SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_____________________

FORM 10-K
_____________________

                                                                Mark One

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2003
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 No. 0-20720

LIGAND PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiciton of incorporation or organization)

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

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

92121-1117
(Zip Code)

Registrant's telephone number, including area code: (858) 550-7500

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value

Preferred Share Purchase Rights
(Title of Class)

        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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

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

         The aggregate market value of the Registrant's voting stock held by non-affiliates as of June 30, 2003, computed by reference to the closing price as quoted by the NASDAQ National Stock Market as of that date, was approximately $727,330,712. For purposes of this calculation, shares of Common Stock held by directors, officers and 5% stockholders known to the Registrant have been deemed to be owned by affiliates which should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant or that such person is controlled by or under common control with the Registrant.

         As of February 27, 2004, the Registrant had 73,358,539 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Registrant's Proxy Statement to be filed not later than 120 days after December 31, 2003, in connection with the Registrant's 2004 Annual Meeting of Stockholders, referred to herein as the "Proxy Statement," are incorporated by reference into Part III of this Form 10-K. Certain exhibits filed with the Registrant's prior registration statements and period reports under the Securities Exchange Act of 1934 are incorporated herein by reference into Part IV of this Report.

Table of Contents

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GLOSSARY

PRODUCTS AND INDICATIONS

ONTAK®(denileukin diftitox)	Approved in February 1999 for sale in the U.S. for the treatment of patients with persistent or recurrent cutaneous T-cell lymphoma whose malignant cells express the CD25 component of the Interleukin-2 receptor.
Targretin®(bexarotene) capsules	Approved in December 1999 for sale in the U.S. and in March 2001 for sale in Europe for the treatment of cutaneous manifestations of cutaneous T-cell lymphoma in patients who are refractory to at least one prior systemic therapy.
Targretin®(bexarotene) gel 1%	Approved in June 2000 for sale in the U.S. for the topical treatment of cutaneous lesions in patients with cutaneous T-cell lymphoma (Stage 1A and 1B) who have refractory or persistent disease after other therapies or who have not tolerated other therapies.
Panretin®gel (alitretinoin) 0.1%	Approved in February 1999 for sale in the U.S. and in October 2000 for sale in Europe for the topical treatment of cutaneous lesions of patients with AIDS-related Kaposi's sarcoma.
AVINZA®	Approved in March 2002 for sale in the U.S. for the once-daily treatment of moderate-to-severe pain in patients who require continuous, around-the-clock opioid therapy for an extended period of time.

CTCL HIV HRT KS NHL NSCLC CLL GVHD

Cutaneous T-cell lymphoma Human immunodeficiency virus Hormone replacement therapy Kaposi's sarcoma Non-Hodgkin's lymphoma Non-small cell lung cancer Chronic lymphocytic leukemia Graft-versus-host disease

SCIENTIFIC TERMS

AR ER GR IR JAK MR PPAR PR RAR RR RXR SARM SERM SGRM STAT

Androgen Receptor Estrogen Receptor Glucocorticoid Receptor Intracellular Receptor Janus Kinase family of tyrosine protein kinases Mineralocorticoid Receptor Peroxisome Proliferation Activated Receptor Progesterone Receptor Retinoic Acid Receptor Retinoid Responsive Intracellular Receptor Retinoid X Receptor Selective Androgen Receptor Modulator Selective Estrogen Receptor Modulator Selective Glucocorticoid Receptor Modulator Signal Transducer and Activator of Transcription

REGULATORY TERMS

CPMP EC EMEA FDA IND MA MAA NDA

Committee for Proprietary Medicinal Products (Europe) European Commission European Agency for the Evaluation of Medicinal Products United States Food and Drug Administration Investigational New Drug Application (United States) Marketing Authorization (Europe) Marketing Authorization Application (Europe) New Drug Application (United States)

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PART I

Item 1.  Business

        Caution: The discussion and analysis of our business contained in this annual report on Form 10-K may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed at “Risks and Uncertainties” in “Item 1 - Business”. 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 annual 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 in this annual report include Ligand^®, ONTAK^®, Panretin^®, Targretin^®, and AVINZA^®. Each other trademark, trade name or service mark appearing in this annual report belongs to its owner.

        References to Ligand Pharmaceuticals Incorporated (“Ligand”, the “Company”, “we” or “our”) include our wholly owned subsidiaries - Glycomed Incorporated; Ligand Pharmaceuticals (Canada) Incorporated; Ligand Pharmaceuticals International, Inc.; and Seragen, Inc. ("Seragen").

        We were incorporated in Delaware in 1987. Our principal executive offices are located at 10275 Science Center Drive, San Diego, California, 92121. Our telephone number is (858) 550-7500.

Overview

        Our goal is to build a profitable pharmaceutical company that discovers, develops and markets new drugs that address critical unmet medical needs in the areas of cancer, men’s and women’s health, skin diseases, osteoporosis, and metabolic, cardiovascular and inflammatory diseases. We strive to develop drugs that are more effective and/or safer than existing therapies, that are more convenient (taken orally or topically administered) and that are cost effective. We plan to build a profitable pharmaceutical company by generating income from the specialty pharmaceutical products we develop and market, and from research, milestone and royalty revenues resulting from our collaborations with large pharmaceutical partners, which develop and market products in large markets that are beyond our strategic focus or resources.

        We currently market four oncology products in the United States: Panretin^® gel, ONTAK^® and Targretin^® capsules, each of which was approved by the FDA in 1999; and Targretin^® gel, which was approved by the FDA in 2000. Our fifth and newest product, AVINZA^®, is a treatment for chronic, moderate-to-severe pain that was approved by the FDA in March 2002. In Europe, the European Community (“EC”) granted a Marketing Authorization (MA) for Panretin^® gel in October 2000 and an MA for Targretin^® capsules in March 2001. We also continue efforts to acquire or in-license products, such as ONTAK^® and AVINZA ^®, which have near-term prospects of FDA approval and which can be marketed by our specialty sales forces. We are developing additional products through our internal development programs and currently have various products in clinical development, including marketed products that we are testing for larger market indications such as non-small cell lung cancer (NSCLC), chronic lymphocytic leukemia (CLL) and hand dermatitis.

        We have formed research and development collaborations with numerous global pharmaceutical companies, including Abbott Laboratories, Allergan, Inc., Bristol-Myers Squibb, Eli Lilly & Company, GlaxoSmithKline, Organon (Akzo Nobel), Pfizer Inc., TAP Pharmaceutical Products, Inc. (TAP), and Wyeth. At the end of 2003, our corporate partners had 11 Ligand products in human development, and numerous compounds on an IND track, or in preclinical and research stages. These corporate partner products are being studied for the treatment of large market indications such as osteoporosis, diabetes, contraception and cardiovascular disease. Three of these partner products are in pivotal Phase III clinical trials: lasofoxifene, which is being developed by Pfizer for osteoporosis and other indications; and bazedoxifene, which is being developed by Wyeth as monotherapy for osteoporosis and in combination with Wyeth’s PREMARIN^® as hormone replacement therapy (HRT). A fourth partner product, LY519818, is being developed by Eli Lilly & Company for the treatment of type 2 diabetes which has announced its advancement into Phase III registration studies after appropriate consultation with the FDA.

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        Internal and collaborative research and development programs are built around our proprietary science technology, which is based on our leadership position in gene transcription technology. Our proprietary technologies involve two natural mechanisms that regulate gene activity: non-peptide hormone-activated IRs, and cytokine and growth factor activated STATs. Panretin^® gel, Targretin^® capsules, Targretin^® gel and most of our corporate partner products currently on human development track are IR modulators, discovered using our IR technology. SB-497115, which Glaxo moved into clinical studies for thrombocytopenia in 2002, was discovered using our STATs expertise.

        In late 1998, we assembled a specialty oncology and HIV-center sales and marketing team to market in the U.S. products developed, acquired or licensed by us. In late 1999, we expanded our U.S. sales force from approximately 20 to approximately 40 sales representatives to support the launch of Targretin® capsules and Targretin® gel and increase market penetration of ONTAK® and Panretin® gel. In 2001, we expanded our sales force to approximately 50 sales representatives, including approximately 20 full-time contract sales representatives who focus on the dermatology market. In 2002, to support the launch of AVINZA ^®, we redirected these contract sales representatives to call on high-prescribing pain specialists. Also in 2002, we hired approximately another 30 representatives to call on pain specialists, bringing the total number of representatives selling only AVINZA ^® to approximately 50. In 2003, we expanded our specialty pain sales force to approximately 70 representatives. In addition, more than 700 Organon sales representatives promote AVINZA ^® as a result of the co-promotion agreement we established in early 2003 (see “AVINZA ^® Co-Promotion Agreement with Organon”). At the end of 2003, we had approximately 25 sales representatives promoting our in-line oncology products. Internationally, through marketing and distribution agreements with Elan, Ferrer International and Alfa Wassermann, we have established marketing and distribution capabilities in Europe, as well as Central and South America. In February 2004, Elan and Medeus Pharma Limited (“Medeus”) announced that Medeus had acquired Elan’s European sales and marketing business, and that the acquisition included the marketing and distribution rights to certain Ligand products in Europe.

Business Strategy

        Our goal is to become a profitable pharmaceutical research, development and marketing company that generates significant cash flow. Building primarily on our proprietary IR and STAT technologies, our strategy is to generate cash flow primarily from the sale in the U.S., Europe and Latin America of specialty pharmaceutical products we develop, acquire or in-license, and from research, milestone and royalty revenues from the development and sale of products our collaborative partners develop and market.

Building a Specialty Pharmaceutical Franchise in the U.S., Europe and Latin America.

        Our strategy with respect to specialty pharmaceutical products is to develop a product pipeline based on our IR and STAT technologies and acquired and in-licensed products, and to market these products initially with a specialized sales force in the U.S. and through marketing partners in selected international markets. Ligand’s international partners are Elan (principally in Western and Eastern Europe), Ferrer (in Spain, Portugal, Greece, Central and South America) and Alfa Wassermann (in Italy). See “Overview” discussion above regarding Elan’s announcement to sell their European sales and marketing business to Medeus.

        Focusing initially on niche pharmaceutical and dermatology indications with the possibility of expedited regulatory approval has allowed us to bring products to market quickly. This strategy also has allowed us to spread the cost of our sales and marketing infrastructure across multiple products. Our goal is to expand the markets for our products through approvals in additional indications and in international markets. To further leverage our sales forces, we intend to acquire selectively or license-in complementary technology and/or products currently being marketed or in advanced stages of development.

Building a Collaborative-Based Business in Large Product Markets.

        Our strategy in our collaborative research and development business is to share the risks and benefits of discovering and developing drugs to treat diseases that are beyond our strategic focus or resources. These diseases typically affect large populations often treated by primary care physicians. Drugs to treat these diseases may be more costly to develop and/or market effectively with a small specialty sales force. On the other hand, drugs approved for these indications may have large market potential – often in excess of $1 billion annually in global sales.

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        We have nine collaborative arrangements with global pharmaceutical companies focusing on a broad range of disease targets.

        Our collaborative programs focus on discovering drugs for cardiovascular, inflammatory, metabolic and other diseases, as well as broad applications for women’s and men’s health. We believe that our collaborators have the resources, including clinical and regulatory experience, manufacturing capabilities and marketing infrastructure, needed to develop and commercialize drugs for these large markets. The arrangements generally provide for collaborative discovery programs funded largely by the corporate partners aimed at discovering new therapies for diseases treated by primary care physicians. In general, drugs resulting from these collaborations will be developed, manufactured and marketed by the corporate partners. Our collaborative agreements provide for us to receive: research revenue during the drug discovery stage; milestone revenue for compounds successfully moving through clinical development and regulatory submission and approval; and royalty revenue from the sale of approved drugs developed through collaborative efforts.

Ligand Marketed Products

        U.S. Specialty Pharmaceutical Franchise. We currently market five pharmaceutical products in the U.S.

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        CTCL Market. CTCL is a type of NHL that appears initially in the skin, but over time may involve other organs. CTCL is a cancer of T-lymphocytes, white blood cells that play a central role in the body’s immune system. The disease can be extremely disfiguring and debilitating. Median survival for late-stage patients is less than three years. The prognosis for CTCL is based in part on the stage of the disease when diagnosed. CTCL is most commonly a slowly progressing cancer, and many patients live with the complications of CTCL for 10 or more years after diagnosis. However, some patients have a much more aggressive form of this disease. CTCL affects an estimated 16,000 people in the U.S. and 12,000 to 14,000 in Europe. With ONTAK^®, Targretin^® capsules, and Targretin^® gel currently approved in the U.S. for the treatment of CTCL, our strategy is to have multiple products available for treating this disease.

        ONTAK^®. ONTAK^® was approved by the FDA and launched in the U.S. in February 1999 as our first product for the treatment of patients with CTCL. ONTAK^® was the first treatment to be approved for CTCL in nearly 10 years. ONTAK^® is currently in Phase II clinical trials for the treatment of patients with CLL, B-cell NHL, other T-cell lymphomas, NSCLC, and GVHD. Results from several of these studies were reported in 2002 and 2003. Ligand's top priority for additional ONTAK^® development is CLL, and we began a large-scale Phase II study in 2003. Clinical trials using ONTAK^® for the treatment of patients with psoriasis and rheumatoid arthritis also have been conducted, and further trials are being considered. These indications provide significantly larger market opportunities than CTCL. A European MAA for CTCL was filed in December 2001, which we withdrew in April 2003. 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 (EMEA) would be better spent on the acceleration of the second generation ONTAK^® development. We expect to resubmit the ONZAR^™ application with the second generation product in 2005.

        Targretin^® capsules. We launched U.S. sales and marketing of Targretin^® capsules in January 2000 following receipt of FDA approval in December 1999. Targretin^® capsules offer the convenience of a daily oral dose administered by the patient at home. We are developing Targretin^® capsules in a variety of larger market opportunities, including NSCLC, moderate to severe plaque psoriasis and renal cell cancer. NSCLC is Ligand’s largest and most important development program. In March 2001, the European Commission granted marketing authorization for Targretin^® capsules in Europe for the treatment of patients with CTCL, and our network of distributors began marketing the drug in the fourth quarter of 2001 in Europe.

        Targretin^® gel. We launched U.S. sales and marketing of Targretin^® gel in September 2000 following receipt of FDA approval in June 2000. Targretin^® gel offers patients with refractory, early stage CTCL a novel, non-invasive, self-administered treatment topically applied only to the affected areas of the skin. Targretin^® gel is currently in clinical development for hand dermatitis. In 2002 and early 2003, we reported exciting Phase I/II data that showed nearly 40% of patients with chronic, severe hand dermatitis improved by 90% or more after being treated with Targretin^® gel monotherapy and nearly 80% responded with greater than 50% improvement. Based on these promising results, we intend to design and implement Phase II/III registration trials in hand dermatitis. We filed an MAA in Europe for CTCL in March of 2001, but withdrew it in 2002. Due to the small size of the European early stage CTCL market and the limited revenue potential of Targretin^® gel, we believed that the additional comparative clinical studies requested by the EMEA were not economically justified.

        Panretin^® gel. Panretin^® gel was approved by the FDA and launched in February 1999 as the first FDA-approved patient-applied topical treatment for AIDS-related KS. Panretin^® gel represents a non-invasive option to the traditional management of this disease. Most approved therapies require the time and expense of periodic visits to a healthcare facility, where treatment is administered by a doctor or nurse. AIDS-related KS adversely affects the quality of life of thousands of people in the U.S. and Europe. Panretin^® gel was approved in Europe for the treatment of patients with KS in October 2000, and was launched through our distributor network in the fourth quarter of 2001 in Europe.

AVINZA ^®. AVINZA ^® was approved by the FDA in March 2002 for the once-daily treatment of moderate-to-severe pain in patients who require continuous, around-the-clock opioid therapy for an extended period of time. We launched the product in the second quarter of 2002. AVINZA ^® consists of two components: an immediate-release component that rapidly achieves plateau morphine concentrations in plasma, and an extended-release component that maintains plasma concentrations throughout a 24-hour dosing interval. This unique drug delivery technology makes AVINZA ^® the only true once-daily sustained release opioid. AVINZA ^® was developed by Elan, which

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licensed the U.S. and Canadian rights to us in 1998. The U.S. sustained-release opioid market grew to approximately $3.5 billion in 2003, the largest initial market we have entered. Because tens of thousands of U.S. physicians prescribe sustained-release opioids, our goal has long been to co-promote the product with another company to maximize its potential. Early in 2003, we finalized a co-promotion agreement with Organon. Together, we achieved the No. 2 share of voice in the sustained-release opioid marketplace with initially more than 800 combined sales representatives.

AVINZA^® Co-Promotion Agreement with Organon

        In February 2003, Organon, a business unit of Akzo Nobel, and Ligand announced that the companies would co-promote AVINZA^® with initially more than 800 sales representatives in the United States.

        Organon brings strong relationships in primary care, anesthesiology, hospitals and managed care to support AVINZA^®. Through the agreement with Organon, Ligand gains strong partner resource commitments in primary care, hospitals and managed care to maximize AVINZA^®‘s potential as our largest near-term commercial opportunity. In addition, the agreement includes a risk/return-balanced set of economics that incentivizes Organon to achieve much greater success than Ligand could alone, that provides a positive operational EPS driver to Ligand, and that enables an attractive return on our cumulative investments in AVINZA^®. Finally, the agreement strengthens our capabilities in retail and wholesale distribution, medical marketing and managed care to support AVINZA^®. Joint co-promotion efforts began in March of 2003.

         AVINZA^® achieved the No. 2 share of voice in the sustained-release opioid marketplace with a combined sales force of more than 800 representatives, and appropriately scaled investments in other medical marketing. Ligand promotes AVINZA^® with its specialty pain sales force of nearly 70 representatives. Organon promotes the product with more than 700 representatives in three sales forces: primary care, hospital (anesthesiology) and specialty (pain centers). In addition, Organon brings critical capabilities with key accounts, managed care and long-term care to accelerate AVINZA^®‘s growth.

        Under the companies’ agreement, Ligand records all sales of AVINZA^®. Ligand will pay Organon a percentage of AVINZA^®‘s net sales based on the following schedule:

        Organon and Ligand share equally all costs for advertising and promotion, medical affairs and clinical trials. Each company is responsible for its own sales force costs and other expenses. Both companies have made significant commitments to conduct a minimum number of sales calls, with AVINZA^® in primary or secondary position, over the term of the agreement.

        The initial term of the co-promotion agreement, which applies only to the U.S. market, is 10 years. Any time prior to the end of year five, Organon has an option to extend the agreement to 2017, the end of the term of a key AVINZA^® patent, by making a $75 million payment to Ligand.

        To provide overall governance of the partnership, Organon and Ligand established a steering committee with three senior executives from each company. The chair of the steering committee will alternate between Organon and Ligand on an annual basis. Organon and Ligand also formed a commercial committee to design and coordinate all sales, marketing and distribution activities for AVINZA^®. The commercial committee is co-chaired by one Organon and one Ligand employee. The commercial committee established a clinical/regulatory subcommittee to design and coordinate all medical, clinical and regulatory activities for AVINZA^®.

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Product Development Process

        There are three phases in product development — the research phase, the preclinical phase and the clinical trials phase. See “Government Regulation” for a more complete description of the regulatory process involved in developing drugs. At Ligand, activities during the research phase include research related to specific IR and STAT targets and the identification of lead compounds. Lead compounds are chemicals that have been identified to meet pre-selected criteria in cell culture models for activity and potency against IR or STAT targets. More extensive evaluation is then undertaken to determine if the compound should enter preclinical development. Once a lead compound is selected, chemical modification of the compound is undertaken to create an optimal drug candidate.

        The preclinical phase includes pharmacology and toxicology testing in preclinical models (in vitro and in vivo), formulation work and manufacturing scale-up to gather necessary data to comply with applicable regulations prior to commencing human clinical trials. Development candidates are lead compounds that have successfully undergone in vitro and in vivo evaluation to demonstrate that they have an acceptable profile that justifies taking them through preclinical development with the intention of filing an IND and initiating human clinical testing.

        Clinical trials are typically conducted in three sequential phases that may overlap. In Phase I, the initial introduction of the pharmaceutical into humans, the emphasis is on testing for adverse effects, dosage tolerance, absorption, metabolism, distribution, excretion and clinical pharmacology. Phase II involves studies in a representative patient population to determine the efficacy of the pharmaceutical for specific targeted indications, to determine dosage tolerance and optimal dosage, and to identify related adverse side effects and safety risks. Once a compound is found to be effective and to have an acceptable safety profile in Phase II studies, Phase III trials are undertaken to evaluate clinical efficacy further and to test further for safety. Sometimes Phase I and II trials or Phase II and III trials are combined. In the U.S., the FDA reviews both clinical plans and results of trials, and may discontinue trials at any time if there are significant safety issues.

Ligand Product Development Programs

        We are developing several proprietary products for which we have worldwide rights for a variety of cancers and skin diseases, as summarized in the table below. This table is not intended to be a comprehensive list of our internal research and development programs. Many of the indications being pursued may present larger market opportunities for our currently marketed products. Our clinical development programs are primarily based on products discovered through our IR technology, with the exception of ONTAK^®, which was developed using Seragen’s fusion protein technology, and AVINZA^® , which was developed by Elan. Five of the products in our proprietary product development programs are retinoids, discovered and developed using our proprietary IR technology. Our research is based on both our IR and STAT technologies. See “Technology” for a discussion of our IR and STAT technologies and retinoids.

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        (1)  See detailed discussion of Panretin^® capsules below.

ONTAK^® Development Programs

        ONTAK^® is a fusion protein that represents the first of a new class of targeted cytotoxic biologic agents. Rights to ONTAK^® were acquired from Eli Lilly in 1997 and in the acquisition of Seragen in 1998. ONTAK^® is marketed in the U.S. for patients with CTCL, which affects approximately 16,000 people in the U.S. In addition to ongoing CTCL trials, we are, or may be, conducting clinical trials with ONTAK^® in patients with CLL, peripheral T-cell lymphoma, B-cell NHL, psoriasis, NSCLC, and GVHD, indications that represent significantly larger market opportunities than CTCL.

        In early 1999, ONTAK^® entered Phase II trials for the treatment of patients with NHL. One study is assessing ONTAK^® in patients with certain types of low-grade B-cell NHL who have previously been treated with at least one systemic anti-cancer treatment. A second multi-center trial for ONTAK^® is being conducted in patients with low-grade B-cell NHL who have been previously treated with at least one chemotherapy regimen and at least one monoclonal antibody therapy. A third trial allows certain patients to enter with low to intermediate grade B-cell NHL.

        Separately, a study of ONTAK^® in patients with relapsed or refractory B-and T-cell NHL conducted by researchers from the M.D. Anderson Cancer Center and published at the 2003 annual meeting of the American Society of Hematology showed that among 39 patients who could be evaluated for a response, four had a complete response, seven had partial responses, and ten had stable disease, indicating that more than half of patients with relapsed or refractory NHL benefited from treatment. NHL affects approximately 300,000 people in the U.S. and Ligand estimates that more than 50,000 of these patients would be candidates for ONTAK^® therapy.

        ONTAK^® is also being evaluated to treat chronic lymphocytic leukemia (CLL), which affects more than 60,000 people in the U.S. At the American Society of Hematology annual meeting in 2002, researchers from Wake Forest University reported results from a preliminary Phase II study that showed ONTAK reduced CLL in blood cells, lymph nodes and bone marrow. In the study, nine of 10 patients with fludarabine-refractory, CD25-positive, B-cell CLL who received at least three courses of ONTAK^® experienced reductions in peripheral CLL cells, with three of these patients showing reductions of at least 99%. In addition, six of 10 patients showed reductions in the diameter of their cancerous lymph nodes, with one patient showing an 80% reduction. One of 12 patients showed a partial remission, with 80% node shrinkage and 100% clearance of CLL cells from bone marrow. Based on these encouraging results, Ligand began a large-scale Phase II study in 2003.

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        Clinical trials with ONTAK^® have demonstrated benefits in patients with long-standing, previously treated severe psoriasis, and in patients with steroid-resistant acute GVHD. For example, according to results of a Phase I/II study presented by independent researchers in early 2003, ONTAK^® generated complete remission of acute GVHD in five of 11 steroid-resistant patients after allogeneic stem cell transplants, and partial remission in two more patients.

Targretin^® Capsules Development Programs

        Targretin^® capsules are marketed in the U.S. for patients with refractory CTCL. Ligand also is investigating the use of Targretin^® capsules in several cancer and skin disease markets that represent significantly larger market opportunities than CTCL.

        In August 2000, we reported that Phase I/II clinical results demonstrated that Targretin^® capsules, in conjunction with chemotherapy, may be an effective treatment for patients with NSCLC and renal cell cancer. These results were published in the May 2001 issue of the Journal of Clinical Oncology. These results add to a growing body of evidence that suggests Targretin^® therapy may delay disease progression and extend survival of patients with some forms of solid tumors. This body of evidence led us to begin two large-scale Phase III clinical studies in 2001 to demonstrate conclusively Targretin^® capsules’ benefit in the treatment of patients with NSCLC. One of these multi-center studies is evaluating Targretin^® in combination with the chemotherapy drugs cisplatin and vinorelbine, and is being conducted primarily in Europe. The other multi-center study is examining Targretin^® in combination with carboplatin and paclitaxel, and is being conducted mainly in the U.S. Both studies are randomized with approximately 600 patients each, and have survival as the primary endpoint. By third quarter 2003, we had enrolled 100% of the required patients. We expect to announce survival data in late 2004. The studies are designed to support a supplemental indication for Targretin^® capsules for first-line treatment of patients with advanced NSCLC. In 2003 we also began a Phase II study of Targretin^® as monotherapy for late-stage lung cancer patients who have failed treatment with chemotherapy or cannot tolerate it. The American Cancer Society estimates that approximately 170,000 Americans are diagnosed with lung cancer each year; of those approximately 80% were diagnosed with NSCLC.

        Our primary focus for Targretin^® capsules during 2004 will be NSCLC. We will, however, continue to explore in Phase II trials the potential of Targretin^® capsules in combination regimens for the treatment of patients in solid tumor indications as well as psoriasis.

Targretin^® Gel Development Program

        Targretin^® gel is marketed in the U.S. for patients with refractory CTCL. In 2002 and early 2003, we reported exciting Phase I/II data that showed 39% of patients with chronic, severe hand dermatitis improved by 90% or more after being treated with Targretin^® gel monotherapy. In addition, 79% of patients improved by at least 50%. Fifty-five patients with a history of chronic severe hand dermatitis for at least six months were enrolled in the 22-week, randomized, open-label study, which was designed to evaluate safety, tolerability and activity. Patients were treated with Targretin^® alone, Targretin^® in combination with a medium potency topical steroid, and Targretin^® in combination with a low potency topical steroid. Based on these promising results, we intend to design and implement Phase II/III registration trials in hand dermatitis in 2004. There are many subtypes of hand dermatitis, and many causes. Most hand dermatitis is caused by contact with irritating environmental substances, such as chemicals, soaps and cleaning fluids, and some cases are caused by allergic reactions to a wide variety of environmental substances. Ligand estimates that more than 4 million people in the United States have hand dermatitis and seek treatment.

        We filed an MAA for Targretin^® gel in Europe for CTCL in March of 2001, but withdrew it in 2002. Due to the small size of the European early stage CTCL market and the limited revenue potential of Targretin^® gel, we believed that the additional comparative clinical studies requested by the EMEA were not economically justified.

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Panretin ^®Capsules Development Programs

        Panretin^® capsules have demonstrated clinical promise for the systemic treatment of cutaneous AIDS-related KS, other cancers and skin disorders. We have reported favorable results in two Phase II trials with Panretin^® capsules in patients with KS. Encouraging results from a Phase II trial with Panretin^® capsules in bronchial metaplasia were published in 2002. The study showed that treatment with Panretin^® capsules reversed biomarkers of pre-lung cancer among former smokers. Ligand believes the promising results seen with Panretin^® capsules further support the potential benefits of using retinoids to treat lung cancer. Toward that end, Ligand’s top development priority is to move ahead with Phase III studies of Targretin^® capsules, which bind selectively to retinoid X receptors, in combination with chemotherapy to treat NSCLC. Further development activities for Panretin^® capsules will require additional research and development funding not currently allocated to the product.

LGD1550 Capsules Development Programs

        LGD1550 is a potent RAR agonist that strongly inhibits growth in vitro of several human cancer cell lines. In Phase I/II clinical trials in advanced cancer, LGD1550 capsules were well tolerated. Investigators observed dose-limiting skin toxicities, diarrhea and abdominal cramps. Other potentially dose-limiting toxicities, such as headache and lipid abnormalities, frequently observed with other retinoids, have not been observed with LGD1550. Unlike all-trans retinoic acid, a retinoid approved for the treatment of acute promyelocytic leukemia, LGD1550 does not appear to induce its own metabolism over the dose range tested since blood levels are maintained with continued therapy. Phase I/II studies with LGD1550 for the treatment of patients with acne and psoriasis are being considered.

Selective Glucocorticoid Receptor Modulators Research and Development Program

        As part of the research and development collaboration we entered into with Abbott in 1994, Ligand received exclusive worldwide rights for all anti-cancer products discovered in the collaboration. When the research phase of the collaboration ended in July 1999, Abbott retained rights to certain selective glucocorticoid receptor modulators, or SGRMs. Ligand retained rights to all other compounds discovered through the collaboration, as well as recapturing technology rights. Ligand then initiated an internal effort to develop SGRMs for inflammation, oncology and other therapeutic applications. As a result of that effort, in 2001, we moved several SGRMs into late preclinical development. During 2003, LGD5552 was designated a clinical candidate and is currently on IND track. These non-steroidal SGRM molecules have anti-inflammatory activity that may be useful against diseases such as asthma and rheumatoid arthritis, as well as anti-proliferative effects that could be beneficial in treating certain leukemias and myelomas. Our goal is to develop novel products that maintain the efficacy of corticosteroids but lack the side effects of current therapies, which can include osteoporosis, hyperglycemia and hypertension.

SARM Programs

        We are pioneering the development of tissue selective SARMs, a novel class of non-steroidal, orally active molecules that selectively modulate the activity of the AR in different tissues, providing a wide range of opportunities for the treatment of many diseases and disorders in both men and women. Tissue-selective AR agonists or antagonists may provide utility in male HRT and the treatment of patients with hypogonadism, osteoporosis, male and female sexual dysfunction, frailty, prostate cancer, benign prostatic hyperplasia, skin disorders and other diseases. The use of androgen antagonists has shown efficacy in the treatment of prostate cancer, with three androgen antagonists currently approved by the FDA for use in the treatment of the disease. However, we believe that there is a substantial medical need for improved androgen modulators for use in the treatment of prostate cancer due to the significant side effects seen with currently available drugs.

        SARM programs have been one of our largest programs over the past several years. We have assembled an extensive SARM compound library and one of the largest and most experienced AR drug discovery teams in the pharmaceutical industry. We intend to pursue the specialty applications emerging from SARMs internally, but may seek collaborations with major pharmaceutical companies to exploit broader clinical applications.

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        Consistent with this strategy, we formed in June 2001 a joint research and development alliance with TAP Pharmaceutical Products to focus on the discovery and development of SARMs. In December 2003, we announced the extension of this collaboration for an additional year. Please see the “Collaborative Research and Development Programs/Sex Hormone Modulators Collaborative Programs/TAP Collaboration” section below for more details on this alliance.

        Apart from the TAP alliance, Ligand has conducted preclinical development for LGD1331, an androgen antagonist for acne, prostate cancer, hirsutism and androgenetic alopecia. Preclinical studies of LGD1331 indicate that it may have utility for treating acne and hirsutism disorders that affect a significant number of women. In vivo studies of LGD1331 have revealed favorable characteristics, including indirect evidence of diminished effects on the central nervous system, compared with currently marketed drugs of this type for the treatment of these conditions.

STAT Research Programs

        In contrast to our IR programs, our STAT programs focus on cytokines and growth factors whose receptors are found on the surface of the cell. STATs play a modulating role in the biology of cytokines and growth factors. Many diseases, such as inflammatory conditions, may result from excessive cytokine activity, and others may result from insufficient cytokine activity. See “Technology/Signal Transducers and Activators of Transcription Technology” for a more complete discussion of our STATs expertise. In our STAT programs, we seek to develop drug candidates that mimic the activity of thrombopoietin (TPO) for use in a variety of conditions including cancer and disorders of blood cell formation. In 2002, our partner GlaxoSmithKline moved into clinical studies the first product discovered from our STAT expertise, SB-497115, an oral TPO agonist for the treatment of thrombocytopenia.

Collaborative Research and Development Programs

        We are pursuing several major collaborative drug discovery programs to further develop the research and development of compounds based on our IR technologies. These collaborations focus on several large market indications as estimated in the table below.

        At the end of 2003, 11 of our collaborative product candidates were in human development - lasofoxifene, bazedoxifene, bazedoxifene+PREMARIN®, pipendoxifene, NSP989, NSP989 combo, GW516, LY818, LY929, LY674 and SB497115. Please see note 13 of notes to consolidated financial statements for a description of the financial terms of our key ongoing collaboration agreements. The table below summarizes our collaborative research and development programs, but is not intended to be a comprehensive summary of these programs.

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(1)	Lilly decision to advance to Phase III announced March 2004
(2)	Compound number not disclosed.

Sex Hormone Modulators Collaborative Programs

        The primary objective of our sex hormone modulators collaborative programs is to develop drugs for hormonally responsive cancers of men and women, hormone replacement therapies, the treatment and prevention of diseases affecting women’s health, and hormonal disorders prevalent in men. Our programs, both collaborative and internal, target development of tissue-selective modulators of the PR, the ER and the AR. Through our collaborations with Pfizer and Wyeth, three SERM compounds are in development for osteoporosis, breast cancer and HRT. In addition, we entered into a joint research and development program in 2001 with TAP Pharmaceutical Products to focus on the discovery and development of SARMs.

        Pfizer Collaboration. In May 1991, we entered into a research and development collaboration with Pfizer to develop better therapies for osteoporosis. In November 1993, we jointly announced the successful completion of the research phase of our alliance with the identification of a development candidate and backups for the prevention and treatment of osteoporosis. In preclinical studies, the candidates from the program mimic the beneficial effects of estrogen on bone and have an impact on blood serum lipids often associated with cardiac benefits without increasing uterine or breast tissue proliferation.

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        We have milestone and royalty rights to lasofoxifene, which is being developed by Pfizer for osteoporosis prevention and other diseases. Lasofoxifene is a second-generation estrogen partial agonist discovered through our collaboration with Pfizer. Pfizer has retained marketing rights to the drug. Lasofoxifene has been shown in Phase II clinical studies to reduce bone loss and decrease low-density lipoprotein (“LDL” or “bad” cholesterol) levels. In September 2000, Pfizer announced that it initiated Phase III studies of lasofoxifene for the treatment and prevention of osteoporosis in post-menopausal women. In December 2001, Pfizer announced that two Phase III studies were fully enrolled with more than 1,800 patients, and that an additional Phase III risk reduction trial was underway to evaluate lasofoxifene’s effects on bone mineral density, lipid-lowering and breast cancer prevention. In January of 2003, Pfizer disclosed that this large, 7,500-patient risk-reduction study was fully enrolled.

        Wyeth Collaboration. In September 1994, we entered into a research and development collaboration with Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products (AHP), to discover and develop drugs that interact with ERs or PRs for use in HRT, anti-cancer therapy, gynecological diseases, and central nervous system disorders associated with menopause and fertility control. AHP has since changed its name to Wyeth. We granted Wyeth exclusive worldwide rights to all products discovered in the collaboration that are agonists or antagonists to the PR and ER for application in the fields of women’s health and cancer therapy.

        As part of this collaboration, we tested Wyeth’s extensive chemical library for activity against a selected set of targets. In 1996, Wyeth exercised its option to include compounds we discovered that modulate PRs, and to expand the collaboration to encompass the treatment or prevention of osteoporosis through the ER. Wyeth also added four advanced chemical compound series from its internal ER-osteoporosis program to the collaboration. The research phase of the collaboration ended in August 1998.

        Wyeth has ongoing clinical studies with two SERMs from the collaboration. Wyeth is developing bazedoxifene (TSE-424) and bazedoxifene+PREMARIN^® for the treatment of post-menopausal osteoporosis. Phase III trials were initiated in June 2001. In late 2002, Wyeth disclosed that it had completed enrollment in a Phase III osteoporosis prevention trial, and that it expected enrollment in a bazedoxifene fracture prevention trial to finish in 2003, and that bazedoxifene is on track for regulatory submission in 2005. In addition, Wyeth reiterated its commitment to developing bazedoxifene+PREMARIN^® as a progesterone-free treatment for menopausal symptoms in the wake of the well-publicized Women’s Health Initiative (WHI) study of hormone replacement therapies. Ligand believes it is important to recognize that bazedoxifene is a synthetic drug that was specifically designed to increase bone density and reduce cholesterol levels while at the same time protecting breast and uterine tissue. In other words, bazedoxifene may represent a potential solution to some of the side effects associated with progestin in the WHI study.

        Wyeth also has conducted Phase II studies of pipendoxifene (formerly ERA 923) for the treatment of breast cancer. In 2003, Wyeth began Phase II studies of NSP-989, a progesterone agonist that may be useful in contraception and HRT. Wyeth also continues to do preclinical work in the area of PR antagonists.

        Organon Collaboration. In February 2000, we entered into a research and development collaboration with Organon to focus on small molecule compounds with potential effects for the treatment and prevention of gynecological diseases mediated through the PR. The objective of the collaboration is the discovery of new non-steroidal compounds that are tissue-selective in nature and that may have fewer side effects. Such compounds may provide utility in hormone replacement therapy, oral contraception, reproductive diseases, and other hormone-related disorders. The initial research phase concluded in February 2002, and preclinical candidates have been selected.

        Bristol-Myers Squibb Collaboration. In May 2000, we entered into a research and development collaboration with Bristol-Myers Squibb Company to focus on the discovery, design and development of orally active compounds that selectively modulate the MR. This receptor plays a critical role in many illnesses, particularly cardiovascular diseases such as congestive heart failure and hypertension. Bristol-Myers Squibb terminated this collaboration in June 2001.

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        TAP Collaboration. In June 2001, we entered into a joint research and development alliance with TAP Pharmaceutical Products to focus on the discovery and development of SARMs. SARMs may contribute to the prevention and treatment of diseases including hypogonadism (low testosterone), male and female sexual dysfunction, male and female osteoporosis, frailty, and male HRT. The three-year collaboration carries an option to extend by up to two additional one-year terms. In December 2003, we announced the extension of this collaboration for an additional year.

        Under the terms of the agreement, TAP received exclusive worldwide rights to manufacture and sell any products resulting from the collaboration in its field, which would include treatment and prevention of hypogonadism, male sexual dysfunction, female osteoporosis, male HRT and other indications not retained by Ligand. Ligand retains certain rights in the androgen receptor field, including the prevention or treatment of prostate cancer, benign prostatic hyperplasia, acne and hirsutism. In addition, Ligand has an option at the expiration of the original three-year term to develop one compound not being developed by TAP in its field, with TAP retaining an option to negotiate to co-develop and co-promote such compounds with Ligand.

Metabolic and Cardiovascular Disease Collaborative Programs

        We are exploring the role of certain IRs, including the PPARs, in cardiovascular and metabolic diseases. PPARs, a subfamily of orphan IRs, have been implicated in processes that regulate plasma levels of very low density lipoproteins and triglycerides. See “Technology/Intracellular Receptor Technology” for a discussion of PPARs and orphan IRs. Data implicate PPARs in the mechanism of action of lipid-lowering drugs such as Lopid^®. There are three subtypes of the PPAR subfamily with defined novel aspects of their action — alpha, beta and gamma. The subtype PPAR alpha appears to regulate the metabolism of certain lipids and is useful in treating hyperlipidemia. PPAR gamma plays a role in fat cell differentiation and cellular responses to insulin. Modulators of PPAR gamma activity (e.g., the glitazone class of insulin sensitizers) have utility in managing type II diabetes. PPARs are believed to function in cells in partnership with RXRs. In addition to compounds that act directly on PPARs and that may have utility in various cardiovascular and metabolic diseases, certain retinoids (e.g., Targretin^® capsules) are able to activate this RXR:PPAR complex and may also have utility in these disorders. We have two collaborative partners, GlaxoSmithKline and Lilly, in the areas of cardiovascular and metabolic diseases, with four compounds in clinical development.

        GlaxoSmithKline Collaboration. In September 1992, we entered into a research and development collaboration with Glaxo Wellcome plc (now GlaxoSmithKline) to discover and develop drugs for the prevention or treatment of atherosclerosis and other disorders affecting the cardiovascular system. The collaboration focuses on discovering drugs that produce beneficial alterations in lipid and lipoprotein metabolism in three project areas: (1) regulation of cholesterol biosynthesis and expression of a receptor that removes cholesterol from the blood stream, (2) the IRs influencing circulating HDL levels, and (3) PPARs, the subfamily of IRs activated by lipid lowering drugs such as Lopid^® and Atromid-S. The research phase was successfully completed in 1997 with the identification of a novel lead structure that activates selected PPAR subfamily members and the identification of a different lead compound that shows activity in preclinical models for lowering LDL cholesterol by up-regulating LDL receptor gene expression in liver cells. We retain the right to develop and commercialize products arising from the collaboration in markets not exploited by GlaxoSmithKline, or where GlaxoSmithKline is not developing a product for the same indication.

        In 1999, two compounds were advanced to exploratory development: (1) GW544, a PPAR agonist for cardiovascular disease and dyslipidemia; and (2) GW516, a second candidate that is in clinical development for cardiovascular disease and dyslipidemia. GW516 remains in Phase II studies. The American Heart Association estimates that 62 million Americans have some form of cardiovascular disease, and that cardiovascular disease accounts for more than 40% of deaths in the U.S. annually.

        Eli Lilly Collaboration. In November 1997, we entered into a research and development collaboration with Eli Lilly & Co. (Lilly) for the discovery and development of products based upon our IR technology with broad applications in the fields of metabolic diseases, including diabetes, obesity, dyslipidemia, insulin resistance and cardiovascular diseases associated with insulin resistance and obesity. Under the collaboration, Lilly received: (1) worldwide, exclusive rights to our compounds and technology associated with the RXR receptor in the field; (2) rights to use our technology to develop an RXR compound in combination with a SERM in cancer; (3) worldwide, exclusive rights in certain areas to our PPAR technology, along with rights to use PPAR research technology with

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the RXR technology; and (4) exclusive rights to our HNF-4 receptor and obesity gene promoter technology. Lilly has the right to terminate the development of compounds under the agreements. We would receive rights to certain of such compounds in return for a royalty to Lilly, the rate of which is dependent on the stage at which the development is terminated. In April 2002, Lilly and Ligand announced the companies would extend the collaboration until November of 2003. In May 2003, the companies announced the second extension of the collaboration through November 2004.

        Under the Lilly collaboration, we retained or received: (1) exclusive rights to independently research, develop and commercialize Targretin^® and other RXR compounds in the fields of cancer and dermatology; (2) an option to obtain selected rights to one of Lilly’s specialty pharmaceutical products; and (3) rights to receive milestones, royalties and options to obtain certain co-development and co-promotion rights for the Lilly-selected RXR compound in combination with a SERM.

        Our rights under the initial agreements have changed. In connection with the acquisition of Seragen in 1998, we obtained from Lilly its rights to ONTAK® in satisfaction of our option to obtain selected rights to one of Lilly’s specialty pharmaceutical products. In 1999, we agreed to focus our collaborative efforts on the RXR modulator second-generation program, which has compounds with improved therapeutic indices relative to the three first-generation compounds, and on co-agonists of the PPAR receptor program. In early 1999, Lilly opted not to proceed with the development of certain first-generation compounds, including Targretin®, in the RXR program for diabetes. As a result of this decision, all rights to the oral form of Targretin® reverted to us, and LGD1268 and LGD1324 returned to the pool of eligible RXR modulators for possible use in oncology in combination with a SERM under the collaboration agreement between Ligand and Lilly.

        In September 2001, we announced that we had earned an undisclosed milestone from Lilly as a result of Lilly’s filing with the FDA an IND for LY818, a PPAR modulator for type II diabetes and metabolic diseases. LY818 entered Phase II studies early in 2003, resulting in a $1.5 million milestone payment. In March 2004, Lilly announced their decision to move LY818 into Phase III registration studies. In June 2002, we announced that we had earned a $1.1 million milestone payment as a result of Lilly’s filing with the FDA an IND for LY929, a PPAR modulator for the treatment of Type II diabetes, metabolic diseases and dyslipidemias. In November 2002, we announced that we had earned a $2.1 million milestone payment as a result of Lilly’s filing with the FDA an IND for LY674, a PPAR modulator for the treatment of dyslipidemias. We will receive additional milestones if these products continue through the development process, and royalties on product sales if the products receive marketing approval. During 2002, Lilly also moved to IND track two other PPAR products, the compound numbers for which have not been disclosed. Lilly and Ligand also have an active preclinical development program.

Inflammatory Disease Collaborative Program

        Abbott Collaboration. In July 1994, we entered into a research and development collaboration with Abbott Laboratories (“Abbott”) to discover and develop small molecule compounds for the prevention or treatment of inflammatory diseases. The collaborative program includes several molecular approaches to discovering modulators of glucocorticoid receptor activity that have significantly improved therapeutic profiles relative to currently known anti-inflammatory steroids such as prednisone and dexamethasone. The collaboration is focused on the development of novel non-steroidal glucocorticoids that maintain the efficacy of corticosteroids, but lack some or all of corticosteroids’ dose-limiting side effects. The research phase concluded in July 1999. Certain compounds discovered during the collaboration have progressed to advanced preclinical testing in an effort to select a clinical candidate.

        When the research phase of the collaboration ended in July 1999, Abbott retained rights to certain selective glucorcorticoid receptor modulators, or SGRMs, whose development has now been slowed or halted. Ligand retained rights to all other compounds discovered through the collaboration, as well as recaptured technology rights. Abbott will make milestone and royalty payments on products targeted at inflammation resulting from the collaboration. Each party will be responsible for the development, registration, and commercialization of the products in its respective field.

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STATs/Blood Disorders Collaborative Program

        Our proprietary STAT technology is distinct from our IR technology platform. STATs are activated through a receptor located on the surface of the cell, rather than a receptor located within the cell. STAT technology provides us with a second broadly enabling drug discovery platform that has potential applications in cancer, inflammation, asthma, allergy, infectious disease, anemia, obesity, diabetes, and growth disorders. See “Technology/Signal Transducers and Activators of Transcription Technology” for a more complete discussion of our STAT technology. We are pursuing product development opportunities based on our STAT expertise through a collaboration with GlaxoSmithKline.

        GlaxoSmithKline Collaboration. In February 1995, we entered into a research and development collaboration with SmithKline Beecham (now GlaxoSmithKline) to use our proprietary STAT technology to discover and characterize small molecule, orally bioavailable drugs to control hematopoiesis (the formation and development of blood cells) for the treatment of a variety of blood cell deficiencies. In 1998, we announced the discovery of the first non-peptide small molecule that mimics in mice the activity of Granulocyte-Colony Stimulating Factor (“G-CSF”), a natural protein that stimulates production of infection-fighting neutrophils (a type of white blood cell). While this lead compound has only been shown to be active in mice, its discovery is a major scientific milestone and suggests that orally active, small-molecule mimics can be developed not only for G-CSF, but for other cytokines as well.

        A number of lead molecules have been found that mimic the activity of natural growth factors for white cells and platelets. In the fourth quarter of 2002, we earned a $2.0 million milestone payment from GlaxoSmithKline, which has begun human trials of SB-497115, an oral, small molecule drug that mimics the activity of thrombopoietin (TPO), a protein factor that promotes growth and production of blood platelets. There are no approved TPO agents for the treatment or prevention of thrombocytopenias (decreased platelet count). Investigational use of injectable forms of recombinant human TPO has been effective in raising platelet levels in cancer patients undergoing chemotherapy, and has led to accelerated hematopoietic recovery when given to stem cell donors. Some of these investigational treatments have not moved forward to registration due to the development of neutralizing antibodies. Thus, a small molecule TPO mimic with no apparent immunogenic potential and oral activity that may facilitate dosing may provide an attractive therapeutic profile for a major unmet medical need.

        The research phase of the collaboration concluded in February 2001. Under the collaboration, we have the right to select up to three compounds related to hematopoietic targets for development as anti-cancer products other than those compounds selected for development by GlaxoSmithKline. GlaxoSmithKline has the option to co-promote these products with us in North America and to develop and market them outside North America.

Dermatology Program

        Allergan. In September 1997, in conjunction with the buyback of Allergan Ligand Retinoid Therapeutics, Inc. (ALRT), we agreed with Allergan to restructure the terms and conditions relating to research, development, and commercialization and sublicense rights for the ALRT compounds. Under the restructured arrangement, we received exclusive, worldwide development, commercialization, and sublicense rights to Panretin^® capsules and Panretin^® gel, LGD1550, LGD1268 and LGD1324. Allergan received exclusive, worldwide development, commercialization and sublicense rights to LGD4310, an RAR antagonist. Allergan also received LGD4326 and LGD4204, two advanced preclinical RXR selective compounds. In addition, we participated in a lottery with Allergan for each of the approximately 2,000 retinoid compounds existing in the ALRT compound library as of the closing date, with each party acquiring exclusive, worldwide development, commercialization, and sublicense rights to the compounds that they selected. We and Allergan will each pay the other a royalty based on net sales of products developed from the compounds selected by each in the lottery and the other ALRT compounds to which each acquires exclusive rights. We will also pay to Allergan royalties based on our net sales of Targretin^® for uses other than oncology and dermatology indications. In the event that we license commercialization rights to Targretin^® to a third party, we will pay to Allergan a percentage of royalties payable to us with respect to sales of Targretin^® other than in oncology and dermatology indications. During 2001, Allergan elected not to proceed with development of AGN4310 for mucocutaneous toxicity.

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Royalty Pharma Agreement

        In March 2002, we announced an agreement with Royalty Pharma AG, which purchased rights to a share of future payments from our collaborative partners’ sales of three SERMs in Phase III development. The SERM products included in the transaction are lasofoxifene, which is in Phase III studies for osteoporosis and other indications at Pfizer, bazedoxifene and bazedoxifene/PREMARIN^® , which are in Phase III trials at Wyeth for osteoporosis and as HRT.

        Royalty Pharma paid us $6.0 million in March 2002 in exchange for a right to receive 0.250% of net sales of the three SERMs for a period of 10 years. In the second quarter of 2002, Royalty Pharma exercised its first option to purchase for $3.0 million an additional 0.125% of the SERMs’ potential future sales. In the third quarter of 2002, Royalty Pharma exercised another option to purchase for $3.5 million an additional 0.125% of the SERMs’ potential future sales. In the fourth quarter of 2002, we and Royalty Pharma expanded our SERM royalty agreement and formed a new royalty-sharing partnership around our approved cancer drug Targretin^® capsules. Under the revised agreement, Royalty Pharma exercised an expanded option in December 2002 and agreed to pay us $6.775 million for 0.1875% of the SERMs’ potential future sales and for 1% of worldwide sales of Targretin^® capsules from January 2003 through 2016. The agreement does not apply to sales of Targretin^® capsules outside the United States for CTCL until the product is approved for an indication other than CTCL.

        In October 2003, we and Royalty Pharma amended our existing royalty agreement, and Royalty Pharma exercised an option for $12.5 million in exchange for 0.7% of potential future sales of three selective estrogen receptor modulator (SERM) products for 10 years. Under the revised agreement, Royalty Pharma has three additional options to purchase up to 1.3% of such product net sales for $39.0 million. Additionally, Royalty Pharma agreed to pay cumulative milestones of up to $2.5 million upon the launches of the SERM products (provided they are approved by September 30, 2005). The revised agreement specifies that the options expire in the fourth quarter of 2003 and as NDA acceptance and approval milestones or specified dates are achieved in 2004 and 2005. Royalty Pharma did not exercise its second option for $12.5 million in the fourth quarter of 2003. For the options that are currently structured to expire in 2004 and 2005, the royalty rates owed to Royalty Pharma will be reduced if certain events occur, and if sales of SERM products exceed certain thresholds. In addition, if Phase III data for at least one of the SERM products have not been published by March 31, 2004, these options will have no fixed expiration date. Instead, they must be exercised within 30 days of the applicable development milestone. Overall, through December 2003, Royalty Pharma purchased for $31.8 million the right to receive 1.3875% of the SERMs’ potential future sales, plus 1% of Targretin® capsules sales. Royalty Pharma has remaining options, exercisable at its discretion, to purchase at escalating prices rights to receive up to another 0.8% of the SERMs’ potential future sales for up to $26.5 million in two installments in 2004 and 2005.

        Under the terms of the agreement, unexercised options expire on their due date and cannot be deferred or accelerated. All payments are non-refundable, regardless of whether the products are ever successfully registered or marketed. Milestone payments owed by our partners as the products complete development and registration are not included in the Royalty Pharma agreement and will be paid to us as earned.

Technology

        In our successful efforts to discover new and important medicines, we and our academic collaborators and consultants have concentrated on two areas of research: advancing the understanding of the activities of hormones and hormone-related drugs, and making scientific discoveries related to IR and STAT technologies. We believe that our expertise in these technologies will enable us to develop novel, small-molecule drugs acting through IRs or STATs with more target-specific properties than currently available drugs. Our efforts may result either in improved therapeutic and side effect profiles and new indications for IRs, or in novel mechanisms of action and oral activity for STATs. Both IRs and STATs are families of transcription factors that change cell function by selectively turning on or off particular genes in response to circulating signals that impinge on cells. In addition to our proprietary IR and STAT technologies, we have acquired fusion protein technology, which was used by Seragen in the development of ONTAK^® .

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Intracellular Receptor Technology

        Hormones occur naturally within the body and control processes such as reproduction, cell growth and differentiation. Hormones generally fall into two classes, non-peptide hormones and peptide hormones. Non-peptide hormones include retinoids, sex steroids (estrogens, progestins and androgens), adrenal steroids (glucocorticoids and mineralocorticoids), vitamin D and thyroid hormone. These non-peptide hormones act by binding to their corresponding IRs to regulate the expression of genes in order to maintain and restore balanced cellular function within the body. Hormonal imbalances can lead to a variety of diseases. The hormones themselves and drugs that mimic or block hormone action may be useful in the treatment of these diseases. Furthermore, hormone mimics (agonists) or blockers (antagonists) can be used to treat diseases in which the underlying cause is not hormonal imbalance. The effectiveness of IRs as drug targets is clearly demonstrated by currently available drugs acting through IRs for several diseases. However, the use of most of these drugs has been limited by their often significant side effects. Examples of currently marketed hormone-related drugs acting on IRs are glucocorticoids (steroids used to treat inflammation), natural and synthetic estrogens and progesterones (used for hormone replacement therapy and contraception), tamoxifen (an estrogen antagonist used in the treatment of breast cancer), and various retinoids such as Accutane® and Retin-A® (used to treat acne) and Dovonex® (used to treat psoriasis).

        We have built a strong proprietary position and accumulated substantial expertise in IRs applicable to drug discovery and development. Building on our scientific findings about the molecular basis of hormone action, we have created proprietary new tools to explore and manipulate non-peptide hormone action for potential therapeutic benefit. We employ a proprietary cell-culture based assay system for small molecules that can modulate IRs, referred to as the co-transfection assay. The co-transfection assay system simulates the actual cellular processes controlled by IRs and is able to detect whether a compound interacts with a particular human IR and whether this interaction mimics or blocks the effects of the natural regulatory molecules on target gene expression.

        The understanding of non-peptide hormones and their actions has increased substantially in the last 15 years. Driving this rapid expansion of knowledge has been the discovery of the family of IRs through which all known small-molecule, non-peptide hormones act. We and our academic collaborators and consultants have made major discoveries pertaining to IRs and to small molecule hormones and compounds that interact with these IRs. These discoveries include: (1) the identification of the IR superfamily, (2) the recognition of IR subtypes, (3) the heterodimer biology of RXR-selective compounds and (4) the discovery of orphan IRs. We believe that each of these broad areas of knowledge provides important opportunities for drug discovery.

        IR Superfamily. The receptors for all non-peptide hormones are closely related members of a superfamily of proteins known as IRs. Human IRs for all the known non-peptide hormones now have been cloned, in many cases by our scientists or our collaborators. The structure and underlying mechanism of action of IRs have many common features, such that drug discovery insights about one IR often can be directly applied to other members of the IR superfamily, bringing synergy to our IR-focused drug discovery efforts. First-generation drugs were developed and commercialized for their therapeutic benefits prior to the discovery of IRs. As a result, they often cross-react with the IRs for hormones other than the intended target, which can result in significant side effects. The understanding that IRs are structurally similar has enabled us to determine the basis for the side effects of some first-generation drugs and to discover improved drug candidates.

        IR Subtypes. For some of the non-peptide hormones, several closely related but non-identical IRs, known as IR subtypes, have been discovered. These include six subtypes of the IRs for retinoids, two subtypes of the IRs for thyroid hormone, two subtypes for the ER, and three subtypes for the PPARs. Patent applications covering many of these IR subtypes have been exclusively licensed by us. We believe that drugs capable of selective modulation of IR subtypes will allow more specific pharmacological intervention that is better matched to therapeutic need. Targretin^®, an RXR-selective molecule, was discovered as a result of our understanding of retinoid receptor subtypes.

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        Retinoid Responsive IRs. Retinoic acid, a derivative of Vitamin A, is one of the body’s natural regulatory hormones that has a broad range of biological actions, influencing cell growth, differentiation, programmed cell death and embryonic development. Many chemical analogues of retinoic acid, called retinoids, also have biological activity. Specific retinoids have been approved by the FDA for the treatment of psoriasis and certain severe forms of acne. Evidence also suggests that retinoids can be used to arrest and, to an extent, reverse the effects of skin damage arising from prolonged exposure to the sun. Other evidence suggests that retinoids are useful in the treatment of a variety of cancers, including kidney cancer and certain forms of leukemia. For example, all-trans-retinoic-acid has been approved by the FDA to treat acute promyelocytic leukemia. Retinoids also have shown an ability to reverse precancerous (premalignant) changes in tissues, reducing the risk of development of cancer, and may have potential as preventive agents for a variety of epithelial malignancies, including skin, head and neck, bladder and prostate cancer. Currently marketed retinoids, which were developed and commercialized prior to the discovery of retinoid-responsive IRs, cause significant side effects. These include severe birth defects if fetal exposure occurs, severe irritation of the skin and mucosal surfaces, elevation of plasma lipids, headache and skeletal abnormalities.

        The six RRs that have been identified to date can be grouped in two subfamilies -- RARs and RXRs. Patent applications covering members of both families of RRs have been licensed exclusively to us primarily from The Salk Institute. The RR subtypes appear to have different functions, based on their distribution in various tissues within the body and data arising from in vitro and in vivo studies, including studies of transgenic mice. Several of the retinoids currently in commercial use are either non-selective in their pattern of RR subtype activation or are not ideal drugs for other reasons. We are developing chemically synthesized retinoids that, by selectively activating RR subtypes, may preserve desired therapeutic effects while reducing side effects.

        We have three retinoid products approved by the FDA (Panretin^® gel, Targretin^® capsules and Targretin^® gel) and four retinoid products in clinical trials (Panretin^® capsules, Targretin^® capsules, Targretin^® gel and LGD1550 capsules). Panretin^® gel and Panretin^® capsules incorporate 9-cis retinoic acid, a retinoid isolated and characterized by us in 1991 in collaboration with scientists at The Salk Institute and Baylor. 9-cis retinoic acid is the first non-peptide hormone discovered in more than 25 years and appears to be a natural ligand for the RAR and RXR subfamilies of retinoid receptors. Bexarotene, the active substance in Targretin^®, is a synthetic retinoid developed by us that shows selective retinoid receptor subtype activity that is different from that of 9-cis retinoic acid, the active substance in Panretin^®. Targretin^® selectively activates a subclass of retinoid receptors called RXRs. RXRs play an important role in the control of a variety of cellular functions. LGD1550 is a potent RAR agonist that strongly inhibits growth of several human cancer cell lines.

        RXRs. RXRs can form a dimer with numerous IRs, such as the PPAR, LXR, RAR, thyroid hormone and vitamin D receptors. While RXRs are widely expressed, their IR partners are more selectively expressed in different tissues, such as liver, fat or muscle. As a result, compounds that bind RXRs offer the unique potential to treat a variety of diseases, including cancer and metabolic diseases. In preclinical models of type II diabetes, RXR agonists appear to stimulate the physiological pathways responsive to RXR-PPAR receptor partners expressed in key target tissues that are involved in glucose metabolism. As a result, a discrete set of genes is activated in these tissues, resulting in a decrease in serum glucose levels and insulin.

        Orphan Receptors. More than 50 additional members of the IR superfamily that do not interact with the known non-peptide hormones have been discovered. These members of the IR superfamily have been designated orphan receptors. We believe that among the orphan IRs there may be receptors for uncharacterized small molecule hormones, and that the physiological roles of the various orphan IRs are likely to be diverse. We have devised strategies to isolate small molecules that interact with orphan IRs. In 1999, we invested in and exclusively licensed specified orphan IR technology to a new private corporation, X-Ceptor Therapeutics, Inc. (“X-Ceptor”), which is conducting research to identify therapeutic products from orphan nuclear receptors. We also retained the right to acquire all the remaining shares of X-Ceptor, which expired in 2003 without our exercising it. Please see note 14 of notes to consolidated financial statements for further details regarding our investment in X-Ceptor.

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Signal Transducers and Activators of Transcription Technology

        STATs are a family of proteins that are a key part of the signal transduction pathway for a variety of biologically important polypeptide hormones (e.g., interferons, interleukins, leptin and hematopoietic growth factors). STATs play a role in the biology of cytokines and growth factors functionally analogous to that played by IRs in the biology of the non-peptide hormones. When various cytokines or growth factors bind to their receptors on the cell surface, this triggers the activation of specific members of the JAKs, which in turn activate specific STATs. The activated STATs enter the cell nucleus and bind to the control regions of specific target genes and alter their expression, thereby modulating physiologic or pathophysiologic processes.

        The discovery of STATs, the elucidation of their roles in interferon signal transduction, and the first cloning of genes encoding STATs were pioneered by our exclusive collaborator, Dr. James Darnell, and were described initially in 1992. A total of seven members of the STAT family have been identified and a large number of peptide hormones have been shown to utilize STAT signaling pathways. These peptide hormones include the interferons (alpha, beta and gamma), the hematopoietic colony stimulating factors (interleukin-3, EPO, G-CSF, GM-CSF and thrombopoietin), growth hormone, prolactin, leptin and many of the interleukins.

        In certain conditions it may prove beneficial to block the actions of specific cytokines. In other pathological states, there is insufficient activity of specific cytokines. For example, in patients with chronic renal failure, diminished erythropoietin (“EPO”) release by the damaged kidneys results in the inadequate production of red blood cells, causing anemia. Recombinant human EPO protein (Epogen^®) can be administered to correct this anemia effectively, but must be injected. Other cytokines are useful as injected protein medicines, including interferons (Intron-A^®, Roferon^®, Betaseron^®) and interleukins (Proleukin^®) and G-CSF (Neupogen^®). Each of these and many other cytokines appear to exert their actions through JAK/STAT signal transduction pathways.

        We have established a collaboration with GlaxoSmithKline to discover and characterize small molecule drugs to modulate specific JAK/STAT pathways to control the formation of red, white and platelet blood cells for treating patients with cancer, anemia, or platelet deficiency disorders. Proof of principle for this approach was achieved with GlaxoSmithKline in the area of G-CSF and thrombopoietin mimics. In 2002, GlaxoSmithKline moved into clinical studies the first product discovered from our STAT technology, SB-497115, an oral TPO agonist for the treatment of thrombocytopenia.

Fusion Protein Technology

        Our fusion protein technology was developed by Seragen, which we acquired in 1998. Seragen’s fusion proteins consist of a fragment of diphtheria toxin genetically fused to a ligand that binds to specific receptors on the surface of target cells. Once bound to the cell, the fusion proteins are designed to enter the cell and destroy the ability of the cell to manufacture proteins, resulting in cell death. Using this platform, Seragen genetically engineered six fusion proteins, each of which consists of a fragment of diphtheria toxin fused to a different targeting ligand, such as a polypeptide hormone or growth factor. ONTAK^®, which is approved in the U.S. for the treatment of patients with persistent or recurrent CTCL, is a fusion protein consisting of a fragment of diphtheria toxin genetically fused to a part of interleukin-2. In addition to treatment of CTCL, fusion proteins may have utility in oncology, dermatology, infectious diseases, and autoimmune diseases. Seragen has entered into exclusive license agreements with Harvard University and other parties for patents related to fusion protein technology and has been issued six U.S. patents for improvements in the technology licensed from Harvard University.

Academic Collaborations

        To date, we have licensed technology from The Salk Institute, Baylor College of Medicine, and Rockefeller University and developed relationships with key scientists to further the development of our core IR and STAT technologies.

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        The Salk Institute of Biological Studies. In 1988, we established an exclusive relationship with The Salk Institute, which is one of the research centers in the area of IR technology. We amended and restated this agreement in April 2002. Under our agreement, we have an exclusive, worldwide license to certain IR technology developed in the laboratory of Dr. Ronald Evans, a Salk professor and Howard Hughes Medical Institute Investigator. Dr. Evans cloned and characterized the first IR in 1985 and is an inventor of the co-transfection assay used by us to screen for IR modulators. Under the agreement, we are obligated to make certain royalty payments based on sales of certain products developed using the licensed technology, as well as certain minimum annual royalty payments and a percentage of milestones and other payments received. The agreement also provides that we have the option of buying out future royalty payments as well as milestone and other payment-sharing obligations on a product-by-product basis by paying the Salk a lump sum calculated using a formula in the agreement. In March 2004, we paid the Salk $1.12 million to exercise this buyout option with respect to lasofoxifene, a product under development by Pfizer. See the discussion above regarding “Collaborative Research and Development Programs.”

        We have also entered into a consulting agreement with Dr. Evans that continues through February 2004. Dr. Evans serves as Chairman of Ligand’s Scientific Advisory Board.

        Baylor College of Medicine. In 1990, we established an exclusive relationship with Baylor, which is a center of IR technology. We entered into a series of agreements with Baylor under which we have an exclusive, worldwide license to IR technology developed at Baylor and to future improvements made in the laboratory of Dr. Bert W. O’Malley through the life of the related patents. Dr. O’Malley is a professor and the Chairman of the Department of Cell Biology at the Baylor College of Medicine and the Director of the Center for Reproductive Biology. He leads IR research at Baylor.

        We work closely with Dr. O’Malley and Baylor in scientific IR research, particularly in the area of sex steroids and orphan IRs. Under our agreement, we are obligated to make certain royalty payments based on the sales of products developed using the licensed technology. Dr. O’Malley is a member of Ligand’s Scientific Advisory Board.

        Rockefeller University. In September 1992, we entered into a worldwide, exclusive license agreement with Rockefeller University, and exclusive consulting agreements with Dr. James Darnell of Rockefeller University and Dr. David Levy of NYU, to develop and commercialize certain technology involving STATs to control gene expression. Dr. Darnell is one of the leading investigators of the control of gene expression by STATs. Rockefeller University will receive a royalty on any commercialized products developed using the technology. Related technology was assigned by NYU to Rockefeller University and is covered by the license agreement with us.

        In addition to the collaborations discussed above, we also have a number of other consulting, licensing, development and academic agreements by which we strive to advance our technology.

Manufacturing

        We currently have no manufacturing facilities and, accordingly, rely on third parties, including our collaborative partners, for commercial or clinical production of any products or compounds. Each of our major products is manufactured by a single supplier: Elan manufactures AVINZA^®; Cambrex manufactures ONTAK^® and Cardinal Health and Raylo manufacture Targretin^® capsules. We recently entered into a contract with Cardinal Health to provide a second source for AVINZA^®, and with Hollister-Stier to fill and finish ONTAK^®.

        Certain raw materials necessary for the commercial manufacturing of our products are custom and must be obtained from a specific sole source. In addition, our finished products are produced by sole source manufacturers. We currently attempt to manage the risk associated with such sole source raw materials and production by actively managing our inventories and supply and production arrangements. We attempt to remain appraised of the financial condition of our suppliers and their ability to continue to supply our raw materials and finished products in an uninterrupted and timely manner. Unavailability of certain materials or the loss of current sources of production could cause an interruption in production and a reduced supply of finished product pending establishment of new sources, or in some cases, implementation of alternative processes. For a discussion of the risks associated with manufacturing, see “Risks and Uncertainties.”

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Quality Assurance

        Our success depends in great measure upon customer confidence in the quality of our products and in the integrity of the data that support their safety and effectiveness. The quality of our products arises from our total commitment to quality in all aspects of our business, including research and development, purchasing, manufacturing and distribution. Quality assurance procedures have been developed relating to the quality and integrity of our scientific information and production processes.

        Control of production processes involves rigid specifications for ingredients, equipment, facilities, manufacturing methods, packaging materials, and labeling. Control tests are made at various stages of production processes and on the final product to assure that the product meets all regulatory requirements and our standards. These tests may involve chemical and physical microbiological testing, preclinical testing, human clinical trials, or a combination of these trials.

Commercial

        Our practices with respect to working capital items are similar to comparable companies in the industry. We accept the return of pharmaceuticals that have reached their expiration date. Our policy for returns allows customers, primarily wholesale distributors, to return our oncology products three months prior to and six months after expiration. Our policy for returns of AVINZA^® allows customers to return the product six months prior to and six months after expiration. The level of actual returns can be influenced by a number of factors including the dating of product when shipped to the customer, the amount of product subsequently shipped by the wholesale distributor to their customers, pricing adjustments, and competing products. Actual product returns may differ from our estimates.

        We have offered and may in the future offer special payment terms as part of promotional launch and other commercial programs such as those that provide customers with discounts off wholesale price and extended payment terms instead of our normal 30-day terms. We offered such special terms, for example, in our launch of AVINZA^®.

        For the year ended December 31, 2003, revenues from sales to three wholesale distributors each accounted for more than 10% of total revenues and in the aggregate, represented 67% of total revenues. These were AmerisourceBergen Corporation, Cardinal Health, Inc., and McKesson Corporation. Each wholesaler individually represented 10% or more of the Company’s product sales and in the aggregate represented approximately 82% of product sales.

        Substantially all of our revenues are attributable to customers in the United States; likewise, substantially all of our long-lived assets are located in the United States.

        For further discussion of these items, as well as a discussion of inventories, see below under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - New Accounting Policies.”

Research and Development Expenses

        Research and development expenses were $67.7 million, $58.8 million and $51.1 million in fiscal 2003, 2002 and 2001, respectively, of which approximately 86%, 75% and 70%, respectively, we sponsored, and the remainder of which was funded pursuant to collaborative research and development arrangements.

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Competition

        Some of the drugs we are developing will compete with existing therapies. In addition, a number of companies are pursuing the development of novel pharmaceuticals that target the same diseases we are targeting. A number of pharmaceutical and biotechnology companies are pursuing IR-related or STAT-related approaches to drug discovery and development. Furthermore, academic institutions, government agencies, and other public and private organizations conducting research may seek patent protection with respect to potentially competing products or technologies and may establish collaborative arrangements with our competitors.

        Our competitive position also depends upon our ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary products or processes, and secure sufficient capital resources for the often substantial period between technological conception and commercial sales. For a discussion of the risks associated with competition, see “Risks and Uncertainties.”

Government Regulation

        The manufacturing and marketing of our products, our ongoing research and development activities, and products being developed by our collaborative partners are subject to regulation for safety and efficacy by numerous governmental authorities in the United States and other countries. In the United States, pharmaceuticals are subject to rigorous regulation by federal and various state authorities, including the FDA. The Federal Food, Drug and Cosmetic Act and the Public Health Service Act govern the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of our products. There are often comparable regulations that apply at the state level. Product development and approval within this regulatory framework takes a number of years and involves the expenditure of substantial resources.

        The steps required before a pharmaceutical agent may be marketed in the United States include (1) preclinical laboratory tests, (2) the submission to the FDA of an IND, which must become effective before human clinical trials may commence, (3) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug, (4) the submission of a NDA to the FDA and (5) the FDA approval of the NDA prior to any commercial sale or shipment of the drug. A company must pay a one-time user fee for NDA submissions, and annually pay user fees for each approved product and manufacturing establishment. In addition to obtaining FDA approval for each product, each domestic drug-manufacturing establishment must be registered with the FDA and, in California, with the Food and Drug Branch of California. Domestic manufacturing establishments are subject to pre-approval inspections by the FDA prior to marketing approval, then to biennial inspections, and must comply with current Good Manufacturing Practices (cGMP). To supply products for use in the United States, foreign manufacturing establishments must comply with cGMP and are subject to periodic inspection by the FDA or by regulatory authorities in such countries under reciprocal agreements with the FDA.

        For both currently marketed and future products, failure to comply with applicable regulatory requirements after obtaining regulatory approval can, among other things, result in the suspension of regulatory approval, as well as possible civil and criminal sanctions. In addition, changes in existing regulations could have a material adverse effect to us.

        For marketing outside the United States before FDA approval to market, we must submit an export permit application to the FDA. We also are subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs. The requirements relating to the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country and there can be no assurance that we or any of our partners will meet and sustain any such requirements. For a discussion of the risks associated with government regulations, see “Risks and Uncertainties.”

Patents and Proprietary Rights

        We believe that patents and other proprietary rights are important to our business. Our policy is to file patent applications to protect technology, inventions and improvements to our inventions that are considered important to the development of our business. We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position.

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        To date, we have filed or participated as licensee in the filing of approximately 93 currently pending patent applications in the United States relating to our technology, as well as foreign counterparts of certain of these applications in many countries. In addition, we own or have licensed rights covered by approximately 344 patents issued or applications, granted or allowed worldwide, including United States patents and foreign counterparts to United States patents. With a few immaterial exceptions, these patents and applications will expire between 2004 and 2021. Our marketed products are expected to have patent protection in the United States and Europe that does not expire until between 2011 and 2017. Subject to compliance with the terms of the respective agreements, our rights under our licenses with our exclusive licensors extend for the life of the patents covering such developments. For a discussion of the risks associated with patent and proprietary rights, see “Risks and Uncertainties.”

Human Resources

        As of February 29, 2004, we had 461 full-time employees, of whom 230 were involved directly in scientific research and development activities. Of these employees, approximately 68 hold Ph.D. or M.D. degrees.

Available Information

        We file electronically with the Securities and Exchange Commission (or SEC) our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and, as necessary, amendments to these reports, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is <http://www.sec.gov>.

        You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports which are posted as soon as reasonably practicable after filing on our website on the World Wide Web at <http://www.ligand.com>, by contacting the Investor Relations Department at our corporate offices by calling (858) 550-7500 or by sending an e-mail message to investors@ligand.com. You may also request information via the Investor Relations page of our Web site.

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.

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 December 31, 2003, our accumulated deficit was approximately $656 million. To date, we have received the majority of our revenues from our collaborative arrangements and only 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:

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

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

        Developing the sales force to market and sell products is a difficult, expensive and time-consuming process. We have developed a US sales force of about 95 people. We also rely on third-party distributors to distribute our products. The distributors are responsible for providing many marketing support services, including customer service, order entry, shipping and billing and customer reimbursement assistance. In Europe, we currently rely on other companies to distribute and market our products. We have entered into agreements for the marketing and distribution of our products in territories such as the United Kingdom, Germany, France, Spain, Portugal, Greece, Italy and Central and South America and have established a subsidiary, Ligand Pharmaceuticals International, Inc., with a branch in London, England, to coordinate our European marketing and operations. Our reliance on these third parties means our results may suffer if any of them are unsuccessful or fail to perform as expected. We may not be able to continue to expand our sales and marketing capabilities sufficiently to successfully commercialize our products in the territories where they receive marketing approval. With respect to our co-promotion or licensing arrangements, for example our co-promotion agreement for AVINZA^®, any revenues we receive will depend substantially on the marketing and sales efforts of others, which may or may not be successful.

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

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

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

        Excluding AVINZA^®, our products are small-volume specialty pharmaceutical products that address the needs of cancer patients in relatively small niche markets with substantial geographical fluctuations in demand. To ensure patient access to our drugs, we maintain broad distribution capabilities with inventories held at approximately 150 locations throughout the United States. Furthermore, the purchasing and stocking patterns of our wholesaler customers are influenced by a number of factors that vary with each 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. If any or all of our major distributors decide to substantially reduce the inventory they carry in a given period, our sales for that period could be substantially lower than historical levels.

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

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

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

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

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

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

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

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

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

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

        We have incurred losses since our inception and may not generate positive cash flow to fund our operations for one or more years. As a result, we may need to complete additional equity or debt financings to fund our operations. Our inability to obtain additional financing could adversely affect our business. Financings may not be available at all or on favorable terms. In addition, these financings, if completed, still may not meet our capital needs and could result in substantial dilution to our stockholders. For instance, in February and March 2002 we issued to Elan 6.3 million shares upon the conversion of zero coupon convertible senior notes held by Elan, and in April 2002 and September 2003 we issued an aggregate of 7.7 million shares of our common stock in a private placement. These transactions have resulted in the issuance of significant numbers of new shares. 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.

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

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

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

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

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

We face substantial competition which may limit our revenues.

        Some of the drugs that we are developing and marketing will compete with existing treatments. In addition, several companies are developing new drugs that target the same diseases that we are targeting and are taking IR-related and STAT-related approaches to drug development. The principal products competing with our products targeted at the cutaneous t-cell lymphoma market are Supergen/Abbott’s Nipent and interferon, which is marketed by a number of companies, including Schering-Plough’s Intron A. Products that compete with AVINZA^® include Purdue Pharma L.P.‘s OxyContin and MS Contin, Janssen Pharmaceutica Products, L.P.‘s Duragesic, aai Pharma’s Oramorph SR, Faulding’s Kadian, and generic sustained release morphine sulfate. 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.

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

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

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

We rely heavily on collaborative relationships and 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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.

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Item 2. Properties

        We currently lease and occupy office and laboratory facilities in San Diego, California. These include a 52,800 square foot facility leased through July 2015 and an 82,500 square foot facility leased through February 2014. The 82,500 square foot facility is owned by our consolidated subsidiary, Nexus Equity VI LLC. In December 2003, we notified the other shareholder of our consolidated subsidiary of our intent to acquire the portion of the subsidiary that we do not currently own. We expect the purchase to close in the first quarter of 2004. See note 2 to notes to consolidated financial statements - Cumulative Effect of Accounting Change for further discussion of this lease. We believe these facilities will be adequate to meet our near-term space requirements.

Item 3. Legal Proceedings

        Seragen, Inc., our 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 our 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 its subsidiary 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. The court subsequently granted Ligand’s motion to dismiss the unfair and deceptive trade practices claim (i.e. the treble damages 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. We have appealed the judgment in this case as well as the award of interest and the calculation of damages.

        We believe that each of these lawsuits is without merit and intend 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.

Item 4. Submission of Matters to a Vote of Security Holders

        There were no matters submitted to a vote of security holders in the fourth quarter ended December 31, 2003.

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PART II

Item 5. Market for Registrant's Common Stock, Related Stockholder Matter, and Issuer Purchases of Equity Securities

(a) Market Information

        Our common stock trades on the NASDAQ National Market tier of the NASDAQ Stock Market under the symbol “LGND.” The following table sets forth the high and low intraday sales prices for our common stock on the NASDAQ National Market for the periods indicated.

(b) Holders

        As of February 27, 2004, there were approximately 1,949 holders of record of the common stock.

(c) Dividends

        We have never declared or paid any cash dividends on our capital stock and do not intend to pay any cash dividends in the foreseeable future. We currently intend to retain our earnings, if any, to finance future growth.

Item 6. Selected Consolidated Financial Data

        The selected financial data set forth below with respect to our consolidated financial statements has been derived from the audited financial statements. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this filing.

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(1)	We began selling ONTAK ® and Panretin ® gel in 1999 and Targretin ® capsules and Targretin ® gel in 2000. AVINZA ® was approved by the FDA in March 2002 and subsequently launched in the U.S. in June 2002.
(2)	Represents amount due Organon Pharmaceuticals USA, Inc. under our AVINZA ® co-promotion agreement entered into in February 2003.
(3)	In 2000, we changed our policy for the recognition of revenue related to up-front fees in accordance with Staff Accounting Bulletin No. 101, Revenue Recognition. See Note 2 (Revenue Recognition) of the notes to consolidated financial statements.
(4)	In December 2003, we adopted FIN 46(R), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. Under FIN 46(R), we are required to consolidate the entity from which we lease our corporate headquarters. Accordingly, we consolidated assets with a carrying value of $13.5 million, debt of $12.5 million, and a non-controlling interest of $0.6 million. In connection with the adoption of FIN 46(R), we recorded a charge of $2.0 million as a cumulative effect of the accounting change on December 31, 2003. See Note 2 (Cumulative Effect of Accounting Change) of the notes to consolidated financial statements.

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Item 7. 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 in Item 1 – Business 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 annual report. This caution is made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

        Our trademarks, trade names and service marks referenced herein include Ligand^®, AVINZA^®, ONTAK^®, Panretin^® and Targretin^®. Each other trademark, trade name or service mark appearing in this annual 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, and metabolic, cardiovascular and inflammatory diseases. Our drug discovery and development programs are based on our proprietary gene transcription technology, primarily related to Intracellular Receptors, also known as IRs, a type of sensor or switch inside cells that turns genes on and off, and Signal Transducers and Activators of Transcription, also known as STATs, which are another type of gene switch.

        We currently market five products in the United States: AVINZA^®, for the relief of chronic, moderate to severe pain; ONTAK^®, for the treatment of patients with persistent or recurrent cutaneous T-cell lymphoma (or CTCL); Targretin^® capsules, for the treatment of CTCL in patients who are refractory to at least one prior systemic therapy; Targretin^® gel, for the topical treatment of cutaneous lesions in patients with early stage CTCL; and Panretin^® gel, for the treatment of Kaposi’s sarcoma in AIDS patients. In March 2002, the Food and Drug Administration (or FDA) approved AVINZA^®, which was subsequently launched in the U.S. in June 2002. In Europe, we were granted a marketing authorization for Panretin^® gel in 2000 and for Targretin^® capsules in 2001. Targretin^® capsules and Panretin^® gel were launched in Europe in the fourth quarter of 2001. In April 2003, we withdrew a marketing authorization application (or MAA) under review in Europe for ONZAR (ONTAK^® in the U.S.) due to requests for additional clinical and technical information that we judged to be uneconomic.

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

        For 2003, net sales of AVINZA^® amounted to $66.2 million. As a result, we recognized co-promote expense of $9.4 million.

        Additionally, both companies agreed to share equally all costs for AVINZA^® advertising and promotion, medical affairs and clinical trials. Each company is responsible for its own sales force costs and other expenses. The initial term of the co-promotion agreement is 10 years. Organon has the option any time prior to the end of year five to extend the agreement to 2017 by making a $75.0 million payment to us.

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        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 Abbott Laboratories, Allergan, Inc., GlaxoSmithKline, Organon, Pfizer Inc. 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. In addition, in connection with some of these collaborations, we received non-refundable up-front payments.

        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 expenses incurred, revenues earned from product sales, collaborative arrangements and other sources. Some of these fluctuations may be significant.

Results of Operations

        Total revenues for 2003 increased to $141.1 million compared to $96.6 million in 2002 and $76.3 million in 2001. Loss before the cumulative effect of a change in accounting principle was $35.5 million ($0.50 per share), compared to $32.6 million ($0.47 per share) in 2002 and $43.0 million ($0.72 per share) in 2001. Net loss for 2003 was $37.5 million or $0.53 per share, compared to $32.6 million or $0.47 per share in 2002 and $43.0 million or $0.72 per share in 2001. As more fully described in Note 2 of the notes to consolidated financial statements, results for 2003 reflect the implementation of FASB Interpretation No. 46, Consolidation of Variable Interest Entites, an interpretation of ARB No. 51 , as revised December 2003, effective December 31, 2003 which required us to consolidate the entity from which we lease one of our corporate office buildings under a synthetic lease arrangement. The effect on 2003 results, recorded as a cumulative effect of a change in accounting principle, increased net loss by $2.0 million or $0.03 per share.

Product Sales

        Ligand’s total net product sales for 2003 were $114.6 million, compared to $54.5 million in 2002 and $45.6 million in 2001. A comparison of sales by product is as follows (in thousands):

        The increase in AVINZA^®, which was launched in June 2002, is due to increasing prescriptions and additional retail and wholesaler stocking resulting from the increased level of marketing and sales activity under our co-promotion arrangement with Organon, and to 2003 being the first full year of AVINZA^® sales. Sales of AVINZA® in the fourth quarter of 2003 also benefited from wholesaler purchases made in advance of a previously announced price increase which became effective January 1, 2004. While we limited shipments of product to wholesalers for good inventory management and supply purposes, we expect there could be some effect on wholesaler purchases in the first quarter of 2004.

        As a result of the co-promotion agreement, AVINZA^® is now promoted by approximately 800 sales representatives, compared to approximately 50 prior to co-promotion. According to IMS NPA monthly data, AVINZA^® ended 2003 with a market share of prescriptions in the sustained-release opioid market of 3.8% compared to less than 1% prior to the commencement of co-promotion activities. We expect that AVINZA^® prescription market share will continue to increase in 2004 as a result of a higher level of sales and marketing activity compared to 2003.

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        The increase in ONTAK^® sales in 2003 compared to 2002 reflects price increases and increasing use (impacted in part by expanded clinical data) in CTCL, chronic lymphocytic leukemia (CLL), non-Hodgkins lymphoma (NHL) and graft-versus-host disease (GVHD). Overall demand for ONTAK^® measured by unit shipments to end users, increased 22% for 2003 compared to the prior year. Sales of Targretin^® capsules also benefited from a 14% increase in prescriptions in 2003 compared to the prior year. Targretin^® capsules sales were negatively impacted, however, by management decisions to better balance wholesale inventories through reductions of product at two major customers. Additionally, sales of ONTAK^® and Targretin^® capsules were negatively impacted by increased chargebacks and rebates reflecting changes in our patient mix and evolving reimbursement rates. We continue to study recently enacted changes to the 2004 Centers for Medicare and Medicaid Services reimbursement rates (ONTAK®) and Section 641 of the Medicare Prescription Drug Improvement and Modernization Act relating to anti-cancer drugs (Targretin^®). Early assessments indicate a much improved patient access for Targretin^® capsules and increased challenges for a small sub-segment of our ONTAK^®/Medicare patients in 2004 and 2005.

        The increase in ONTAK^® sales in 2002 compared to 2001 reflects price increases, further penetration of private oncology practices and a higher level of use for indications where the product may be effective but for which registration clinical trials have not been completed and for which FDA approval has not yet been granted. These indications include chronic lymphocytic leukemia (CLL), B- and T-cell non-Hodgkins Lymphoma (NHL) and graft-versus-host disease (GVHD). Likewise, demand for Targretin^® capsules in 2002 benefited from growing prescriptions for treatment of non-small cell lung cancer (NSCLC) as well as increased use in CTCL. Sales of both ONTAK^® and Targretin^® capsules in 2002 were negatively impacted, however, by lower than expected demand growth in the first half of 2002 due to delays in completion and data publication of key ongoing, expanded-use clinical trials and physician initiated studies, as well as a lower company-wide focus on these products as commercial resources were shifted to assist in the launch of AVINZA^®. Sales of all in-line products were further negatively impacted by decisions made by several of our major wholesaler customers during 2002 to purchase lower quantities of our products in order to reduce inventory carrying levels as well as the effect of incremental wholesaler purchases in the fourth quarter of 2001 made in advance of announced price increases that became effective in 2002. Sales for 2002 also reflect a reduction of $1.5 million for higher than estimated returns of expired product resulting from the lower than expected demand growth and inconsistent inventory rotation by certain wholesaler distributors.

        Our product sales for any individual quarter or annual period can be influenced by a number of factors including changes in demand for a particular product, the level and nature of promotional activity, the timing of announced price increases, and wholesaler inventory practices. We expect that product sales will increase in 2004 due primarily to higher sales of AVINZA^®, which will further benefit from our co-promotion arrangement with Organon. We also continue to expect that demand for and sales of ONTAK^® and Targretin^® capsules will increase when and 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 including efforts of our co-promotion partner, the accrual of patients and overall progress of clinical trials which are managed by third parties.

        Excluding AVINZA^®, our products are small-volume specialty pharmaceutical products that address the needs of cancer patients in relatively small niche markets with substantial geographical fluctuations in demand. To ensure patient access to our drugs, we maintain broad distribution capabilities with inventories held at approximately 150 locations throughout the United States. Furthermore, the purchasing and stocking patterns of our wholesaler customers are influenced by a number of factors that vary with each product including 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. If any or all of our major distributors decide to substantially reduce the inventory they carry in a given period, our sales for that period could be substantially lower than historical levels.

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        Certain of our products are included on the formularies (or lists of approved and reimbursable drugs) of many states’ health care plans, as well as the formulary for certain Federal government agencies. In order to be placed on these formularies, we generally sign contracts which provide discounts to the purchaser off the then-current list price and limit how much of an annual price increase we can implement on sales to these groups. As a result, the discounts off list price for these groups can be significant for products where we have implemented list price increases. We monitor the portion of our sales subject to these discounts, and accrue for the cost of these discounts at the time of the sale of the product to the wholesaler. We believe that by being included on these formularies, we will gain better physician acceptance, which will then result in greater overall usage of our products. If the relative percentage of our sales subject to these discounts increases materially in any period, our sales and gross margin could be substantially lower than historical levels.

Collaborative Research and Development and Other Revenues

        Collaborative research and development and other revenues for 2003 were $26.5 million, compared to $42.1 million for 2002 and $30.7 million for 2001. A comparison of the components of collaborative research and development and other revenues is as follows (in thousands):

        Collaborative research and development revenue includes reimbursement for ongoing research activities, earned development milestones and recognition of prior years’ up-front fees previously deferred in accordance with Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements. Royalty sale revenue represents the sale to third parties of rights and options to future royalties we may earn from the sale of products now in development with our collaborative partners. Revenue from distribution agreements includes recognition of up-front fees collected upon contract signing and deferred over the life of the distribution arrangement and milestones achieved under such agreements.

        The decrease in ongoing research activities reimbursement revenue in 2003 compared to 2002 is due to lower funding from our research arrangement with Lilly, which contributed $5.7 million to revenue in 2003 compared to $8.2 million in 2002. The initial research term of the Lilly collaboration was extended for one year in November 2002 at a lower level of ongoing research funding. In the second quarter of 2003, we agreed to extend the collaboration again, through November 2004. Additionally, the decrease is due to the contractually agreed lower level of research activity and funding under our research arrangement with TAP, which contributed $4.2 million to revenue in 2003 compared to $5.0 million in 2002.

        We earned milestone revenues of $2.8 million in 2003, net of royalties owed, under our collaborative agreements with Lilly, Wyeth, and GlaxoSmithKline, compared to $5.1 million in 2002. Revenue from up-front fees, which we recognize over the period during which we provide research services, decreased to $1.0 million in 2003 from $4.8 million in 2002 due primarily to the completion of the initial research term of the Lilly collaboration.

        Revenues from royalty sales represents revenue earned from the sale to Royalty Pharma AG of rights to future royalties from certain collaborative partners’ net sales of three selective estrogen receptor modulator (SERM) products. These products are currently in Phase III clinical development. The royalty purchase agreement, entered into in March 2002, provided for the initial sale of rights to 0.25% of such product net sales and granted Royalty Pharma options to acquire up to an additional 1.00% of net sales for $50.0 million. Later in 2002, the agreement was amended to replace the existing options with new options providing for the rights to acquire an additional 1.3125% of net sales for $63.8 million. We earned $6.0 million upon the initial sales of rights and $12.3 million subsequently upon Royalty Pharma’s exercise of the first three options, as amended, to acquire rights to an additional 0.4375% of such product net sales.

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        In October 2003, we and Royalty Pharma again amended the royalty agreement, and Royalty Pharma exercised an option for $12.5 million in exchange for 0.7% of potential future sales of the SERM products. Under the revised agreement, Royalty Pharma has three additional options to purchase up to 1.3% of such product net sales for $39.0 million, including one option exercisable in the third quarter of 2004 to acquire 0.45% of such product net sales for $13.3 million. Additionally, Royalty Pharma agreed to pay cumulative milestones of up to $2.5 million upon the launches of the SERM products (provided they are approved by September 30, 2005). The options are currently structured to expire as NDA acceptance and approval milestones or specified dates are achieved in 2004 and 2005. For the options that are currently structured to expire in 2004 and 2005, the royalty rates owed to Royalty Pharma will be reduced if certain events occur, and if sales of SERM products exceed certain thresholds. In addition, if Phase III data for at least one of the SERM products have not been published by March 31, 2004, these options will have no fixed expiration date. Instead, they must be exercised within 30 days of the applicable development milestone.

        The increase in 2002 collaborative research and development revenue compared to 2001 is primarily due to the $18.3 million revenue earned from the sale to Royalty Pharma AG of rights to future royalties. The increase in revenue from royalty sales is offset by a decrease in revenue from distributor agreements in 2002 compared to 2001. The 2001 revenue reflects milestones earned under a 2001 distribution agreement with Elan for the European submission of an MAA for Targretin gel and ONTAK^® and the European grant of an MAA for Targretin^® capsules.

Gross Margin

        Gross margin on product sales was 72.4% in 2003 compared to 62.8% in 2002 and 69.4% in 2001. The increase in the margin in 2003 is primarily due to increased sales of AVINZA^® compared to 2002. AVINZA^® cost of product sold includes the amortization of license and royalty rights capitalized in connection with the restructuring of our AVINZA^® license and supply agreement in November 2002. The total amount of capitalized license and royalty rights, $114.4 million, is being amortized to cost of product sold on a straight-line basis over 15 years. Additionally, the increase in ONTAK^® sales in 2003 compared to 2002 resulted in a higher base to absorb the fixed amortization of the ONTAK^® acquired technology. The total amount of acquired technology, $45.3 million, is amortized to cost of product sold on a straight-line basis over 15 years. The increase in the margin in 2003 was partially offset by higher chargebacks and rebates relecting changes in our patient mix and evolving reimbursement rates. These changes impacted the 2003 gross margin by approximately 0.5%. Given the fixed level of amortization of the capitalized AVINZA^® license and royalty rights and the ONTAK^® acquired technology, we expect the AVINZA^® and ONTAK^® gross margin percentages to continue to increase as sales of AVINZA^® and ONTAK^® increase. Gross margins are also expected to be favorably impacted by price increases on our products which became effective January 1, 2004.

        The decrease in the 2002 margin compared to 2001 was primarily due to sales of AVINZA^®, which prior to the restructuring of the AVINZA^® license and supply agreement discussed below, had higher product costs than our in-line products. The margin was further negatively impacted by higher than estimated returns of expired products recorded in the second quarter of 2002 and the final annual increase in the contractual royalty rate on ONTAK^®.

        Through November 2002, we purchased AVINZA^® from Elan at a cost of approximately 30% of the net sales price of AVINZA^®. In November 2002, we and Elan agreed to amend the terms of the AVINZA^® license and supply agreement for purchases of product starting in December 2002. Under the terms of the amendment, we paid Elan approximately $100.0 million in exchange for a reduction in the royalty and supply price of AVINZA^® to approximately 10% of the product’s net sales, and certain other manufacturing and promotional rights.

Research and Development Expenses

        Research and development expenses were $67.7 million in 2003 compared to $58.8 million in 2002 and $51.1 million in 2001. The major components of research and development expenses are as follows (in thousands):

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

        The overall increase in research and development expenses in 2003 compared to 2002 is primarily due to development funding of Phase III clinical trials for Targretin^® capsules in non-small cell lung cancer (NSCLC) which increased approximately $12.2 million in 2003 relative to the prior year. This increase was partially offset by a lower level of research funding agreed to with Lilly in connection with the two one-year extensions of our collaboration agreements through November 2004. This lower level of funding resulted in lower research expenses performed under collaboration agreements by approximately $3.1 million in 2003 compared to 2002.

        The increase in the expense for 2002 compared to 2001 is due to the development funding of Phase III clinical trials for Targretin^® capsules in NSCLC and research costs incurred on our selective glucocorticoid receptor modulator (SGRM) program. SGRMs are non-steroidal molecules that may be useful in treating asthma, rheumatoid arthritis, and certain leukemias and myelomas. The increase in expenses for these programs was partially offset by decreased research efforts on our collaboration programs in connection with the loss of research funding under our arrangement with Bristol-Myers Squibb, which was terminated in June 2001, and Organon, the research phase of which concluded in February 2002; lower expenses on post-marketing regulatory commitments; and lower expenses associated with the clinical trial stages of AVINZA^® development prior to FDA approval in March 2002.

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

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

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        We do not provide forward-looking estimates of costs and time to complete our ongoing research and development projects, as such estimates would involve a high degree of uncertainty. Uncertainties include our ability to predict the outcome of complex research, our ability to predict the results of clinical studies, regulatory requirements placed upon us by regulatory authorities such as the FDA and 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. Refer to the “Risks and Uncertainties” section for additional discussion of the uncertainties surrounding our research and development initiatives.

Selling, General and Administrative Expenses

        Selling, general and administrative expenses were $51.6 million for 2003 compared to $41.7 million for 2002 and $34.4 million for 2001. The increase in 2003 compared to the prior year is primarily due to costs associated with additional Ligand sales representatives hired to promote AVINZA^® (an increase of approximately $5.7 million) and higher advertising and promotion expenses for AVINZA^® which was launched in June 2002 (an increase of approximately $3.3 million). Additionally, marketing expenses increased in 2003 in connection with our increased emphasis on physician-attended product information and advisory meetings for our oncology products (an increase of approximately $1.6 million). Selling, general and administrative expenses are expected to continue to increase in 2004 as a result of increased selling and marketing activities for AVINZA^® which is now promoted on a broader scale and by a significantly larger sales force as a result of our co-promotion agreement with Organon. Under the co-promotion agreement, we and Organon share equally all costs for AVINZA^® advertising and promotion, medical affairs and clinical trials.

        The increase in 2002 compared to 2001 is due to higher advertising and promotion expenses in connection with the launch of AVINZA^® and costs associated with approximately 25 additional sales representatives hired in the second quarter of 2002 to target general pain centers not served by our existing oncology and dermatology sales forces. The impact from the launch of AVINZA^® is partially offset by lower Targretin^® related expenses in 2002 compared to 2001 when significant advertising and promotion expenses were incurred in connection with the commencement of post-approval trials and post-launch promotions for Targretin^® capsules.

Co-promotion Expense

        Co-promotion expense payable to Organon amounted to $9.4 million in 2003 in connection with net sales of AVINZA^® reaching $66.2 million. As further discussed under “Overview”, we were required to pay Organon, under the terms of our co-promotion agreement entered into in February 2003, 30% of net AVINZA^® sales in excess of $35.0 million. We expect this expense to increase in 2004 when we are required to pay Organon 30% of net AVINZA^® sales up to $150.0 million and higher percentage payments for net sales in excess of $150.0 million.

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Other Expenses, Net

        Other expenses, net were $16.3 million for 2003 compared to $8.4 million for 2002 and $19.9 million for 2001. The increase in other expenses, net for 2003 compared to 2002 includes the 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. Interest expense increased to $11.0 million in 2003 compared to $6.3 million in 2002. The 2003 expense primarily represents interest on the $155.3 million of 6% convertible subordinated notes that we issued in November 2002. The 2002 expense represents interest on the $20.0 million in issue price of zero coupon convertible senior notes that were converted into common stock in March 2002 and interest on our outstanding $50.0 million face value of convertible subordinated debentures that were redeemed in June 2002. This increase is partially offset by the reduction of debt conversion expense of which $2.0 million was incurred in March 2002 in connection with the early conversion of $20.0 million in issue price of zero coupon convertible senior notes into common stock.

        The decrease in other expense, net for 2002 compared to 2001 is primarily due to lower interest expenses as a result of the conversion of all outstanding zero coupon convertible senior notes owed to Elan in the fourth quarter of 2001 and the first quarter of 2002 and the early redemption of $50.0 million in face value of convertible subordinated debentures in June 2002. In addition, we recognized $2.0 million of debt conversion expense in 2002 upon the conversion of the Elan convertible securities compared to $5.0 million in 2001, and recorded a one time charge in 2001 of $2.5 million related to a payment subsequently made in 2002 to one of our licensors in connection with the amendment of an existing license agreement. The decrease in the net expense was partially offset by $1.8 million of accelerated accretion to face value in 2002 in connection with the early redemption of the convertible subordinated debentures, lower interest income earned on our investments due to declining interest rates and lower average investment balances during the year, and the accrual of interest on the $155.3 million of 6% convertible subordinated notes that we issued in November 2002.

Cumulative Effect of Accounting Change

        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 in December 2003 (“FIN 46(R)”). 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) effective December 31, 2003, and consolidated the entity from which we lease one of our two corporate office buildings as of that date, as we determined that the entity is a VIE, as defined by FIN 46(R), and that we would absorb a majority of its expected losses if any, as defined by the Interpretation. Accordingly, we consolidated the assets of the entity, which consist of land, the building, and related tenant improvements, with a total carrying value of $13.5 million, net of accumulated depreciation. Additionally, we consolidated the entity’s debt of $12.5 million and non-controlling interest of $0.6 million. In connection with the implementation of FIN 46(R), we also recorded a $2.0 million charge ($0.03 per share) as a cumulative effect of the accounting change on December 31, 2003.

Net Operating Loss Carryforwards

        At December 31, 2003, we had consolidated federal and combined California income tax net operating loss carryforwards of approximately $541.2 million and $81.8 million, respectively. The difference between the federal and California tax loss carryforwards is primarily attributable to the capitalization of research and development expenses for California income tax purposes and the 60% limitation on California loss carryforwards. The federal tax loss and California tax loss carryforwards began expiring in 2002 and 1998, respectively. At December 31, 2003, we also had consolidated federal and combined California research tax credit carryforwards of approximately $24.1 million and $11.9 million, respectively, which began to expire in 2003.

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        Pursuant to Internal Revenue Code Sections 382 and 383, use of a portion of net operating loss and credit carryforwards will be limited because of cumulative changes in ownership of more than 50% that occurred within three periods during 1989, 1992 and 1996. In addition, use of Glycomed’s and Seragen’s preacquisition tax net operating and credit carryforwards will also be limited because the acquisitions by Ligand represent changes in ownership of more than 50%.

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, equipment financing arrangements, and investment income.

        Working capital was $76.1 million at December 31, 2003 compared to $53.2 million at December 31, 2002. Cash, cash equivalents, short-term investments, and restricted investments totaled $100.7 million at December 31, 2003 compared to $74.9 million at December 31, 2002. We primarily invest our cash in United States government and investment grade corporate debt securities. Restricted investments consist of U.S. government securities required to be held with a trustee to pay semi-annual interest payments due in 2004 on the 6% convertible subordinated notes issued in November 2002 and certificates of deposit held with a financial institution as collateral under equipment financing and third-party service provider arrangements.

Operating Activities

        Operating activities provided cash of $0.3 million in 2003 and used cash of $25.1 million in 2002 and $19.9 million in 2001. Operating cash flow in 2003 compared to 2002 primarily benefited from $54.0 million higher product sales of AVINZA^® and from the receipt of $27.5 million in the fourth quarter upon the non-recourse sale of trade accounts receivable under a one-year factoring arrangement that we entered into in June 2003. Operating cash was negatively impacted, however, by higher operating expenses including development expenses to fund clinical trials of our existing products in new indications including Phase III registration trials for Targretin® capsules in NSCLC, and higher selling and marketing expenses for AVINZA^®.

        Non-cash expenses in 2003 increased $8.6 million compared to 2002. The increase includes the $5.0 million write-off of the X-Ceptor purchase right in March 2003, and the non-cash cumulative effect of the change in accounting principle (approximately $2.0 million) recognized in connection with the implementation of FIN 46(R). Net increases in operating assets used an additional $3.2 million compared to the prior year. This was due primarily to an increase in receivables from the finance company, partially offset by a decrease in our trade receivables accounts due to the factoring arrangement of $14.1 million and an increase in inventories of $3.4 million, partially offset by a decrease in other assets of $3.5 million, primarily due to the collection of non-trade accounts receivable. Additionally, net increases in operating liabilities generated $24.9 million more than 2002. This was primarily due to our co-promotion liability to Organon of $9.4 million, increases in our sales-related liability accounts of approximately $6.2 million, and increases in accruals for royalty payments of approximately $1.3 million.

        Operating cash flow in 2002 compared to 2001 benefited from increased product sales and $16.4 million of cash received in connection with the sale to Royalty Pharma AG of rights and options to future royalties from certain collaborative partners’ net sales of three selective estrogen receptor modulator (SERM) products and a 1% royalty interest in sales of Targretin^® capsules. The increase in 2002 revenue was offset by higher operating expenses and $6.8 million in negative working capital changes attributed to an increase in other current assets of $5.0 million and a decrease in deferred revenue of $5.2 million partially offset by a decrease in accounts receivable of $2.4 million and an increase in accounts payable and accrued liabilities of $2.0 million. Working capital changes in 2001 had a neutral impact on net operating cash flows.

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        We expect operating cash flows to continue to benefit in 2004 from increased product sales driven by AVINZA^®. Operating cash will be negatively impacted, however, by the expense related to our co-promotion arrangement with Organon and higher development expenses to fund clinical trials of our existing products in new indications including Phase III registration trials for Targretin^® capsules in non-small cell lung cancer, and higher selling and marketing expenses on AVINZA^®. Additionally, we will be required to pay interest of approximately $9.3 million in 2004 on the $155.3 million in 6% convertible subordinated notes issued in November 2002. We are also considering extending our current accounts receivable factoring arrangement beyond its June 2004 expiration date.

Investing Activities

        Investing activities used cash of $24.6 million in 2003, $105.2 million in 2002 and $4.2 million in 2001. The use of cash in 2003 reflects the net purchase of short-term investments of $18.0 million, a $4.1 million payment to Elan in connection with the November 2002 restructuring of the AVINZA^® license and supply agreement and capital expenditures of $2.8 million to purchase lab and computer equipment.

        The use of cash in 2002 includes $100.0 million paid to Elan to restructure the AVINZA^® license and supply agreement and $1.3 million in related transaction fees. Other investing activity in 2002 includes a $5.0 million payment to X-Ceptor Therapeutics, Inc. (X-Ceptor) and capital expenditures of $3.2 million, partially offset by net proceeds of $4.1 million from the sale of short-term investments. The payment to X-Ceptor was pursuant to a 1999 investment agreement where we 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, we elected to extend the purchase right and payment was subsequently made in July 2002. In March 2003, Ligand informed X-Ceptor that it would not exercise the purchase right. The use of cash in 2001 reflects the net purchase of short-term investments of $2.5 million and purchases of property and equipment of $2.0 million.

Financing Activities

        Financing activities provided cash of $41.0 million in 2003 compared to $152.0 million in 2002 and $35.6 million in 2001. Cash provided by financing activities in 2003 includes net proceeds of $45.0 million from the issuance of common stock through a private placement of 3,483,593 shares of our common stock, $8.8 million from the maturing of restricted investments which was subsequently used to pay interest on our 6% convertible subordinated notes, $4.5 million from the exercise of employee stock options and employee stock purchases, and $1.1 million from equipment financing arrangements. The net proceeds of $45.0 million from the private placement are being used to support our working capital priorities, including qualifying second source manufacturer(s) for AVINZA^® and ONTAK^®, completion of a second generation formulation of ONTAK^®, continuing expansion of commercial support activities for AVINZA^® and ONTAK^®, and for general corporate purposes. These proceeds were offset by the $15.9 million repurchase and retirement 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 completed in February 2003, and payments of $2.5 million on equipment financing arrangements.

        Cash provided by financing activities in 2002 includes net proceeds of $150.1 million from the issuance of 6% convertible subordinated notes in November 2002, net proceeds of $65.9 million through a private placement of 4,252,500 shares of our common stock, and $3.8 million from the exercise of employee stock options and employee stock purchases. This was partially offset by the $50.0 million early redemption of convertible subordinated debentures in June 2002. The convertible subordinated notes issued in November 2002 pay interest at a semi-annual rate of 6% and mature on November 16, 2007. Of the net proceeds, $18.0 million was invested in U.S. government securities and placed with a trustee to pay the first four scheduled interest payments. The first two interest payments, totaling $9.1 million, were made in 2003.

        Cash provided from financing activities in 2001 includes $22.4 million from a private placement of our common stock, $10.0 million received in connection with the issuance of zero coupon convertible senior notes to Elan and $6.2 million upon the exercise of employee stock options, partially offset by net repayments of $2.0 million on equipment financing arrangements.

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        Certain of our property and equipment is pledged as collateral under various equipment financing arrangements. As of December 31, 2003, $4.8 million was outstanding under such arrangements with $2.2 million classified as current. Our equipment financing arrangements have terms of three to five years with interest ranging from 4.73% to 10.66%.

        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 pace of scientific progress in our research and development programs; the magnitude of these programs; the scope and results of preclinical testing and clinical trials; 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 ability to establish additional collaborations or changes in existing collaborations; the efforts of our collaborators; and the cost of production. We will also consider additional equipment financing arrangements similar to arrangements currently in place.

Leases and Off-Balance Sheet Arrangements

        We lease our office and research facilities under operating leases that generally require us to pay taxes, insurance, maintenance and minimum lease payments. Some of our leases have options to renew. An operating lease for one of our two corporate office buildings is commonly referred to as a “synthetic lease.” Prior to the issuance of Financial Accounting Standards Board (or FASB) Interpretation No. 46, as revised (or "FIN 46(R)"), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, synthetic leases represented a form of off-balance sheet financing which allowed us to treat the leases as operating leases for accounting purposes and as financing leases for tax purposes. As more fully discussed under “Results of Operations – Cumulative Effect of Accounting Change”, we implemented FIN 46(R) effective December 31, 2003 and as a result, consolidated the entity from which we lease the subject office building.

        As of December 31, 2003, we are not involved in any off-balance sheet arrangements.

Contractual Obligations

        As of December 31, 2003, future minimum payments due under our contractual obligations are as follows (in thousands):

(1)	In connection with the implementation of FIN 46(R), we consolidated the entity from which we lease one of our corporate office buildings. Amounts consolidated include the entity's debt of $12.5 million and non-controlling interest of $0.6 million which are included in long-term debt and other long-term liabilities, respectively, at December 31, 2003.
(2)	Other long-term liabilities include merger contingencies, a liability under a royalty financing arrangement and a non-controlling interest in a VIE. Deferred revenues are excluded because they have no effect on future liquidity.

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        As of December 31, 2003, we have net open purchase orders (defined as total open purchase orders at year end less any accruals or invoices charged to or amounts paid against such purchase orders) totaling approximately $13.8 million. In the next twelve months, we also plan to spend approximately $4.0 to $5.0 million on capital expenditures.

        In November 2002, Ligand and Elan agreed to amend the terms of the AVINZA^® license and supply agreement. Under the terms of the amendment, we paid Elan $100.0 million in return for a reduction in Elan's product supply price on sales of AVINZA^® by Ligand, rights to sublicense and obtain a co-promotion partner in its territories, and rights to qualify, and purchase AVINZA^® from a second manufacturing source. Elan's adjusted royalty and supply price of AVINZA^® is approximately 10% of the product's net sales. We also committed to purchase an annual minimum number of batches of AVINZA^® from Elan through 2005 estimated at approximately $9.2 million per year.

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

Critical Accounting Policies

        Certain of our 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. Our critical accounting policies are as follows:

Revenue Recognition and Accounts Receivable

        We recognize revenue upon product delivery, net of allowances for returns, rebates, discounts and chargebacks. Revenue associated with the launch of retail products sold with promotional terms that are more favorable to the customer than our standard terms (for example, to facilitate broad retail pharmacy distribution of the product) are deferred. The amount of deferred revenue recognized in subsequent periods is determined based on an estimate, using available market information, of the level of product at wholesalers that will sell through to retail outlets.

        Our policy for returns of AVINZA^® allows customers to return the product six months prior to and six months after expiration. Our policy for returns of our oncology products allows customers, primarily wholesale distributors, to return the product three months prior to and six months after expiration. The level of actual returns can be influenced by a number of factors including the dating of product when shipped to the customer, the amount of product subsequently shipped by the wholesale distributor to their customers, pricing adjustments, and competing products. In recording adjustments to sales for estimated returns, we consider each of these factors as well as historical return patterns of our products, independent reports of the level of our product in the distribution channel, and industry trends. Actual product returns may differ from our estimates.

        We may provide rebates and/or chargebacks to our wholesaler distributors who sell to customers that have a purchasing contract with us, members of group purchasing organizations and managed care organizations who purchase our product through wholesalers and state agencies that administer certain government sponsored health programs. Such rebates and chargebacks are generally determined based on the volume of purchases or by reference to a specific price for a product. We accrue for these liabilities when we record the product sale. The underlying accrual rates and related reserves are regularly reviewed and adjusted, if necessary, based on newly enacted legislation, changes in historical trends, significant new contracts or amendments to existing contracts.

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        We record allowances for doubtful accounts for estimated losses resulting from our customers’ inability to pay amounts owed. If the financial condition of one or more of our customers were to deteriorate, we may be required to record additional allowances or write-off all or a portion of the amount due us.

        We recognize collaborative research and development and other revenues as services are performed consistent with the performance requirements of the contract. Non-refundable contract fees for which no further performance obligation exists and where we have no continuing involvement are recognized when payment is received or collection is assured. Revenue from non-refundable contract fees where we have continuing involvement through research and development collaborations or other contractual obligations is recognized ratably over the development period or the period for which we continue to have a performance obligation. Revenue from performance milestones is recognized upon the achievement of the milestones as specified in the respective agreement provided payment is proportionate to the effort expended. Payments received in advance of performance or delivery are recorded as deferred revenue and subsequently recognized over the period of performance or upon delivery.

Inventories

        Our inventories are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. We record reserves for estimated obsolescence to account for unsaleable products including products that are nearing or have reached expiration, and slow-moving inventory.

Impairment of Long-Lived Assets

        We review long-lived assets, including acquired technology and product rights and property and equipment, whenever events or circumstances indicate that the carrying amount of the assets may not be fully recoverable. We measure the recoverability of assets to be held and used by comparing the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. Fair value of our long-lived assets are determined using the expected cash flows discounted at a rate commensurate with the risk involved. We believe that the future cash flows to be received from our long-lived assets will exceed the assets’ carrying value, and accordingly have not recorded any impairment losses through December 31, 2003.

Stock-Based Compensation

        We grant stock options to our employees at an exercise price equal to the fair value of the shares at the date of grant and account for these stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations. Under APB 25, when stock options are issued with an exercise price equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized in the statement of operations. Refer to Note 2 of the notes to consolidated financial statements for pro-forma disclosures of the impact on our financial statements of accounting for stock options under the fair-value requirements of SFAS No. 123, Accounting for Stock-based Compensation.

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 from which we lease one of our two corporate office buildings as of that date, as we determined that this entity was a VIE, as defined by FIN 46(R), and that we would absorb a majority of its expected losses, if any, as defined by the Interpretation. Please see Note 2 to the consolidated financial statements for a discussion of FIN 46(R) and its impact on Ligand.

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        In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with the characteristics of both liability and equity, and requires that such financial instruments be reported as liabilities. The provisions of SFAS 150 are effective for instruments entered into or modified after May 31, 2003, and pre-existing instruments after June 15, 2003. The Company does not have any financial instruments covered by the Statement.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

        At December 31, 2003 and 2002, our investment portfolio included fixed-income securities of $30.8 million and $12.8 million, respectively. These securities are subject to interest rate risk and will decline in value if interest rates increase. However, due to the short duration of our investment portfolio, 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 will, however, reduce our interest income while increases in interest rates over time will increase our interest expense.

        We do not have a significant level of transactions denominated in currencies other than U.S. dollars and as a result we have very 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.

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Item 8. Consolidated Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

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INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Ligand Pharmaceuticals Incorporated

We have audited the accompanying consolidated balance sheets of Ligand Pharmaceuticals Incorporated and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ligand Pharmaceuticals Incorporated and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, in 2003 the Company changed its method of accounting for variable interest entities to comply with the provisions of Financial Accounting Standards Board Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.

DELOITTE & TOUCHE LLP

San Diego, California
March 10, 2004

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LIGAND PHARMACEUTICALS INCORPORATED

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

ASSETS