -- --
Volatility.............................. 116% 69% 116% 69%
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.

7



ACCOUNTS RECEIVABLE. Accounts receivable consist of the following (in
thousands):



September 30, December 31,
2004 2003
---------------- ------------

Due from finance company............$ 17,509 $ 14,106
Trade accounts receivable............ 14,493 6,060
Less allowances...................... (1,419) (1,115)
---------------- ------------
$ 30,583 $ 19,051
=============== ============


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):



September 30, December 31,
2004 2003
---------------- -----------

Raw materials.......................$ 631 $ 101
Work-in-process...................... 2,653 4,261
Finished goods....................... 8,071 3,900
--------------- -----------
$ 11,355 $ 8,262
=============== ===========


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



September 30, December 31,
2004 2003
---------------- -----------

Debt issue costs, net...............$ 3,481 $ 4,205
Prepaid royalty buyout, net (1)...... 3,772 2,856
Other................................ 724 1,023
---------------- -----------
$ 7,977 $ 8,084
=============== ===========



Amortization of debt issue costs was $0.2 million for each of the three
months ended September 30, 2004 and 2003, and $0.7 million for each of the nine
months ended September 30, 2004 and 2003. Estimated annual amortization for
these assets in each of the years in the period from 2004 to 2007 is
approximately $1.0 million.

(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(R) and license and royalty rights for AVINZA(R).
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):



September 30, December 31,
2004 2003
-------------- --------------

AVINZA(R).................................... $ 114,437 $ 114,437
ONTAK(R)..................................... 45,312 45,312
Less accumulated amortization............... (29,897) (21,892)
-------------- --------------
$ 129,852 $ 137,857
============== ==============


Amortization of acquired technology and product rights was $2.7 million for
each of the three months ended September 30, 2004 and 2003, and $8.0 million for
each of the nine months ended September 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.

8



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



September 30, December 31,
2004 2003
-------------- -------------

Allowances for product returns, sales
incentives, rebates and chargebacks..... $ 23,776 $ 10,347
Amount due co-promote
partner................................. 9,039 9,360
Compensation............................... 4,653 3,888
Royalties.................................. 4,454 3,833
Interest................................... 3,493 1,138
Other...................................... 4,112 1,749
-------------- -------------
$ 49,527 $ 30,315
============= =============


LONG-TERM DEBT. Long-term debt consists of the following (in thousands):



September 30, December 31,
2004 2003
--------------- --------------

6% Convertible Subordinated Notes..$ 155,250 $ 155,250
Note payable to bank............... 12,235 12,453
--------------- --------------
167,485 167,703
Less current portion............... (314) (295)
--------------- --------------
Long-term debt ....................$ 167,171 $ 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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------- ---------------- ------------------ ------------------

Net loss, as reported..................$ (6,789) $ (11,087) $ (34,144) $ (43,405)
Unrealized gains (losses) on
available for sale securities........ 8 (46) (45) (57)
Foreign currency translation
adjustments.......................... (5) 4 (12) 13
------------- ---------------- ------------------ ------------------
Comprehensive loss $ (6,786) $ (11,129) $ (34,201) $ (43,449)
============= ================ ================== ==================


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



September 30, December 31,
2004 2003
------------- -------------

Net unrealized holding (loss) gain
on available-for-sale securities...........$ (16) $ 29
Net unrealized loss on foreign currency
translation................................ (107) (95)
------------- -------------
$ (123) $ (66)
============= ==============



9



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. 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 and nine
months ended September 30, 2004, cash in the amount of $30.0 million and $86.0
million, respectively, was received through the factoring arrangement. Fees and
expenses related to the factoring arrangement for the three and nine months
ended September 30, 2004 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 September 30, 2004, the gross amount due from the financing company was $17.5
million, which represents approximately 57% of the Company's accounts
receivable.

3. REPURCHASE OF ELAN SHARES

In connection with the November 2002 restructuring of the Company's
AVINZA(R) 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(R) royalty rate under the restructured
license and supply agreement. The shares were repurchased and retired in
February 2003.

4. AVINZA(R) CO-PROMOTION

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



% of Incremental Net Sales
ANNUAL NET SALES OF AVINZA(R) 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 nine months ended September 30, 2004, Ligand recognized
co-promotion expense of $8.5 million and $22.2 million, respectively.

Additionally, Ligand and Organon agreed to equally share all costs for
AVINZA(R) 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.

10




5. 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 2003 Consolidated Statement
of Operations.

On September 29, 2004, Ligand announced that the Company had agreed to vote
its shares in favor of the proposed acquisition of X-Ceptor by Exelixis Inc.
("Exelixis"). Exelixis' acquisition of X-Ceptor was subsequently completed on
October 18, 2004 and in connection therewith, Ligand received 618,165 shares of
Exelixis common stock. The shares received by Ligand are unregistered and
subject to trading restrictions for up to two years. Additionally, approximately
21% of the shares will be placed in escrow for up to one year to satisfy
indemnification and other obligations. Ligand expects to record a net gain on
the transaction in the fourth quarter of 2004 of approximately $2.9 million,
based on the fair market value of the consideration received.

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(R) 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(R) at the Kentucky facility has not been obtained
by August 2006, 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. PFIZER MILESTONE

In the third quarter of 2004, Ligand earned a development milestone of
approximately $2.0 million from Pfizer, Inc. ("Pfizer") in connection with
Pfizer's filing with the FDA of a new drug application for lasofoxifene. The
milestone is recorded as "Other revenue" in the accompanying 2004 Consolidated
Statement of Operations. Under the terms of the agreement between Ligand and
Pfizer, settlement of milestones can occur in either cash or shares of Ligand
common stock held by Pfizer. Pfizer elected to settle the milestone in stock and
subsequently tendered 181,818 shares to the Company. Ligand retired the tendered
shares in September 2004.

9. 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.


11




10. 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 has not
accrued any portion of the awarded interest as it cannot reasonably estimate a
range of possible loss given the current status of the litigation.

Beginning on August 9, 2004, several purported class action stockholder
lawsuits were filed in the United States District Court for the Southern
District of California against the Company and certain of its directors and
officers. The actions were brought on behalf of purchasers of the Company's
common stock during several time periods, the longest of which runs from July
28, 2003 through August 2, 2004. The complaints generally allege that the
Company violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 of the Securities and Exchange Commission by making false and
misleading statements, or concealing information about the Company's business,
forecasts and financial performance, in particular statements and information
related to drug development issues and AVINZA(R) inventory levels. Plaintiffs in
the federal securities actions have recently filed motions to consolidate the
actions and for the appointment of lead counsel and lead plaintiff. These
motions are scheduled to be heard by the Court in November 2004. No trial date
has been set.

Beginning on August 13, 2004, several derivative actions were filed on
behalf of the Company by individual stockholders in the Superior Court of
California. The complaints name the Company's directors and certain of its
officers as defendants and name the Company as a nominal defendant. The
complaints are based on the same facts and circumstances as the purported class
actions discussed in the previous paragraph and generally allege breach of
fiduciary duties, abuse of control, waste and mismanagement, insider trading and
unjust enrichment. No trial date has been set.

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.

12



11. SUBSEQUENT EVENTS

ROYALTY PHARMA AGREEMENT

In November 2004, Ligand and Royalty Pharma agreed to amend their existing
royalty agreement for three selective estrogen receptor modulator (SERM)
products now in late-stage development with two of the Company's collaborative
partners, Pfizer and Wyeth. Under the revised agreement, Royalty Pharma agreed
to purchase an additional 1.625% royalty on future sales of the SERM products
for $32.5 million. Payments from the royalty purchase are non-refundable and
Royalty Pharma has no remaining royalty purchase options. Ligand expects to
recognize the $32.5 million as other revenue upon receipt in the fourth quarter
of 2004.

RESTRUCTURING OF ONTAK ROYALTY

In November 2004, Ligand and Eli Lilly and Company (Lilly) agreed to amend
their ONTAK royalty agreement to add options in 2005 that if exercised would
restructure Ligand's royalty obligations on net sales of ONTAK. Under the
revised agreement, Ligand and Lilly will each have two options. Ligand's options
will be exercisable in January 2005 and April 2005 to buy down a portion of the
Company's ONTAK royalty obligation on net sales in the United States for total
consideration of $33.0 million. Lilly will also have two options exercisable in
July 2005 and October 2005 to trigger the same royalty buy-downs for total
consideration of up to $37.0 million dependent on whether Ligand has exercised
one or both of its options.

Ligand's first option provides for a one-time payment of $20.0 million to
Lilly in exchange for the elimination of Ligand's ONTAK royalty obligations in
2005 and a reduced reverse-tiered royalty scale on ONTAK sales in the U.S.
thereafter. The second option provides for a one-time payment of $13.0 million
to Lilly in exchange for the elimination of royalties on ONTAK net sales in the
U.S. in 2006 and a reduced reverse-tiered royalty thereafter. If both options
are exercised, beginning in 2007 and throughout the remaining ONTAK patent life
(2014), Ligand would pay no royalties to Lilly on U.S. sales up to $38.0
million. Thereafter, Ligand would pay royalties to Lilly at a rate of 20% on net
U.S. sales between $38.0 million and $50.0 million; at a rate of 15% on net U.S.
sales between $50.0 million and $72.0 million; and at a rate of 10% on net U.S.
sales in excess of $72.0 million.

Neither party is obligated to exercise either of its options and the
options will expire if not exercised by specified dates.


13



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(R), AVINZA(R), ONTAK(R), PANRETIN(R) AND TARGRETIN(R). 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(R), for the
relief of chronic, moderate to severe pain; ONTAK(R), for the treatment of
patients with persistent or recurrent cutaneous T-cell lymphoma (or CTCL);
Targretin(R) capsules, for the treatment of CTCL in patients who are refractory
to at least one prior systemic therapy; Targretin(R) gel, for the topical
treatment of cutaneous lesions in patients with early stage CTCL; and
Panretin(R) gel, for the treatment of Kaposi's sarcoma in AIDS patients. In
Europe, we have marketing authorizations for Panretin(R) gel and Targretin(R)
capsules and are currently marketing these products under arrangements with
local distributors. In April 2003, we withdrew our ONZAR(TM) (ONTAK(R) 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(R) development. We expect
to resubmit the ONZAR(TM) application with the second generation product in
2005.

In February 2003, we entered into an agreement for the co-promotion of
AVINZA(R) 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(R) net sales
based on the following schedule:



% of Incremental Net Sales
ANNUAL NET SALES OF AVINZA(R) 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 nine months ended September 30, 2004, we recognized
co-promotion expense of $8.5 million and $22.2 million, respectively, with no
such expenses incurred in the same periods during 2003. Additionally, both
companies agreed to share equally all costs for AVINZA(R) 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.

14



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 through the hiring, in the second and third quarters
of 2004, of an additional 36 Ligand specialty sales representatives, calling on
top decile primary care physicians in a mirrored activity to Organon's sales
representatives. Additionally, the companies announced plans for increased sales
calls to the long-term care and hospice market segments 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.

Although these sales call expansion initiatives were in process during the
second and third quarters of 2004, the productivity and prescription increases
anticipated from the expanded calls on primary care physicians and the long-term
care and hospice sales plans were slower than expected. The most significant
factor impacting primary care physician call productivity was considered to be
territory imbalances of AVINZA(R) target physicians (range of 20 - 120
physicians per territory), making high quality reach and frequency of calls
difficult to sustain. As part of an overall larger sales force realignment in
Organon, a thorough territory rebalancing built around AVINZA(R) targets
(resulting in an average of 60 physicians across all territories) was
implemented in November 2004 and is expected to result in significant sales call
productivity increases beginning in the fourth quarter of 2004 and continuing in
2005. While the overall impact of these changes is expected to be positive, the
impact in some territories in the fourth quarter of 2004 could cause near term
discontinuity of effort. The long-term care and hospice plans have progressed
with key contract additions but pull-through demand has lagged due to limited
capability to cover physicians and consulting pharmacists. The reorganization
and rebalancing is expected to improve this deficiency through increased
coverage of focused targets.

RESULTS OF OPERATIONS

Total revenues for the three months ended September 30, 2004 were $49.5
million compared to $31.3 million for the three months ended September 30, 2003.
Loss from operations for the three months ended September 30, 2004 was $3.9
million compared to $8.2 million for the 2003 period. Net loss for the three
months ended September 30, 2004 was $6.8 million, or $0.09 per share, compared
to net loss of $11.1 million, or $0.16 per share, for the three months ended
September 30, 2003.

For the nine months ended September 30, 2004, total revenues were $126.6
million, compared to $83.5 million for 2003. Loss from operations for the nine
months ended September 30, 2004 of $25.4 million compares to $29.8 million for
2003. Net loss for the same period in 2004 was $34.1 million, or $0.46 per
share, compared to a net loss of $43.4 million, or $0.62 per share, for the 2003
period.

PRODUCT SALES

Product sales for the three months ended September 30, 2004 were $44.7
million compared to $28.1 million for the three months ended September 30, 2003.
Product sales for the nine months ended September 30, 2004 were $116.3 million
compared to $72.2 million for the nine months ended September 30, 2003. A
comparison of sales by product is as follows (in thousands):

15





Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ --------------

AVINZA(R)................................ $ 28,336 $ 15,898 $ 74,107 $ 34,188
ONTAK(R) ................................ 9,897 10,909 25,931 27,261
Targretin(R) capsules.................... 4,784 1,058 12,445 7,490
Targretin(R) gel and Panretin(R) gel..... 1,709 258 3,864 3,299
------------ ------------ ------------ --------------
Total product sales.................. $ 44,726 $ 28,123 $ 116,347 $ 72,238
============ ============ ============ ==============


AVINZA(R)

The increase in sales of AVINZA(R) for the three and nine months ended
September 30, 2004 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 and the product's success in achieving state
Medicaid and commercial formulary status. Formulary access removes obstacles to
physicians prescribing the product and facilitates patient access to the product
through lower co-pays. Sales in 2004 also benefited from a 9.9% price increase
effective January 1, 2004 and a 9.0% price increase effective July 1, 2004.
Since the start of co-promotion activities, AVINZA(R) had been promoted by more
than 800 sales representatives compared to approximately 50 representatives in
2003 prior to co-promotion. As a result of a recent sales force restructuring
and rebalancing of the Organon AVINZA(R) sales territories, as further discussed
above under "Recent Developments", and the expansion of Ligand's sales force,
four separate sales forces of approximately 600 representatives will now be
deployed to provide more than 850,000 focused sales calls per year to the
primary care, specialist, and long-term care and hospice markets. The increased
focus on AVINZA(R) physicians and the rebalanced territories are expected to
improve the quality and productivity of the co-promotion joint sales call plan.

AVINZA(R) sales were negatively impacted during 2004 by a higher level of
Medicaid rebates driven by increased prescriptions in states where AVINZA(R) (1)
obtained preferred formulary status relative to competing products and (2) came
onto the state formulary but not in a preferred position. AVINZA(R) sales for
the three and nine months ended September 30, 2004 compared to the three and
nine months ended September 30, 2003 were also impacted by a higher level of
rebates under certain commercial contracts entered into in late 2003 and early
2004 with pharmacy benefit managers (PBMs), group purchasing organizations
(GPOs) and health maintenance organizations (HMOs).

In 2004, the level of Medicaid prescriptions significantly exceeded the
amounts previously experienced in 2003 as a result of the rapid uptake of
AVINZA(R) prescriptions in states where Medicaid preferred status was achieved.
As a result, we increased our AVINZA(R) Medicaid 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 to our estimates for Medicaid
prescription activity or prescriptions written under our commercial contracts,
however, may have an impact on our rebate liability and a corresponding impact
on AVINZA(R) net product sales.

AVINZA(R) sales in the first and second quarters of 2004 were also impacted
by approximately $4.9 million from higher than estimated product 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 product
returns will continue to normalize to a more predictable level across all
geographic territories as AVINZA(R) prescriptions continue to increase, the fact
that there are no more development stage batches in the wholesale channel, and
the effect of distribution service agreements entered during the third quarter
of 2004 with certain wholesaler customers (as more fully discussed under "Our
Product Sales" below). 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(R) product returns and net sales.
For example, a 20% variance to our estimated returns rate for AVINZA(R) could
result in an adjustment to our returns provision and net product sales of
approximately $1.5 million.


16




ONTAK(R)

The decrease in ONTAK(R) sales for the three and nine months ended
September 30, 2004 compared to the same periods in 2003 reflects increased
chargebacks and rebates due to our patient mix and evolving reimbursement rates.
This was partially offset by a 9% price increase effective January 1, 2004 and
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(R) as measured by shipments to end users
increased by 19% for the three months ended September 30, 2004 and 25% for the
nine months ended September 30, 2004 compared to the same periods in 2003.
ONTAK(R) sales in 2003 also benefited from increased wholesaler stocking as
certain wholesaler customers expanded storage capacity in connection with
increasing demand.

TARGRETIN(R) CAPSULES

The increase in sales of Targretin(R) capsules for the three and nine
months ended September 30, 2004 compared to the same periods in 2003 reflects a
7% price increase effective January 1, 2004 and the full period impact of a 15%
price increase effective April 1, 2003. Additionally, sales in the third quarter
of 2003 reflect lower product shipments due to a decision to better balance
wholesale inventories through reductions at two major customers. 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(R) for patients with CTCL. As a result, we continue to expect improved
patient access for Targretin(R) for the remainder of 2004.

OUR PRODUCT SALES

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(R) ended the third quarter
of 2004 with a market share of prescriptions in the sustained-release opioid
market of 4.8% compared to 2.0% at the end of the third quarter of 2003.
Quarterly prescription market share for the three months ended September 30,
2004 was 4.2% compared to 1.4% for the three months ended September 30, 2003. We
expect that AVINZA(R) 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 due primarily to
higher sales of AVINZA(R), which will benefit from the expansion of the Ligand
AVINZA(R) sales force and sales efforts discussed under the "Recent
Developments" section above and the January 2004 and July 2004 price increases
discussed previously. We also continue to expect that demand for and sales of
ONTAK(R) 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(R), 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 wholesalers decide to reduce the inventory they carry
in a given period (subject to the terms of our fee-for-service agreements
discussed below), our sales for that period could be substantially lower than
historical levels.

In the third quarter of 2004, we entered into fee-for-service agreements
(or distribution service agreements) for each of our products with our three
largest wholesaler customers. In exchange for a set fee, the wholesalers have
agreed to provide us with certain information regarding product stocking and
out-movement; agreed to maintain inventory quantities within specified minimum
and maximum levels; inventory handling, stocking and management services; and
certain other services surrounding the administration of returns and
chargebacks. In connection with


17



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 product gross margins as volumes grow. 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 have entered discussions and expect to
complete distribution service agreements with additional, smaller wholesaler
customers during the fourth quarter of 2004.

COLLABORATIVE RESEARCH AND DEVELOPMENT AND OTHER REVENUES

Collaborative research and development and other revenues for the three
months ended September 30, 2004 were $4.8 million compared to $3.2 million for
the three months ended September 30, 2003. For the nine months ended September
30, 2004, collaborative research and development and other revenues were $10.2
million compared to $11.3 million in the prior year period. Collaborative
research and development and other revenues include 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.

A comparison of collaborative research and development and other revenues
is as follows (in thousands):



Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ --------------

Collaborative research and development..... $ 1,988 $ 2,520 $ 6,307 $ 8,516
Development milestones..................... 2,706 563 3,681 2,544
Other...................................... 77 77 234 234
------------ ------------ ------------ --------------
$ 4,771 $ 3,160 $10,222 $11,294
============ ============ ============ ==============


The decrease in ongoing research activities reimbursement revenue for the
nine months ended September 30, 2004 compared to the 2003 period is due to the
contractually agreed lower level of research activity and funding under our
collaboration arrangement with TAP, which contributed $2.5 million to revenue
for the nine months ended September 30, 2004 compared to $3.4 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
$3.4 million to revenue for the nine months ended September 30, 2004 compared to
$4.3 million for the nine months ended September 30, 2003. The research term of
the Lilly collaboration was extended for an additional year effective November
2003 at a lower level of funding.

Development milestone revenue for the three months ended September 30, 2004
includes net development milestones of $2.0 million from Pfizer as a result of
Pfizer's filing with the FDA of a new drug application for lasofoxifene and $0.8
million earned from TAP in connection with TAP's selection of an additional
selective androgen receptor modulator (SARM) as a second clinical candidate for
development for the treatment of major androgen-related diseases. Development
milestone revenue for the three months ended September 30, 2003 represents a
$0.6 million milestone earned from Wyeth. Development milestone revenues for the
nine months ended September 30, 2004 also includes a $0.8 million milestone
earned from Glaxo, while revenues for 2003 include a $1.1 million milestone from
Lilly and a $0.8 million milestone from Glaxo.

GROSS MARGIN

Gross margin on product sales was 75.4% for the three months ended
September 30, 2004 compared to 69.5% for the three months ended September 30,
2003. Gross margin on product sales for the nine months ended September 30, 2004
was 74.4% compared to 68.2% for the prior year period. The increase in the
margin in 2004 is due to the relative increase of sales of AVINZA(R) compared to
2003. AVINZA(R), which represented 64% of product sales in 2004 compared to 47%
in the prior year, has significantly higher margins than ONTAK(R) for which we
pay third party royalties totaling 26.5% of ONTAK(R) product sales. For both
AVINZA(R) and ONTAK(R) we have capitalized license, royalty and technology
rights recorded in connection with the acquisition of the rights to those


18



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(R) rebates and
product returns and ONTAK(R) chargebacks and rebates as further discussed under
"PRODUCT SALES". Overall, given the fixed level of amortization of the
capitalized AVINZA(R) license and royalty rights and the ONTAK(R) acquired
technology, we expect the AVINZA(R) and ONTAK(R) gross margin percentages to
continue to increase as sales of AVINZA(R) and ONTAK(R) increase.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses were $18.0 million for the three months
ended September 30, 2004 compared to $17.7 million for the three months ended
September 30, 2003. For the nine months ended September 30, 2004, research and
development expenses were $53.0 million compared to $51.2 million for the nine
months ended September 30, 2003. The components of research and development
expenses are as follows (in thousands):



Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------

RESEARCH
Research performed under collaboration agreements ...... $ 1,937 $ 2,479 $ 5,813 $ 8,453
Internal research programs ............................. 4,117 2,996 11,636 8,534
------------ ------------ ------------ ------------
Total research.......................................... 6,054 5,475 17,449 16,987
------------ ------------ ------------ ------------

DEVELOPMENT
New product/indications development .................... 7,084 8,166 23,945 24,215
Existing product support (1) ........................... 4,842 4,055 11,612 9,994
------------ ------------ ------------ ------------
Total development....................................... 11,926 12,221 35,557 34,209
------------ ------------ ------------ ------------

Total research and development.......................... $ 17,980 $ 17,696 $ 53,006 $ 51,196
============ ============ ============ ============



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

Overall, spending for research expenses remained relatively constant in
2004 compared to the 2003 periods, 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 2004 compared to 2003 is due to
increased activity on the development of our ONTAK(R) 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(R). See further
discussion of agreement with Cardinal under "Liquidity - Contractual
Obligations".

We expect development expenses to increase in the fourth quarter of 2004
due to increased expenses associated with AVINZA(R) post-marketing regulatory
commitments, continued activity on the development of our ONTAK(R) second
generation product, expanded ONTAK(R) trials for indications other than CTCL,
ongoing expenses on the Phase III clinical trials for Targretin(R) capsules in
NSCLC, and initiation of additional clinical trials for AVINZA(R) and
Targretin(R) gel.


19



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



PROGRAM DISEASE/INDICATION DEVELOPMENT PHASE
- -------- ------------------ -----------------

AVINZA(R) Chronic, moderate-to-severe pain Marketed in U.S.
Phase IIIB/IV

ONTAK(R) CTCL Marketed in U.S.
CLL Phase II
Peripheral T-cell lymphoma Phase II
B-cell NHL Phase II
Psoriasis (severe) Phase II
NSCLC third line Phase II

Targretin(R) capsules CTCL Marketed in U.S.
NSCLC first-line Phase III
NSCLC third-line monotherapy Phase II
NSCLC second/third-line Phase II
Advanced breast cancer Phase II
Psoriasis (moderate to severe) Phase II
Renal cell cancer Phase II

Targretin(R) gel CTCL Marketed in U.S.
Hand dermatitis (eczema) Phase II/Planned Phase III
Psoriasis Phase II

Panretin(R) gel KS Marketed in U.S.

LGD1550 (RAR agonist) Advanced cancers Phase II
Acne Pre-clinical
Psoriasis Pre-clinical

Selective androgen receptor modulators Male hypogonadism, female & male Pre-clinical
(agonist/antagonist) osteoporosis, male & female sexual
dysfunction, frailty. Prostate cancer,
hirsutism, acne, androgenetic alopecia.

LGD5552 (Selective glucocorticoid Inflammation, cancer Pre-clinical
receptor modulator)

Thrombopoietin oral mimic Chemotherapy-induced Pre-clinical
thrombocytopenias (TCP), other TCPs


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 below for additional discussion of the uncertainties surrounding our
research and development initiatives.


20



SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $15.9 million for the
three months ended September 30, 2004 compared to $13.2 million for the three
months ended September 30, 2003. Selling, general and administrative expenses
for the nine months ended September 30, 2004 were $47.0 million compared to
$39.2 million for the nine months ended September 30, 2003. The increase in 2004
is primarily due to costs associated with additional Ligand sales
representatives hired to promote AVINZA(R) and higher advertising and promotion
expenses for AVINZA(R) in connection with our co-promotion activites 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(R). Selling, general and
administrative expenses are expected to continue to increase in the fourth
quarter of 2004 due to increased marketing activities for AVINZA(R) and the
hiring of an additional 36 pain specialist sales representatives as discussed
above. Under the co-promotion agreement, we and Organon share equally all costs
for AVINZA(R) advertising and promotion, medical affairs and clinical trials.

CO-PROMOTION EXPENSE

Co-promotion expense payable to Organon amounted to $8.5 million and $22.2
million in the three and nine months ended September 30, 2004, respectively.
Co-promotion expense is based on net sales of AVINZA(R) which totaled $28.3
million for the three months ended September 30, 2004 and $74.1 million for the
nine months ended September 30, 2004. As further discussed under "Overview", we
pay Organon, under the terms of our co-promotion agreement, 30% of net AVINZA(R)
sales up to $150.0 million.

OTHER EXPENSES, NET

Interest expense increased to $2.9 million for the three months ended
September 30, 2004 compared to $2.7 million for the three months ended September
30, 2003 and increased to $8.7 million for the nine months ended September 30,
2004 compared to $8.0 million for the nine months ended September 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, net were $0.7 million for the nine months ended September 30, 2004
compared to $6.1 million for the nine months ended September 30, 2003. The
decrease in the net expense for the nine months ended September 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 September 30, 2004, working capital was $53.8 million compared to
working capital of $76.1 million at December 31, 2003. Cash, cash equivalents,
short-term investments, and restricted investments totaled $82.1 million at
September 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. During the three and nine months ended September
30, 2004, cash in the amount of $30.0 million and $86.0 million, respectively,
was received through the factoring arrangement.


21



OPERATING ACTIVITIES

Operating activities used cash of $22.3 million for the nine months ended
September 30, 2004 compared to $8.9 million for the nine months ended September
30, 2003. The higher use of cash in the 2004 period reflects the impact of
changes in working capital primarily driven by an increase in net accounts
receivable resulting from higher 2004 product sales and higher inventory levels
at September 30, 2004 to support the increased product sales. Operating cash
flows in the 2003 period benefited from the impact of the accounts receivable
factoring agreement which was entered into in the second quarter of 2003,
combined with the positive impact 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 $3.2 million for the nine months ended
September 30, 2004 and provided cash of $3.1 million for the nine months ended
September 30, 2003. The use of cash in the 2004 period reflects capital
expenditures of $2.8 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, partially offset by the net proceeds from the sale of short-term
investments of $1.1 million. Cash provided by investing activities for 2003
reflects net proceeds of $8.4 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(R) license and supply agreement and
capital expenditures of $1.2 million.

FINANCING ACTIVITIES

Financing activities provided cash of $12.5 million and $36.3 million for
the nine months ended September 30, 2004 and 2003, respectively. Cash provided
by financing activities in 2004 includes net proceeds of $6.3 million from the
exercise of employee stock options and stock purchases under our employee stock
purchase plan and $3.8 million of net proceeds received under equipment
financing arrangements. Cash provided by financing activities in 2003 includes
proceeds of $49.4 million from the issuance of common stock, primarily through a
private placement of 3,483,593 share of our common stock. Cash financing
activities for 2003 also reflect 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 investments due to
the maturity of U.S. government securities held with a trustee under the
requirements of our 6% convertible subordinated 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 September 30, 2004, $6.7 million
was outstanding under such arrangements with $2.6 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 from increased
product sales driven by AVINZA(R). Additionally, in November 2004, Ligand and
Royalty Pharma agreed to amend their existing royalty agreement for three
selective estrogen receptor modulator (SERM) products now in late-stage
development with two of the Company's collaborative partners, Pfizer and Wyeth.
Under the revised agreement, Royalty Pharma agreed to purchase an additional
1.625% royalty on future sales of the SERM products for $32.5 million. We expect
to receive the $32.5 million in the fourth quarter of 2004.

Operating cash will be negatively impacted, however, by higher development
expenses to fund clinical trials of our existing products in new indications, by
higher selling and marketing expenses on AVINZA(R), 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.


22



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; and the cost of production.

LEASES AND OFF BALANCE SHEET ARRANGEMENTS

We lease our office, research facilities and salesforce fleet vehicles
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 September 30, 2004, we are not involved in any off-balance sheet
arrangements.

CONTRACTUAL OBLIGATIONS

For a discussion of our contractual obligations, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" in our
2003 Form 10-K.

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(R) 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(R) at the Kentucky facility has not been obtained
by August 2006, 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 three months ended September 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 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
Issue 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 that are deemed to be temporarily
impaired. In September 2004, the FASB delayed the accounting provisions of EITF
03-1; however, the disclosure requirements remain effective for annual periods
ending after June 15, 2004. We do not believe the impact of adopting EITF 03-1
will be significant to our overall results of operations or financial position.


23




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 September 30, 2004, our accumulated deficit was approximately $690
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
approximately 140 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(R), any revenues we receive will depend substantially on the
marketing and sales efforts of others, which may or may not be successful.


24



OUR SMALL NUMBER OF PRODUCTS AND OUR DEPENDENCE ON PARTNERS AND OTHER THIRD
PARTIES 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,
as well as higher than expected total rebates, returns or discounts.

In particular, AVINZA(R) our pain product, now accounts for a majority of
our revenues and we expect AVINZA(R) revenues will continue to grow over the
next several years. Thus any setback with respect to AVINZA(R) could
significantly impact our results and our share price. AVINZA(R) 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 a significant supplier over the next several years. Any problems
with Elan's or Cardinal's manufacturing operations or capacity could reduce
sales of AVINZA(R), as could any licensing or other contract disputes with these
suppliers. Similarly, our co-promotion partner executes a large part of the
marketing and sales efforts for AVINZA(R) and those efforts may be affected by
our partner's organization, operations, activities and events both related and
unrelated to AVINZA(R). AVINZA(R) is a new product and therefore the
predictability of its commercial results is relatively low. Higher than expected
discounts (especially PBM/GPO rebates and Medicaid rebates, which can be
substantial), returns and chargebacks and/or slower than expected market
penetration could reduce sales. Other setbacks that AVINZA(R) could face in the
sustained-release opioid market include product safety and abuse issues,
intellectual property disputes and the inability to obtain sufficient quotas of
morphine from the Drug Enforcement Agency (DEA) to support our production
requirements.

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.

Excluding AVINZA(R), 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, including but not limited to overall level of demand, periodic
promotions, required minimum shipping quantities and wholesaler competitive
initiatives. As a result, the overall level of product in the distribution
channel may average from two to six months' worth of projected inventory usage.
Although we have distribution services contracts in place to maintain stable
inventories at our major wholesalers, if any of them were to substantially
reduce the inventory they carry in a given period, e.g. due to circumstances
beyond their reasonable control, or contract termination or expiration, our
sales for that period could be substantially lower than historical levels.

In the third quarter of 2004, we entered into new fee-for-service or
distributor services agreements for each of our products with our major
wholesalers, and intend to enter into similar agreements with some of our
smaller wholesalers. Under these agreements, in exchange for a set fee, the
wholesalers have agreed to provide us with certain services. Concurrent with the
implementation of these agreements we will no longer routinely offer these
wholesalers promotional discounts or incentives. The agreements typically have a
one-year initial term and are renewable. If however these agreements are
terminated or not renewed, we may need to offer discounts or incentives to the
wholesalers in order to be competitive, which could reduce our net sales.

25




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 function of IRs and STATs. If we are unable to apply our IR
and STAT technologies to the development of our potential products, we may 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.


26



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(R) capsules in non-small cell lung cancer,
lasofoxifene which is under NDA review and two products in Phase III trials by
one of our partners involving bazedoxifene. 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(R) 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(R) include Purdue Pharma L.P.'s OxyContin and MS Contin and Palladone
(expected 2005 launch), Janssen Pharmaceutica Products, L.P.'s Duragesic, aai
Pharma's Oramorph SR, Alpharma'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.


27



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(R). 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(R), is currently eligible to be reimbursed by Medicare
(reimbursement for Targretin is being provided to a small group of patients by
Medicare through December 2005 as part of the Medicare Replacement Drug
Demonstration). Recently enacted changes by Medicare to the hospital outpatient
payment reimbursement system may adversely affect reimbursement rates for
ONTAK(R).

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(R). 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.


28



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(R) 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(R) 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(R) gel in specified cancers, not currently under
active development or commercialization by us.


29


Novartis AG has filed an opposition to our European patent that covers the
principal active ingredient of our ONTAK(R) drug. We have received a favorable
preliminary opinion from the Europrean Patent Office, however this is not a
final determination. If the opposition is successful, we could lose our ONTAK(R)
patent protection in Europe which could substantially reduce our future ONTAK(R)
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(R) for us, Cambrex manufactures ONTAK(R) for us and Cardinal
Health and Raylo manufacture Targretin(R) capsules for us. We also recently
entered into contracts with Cardinal Health to manufacture and package AVINZA(R)
and with Hollister-Stier for the filling and finishing of ONTAK(R). 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.


30



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.


31



WHILE WE BELIEVE THAT WE CURRENTLY HAVE ADEQUATE INTERNAL CONTROL PROCEDURES IN
PLACE, WE ARE STILL EXPOSED TO POTENTIAL RISKS FROM RECENT LEGISLATION REQUIRING
COMPANIES TO EVALUATE CONTROLS UNDER SECTION 404 OF THE SARBANES-OXLEY ACT OF
2002.

We are evaluating our internal control systems in order to allow management
to report on, and our registered independent public accounting firm to attest
to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act.
We are performing the system and process evaluation and testing required in an
effort to comply with the management certification and auditor attestation
requirements of Section 404. As a result, we are incurring additional expenses
and a diversion of management's time. While we anticipate being able to fully
implement the requirements relating to internal controls and all other aspects
of Section 404 in a timely fashion, we cannot be certain as to the timing of
completion of our evaluation, testing and remediation actions or the impact of
the same on our operations. Due to ongoing evaluation and testing of our
internal controls and the uncertainties of the interpretation of these new
requirements, we have not yet determined whether there are any deficiencies,
significant deficiencies or material weaknesses that would be required to be
reported.

If we are not able to implement the requirements of Section 404 in a timely
manner or with adequate compliance, we might be subject to sanctions or
investigation by regulatory authorities. Any such action could adversely affect
our financial results and the market price of our common stock. Additionally, if
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud. As a result,
current and potential stockholders could lose confidence in our financial
reporting, which would harm our business and the trading price of our stock.


32



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At September 30, 2004, our investment portfolio included fixed-income
securities of $29.7 million. At September 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.



33



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 September 30, 2004 that have materially affected
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.


34





PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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 has not
accrued any portion of the awarded interest as it cannot reasonably estimate a
range of possible loss given the current status of the litigation.

Beginning on August 9, 2004, several purported class action stockholder
lawsuits were filed in the United States District Court for the Southern
District of California against the Company and certain of its directors and
officers. The actions were brought on behalf of purchasers of the Company's
common stock during several time periods, the longest of which runs from July
28, 2003 through August 2, 2004. The complaints generally allege that the
Company violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 of the Securities and Exchange Commission by making false and
misleading statements, or concealing information about the Company's business,
forecasts and financial performance, in particular statements and information
related to drug development issues and AVINZA(R) inventory levels. Plaintiffs in
the federal securities actions have recently filed motions to consolidate the
actions and for the appointment of lead counsel and lead plaintiff. These
motions are scheduled to be heard by the Court in November 2004. No trial date
has been set.

Beginning on August 13, 2004, several derivative actions were filed on
behalf of the Company by individual stockholders in the Superior Court of
California. The complaints name the Company's directors and certain of its
officers as defendants and name the Company as a nominal defendant. The
complaints are based on the same facts and circumstances as the purported class
actions discussed in the previous paragraph and generally allege breach of
fiduciary duties, abuse of control, waste and mismanagement, insider trading and
unjust enrichment. No trial date has been set.

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.


35



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 13, 2000.

Exhibit 3.6 Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company
dated September 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.



* These certifications are being furnished solely to accompany this quarterly
report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes
of Section 18 of the Securities Exchange Act of 1934 and are not to be
incorporated by reference into any filing of Ligand Pharmaceuticals
Incorporated, whether made before or after the date hereof, regardless of any
general incorporation language in such filing.

- --------------------------


(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.


36




(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.




37






LIGAND PHARMACEUTICALS INCORPORATED

SEPTEMBER 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.





Ligand Pharmaceuticals Incorporated

Date: NOVEMBER 9, 2004 By: /S/ PAUL V. MAIER
----------------- -----------------------------------------
Paul V. Maier
Senior Vice President, Chief Financial Officer

















38