UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q10-Q/A
Mark One
   
þ Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2006 March 31, 2007
or
   
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From                    to                    .
Commission File Number: 0-20720
LIGAND PHARMACEUTICALS INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
   
Delaware
77-0160744
(State or Other Jurisdiction of 77-0160744
(I.R.S. Employer
Incorporation or Organization) Identification No.)
   
10275 Science Center Drive 92121-1117
San Diego, CA (Zip Code)
(Address of Principal Executive Offices)  
Registrant’s Telephone Number, Including Area Code: (858) 550-7500
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large Accelerated Filero      Accelerated Filerþ       Non-Accelerated Filero
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
     As of October 31, 2006,April 30, 2007, the registrant had 79,229,629101,096,542 shares of common stock outstanding.
EXPLANATORY NOTE
      This amendment amends the quarterly report on Form 10-Q of Ligand Pharmaceuticals Incorporated (the “Company”) for the quarter ended March 31, 2007 (the “Original Form 10-Q”), which was initially filed with the Securities and Exchange Commission (“SEC”) on May 10, 2007. The Original Form 10-Q furnished Exhibits 31.2 and 32.2, executed by our exiting interim chief accounting officer, who was employed by the Company until May 15, 2007 and served as the principal financial officer during the quarter ended March 31, 2007, rather than the Company’s incoming principal financial officer, who was employed by the Company beginning April 30, 2007. This amendment furnishes the correct Exhibits 31.2 and 32.2, executed by our principal financial officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. This amendment also furnishes as exhibits new certifications of our principal executive officer.
      In addition, we have modified Item 4, “Controls and Procedures,” in this amendment in response to our failure to file correct Exhibits 31.2 and 32.2 and updated the disclosure regarding our disclosure controls and procedures. Except for the matters referenced in this Explanatory Note, this amendment does not modify or update the disclosures set forth in the Original Form 10-Q and no other changes have been made to the Original Form 10-Q.
 


 

LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT
FORM 10-Q
TABLE OF CONTENTS
     
    
     
    
     
  3 
     
  4 
     
  5 
     
  6 
     
  3332 
     
  5350 
     
  5451 
     
    
     
  6052
 
     
  6254 
     
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds
  * 
     
ITEM 3.Defaults upon Senior Securities
  * 
     
  *62 
     
ITEM 5.Other Information
  * 
     
  7263 
     
SIGNATURE
  7565 
EXHIBIT 10.298
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2
 
* No information provided due to inapplicability of item
item.

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PART 1.I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
                
 September 30, December 31,  March 31, December 31, 
 2006 2005  2007 2006 
ASSETS
  
 
Current assets:  
Cash and cash equivalents $10,029 $66,756  $403,911 $158,401 
Short-term investments 21,862 20,174  6,319 13,447 
Restricted cash  38,814 
Accounts receivable, net 7,077 20,954  1,269 11,521 
Current portion of inventories, net 5,039 9,333 
Inventories, net  3,856 
Other current assets 12,465 15,750  4,567 9,518 
Current portion of assets held for sale 8,055  
Current portion of co-promote termination payments receivable 11,881  
          
Total current assets 64,527 132,967  427,947 235,557 
Restricted investments 1,826 1,826  1,826 1,826 
Long-term portion of inventories, net  5,869 
Property and equipment, net 21,453 22,483  4,022 5,551 
Acquired technology and product rights, net 84,990 146,770   83,083 
Long-term portion of assets held for sale 57,807  
Long-term portion of co-promote termination payments receivable 81,015  
Restricted indemnity account 10,000  
Other assets 1,264 4,704   36 
          
Total assets $231,867 $314,619  $524,810 $326,053 
          
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:  
Dividend payable $252,742 $ 
Accounts payable $16,080 $15,360  13,181 12,259 
Accrued liabilities 52,902 59,587  57,380 46,509 
Current portion of deferred revenue, net 80,395 157,519   57,981 
Current portion of deferred gain 1,964 1,964 
Current portion of co-promote termination liability 47,722   13,083 12,179 
Current portion of equipment financing obligations 2,150 2,401  2,151 2,168 
Current portion of long-term debt 363 344 
Current portion of liabilities related to assets held for sale 26,803  
Note payable  37,750 
          
Total current liabilities 226,415 235,211  340,501 170,810 
Long-term debt 139,371 166,745 
Long-term portion of co-promote termination liability 95,258   81,015 81,149 
Long-term portion of equipment financing obligations 2,699 3,430  1,641 2,156 
Long-term portion of deferred revenue, net 2,546 4,202  2,546 2,546 
Long-term portion of liabilities related to assets held for sale 2,017  
Long-term portion of deferred gain 26,729 27,220 
Other long-term liabilities 2,406 3,105  2,631 2,475 
          
Total liabilities 470,712 412,693  455,063 286,356 
          
Commitments and contingencies  
Common stock subject to conditional redemption; 997,568 shares issued and outstanding at September 30, 2006 and December 31, 2005 12,345 12,345 
Common stock subject to conditional redemption; 997,568 shares issued and outstanding at March 31, 2007 and December 31, 2006 12,345 12,345 
          
Stockholders’ deficit: 
Stockholders’ equity: 
Convertible preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued      
Common stock, $0.001 par value; 200,000,000 shares authorized; 77,789,924 and 73,136,340 shares issued at September 30, 2006 and December 31, 2005, respectively 78 73 
Common stock, $0.001 par value; 200,000,000 shares authorized; 100,038,120 and 99,553,504 shares issued at March 31, 2007 and December 31, 2006, respectively 100 100 
Additional paid-in capital 753,947 720,988  647,232 891,446 
Accumulated other comprehensive (loss) income  (138) 490 
Accumulated other comprehensive loss  (140)  (481)
Accumulated deficit  (1,004,166)  (831,059)  (588,879)  (862,802)
          
  (250,279)  (109,508) 58,313 28,263 
Treasury stock, at cost; 73,842 shares  (911)  (911)  (911)  (911)
          
Total stockholders’ deficit  (251,190)  (110,419)
Total stockholders’ equity 57,402 27,352 
          
 $231,867 $314,619  $524,810 $326,053 
          
See accompanying notes.

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LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share data)
                
 Three Months Nine Months         
 Ended September 30, Ended September 30,  Three Months Ended March 31, 
 2006 2005 2006 2005  2007 2006 
Revenues:  
Product sales $36,707 $29,908 $102,853 $79,367 
Collaborative research and development and other revenues  2,095 3,977 7,944  $235 $2,914 
              
Total revenues 36,707 32,003 106,830 87,311 
         
Operating costs and expenses:  
Cost of products sold 5,800 6,422 16,768 17,987 
Research and development 10,468 7,920 29,013 23,787  15,602 8,417 
Selling, general and administrative 20,085 14,484 58,077 43,133 
Co-promotion 11,776 7,766 33,656 22,472 
Co-promote termination charges 3,643  142,980  
General and administrative 14,167 8,811 
              
Total operating costs and expenses 51,772 36,592 280,494 107,379  29,769 17,228 
     
Amortization of deferred gain on sale leaseback 491  
              
Loss from operations  (15,065)  (4,589)  (173,664)  (20,068)  (29,043)  (14,314)
              
Other income (expense):  
Interest income 577 483 1,737 1,325  3,279 573 
Interest expense  (2,547)  (3,118)  (7,920)  (9,247)  (370)  (328)
Other, net 66  (60) 1,068 173  51 383 
              
Total other expense, net  (1,904)  (2,695)  (5,115)  (7,749)
Total other income, net 2,960 628 
              
Loss before income taxes  (16,969)  (7,284)  (178,779)  (27,817)  (26,083)  (13,686)
Income tax benefit 828  2,290   9,194  
              
Loss from continuing operations  (16,141)  (7,284)  (176,489)  (27,817)  (16,889)  (13,686)
Income (loss) from discontinued operations, net of income tax 1,223 1,003 3,382  (5,860)
              
Net loss $(14,918) $(6,281) $(173,107) $(33,677)
Discontinued operations: 
Income (loss) from discontinued operations before income taxes 5,993  (128,526)
Gain on sale of AVINZA Product Line before income taxes 310,131  
Adjustment to gain on sale of Oncology Product Line before income taxes  (61)  
Income tax expense on discontinued operations  (24,853)  (17)
     
Discontinued operations 291,210  (128,543)
     
Net income (loss) $274,321 $(142,229)
              
  
Basic and diluted per share amounts:  
Loss from continuing operations $(0.21) $(0.10) $(2.26) $(0.38) $(0.17) $(0.18)
Income (loss) from discontinued operations 0.02 0.02 0.05  (0.08)
Discontinued operations 2.89  (1.66)
              
Net loss $(0.19) $(0.08) $(2.21) $(0.46)
 
Net income (loss) $2.72 $(1.84)
              
Weighted average number of common shares 78,670,137 74,041,204 78,239,868 73,998,594  100,686,308 77,496,969 
              
See accompanying notes.

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LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
                
 Nine Months Ended September 30,  Three Months Ended March 31, 
 2006 2005  2007 2006 
Operating activities
 
Net loss $(173,107) $(33,677)
Adjustments to reconcile net loss to net cash used in operating activities: 
Operating activities:
 
Net income (loss) $274,321 $(142,229)
Adjustments to reconcile income (loss) to net cash used in operating activities: 
Gain on sale of AVINZA Product Line before income taxes  (310,131)  
Adjustment to gain on sale of Oncology Product Line before income taxes 61  
Amortization of deferred gain on sale leaseback  (491)  
Amortization of acquired technology and license rights 10,248 10,376  909 3,570 
Depreciation and amortization of property and equipment 2,576 2,779  496 913 
Amortization of debt issue costs 705 775 
Gain on sale of Exelixis stock  (953)  (171)
Loss on asset write-offs 1,013  
Amortization of debt discount and issuance costs  244 
Gain on sale of investment   (343)
Stock-based compensation 3,981   5,554 814 
Non-cash co-promote termination expense  (207) 136,241 
Non-cash interest expense 60    57 
Other  (16) 79  356  (8)
Changes in operating assets and liabilities:  
Accounts receivable, net 13,877 6,469  10,268 908 
Inventories, net  (514)  (3,103) 930 1,484 
Other current assets 1,976 5,041  3,459  (144)
Restricted indemnity account  (10,000)  
Accounts payable and accrued liabilities  (5,753) 2,286   (12,988)  (14,912)
Other liabilities  (14)  (24)  (242)  (3)
Deferred revenue, net  (50,498) 5,463   (8,657)  (6,576)
Co-promote termination liability 142,980  
          
Net cash used in operating activities  (54,452)  (3,707)  (45,349)  (19,984)
          
 
Investing activities
 
Investing activities:
 
Proceeds from sale of AVINZA Product Line 280,400  
Purchases of short-term investments  (18,324)  (28,253)   (4,726)
Proceeds from sale of short-term investments 16,963 24,748  7,128 7,884 
Increase in restricted investments ¾  (170)
Decrease in restricted cash 38,814  
Purchases of property and equipment  (1,592)  (1,770)  (86)  (190)
Payment to buy-down ONTAK royalty obligation ¾  (33,000)
Capitalized portion of payment of lasofoxifene royalty rights ¾  (558)
Other, net 72 165  28 27 
          
Net cash used in investing activities  (2,881)  (38,838)
Net cash provided by investing activities 326,284 2,995 
          
 
Financing activities
 
Financing activities:
 
Principal payments on equipment financing obligations  (2,012)  (2,147)  (532)  (680)
Proceeds from equipment financing arrangements 1,030 1,390   398 
Repayment of long-term debt  (255)  (238)
Repayment of debt  (37,750)  (86)
Proceeds from issuance of common stock 1,981 912  2,857 468 
Decrease in other long-term liabilities  (138)  (94)   (59)
          
Net cash provided by (used in) financing activities 606  (177)
Net cash (used in) provided by financing activities  (35,425) 41 
          
Net decrease in cash and cash equivalents  (56,727)  (42,722)
Net increase (decrease) in cash and cash equivalents 245,510  (16,948)
Cash and cash equivalents at beginning of period 66,756 92,310  158,401 66,756 
          
Cash and cash equivalents at end of period $10,029 $49,588  $403,911 $49,808 
          
  
Supplemental disclosure of cash flow information
 
Supplemental disclosure of cash flow information:
 
Interest paid $5,283 $5,569  $1,146 $517 
          
  
Non-cash impact of the conversion of 6% convertible subordinated notes into common stock:
 
Taxes paid $1,042 $ 
     
 
Supplemental schedule of non-cash investing and financing activities:
 
 
Conversion of principal amount of convertible notes $27,100 $  $ $26,100 
Conversion of unamortized debt issue costs  (362)     (351)
Conversion of unpaid accrued interest 264    264 
     
 $27,002 $ 
     
Employee receivable from stock option exercises 127 469 
Declaration of dividend 252,742  
See accompanying notesnotes..

5


LIGAND PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
     The accompanying condensed consolidated financial statements of Ligand Pharmaceuticals Incorporated (the “Company” or “Ligand”) were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the condensed consolidated financial statements, have been included. The results of operations for the three and nine monththree-month periods ended September 30,March 31, 2007 and 2006 and 2005 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other future period.
     As further discussed in Note 2, the Company sold its oncology products (“Oncology”) effective October 25, 2006. The operating results for Oncology for all periods presented have been presented in the accompanying condensed consolidated financial statements as “Discontinued Operations”. Likewise, assets and liabilities associated with Oncology are presented as “Assets held for sale” and “Liabilities related to assets held for sale” as of September 30, 2006. Additionally, as discussed in Note 13, on September 7, 2006 the Company announced plans to sell its AVINZA product line, subject to shareholder approval. Due to the uncertainty surrounding shareholder approval, the operating results for the AVINZA product line do not qualify for discontinued operations (held for sale) presentation and therefore are presented in the accompanying condensed consolidated financial statements as continuing operations. Furthermore, the Company, along with its wholly-owned subsidiary Nexus Equity VI, LLC (“Nexus”) entered into an agreement with Slough Estates USA, Inc. (“Slough”) for the sale of the Company’s real property located in San Diego, California. The transaction closed in November 2006 and includes an agreement between the Company and Slough for the Company to leaseback the building for a period of 15 years. In connection with the sale transaction, on November 6, 2006, the Company paid off the existing mortgage on the building of approximately $11.6 million.
These statements should be read in conjunction with the consolidated financial statements and related notes, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.2006.
     As further discussed in Note 2, the Company sold its oncology product line (“Oncology”) on October 25, 2006 and its AVINZA product line (“AVINZA”) on February 26, 2007. The operating results for Oncology and AVINZA have been presented in the accompanying condensed consolidated financial statements as “Discontinued Operations”.
     The Company’s other potential products are in various stages of development. Potential products that are promising at early stages of development may not reach the market for a number of reasons. A significant portion of the Company’s revenues to date have been derived from research and development agreements with major pharmaceutical collaborators. Prior to generating revenues from these products, the Company or its collaborators must complete the development of the products in the human health care market. No assurance can be given that: (1) product development efforts will be successful, (2) required regulatory approvals for any indication will be obtained, (3) any products, if introduced, will be capable of being produced in commercial quantities at reasonable costs or, (4) patient and physician acceptance of these products will be achieved. There can be no assurance that Ligand will ever achieve or sustain annual profitability.
     The Company faces risks common to companies whose products are in various stages of development. These risks include, among others, the Company’s potential need for additional financing to complete its research and development programs and commercialize its technologies. The Company has incurred significant losses since its inception. At March 31, 2007, the Company’s accumulated deficit was $588.9 million. The Company expects to continue to incur substantial research and development expenses.
     The Company believes that patents and other proprietary rights are important to its business. Its policy is to file patent applications to protect technology, inventions and improvements to its inventions that are considered important to the development of its business. The patent positions of pharmaceutical and biotechnology firms, including the Company, are uncertain and involve complex legal and technical questions for which important legal principles are largely unresolved.
Principles of Consolidation
     The condensed consolidated financial statements include the Company’s wholly owned subsidiaries, Ligand Pharmaceuticals International, Inc., Ligand Pharmaceuticals (Canada) Incorporated, Seragen, Inc. (“Seragen”) and Nexus Equity VI LLC (“Nexus”). Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
     The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and contingent liabilities, at the date of the consolidated financial statements, and the

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reported amounts of revenue and expenses during the reporting period. The Company’s critical accounting policies are those that are both most important to both the Company’s financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because of the uncertainty of factors surrounding the estimates or judgments used in the preparation of the consolidated financial statements, actual results may materially vary from these estimates.
Income (Loss) Per Share
     Net lossincome (loss) per share is computed using the weighted average number of common shares outstanding. Basic and diluted income (loss) per share amounts are equivalent for the periods presented as the inclusion of potential common shares in the number of shares used for the diluted computation would be anti-dilutive to loss per share from continuing operations. In accordance with SFASStatement of Financial Accounting Standards (“SFAS”) No. 128,Earnings Per Share, no potential common shares

6


are included in the computation of any diluted per share amounts, including income (loss) per share from discontinued operations and net income (loss) per share, as the Company reported a net loss from continuing operations for all periods presented. Potential common shares, the shares that would be issued upon the conversion of convertible notes, and the exercise of outstanding warrants and stock options, and the vesting of restricted shares, were 28.64.4 million and 32.628.9 million at September 30,March 31, 2007 and 2006, and 2005, respectively. As ofIn October 6, 2006, all outstanding warrants to purchase 748,800 shares of the Company’s common stock expired. In November 2006, all convertible notes had been converted into shares of the Company’s common stock.
Guarantees and Indemnifications
     The Company accounts for and discloses guarantees in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 45 (“FIN 45”),Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34. The following is a summary of the Company’s agreements that the Company has determined are within the scope of FIN 45:
     Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer’s or director’s serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, theThe Company has a directors and officers liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of September 30, 2006March 31, 2007 and December 31, 2005.2006. These insurance policies, however, do not cover the ongoing legal costs or the fines, if any, that may become due in connection with the ongoing SEC investigation of the Company, following the use of prior directors and officers liability insurance policy limits to settle certain shareholder litigation matters. The SEC investigation is ongoing, and the Company is currently unable to assess the duration, extent, and cost of such investigation. Further, the Company is unable to assess the amount of such costs that may in turn be required to be reimbursed to any individual director or officer under the Company’s indemnification agreements as the scope of the investigation cannot be apportioned amongst the Company and the indemnified officers and directors. Accordingly, a liability has not been recorded for the fair value of the ongoing and ultimate obligations, if any, related to the SEC investigation.
     On March 1, 2007, the Company entered into an indemnity fund agreement, which established in a trust account with Dorsey & Whitney LLP, counsel to the Company’s independent directors and to the Audit Committee of the Company’s Board of Directors, a $10.0 million indemnity fund to support the Company’s existing indemnification obligations to continuing and departing directors in connection with the ongoing SEC investigation and related matters. The balance of this fund has been recorded as restricted indemnification account on the condensed consolidated balance sheet as of March 31, 2007 (see Note 12).
     The Company entersmay enter into other indemnification provisions under its agreements with other companies in its ordinary course of business, typically with business partners, suppliers, contractors, customers and landlords.

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Under these provisions the Company generally indemnifies and holds harmless the indemnified party for direct losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of September 30, 2006March 31, 2007 and December 31, 2005.2006.
Revenue Recognition – AVINZA Royalties
     In accordance with the AVINZA Purchase Agreement (see Note 2), royalties are required to be reported and paid to the Company within 45 days of quarter end during the 20 month period following the closing of the sale transaction. Thereafter, royalties will be paid on a calendar year basis. Royalties on sales of AVINZA due from King will be recognized in the quarter reported by King. Since there is a one quarter lag from when King recognizes AVINZA net sales to when King reports those sales and the corresponding royalties to the Company, the Company will begin recognizing AVINZA royalty revenue in the second quarter of 2007.
Accounting for Stock-Based Compensation
     Prior to January 1, 2006, the Company accounted for stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees,and related interpretations. The pro forma effects of employee stock options were disclosed as required byFinancial Accounting Standard Board Statement(“SFAS”) SFAS No. 123,Accounting for Stock-Based Compensation(“SFAS 123”).
     Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”)SFAS No. 123 (revised 2004),Share-Based Payment(“SFAS 123(R)”), using the modified prospective transition method. No stock-based employee compensation cost was recognized prior to January 1, 2006, as all options granted prior to 2006 had an exercise price equal to the market value of the underlying common stock on the date of the grant. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). Under the transition method, compensation cost recognized in 2007 and 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted in the nine months ended September 30,on or after January 1, 2006, based on grant-date fair value estimated in accordance with the provisions of SFAS 123(R).

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     Additionally, the Company accounts for the fair value of options granted to non-employee consultants under Emerging Issues Task Force (“EITF”) 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction withWith Selling, Goods or Services.
     Results for the three and nine months ended September 30, 2005 have not been retrospectively adjusted. The fair value of the options was estimated using a Black-Scholes option-pricing formula and amortized to expense over the options’ vesting periods.
     The following table illustrates the pro forma effect of share-based compensation on net loss and loss per share for the three and nine months ended September 30, 2005 (in thousands, except per share data):
         
  Three Months Ended  Nine Months Ended 
  September 30, 2005  September 30, 2005 
Net loss, as reported $(6,281) $(33,677)
         
Stock-based employee compensation expense included in reported net loss      
Less: total stock-based compensation expense determined under fair value based method for all awards continuing to vest  (723)  (2,261)
Less: total stock-based compensation expense determined under fair value based method for options accelerated in January 2005 (1)     (12,455)
       
Net loss, pro forma $(7,004) $(48,393)
       
         
Basic and diluted per share amounts:        
Net loss per share as reported $(0.08) $(0.46)
       
Net loss per share pro forma $(0.09) $(0.65)
       
(1)Represents pro forma unrecognized expense for accelerated options as of the date of acceleration.
     The estimated weighted average fair value at grant date for the options granted for the three and nine months ended September 30, 2005 was $7.37 and $7.25, respectively.
     On January 31, 2005, Ligand accelerated the vesting of certain unvested and “out-of-the-money” stock options previously awarded to the executive officers and other employees under the Company’s 1992 and 2002 stock option plans which had an exercise price greater than $10.41, the closing price of the Company’s stock on that date. The vesting for options to purchase approximately 1.3 million shares of common stock (of which approximately 450,000 shares were subject to options held by the executive officers) were accelerated. Options held by non-employee directors were not accelerated.
     Holders of incentive stock options (“ISOs”) within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, were given the election to decline the acceleration of their options if such acceleration would have the effect of changing the status of such option for federal income tax purposes from an ISO to a non-qualified stock option. In addition, the executive officers plus other members of senior management agreed that they will not sell any shares acquired through the exercise of an accelerated option prior to the date on which the exercise would have been permitted under the option’s original vesting terms. This agreement does not apply to a) shares sold in order to pay applicable taxes resulting from the exercise of an accelerated option or b) upon the officers’ retirement or other termination of employment.
     The purpose of the acceleration was to eliminate any future compensation expense the Company would have otherwise recognized in its statement of operations with respect to these options upon the implementation of SFAS 123(R).

8


Other Stock-Related Information
     The 2002 Stock Incentive Plan contains four separate equity programs – Discretionary Option Grant Program, Automatic Option Grant Program, Stock Issuance Program and Director Fee Option Grant Program (“the 2002 Plan”). On January 31, 2006, shareholders of the Company approved an amendment to the 2002 Plan to increase the number of shares of the Company’s common stock authorized for issuance by 750,000 shares, from 8.3 million shares to 9.1 million shares. As of September 30, 2006,March 31, 2007, options for 7,058,4354,210,001 shares of common stock were outstanding under the 2002 plan and 499,5351,880,128 shares remained available for future option grant or direct issuance.
     The Company grants options to employees, non-employee consultants, and non-employee directors. Additionally, the Company granted restricted stock to the new Chief Executive Officer in the first quarter of 2007 (see Note 10) and to non-employee directors in the first quarter of 2006. Non-employee directors are accounted for as employees under SFAS 123(R). Options and restricted stock granted to certain directors vest in equal monthly installments over one year. Options granted to employees vests 1/8 on the six month anniversary and 1/48 each month thereafter for forty-two months. Options granted to non-employee consultants generally vest between 24 and 36 months. All option awards generally expire ten years from the date of the grant.

8


     Stock-based compensation cost for awards to employees and non-employee directors is recognized on a straight-line basis over the vesting period until the last tranche vests. Compensation cost for consultant awards is recognized over each separate tranche’s vesting period. The Company recognized compensation expense of approximately $1.9$5.6 million and $4.0$0.8 million for the three and nine months ended September 30,March 31, 2007 and 2006, respectively, associated with option awards and restricted stock. Of the total compensation expense associated with option awards, approximately $0.1$0.01 million and $0.3$0.2 million related to options granted to non-employee consultants for the three and nine months ended September 30,March 31, 2007 and 2006, respectively. Of the total compensation expense associated with the option awards for the three months ended March 31, 2007, $1.8 million related to the $2.50 equitable adjustment of the exercise price for all options outstanding as of April 3, 2007 that was measured for financial reporting purposes on March 28, 2007. Under the requirements of SFAS 123(R), the Company will recognize a total of approximately $2.0 million of stock compensation expense in connection with the equitable adjustment of which $1.8 million was recognized in the first quarter of 2007 effective March 28, 2007, the date the Company’s Compensation Committee of the Board of Directors approved the adjustment (see Note 13). There was no deferred tax benefit recognized in connection with this cost.
     The fair-value for options that were awarded to employees and directors was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions:
           
 Three Months Ended Nine Months Ended        
 September 30 September 30 Three Months Ended March 31
 2006 2005 2006 2005 2007 2006
Risk-free interest rate  4.8%  4.2%  4.8%  4.2%  4.7%  4.7%
Dividend yield        
Expected volatility  70%  73%  70%  73%  70%  70%
Expected term 5.7 years 5 years 5.9 years 5 years 5 years 6 years
     The expected term of the employee and non-employee director options is the estimated weighted-average period until exercise or cancellation of vested options (forfeited unvested options are not considered). SAB 107 guidance permits companies to use a “safe harbor” expected term assumption for grants up to December 31, 2007 based on the mid-point of the period between vesting date and contractual term, averaged on a tranche-by-tranche basis. The Company used the safe harbor in selecting the expected term assumption in 2007 and 2006. The expected term for consultant awards is the remaining period to contractual expiration.
     Volatility is a measure of the expected amount of variability in the stock price over the expected life of an option expressed as a standard deviation. SFAS 123(R) requires an estimate of future volatility. In selecting this assumption, the Company used the historical volatility of the Company’s stock price over a period equal toapproximating the expected term.
     For options granted to the Company’s former Chief Executive Officer (“CEO”) and for shares purchased under the Company’s employee stock purchase plan (“ESPP”), an expected volatility of 50% was used for the three and nine months ended September 30, 2006. The expected term of the options granted to the former CEO is 5.5 months. The expected term for shares issued under the ESPP is three months.

9


Stock Option Activity
                                
 Weighted- Weighted-Average    Weighted-   
 Average Remaining Aggregate  Average   
 Exercise Contractual Term Intrinsic Value  Weighted- Remaining Aggregate 
 Shares Price in Years (in thousands)  Average Exercise Contractual Term Intrinsic Value 
Balance at December 31, 2005 7,001,657 $11.76 
 Shares Price (1) in Years (in thousands) 
Balance at December 31, 2006 5,766,386 $12.17 
Granted 1,161,518 10.84  82,686 9.26 
Exercised  (233,885) 7.98   (329,046) 9.02 
Forfeited  (177,834) 9.51   (364,636) 9.89 
Cancelled  (693,021) 13.09   (949,106) 14.08 
        
Balance at September 30, 2006 7,058,435 $11.66 6.11 $4,377 
Balance at March 31, 2007 4,206,284 $12.12 6.01 $3,366 
                  
  
Exercisable at September 30, 2006 5,384,044 $12.20 5.18 $2,978 
Exercisable at March 31, 2007 3,734,083 $12.33 5.65 $2,992 
                  
  
Options expected to vest as of September 30, 2006 6,891,572 $11.70 6.03 $4,239 
Options expected to vest as of March 31, 2007 4,168,318 $12.14 5.97 $3,346 
                  
(1)Exercise prices have not been adjusted to reflect the effect of the subsequent $2.50 reduction in exercise price for each outstanding option in April 2007 (see Note 13).
     The weighted-average grant-date fair value of all stock options granted during the ninethree months ended September 30, 2006March 31, 2007 was $7.15$7.55 per share. The total intrinsic value of all options exercised during the ninethree months ended September 30, 2006March 31, 2007 was approximately $0.9$1.0 million. As of September 30, 2006,March 31, 2007, there was approximately $8.3$2.9 million of total unrecognized compensation cost related to nonvested stock options. That cost is expected to be recognized over a weighted average period of 2.72.31 years.
     Cash received from options exercised for the ninethree months ended September 30,March 31, 2007 and 2006 and 2005 was approximately $1.9$2.8 million and $0.9$0.5 million, respectively. An additional $0.1 million was received subsequent to March 31, 2007 for options exercised during the three months ended March 31, 2007. There is no current tax benefit related to options exercised because of net operating losses (“NOLs”) for which a full valuation allowance has been established.
Restricted Stock Activity
         
      Weighted-Average 
  Shares  Stock Price 
Balance at December 31, 2005    $ 
Granted  15,566   11.56 
Vested  (11,677)  11.56 
Forfeited      
       
Nonvested at September 30, 2006  3,889  $11.56 
       
     Restricted stock as of March 31, 2007 includes a grant of 150,000 restricted shares to the Company’s new CEO (see Note 10). Restricted stock activity for the three months ended March 31, 2007 is as follow:
         
      Weighted- 
      Average Stock 
  Shares  Price 
Balance at December 31, 2006  1,297  $11.56 
Granted  150,000   12.68 
Vested  (1,297)  11.56 
Forfeited      
       
Nonvested at March 31, 2007  150,000  $12.68 
       
     The weighted-average grant-date fair value of restricted stock granted during the three months ended March 31, 2007 was $12.68 per share. As of September 30, 2006,March 31, 2007, there was $47,000$1.8 million of total unrecognized compensation cost related to nonvested restricted stock. That cost is expected to be recognized over the remainder of 2006.two years.

10


Employee Stock Purchase Plan
     The Company also has an employee stock purchase plan (the “2002 ESPP”). The 2002 ESPP was originally adopted July 1, 2001 and amended through June 30, 2003 to allow employees to purchase a limited amount of common stock at the end of each three month period at a price equal to the lesser of 85% of fair market value on a) the first trading day of the period, or b) the last trading day of the Lookback period (the “Lookback Provision”). The 15% discount and the Lookback Provision make the 2002 ESPP compensatory under SFAS 123(R). Stock purchases under the 2002 ESPP in the third quarter of 2006 resulted in an expense of $0.03 million. There were no5,570 shares of common stock purchasesissued under the 2002 ESPP during the sixthree months ended June 30,March 31, 2007, resulting in an expense of $0.01 million. There were no shares of common stock issued under the 2002 ESPP during the three months ended March 31, 2006. Since the adoption of the 2002 ESPP in 2001, a total of 510,248 shares of common stock has been reserved for issuance by Ligand under the 2002 ESPP (includes shares transferred from the predecessor plan). As of September 30, 2006, 376,937March 31, 2007, 393,071 shares of

10


common stock had been issued under the 2002 ESPP to employees and 133,311117,177 shares are available for future issuance. For the nine months ended September 30, 2006, there were 14,199 shares of common stock issued under the 2002 ESPP.
Accounts ReceivableShort-term and Restricted Investments
     Accounts receivable consist ofThe following table summarizes the followingvarious investment categories at March 31, 2007 and December 31, 2006 (in thousands):
         
  September 30,  December 31, 
  2006  2005 
Trade accounts receivable $6,164  $1,344 
Due from finance company (Note 3)  1,197   20,464 
Less: discounts and allowances  (284)  (854)
       
  $7,077  $20,954 
       
                 
      Gross  Gross    
      unrealized  unrealized  Estimated 
  Cost  gains  losses  Fair Value 
March 31, 2007
                
U.S. government securities $1,762  $¾  $(10) $1,752 
Corporate obligations  4,562   5   ¾   4,567 
             
   6,324   5   (10)  6,319 
Certificates of deposit — restricted  1,826   ¾   ¾   1,826 
             
Total debt securities $8,150  $5  $(10) $8,145 
             
                 
December 31, 2006
                
U.S. government securities $2,750  $¾  $(4) $2,746 
Corporate obligations  10,681   23   (3)  10,701 
             
   13,431   23   (7)  13,447 
Certificates of deposit — restricted  1,826   ¾   ¾   1,826 
             
Total debt securities $15,257  $23  $(7) $15,273 
             

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Inventories
     Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Inventories consist of the following (in thousands):
            
 September 30, December 31,  December 31, 
 2006 2005  2006 
Raw materials $¾ $1,508 
Work-in-process 1,074 9,115  $1,041 
Finished goods 4,021 6,324  2,968 
Less: inventory reserves  (56)  (1,745)  (153)
        
 5,039 15,202  $3,856 
Less: current portion  (5,039)  (9,333)
        
Long-term portion of inventories, net $ $5,869 
     
     Inventories, relatednet as of December 31, 2006 is comprised of AVINZA Product Line inventory which was sold in connection with the sale of the AVINZA Product Line on February 26, 2007 (see Note 2).
Other Current Assets
     Other current assets consist of the following (in thousands):
         
  March 31,  December 31, 
  2007  2006 
Deferred royalty cost $  $1,785 
Deferred cost of products sold     2,153 
Other receivables  2,509   4,066 
Prepaid expenses  1,980   1,442 
Other  78   72 
       
  $4,567  $9,518 
       
     Deferred royalty cost and deferred cost of products sold as of December 31, 2006 pertain to the Oncology product line have been reclassified as assets held for sale as of September 30, 2006 (Refer toAVINZA Product Line which was sold on February 26, 2007 (see Note 2).
Property and Equipment
     Property and equipment is stated at cost and consists of the following (in thousands):
         
  September 30,  December 31, 
  2006  2005 
Land $5,176  $5,176 
Equipment, building, and leasehold improvements  62,526   61,732 
Less accumulated depreciation and amortization  (46,249)  (44,425)
       
  $21,453  $22,483 
       
         
  March 31,  December 31, 
  2007  2006 
Equipment and leasehold improvements $40,725  $45,835 
Less accumulated depreciation and amortization  (36,703)  (40,284)
       
  $4,022  $5,551 
       
     Depreciation of equipment and building is computed using the straight-line method over the estimated useful lives of the assets which range from three to thirtyten years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or their related lease term, whichever is shorter. Property and equipment related to the Oncology product line have
     The Company’s corporate headquarter building, which was sold on November 9, 2006 (see Note 6), had been reclassified as assets held for sale asdepreciated over its estimated useful life of September 30, 2006 (Refer to Note 2).

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Other Current Assets
     Other current assets consist of the following (in thousands):
         
  September 30,  December 31, 
  2006  2005 
Deferred royalty cost $2,575  $5,203 
Deferred cost of products sold  3,327   5,103 
Prepaid insurance  381   1,071 
Prepaid other  1,550   2,807 
Due from insurance company (Note 6)  4,000    
Other  632   1,566 
       
  $12,465  $15,750 
       
     Other current assets related to the Oncology product line have been reclassified as assets held for sale as of September 30, 2006 (Refer to Note 2).
Other Assets
     Other assets consist of the following (in thousands):
         
  September 30,  December 31, 
  2006  2005 
Prepaid royalty buyout, net $  $2,312 
Debt issue costs, net  1,125   2,193 
Other  139   199 
       
  $1,264  $4,704 
       
     Other assets related to the Oncology product line have been reclassified as assets held for sale as of September 30, 2006 (Refer to Note 2).
     Amortization of debt issue costs was $0.2 million and $0.3 million for the three months ended September 30, 2006 and 2005, respectively, and $0.7 and $0.8 million for the nine months ended September 30, 2006 and 2005, respectively. Estimated annual amortization of this asset in both of 2006 and 2007 is approximately $1.0 million. As further discussed under “Long-term Debt”, during the three and six months ended June 30, 2006, convertible notes with a face value of $1.0 million and $27.1 million, respectively, were converted into approximately 0.2 million and 4.4 million shares of common stock. In connection with the conversions, unamortized debt issue costs of $0.01 million and $0.4 million for the three and six months ended June 30, 2006, respectively, were recorded as additional paid-in capital. There were no conversions during the three months ended September 30, 2006.thirty years.
Acquired Technology and Product Rights Net
     In accordance with SFAS No. 142,Goodwill and Other Intangibles,the Company amortizes intangible assets with finite lives in a manner that reflects the pattern in which the economic benefits of the assets are consumed or otherwise used up. If that pattern cannot be reliably determined, the assets are amortized using the straight-line method.
     Acquired technology and product rights, net as of September 30, 2006 represent payments related to the Company’s acquisition of license rights for AVINZA. Because the Company cannot reliably determine the pattern in which the economic benefits of the acquired technology and products rights are realized, acquired technology and product rights are amortized on a straight-line basis over 15 years, which approximated the remaining patent life at the time the asset was acquired and otherwise represents the period estimated to be benefited. Specifically, the AVINZA asset is being amortized through November 2017, the expiration of its U.S. patent.

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     Acquired technology and product rights, net consist of the following (in thousands):
            
 September 30, December 31,  December 31, 
 2006 2005  2006 
AVINZA $114,437 $114,437  $114,437 
Less accumulated amortization  (29,447)  (23,725)  (31,354)
        
 84,990 90,712  $83,083 
        
 
ONTAK  78,312 
Less accumulated amortization   (22,254)
     
  56,058 
     
 $84,990 $146,770 
     
     Amortization of AVINZA acquired technology and product rights, net was $1.9$0.9 million and $5.7$3.6 million for the three months ended March 31, 2007 and nine month periods ended September 30, 2006, and 2005, respectively. Estimated annual amortizationThese amounts are included in results of discontinued operations for this asset in each of the years in the period from 2006 through 2010 is approximately $7.6 million and a total of $52.6 million, thereafter.applicable periods. Acquired technology and product rights related to ONTAK have been reclassifiedthe Oncology Product Line were sold effective October 25, 2006 as part of the sale of the Company’s Oncology Product Line (see Note 2). Additionally, the AVINZA assets held forwere sold effective February 26, 2007 as part of the sale as of September 30, 2006 (Refer tothe Company’s AVINZA Product Line (see Note 2).
Impairment of Long-Lived Assets
     The Company reviews long-lived assets for impairment annually or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value for the Company’s long-lived assets is determined using the expected cash flows discounted at a rate commensurate with the risk involved. During the three months ended March 31, 2007, the Company recorded an impairment charge of approximately $1.0 million ($0.5 million to research and development expenses and $0.5 million to general and administrative expenses) to reflect the abandonment or disposal of certain equipment items that are no longer used in the Company’s ongoing operations following the sale of the Company’s AVINZA product line (see Note 2) and the restructuring/reduction in workforce (see Note 11). As of March 31, 2007, the Company believes that the future cash flows to be received from its long-lived assets will exceed the assets’ carrying value.
Deferred Revenue Net
     Under the sell-through revenue recognition method, the Company does not recognize revenue upon shipment of product to the wholesaler. For these shipments, the Company invoices the wholesaler, records deferred revenue at gross invoice sales price, and classifies the inventory held by the wholesaler (and subsequently held by retail pharmacies foras in the case of AVINZA) as deferred cost of goods sold within “other current assets.” Deferred revenue is presented net of deferred cash and other discounts. Other deferred revenue reflects certain collaborative research and development payments and the sale of certain royalty rights.
     Deferred revenue related to the Oncology product line has been reclassified as liabilities related to assets held for sale as of September 30, 2006 (Refer to Note 2).

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     The composition of deferred revenue, net is as follows (in thousands):
         
  September 30,  December 31, 
  2006  2005 
Deferred product revenue $81,436  $158,030 
Other deferred revenue  2,546   5,296 
Deferred discounts  (1,041)  (1,605)
       
Deferred revenue, net $82,941  $161,721 
       
         
Deferred revenue, net:        
Current, net $80,395  $157,519 
Long term, net  2,546   4,202 
       
  $82,941  $161,721 
       
         
Deferred product revenue, net (1):        
Current $80,395  $156,425 
Long term      
       
  $80,395  $156,425 
       
         
Other deferred revenue:        
Current $  $1,094 
Long term  2,546   4,202 
       
  $2,546  $5,296 
       
         
  March 31,  December 31, 
  2007  2006 
Deferred product revenue (net), current $  $57,981 
Other deferred revenue (net), long term  2,546   2,546 
       
  $2,546  $60,527 
       
     Deferred product revenue as of December 31, 2006 pertains to the AVINZA Product Line which was sold on February 26, 2007
(see Note 2).

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(1)Deferred product revenue, net does not include other gross to net revenue adjustments made when the Company reports net product sales. Such adjustments include Medicaid rebates, managed health care rebates, and government chargebacks, which are included in accrued liabilities in the accompanying condensed consolidated financial statements.
Accrued Liabilities
     Accrued liabilities consist of the following (in thousands):
                
 September 30, December 31,  March 31, December 31, 
 2006 2005  2007 2006 
Allowances for loss on returns, rebates, chargebacks, other discounts, ONTAK end-customer and Panretin product returns (1) $10,397 $15,729 
Allowances for loss on returns, rebates, chargebacks, and other discounts $30,580 $14,688 
Income taxes 16,292 822 
Co-promotion 18,443 24,778  1,773 14,265 
Compensation 1,910 9,330 
Distribution services 2,477 4,044  1,899 2,641 
Employee compensation 8,106 5,746 
Securities class action and derivative lawsuit liability (2) 4,150  
Royalties 1,662 1,994  944 1,261 
Seragen purchase liability (2) ¾ 2,925 
Interest 2,883 1,164   776 
Other 4,784 3,207  3,982 2,726 
          
 $52,902 $59,587  $57,380 $46,509 
          
(1)Liabilities related to ONTAK end-customer and Panretin product returns will be retained by the Company after the close of the sale of the Company’s oncology products (refer to Note 2) and therefore have not been classified as “Liabilities related to assets held for sale.”
(2)Refer to Note 6, “Litigation”.

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     The following summarizes the activity in the accrued liability accounts related to allowances for loss on returns, rebates, chargebacks, and other discounts and ONTAK end-customer and Panretin returns (in thousands):
                         
  Losses on      Managed      ONTAK End-    
  Returns Due      Care and      customer and    
  to Changes  Medicaid  Other      Panretin    
  In Price  Rebates  Rebates  Chargebacks  Returns  Total 
Nine Months Ended September 30, 2006:
                        
Balance at December 31, 2005 $4,038  $5,348  $3,467  $200  $2,676  $15,729 
Provision  2,126   3,645   6,682   5,026   1,812   19,291 
Payments  ¾   (8,022)  (6,040)  (5,028)  ¾   (19,090)
Charges  (3,350)  ¾   ¾   ¾   (2,183)  (5,533)
                   
Balance at September 30, 2006 $2,814  $971  $4,109  $198  $2,305  $10,397 
                   
     The accrual for other rebates as of September 30, 2006, reflects the release of a $1.8 million accrual previously recorded for billings received from the Department of Veteran Affairs under the Department of Defense’s TriCare Retail Pharmacy refund program. In September 2006, the U.S. Court of Appeals for the Federal Circuit struck down the TriCare program.
Long-term Debt
     Long-term debt consists of the following (in thousands):
         
  September 30,  December 31, 
  2006  2005 
6% Convertible Subordinated Notes $128,150  $155,250 
Note payable to bank  11,584   11,839 
       
   139,734   167,089 
Less current portion  (363)  (344)
       
Long-term debt $139,371  $166,745 
       
     During the six months ended June 30, 2006, certain holders of the Company’s outstanding 6% convertible subordinated notes converted notes with face values of $27.1 million into approximately 4.4 million shares of common stock. Accrued interest and unamortized debt issue costs related to the converted notes of $0.3 million and $0.4 million, respectively, were recorded to additional paid-in capital during the six months ended June 30, 2006. There were no conversions during the three months ended September 30, 2006.March 31, 2007 (in thousands):
     On October 30, 2006, the Company gave notice of redemption to the noteholders of its 6% convertible subordinated notes due November 2007. The redemption date of the notes has been set for November 29, 2006. The noteholders may elect to convert the 6% notes, on or before November 29, 2006, into shares of common stock at a conversion rate of 161.9905 shares per $1,000 principal amount of the notes (approximately $6.17 per share). Based on the current price of the Company’s common stock, the majority of the noteholders are expected to convert their notes into shares of the Company’s common stock prior to the redemption date. The $128.2 million of principal amount of the notes outstanding may be converted into approximately 20.8 million shares of common stock. The Company will pay the holders of those notes that are not converted into shares a redemption price equal to 101.2% of the outstanding principal amount plus accrued and unpaid interest.
                         
  Losses on      Managed          
  Returns      Care          
  Due to      Rebates and          
  Changes  Medicaid  Other  Charge-       
  In Price  Rebates  Rebates  backs  Returns  Total 
Balance at December 31, 2006 $1,341  $1,406  $3,561  $1,280  $7,100  $14,688 
Provision  244   952   2,768   209   (393)(3)  3,780 
AVINZA Transaction Provision (1)  ¾   513   1,382   58   17,061   19,014 
Oncology Transaction Provision (2)  ¾   145   ¾   87   486   718 
Payments  ¾   (1,050)  (2,615)  (416)  ¾   (4,081)
Charges  (252)  ¾   ¾   ¾   (3,287)  (3,539)
                   
Balance at March 31, 2007 $1,333  $1,966  $5,096  $1,218  $20,967  $30,580 
                   
     As discussed more fully in Note 14, on October 25, 2006, the Company, along with its wholly-owned subsidiary Nexus Equity VI, LLC (“Nexus”) entered into an agreement with Slough Estates USA, Inc. (“Slough”) for the sale of the Company’s real property located in San Diego, California. The transaction closed in November 2006 and includes an agreement between the Company and Slough for the Company to leaseback the building for a period of 15 years. In connection with the sale transaction, on November 6, 2006, the Company paid off the existing mortgage on the building of approximately $11.6 million.
(1)The AVINZA transaction provision amounts represent additional accruals recorded in connection with the sale of the AVINZA Product Line to King Pharmaceuticals, Inc. on February 26, 2007. The Company will maintain the obligation for returns of product that were shipped to wholesalers prior to the close of the King transaction on February 26, 2007 and chargebacks and rebates associated with product in the distribution channel as of the closing date. See Note 2 for additional information.
(2)The Oncology transaction provision amounts represent changes in the estimates of the accruals for chargebacks and rebates recorded in connection with the sale of the Oncology Product Line to Eisai Pharmaceuticals, Inc. on October 25, 2006. See Note 2 for additional information.
(3)The credit for returns in the first quarter of 2007 consists of a change in the estimate of ONTAK end-customer returns. The accrual for ONTAK end-customer returns is a result of the operations of the Oncology Product Line prior to its sale on October 25, 2006.

1514


Condensed Changes in Stockholders’ DeficitEquity
     Condensed changes in stockholders’ deficitequity for the ninethree months ended September 30, 2006March 31, 2007 are as follows (in thousands, except share data):
                                 
              Accumulated                
          Additional  other              Total 
  Common Stock  paid-in  comprehensive  Accumulated  Treasury Stock  stockholders’ 
  Shares  Amount  capital  income (loss)  deficit  Shares  Amount  deficit 
Balance at December 31, 2005  73,136,340  $73  $720,988  $490  $(831,059)  (73,842) $(911) $(110,419)
Issuance of common stock upon exercise of stock options and restricted stock grants  263,650   1   1,980               1,981 
Issuance of common stock on conversion of debt  4,389,934   4   26,998               27,002 
Unrealized losses on available-for-sale securities           (613)           (613)
Foreign currency translation adjustments           (15)           (15)
Equity- based compensation        3,981               3,981 
Net loss              (173,107)        (173,107)
                         
                                 
Balance at September 30, 2006  77,789,924  $78  $753,947  $(138) $(1,004,166)  (73,842) $(911) $(251,190)
                         
                                 
     Additional  Accumulated other              Total 
  Common Stock  paid-in  comprehensive  Accumulated  Treasury Stock  stockholders’ 
  Shares  Amount  capital  loss  deficit  Shares  Amount  equity 
Balance at December 31, 2006  99,553,504  $100  $891,446  $(481) $(862,802)  (73,842) $(911) $27,352 
Effect of adopting FIN 48 (see Note 14)  ¾   ¾   ¾   ¾   (398)  ¾   ¾   (398)
                         
Balance at January 1, 2007  99,553,504   100   891,446   (481)  (863,200)  (73,842)  (911)  26,954 
Issuance of common stock under employee stock compensation plans  484,616   ¾   2,974   ¾   ¾   ¾   ¾   2,974 
Foreign currency translation adjustments  ¾   ¾   ¾   341   ¾   ¾   ¾   341 
Stock-based compensation  ¾   ¾   5,554   ¾   ¾   ¾   ¾   5,554 
Net income  ¾   ¾   ¾   ¾   274,321   ¾   ¾   274,321 
Declaration of dividend  ¾   ¾   (252,742)  ¾   ¾   ¾       (252,742)
                         
Balance at March 31, 2007  100,038,120  $100  $647,232  $(140) $(588,879)  (73,842) $(911) $57,402 
                         
Comprehensive LossIncome (Loss)
     Comprehensive lossincome (loss) represents net lossincome (loss) adjusted for the change during the periods presented in unrealized gains and losses on available-for-sale securities less reclassification adjustments for realized gains or losses included in net loss,income (loss), as well as foreign currency translation adjustments. The accumulated unrealized gains or losses and cumulative foreign currency translation adjustments are reported as accumulated other comprehensive income (loss)loss as a separate component of stockholders’ deficit.equity. Comprehensive lossincome (loss) is as follows (in thousands):
                 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2006  2005  2006  2005 
Net loss as reported $(14,918) $(6,281) $(173,107) $(33,677)
Unrealized (losses) gains on available-for-sale securities  (93)  108   282   (512)
Reclassification adjustment for (losses) gains on sale of available-for-sale securities  (75)  143   (895)  143 
Foreign currency translation adjustments     (13)  (15)  (42)
             
Comprehensive loss $(15,086) $(6,043) $(173,735) $(34,088)
             
         
  Three Months Ended March 31, 
  2007  2006 
Net income (loss) as reported $274,321  $(142,229)
Unrealized net gains on available-for-sale securities  ¾   534 
Foreign currency translation adjustments  341   (3)
       
Comprehensive income (loss) $274,662  $(141,698)
       
     The components of accumulated other comprehensive (loss) incomeloss are as follows (in thousands):
                
 September 30, December 31,  March 31, December 31, 
 2006 2005  2007 2006 
Net unrealized holding gain on available-for-sale securities $130 $743 
Net unrealized holding loss on available-for-sale securities $(5) $(5)
Net unrealized loss on foreign currency translation  (268)  (253)  (135)  (476)
          
 $(138) $490  $(140) $(481)
          

1615


Net Product Sales
     The Company’s AVINZA net product sales are determined on a sell-through basis less allowances for rebates, chargebacks, discounts, and losses to be incurred on returns from wholesalers resulting from increases in the selling price of the Company’s products. In addition, the Company incurs certain distributor service agreement fees related to the management of its product by wholesalers. These fees have been recorded within net product sales.
     The Company’s total net product sales from continuing operations for the three months ended September 30, 2006 were $36.7 million compared to $29.9 million for the same 2005 period. Total net product sales from continuing operations for the nine months ended September 30, 2006 were $102.9 million compared to $79.4 million for the same 2005 period.
Collaborative Research and Development and Other Revenues
     Collaborative research and development and other revenues are recognized 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 the Company has no continuing involvement are recognized upon the earlier of when payment is received or collection is assured. Revenue from non-refundable contract fees where the Company has continuing involvement through research and development collaborations or other contractual obligations is recognized ratably over the development period or the period for which the Company continues to have a performance obligation. Revenue from performance milestones is recognized upon the achievement of the milestones as specified in the respective agreement. Payments received in advance of performance or delivery are recorded as deferred revenue and subsequently recognized over the period of performance or upon delivery.
     The composition of collaborative research and development and other revenues is as follows (in thousands):
                
 Three Months Ended Nine Months Ended         
 September 30, September 30,  Three Months Ended March 31, 
 2006 2005 2006 2005  2007 2006 
Collaborative research and development $ $894 $1,678 $2,618  $¾ $894 
Development milestones and other  1,201 2,299 5,326  235 2,020 
              
 $ $2,095 $3,977 $7,944  $235 $2,914 
              
Income Taxes
     The Company recognizes liabilities or assets for the deferred tax condensed consolidated consequences of temporary differences between the tax bases of assets or liabilities and their reported amounts in the condensed consolidated financial statements in accordance with SFAS No. 109,Accounting for Income Taxes (“(“SFAS 109”). These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. SFAS 109 requires that a valuation allowance be established when management determines that it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company evaluates the reliabilityrealizability of its net deferred tax assets on a quarterly basis and valuation allowances are provided, as necessary. During this evaluation, the Company reviews its forecasts of income in conjunction with other positive and negative evidence surrounding the reliabilityrealizability of its deferred tax assets to determine if a valuation allowance is required. Adjustments to the valuation allowance will increase or decrease the Company’s income tax provision or benefit. At September 30,The Company also applies the guidance of SFAS 109 to determine the amount of income tax expense or benefit to be allocated among continuing operations, discontinued operations, and items charged or credited directly to stockholders’ equity.
     Due to the adoption of SFAS 123(R) beginning January 1, 2006, and December 31, 2005, the Company has established a full valuation allowance against netrecognizes windfall tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. Accordingly, deferred tax assets. In accordanceassets are not recognized for net operating loss carryforwards resulting from windfall tax benefits occurring from January 1, 2006 onward. A windfall tax benefit occurs when the actual tax benefit realized by the Company upon an employee’s disposition of a share-based award exceeds the deferred tax asset, if any, associated with SFAS 109, income taxes from continuing operations for the three and nine months ended September 30, 2006 reflectaward that the Company had recorded. When assessing whether a tax benefit equalrelating to share-based compensation has been realized, the Company follows the with-and-without method, excluding the indirect effects, under which current year share-based compensation deductions are assumed to be utilized after net operating loss carryforwards and other tax expense attributed toattributes.
     As discussed in Note 14, effective January 1, 2007 the income from discontinued operations. Tax expense on income from discontinued operations was computed using statutory rates.Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN48”).

1716


2. Discontinued Operations
Oncology Product Line
     On September 7, 2006, the Company, Eisai Inc., a Delaware corporation and Eisai Co., Ltd., a Japanese company (together with Eisai Inc., “Eisai”), entered into a purchase agreement (the “Oncology Purchase Agreement”) pursuant to which Eisai agreed to acquire all of the Company’s worldwide rights in and to the Company’s oncology products, including, among other things, all related inventory, equipment, records and intellectual property, and assume certain liabilities (the “Oncology Product Line”) as set forth in the Oncology Purchase Agreement. The Oncology Product Line includesincluded the Company’s four marketed oncology drugs: ONTAK, Targretin capsules, Targretin gel and Panretin gel. Pursuant to the Oncology Purchase Agreement, at closing on October 25, 2006, Ligand received approximately $205.0$185.0 million in net cash and Eisai assumed certain liabilities. Asproceeds, net of the closing date, the Company was also required to transfer manufactured product to Eisai of at least $9.8 million. To the extent the actual inventory amount is less than $9.8 million, the Oncology Purchase Agreement provides for a corresponding decrease to the purchase price. The Company believes that oncology inventory on October 25, 2006 exceeded $9.8 million. Until Eisai agrees with the determination of the amount transferred, however, there can be no assurance that the final purchase price will not be adjusted. Of the $205.0 million, $20.0 million that was funded into an escrow account to support any indemnification claims made by Eisai following the closing of the sale.sale as further discussed below. Eisai also assumed certain liabilities. The Company also incurred approximately $1.7 million in transaction fees and costs associated with the sale that are not reflected in net cash proceeds. The Company recorded a pre-tax gain on the sale of $135.8 million in the fourth quarter of 2006. The Company recorded a $0.1 million pre-tax reduction to the gain on the sale in the first quarter of 2007 due to subsequent changes in certain estimates of assets and liabilities recorded as of the sale date.
     As more fully described in Note 13,Additionally, $38.6 million of the fundsproceeds received from Eisai have beenwere deposited into a restrictedan escrow account to be used to repay a loan plus interest, the Company received from King Pharmaceuticals, Inc. (“King”), the expected acquirerproceeds of which were used to pay the Company’s product, AVINZA. If the transactionco-promote termination obligation to sell the AVINZA product line closes as expected, the principalOrganon in October 2006. The escrow amounts were released and interest on the loan will be forgiven.repaid to King in January 2007.
     After closing of the Oncology purchase, Ligand will receive no further direct cash flows related to the oncology products. The Company has, however, inIn connection with the Oncology Purchase Agreement with Eisai, the Company entered into a transition services agreement whereby Ligand willthe Company agreed to perform certain transition services for Eisai, in order to effect, as rapidly as practicable, the transition of purchased assets from Ligand to Eisai. In exchange for these services, Eisai will paypays the Company a monthly service fee to the Company.fee. The term of the transition services provided is generally three months; however, certain services will beare being provided for a period of up to eight months. Fees earned under the transition services agreement during the first quarter of 2007, which were recorded as an offset to operating expenses, were approximately $1.8 million.
     The Company agreed to indemnify Eisai, after the closing, for damages suffered by Eisai arising for any breach of any of the representations, warranties, covenants or obligations the Company made in the Oncology Purchase Agreement. The Company’s obligation to indemnify Eisai survives the closing in some cases up to 18 or 36 months following the closing, and in other cases, until the expiration of the applicable statute of limitations. In a few instances, the Company’s obligation to indemnify Eisai survives in perpetuity. The Company’s agreement with Eisai required that $20.0 million of the total upfront cash payment be deposited into an escrow account to secure the Company’s indemnification obligations to Eisai after the closing. Of the escrowed amounts not required for claims to Eisai, $10.0 million was released to the Company on April 25, 2007, with the remaining balance available to be released on October 25, 2007. The Company’s indemnification obligations could cause the Company to be liable to Eisai, under certain circumstances, in excess of the amounts set forth in the escrow account. The Company’s liability for any indemnification claim brought by Eisai is generally limited to $30.0 million. However, the Company’s obligation to provide indemnification on certain matters is not subject to these indemnification limits. For example, the Company agreed to retain, and provide indemnification without limitation to Eisai for, all liabilities related to certain claims regarding promotional materials for the ONTAK and Targretin drug products. The Company cannot estimate the liabilities that may arise as a result of these matters.
     Prior to the Oncology sale, the Company recorded accruals for rebates, chargebacks, and other discounts related to Oncology products when product sales were recognized as revenue under the sell-through method. Upon the Oncology sale, the Company accrued for rebates, chargebacks, and other discounts related to Oncology products in the distribution channel which had not sold-through at the time of the Oncology sale and for which the Company retained the liability subsequent to the Oncology sale. The Company’s accruals for Oncology rebates, chargebacks, and other discounts total $1.6 million as of March 31, 2007 and are included in accrued liabilities in the accompanying condensed consolidated balance sheet.

17


     Additionally, and pursuant to the terms of the Oncology Purchase Agreement, the Company retained the liability for returns of product from wholesalers that had been sold by the Company prior to the close of the transaction. Accordingly, as part of the accounting for the gain on the sale of the Oncology Product Line, the Company recorded a reserve for Oncology product returns. Under the sell-through revenue recognition method, the Company previously did not record a reserve for returns from wholesalers. The Company’s reserve for Oncology returns, including estimated losses on returns due to changes in price, is $5.6 million as of March 31, 2007 and is included in accrued liabilities in the accompanying condensed consolidated balance sheet.
AVINZA Product Line
     On September 6, 2006, Ligand and King Pharmaceuticals, Inc. (“King”), entered into a purchase agreement (the “AVINZA Purchase Agreement”), pursuant to which King agreed to acquire all of the Company’s rights in and to AVINZA in the United States, its territories and Canada, including, among other things, all AVINZA inventory, records and related intellectual property, and assume certain liabilities as set forth in the AVINZA Purchase Agreement (collectively, the “Transaction”). In addition, King, subject to the terms and conditions of the AVINZA Purchase Agreement, agreed to offer employment following the closing of the Transaction (the “Closing”) to certain of the Company’s existing AVINZA sales representatives or otherwise reimburse the Company for agreed upon severance arrangements offered to any such non-hired representatives.
     Pursuant to the AVINZA Purchase Agreement, at Closing on February 26, 2007 (the “Closing Date”), the Company received $280.4 million in net cash proceeds, which is net of $15.0 million that was funded into an escrow account to support potential indemnification claims made by King following the Closing. The purchase price reflected a reduction of $12.7 million due to the preliminary estimate of retail inventory levels of AVINZA at the Closing Date exceeding targeted levels. After final studies and review by King, the final retail inventory-level adjustment was determined to be $11.2 million. The Company received the additional $1.5 million in proceeds in April 2007. The purchase price also reflects a reduction of $6.0 million for anticipated higher cost of goods for King related to the Cardinal Health PTS, LLC (“Cardinal”) manufacturing and packaging agreement. At the closing, Ligand agreed to not assign the Cardinal agreement to King, wind down the contract, and remain responsible for any resulting liabilities. The costs of winding down the Cardinal agreement were not material.
     The net cash received also includes reimbursement of $47.8 million for co-promote termination payments which had previously been paid to Organon, $0.9 million of interest Ligand paid King on a loan that was repaid in January 2007, and $0.5 million of severance expense for AVINZA sales representatives not offered positions with King. A summary of the net cash proceeds, exclusive of $7.2 million in transaction costs and adjusted to reflect the final results of the retail inventory study, is as follows (in thousands):
     
Purchase price $265,000 
Reimbursement of Organon payments  47,750 
Repayment of interest on King loan  883 
Reimbursement of sales representative severance costs  453 
    
   314,086 
     
Less retail pharmacy inventory adjustment  (11,225)
Less cost of goods manufacturing adjustment  (6,000)
    
   296,861 
Less funds placed into escrow  (15,000)
    
     
Net cash proceeds $281,861 
    

18


     King also assumed Ligand’s co-promote termination obligation to make payments to Organon based on net sales of AVINZA (approximately $93.2 million as of February 26, 2007). As Organon has not consented to the legal assignment of the co-promote termination obligation from Ligand to King, Ligand remains liable to Organon in the event of King’s default of this obligation (Note 5). The Company also incurred approximately $7.2 million in transaction fees and other costs associated with the sale that are not reflected in the net cash proceeds, of which $3.6 million was recognized in 2006. The $7.2 million also includes approximately $3.6 million recognized in the first quarter of 2007 for investment banking services and related expenses which have not yet been paid. The Company is disputing that these fees are owed to the investment banking firm. The investment banking firm filed suit against the Company in New York on April 17, 2007 seeking recovery of these fees, plus interest, attorneys’ fees and costs. The Company recorded a pre-tax gain on the sale of $310.1 million in the first quarter of 2007.
     In addition to the assumption of existing royalty obligations, King will pay Ligand a 15% royalty on AVINZA net sales during the first 20 months after Closing. Subsequent royalty payments will be based upon calendar year net sales. If calendar year net sales are less than $200.0 million, the royalty payment will be 5% of all net sales. If calendar year net sales are greater than $200.0 million, the royalty payment will be 10% of all net sales less than $250.0 million, plus 15% of net sales greater than $250.0 million.
     In connection with the sale, the Company has agreed to indemnify King for a period of 16 months after the closing for a number of specified matters including the breach of the Company’s representations, warranties and covenants contained in the asset purchase agreement, and in some cases for a period of 30 months following the closing of the asset sale. Under the Company’s agreement with King, $15.0 million of the total upfront cash payment was deposited into an escrow account to secure the Company’s indemnification obligations to King following the closing. If not used for valid indemnification claims, one half of the escrow amounts will be available for release to the Company on August 26, 2007 with the remainder available for release on February 26, 2008.
     The Company’s indemnification obligations under the asset purchase agreements could cause Ligand to be liable to King under certain circumstances, in excess of the amount set forth in the escrow account. The AVINZA asset purchase agreement also allows King, under certain circumstances, to set off indemnification claims against the royalty payments payable to the Company. Under the asset purchase agreement, the Company’s liability for any indemnification claim brought by King is generally limited to $40.0 million. However, the Company’s obligation to provide indemnification on certain matters is not subject to this indemnification limit. For example, the Company agreed to retain, and provide indemnification without limitation to King for all liabilities arising under certain agreements with Cardinal Health PTS, LLC related to the manufacture of AVINZA. The Company cannot predict the liabilities that may arise as a result of these matters. Any liability claims related to these matters or any indemnification claims made by King could materially and adversely affect the Company’s financial condition.
     In connection with the Transaction, King loaned the Company $37.8 million (the “Loan”) which was used to pay the Company’s co-promote termination obligation to Organon due October 15, 2006. This loan was drawn, and the $37.8 million co-promote liability settled in October 2006. Amounts due under the loan were subject to certain market terms, including a 9.5% interest rate. In addition, and as a condition of the loan, $38.6 million of the funds received from Eisai was deposited into a restricted account to be used to repay the loan to King, plus interest. The Company repaid the loan plus interest in January 2007. As noted above, King refunded the interest to the Company on the Closing Date.
     Also on September 6, 2006, the Company entered into a contract sales force agreement (the “Sales Call Agreement”) with King, pursuant to which King agreed to conduct a sales detailing program to promote the sale of AVINZA for an agreed upon fee, subject to the terms and conditions of the Sales Call Agreement. Pursuant to the Sales Call Agreement, King agreed to perform certain minimum monthly product details (i.e. sales calls), which commenced effective October 1, 2006 and continued until the Closing Date. Co-promotion expense recognized under the Sales Call Agreement for the three months ended March 31, 2007 was $2.8 million. The amount due to King under the Sales Call Agreement as of March 31, 2007 is approximately $1.7 million. The Sales Call Agreement terminated effective on the Closing Date.

19


     Assets and liabilities of the Company’s Oncology Product Line classified as held for sale as of September 30, 2006 areAVINZA product line on February 26, 2007 were as follows (in thousands):
     
  September 30, 
  2006 
  (unaudited) 
ASSETS
    
Current assets:    
Current portion of inventories, net (1) $6,764 
Other current assets (2)  1,291 
    
Total current portion of assets held for sale  8,055 
    
Long-term portion of inventories, net (1)  3,913 
Equipment, net of accumulated depreciation (1)  50 
Acquired technology, product rights and royalty buy-down, net (1)  51,717 
Other assets (1)  2,127 
    
Total long-term portion of assets held for sale  57,807 
    
Total assets held for sale $65,862 
    
     
LIABILITIES
    
Current liabilities:    
Current portion of deferred revenue, net (2) $26,803 
    
Total current portion of liabilities related to assets held for sale  26,803 
    
Long-term portion of deferred revenue, net (2)  1,479 
Other long-term liabilities (1)  538 
    
Total long-term portion of liabilities related to assets held for sale  2,017 
    
Total liabilities related to assets held for sale $28,820 
    
     
ASSETS
    
Current assets:    
Inventories, net (1) $2,926 
Other current assets (2)  2,780 
    
Total current portion of assets disposed  5,706 
    
Equipment, net of accumulated depreciation (1)  89 
Acquired technology and product rights, net (1)  82,174 
    
Total long-term portion of assets disposed  82,263 
    
Total assets disposed $87,969 
    
     
LIABILITIES
    
Current liabilities:    
Deferred revenue, net (2) $49,324 
    
Total liabilities disposed $49,324 
    
 
(1) Represents assets acquired or liabilities assumed by EisaiKing in accordance with the terms of the OncologyAVINZA Purchase Agreement.
 
(2) Represents assets or liabilities that will be eliminated from the Company’s condensed consolidated balance sheet in connection with the OncologyAVINZA sale transaction.
     Prior to the AVINZA sale, the Company recorded accruals for rebates, chargebacks, and other discounts related to AVINZA products when product sales were recognized as revenue under the sell-through method. Upon the AVINZA sale, the Company accrued for rebates, chargebacks, and other discounts related to AVINZA products in the distribution channel which had not sold-through at the time of the AVINZA sale and for which the Company retained the liability subsequent to the sale. The Company’s accruals for AVINZA rebates, chargebacks, and other discounts total $6.7 million as of March 31, 2007 and are included in accrued liabilities in the accompanying condensed consolidated balance sheet.
     Additionally, and pursuant to the terms of the AVINZA Purchase Agreement, the Company retained the liability for returns of product from wholesalers that had been sold by the Company prior to the close of the transaction. Accordingly, as part of the accounting for the gain on the sale of AVINZA, the Company recorded a reserve for AVINZA product returns. Under the sell-through revenue recognition method, the Company previously did not record a reserve for returns from wholesalers. The Company’s reserve for AVINZA returns, including estimated losses on returns due to changes in price, is $16.7 million as of March 31, 2007 and is included in accrued liabilities in the accompanying condensed consolidated balance sheet.

1920


Results from Discontinued Operations
     The following table summarizes results from discontinued operations for the three months ended March 31, 2007 included in the condensed consolidated statements of operations (in thousands):
     
  AVINZA 
  Product 
  Line 
Product sales $18,256 
    
Operating costs and expenses:    
Cost of products sold  3,608 
Research and development  120 
Selling, general and administrative  3,709 
Co-promotion  2,814 
Co-promote termination charges  2,012 
    
Total operating costs and expenses  12,263 
    
Income from operations  5,993 
Interest expense   
    
Income before income taxes $5,993 
    

21


     The following table summarizes results from discontinued operations for the three and nine months ended September 30,March 31, 2006 and 2005 included in the condensed consolidated statements of operations (in thousands):
                
 Three Months Nine Months             
 Ended September 30, Ended September 30,  Oncology AVINZA   
 2006 2005 2006 2005  Product Product   
 (unaudited)  Line Line Total 
Product sales $13,292 $12,676 $42,457 $39,997  $15,489 $32,495 $47,984 
Collaborative research and development and other revenues 75 77 188 232  58  58 
                
Total revenues 13,367 12,753 42,645 40,229  15,547 32,495 48,042 
                
Operating costs and expenses:  
Cost of products sold 3,410 3,385 12,448 13,552  4,146 5,594 9,740 
Research and development 4,166 4,991 11,734 18,383  3,893  3,893 
Selling, general and administrative 3,722 3,303 12,688 14,018  4,518 8,780 13,298 
Co-promotion  10,957 10,957 
Co-promote termination charges  136,241 136,241 
                
Total operating costs and expenses 11,298 11,679 36,870 45,953  12,557 161,572 174,129 
                
Income (loss) from operations 2,069 1,074 5,775  (5,724) 2,990  (129,077)  (126,087)
Interest expense  (1)  (54)  (51)  (82)  (25)  (2,414)(1)  (2,439)
                
Income (loss) before income taxes 2,068 1,020 5,724  (5,806) $2,965 $(131,491) $(128,526)
Income tax expense  (845)  (17)  (2,342)  (54)
                
Net income (loss) $1,223 $1,003 $3,382 $(5,860)
         
Selected Information Regarding Discontinued Operations
Inventories
 Inventories consist of the following (in thousands):
     
  September 30, 
  2006 
Raw materials $1,246 
Work-in-process  8,004 
Finished goods  2,631 
Less: inventory reserves  (1,204)
    
   10,677 
Less: current portion  (6,764)
    
Long-term portion of inventories, net $3,913 
    
     In 2005, the Company completed a multi-year process of transferring its filling and finishing of ONTAK from Eli Lilly (Lilly) and Company to Hollister-Stier. In anticipation of this transfer, the Company used Lilly to fill and finish, in 2003, a higher than normal number of ONTAK lots, each of which required a forward dating determination. ONTAK otherwise has a shelf life projection of up to 36 months. As of September 30, 2006 total ONTAK inventory amounted to approximately $7.0 million, of which $2.0 million is classified as long-term, respectively.
     During 2005, the Company manufactured a higher than normal amount of drug substance (bexarotene) for Targretin capsules in the event the Company’s non-small cell lung cancer (“NSCLC”) clinical trials were successful. In March 2005, the Company disclosed that the trials did not meet their endpoints of improved overall survival and projected two year survival. The additional manufactured bexarotene has a shelf life projection of approximately 10

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years. As of September 30, 2006, total Targretin capsules inventory amounted to $3.4 million, of which $1.9 million is classified as long-term.
Acquired Technology, Product Rights and Royalty Buy-Down, Net
     Acquired technology, product rights and royalty buy-down, net as of September 30, 2006 include payments made in 2005 totaling $33.0 million to Lilly in exchange for the elimination of the Company’s ONTAK royalty obligations in 2005 and 2006 and a reduced reverse-tiered royalty scale on ONTAK sales in the U.S. thereafter. Other acquired technology and product rights represent payments related to the Company’s acquisition of ONTAK. As these assets are classified as held for sale effective September 7, 2006, the Company ceased amortizing these assets as of that date.
     Acquired technology, product rights, and royalty buy-down, net consist of the following (in thousands):
     
  September 30, 
  2006 
ONTAK  78,312 
Less accumulated amortization  (26,595)
    
  $51,717 
    
     Amortization of acquired technology, product rights and royalty buy-down, net was $1.2 million and $4.3 million for the three and nine months ended September 30, 2006 and $1.6 million and $4.5 million, respectively, for the same 2005 periods.
Deferred Revenue, Net
     The composition of deferred revenue, net is as follows (in thousands):
     
  September 30, 
  2006 
Deferred product revenue $26,648 
Other deferred revenue  1,778 
Deferred discounts  (144)
    
Deferred revenue, net $28,282 
    
     
Deferred revenue, net:    
Current, net $26,803 
Long term, net  1,479 
    
  $28,282 
    
     
Deferred product revenue, net:    
Current $26,504 
Long term   
    
  $26,504 
    
     
Other deferred revenue:    
Current $299 
Long term  1,479 
    
  $1,778 
    

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Net Product Sales
(1)As part of the terms of the AVINZA Purchase Agreement, the Company was required to redeem its outstanding convertible subordinated notes. All of the notes converted into shares of common stock in 2006 prior to redemption. In accordance with EITF 87-24,Allocation of Interest to Discontinued Operations, the interest on the notes was allocated to discontinued operations because the debt was required to be repaid in connection with the disposal transaction.
     A comparison of sales by product for discontinued operations is as follows (in thousands):
                        
 Three Months Ended Nine Months Ended  Three Months Ended March 31, 
 September 30, September 30,  2007 2006 
 2006 2005 2006 2005 
AVINZA
 $18,256 $32,495 
ONTAK
 $6,574 $7,371 $23,960 $24,173   9,182 
Targretin capsules 5,610 4,394 15,608 13,080   5,002 
Targretin gel and Panretin gel 1,108 911 2,889 2,744   1,305 
              
Total product sales $13,292 $12,676 $42,457 $39,997  $18,256 $47,984 
              
3. Accounts Receivable Factoring Arrangement
     During 2003, the Company entered into a one-year accounts receivable factoring arrangement under which eligible accounts receivable are sold without recourse to a finance company. The agreement was renewed for a one-year period in the second quarter of 2004 and for two years in the second quarter of 2005 through December 2007. Commissions on factored receivables are paid to the finance company based on the gross receivables sold, subject to a minimum annual commission. Additionally, the Company pays interest on the net outstanding balance of the uncollected factored accounts receivable at an interest rate equal to the JPMorgan Chase Bank prime rate. The Company continues to service the factored receivables. The servicing expenses for the three and nine months ended September 30,March 31, 2007 and 2006 and 2005the servicing liability at March 31, 2007 and December 31, 2006 were not material. There were no material gains or losses on the sale of such receivables. The Company accounts for the sale of receivables under this arrangement in accordance with SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities(“SFAS 140”). No amount was due from the finance company at March 31, 2007. The gross amount due from the finance company at September 30, 2006 and December 31, 20052006 was $1.2 million and $20.5 million, respectively.$1.0 million.

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4. Buyout of SalkCollaboration Agreements and Royalty ObligationsMatters
AVINZA Royalty
     In January 2005,connection with the sale of the Company’s AVINZA product line to King, King will pay Ligand paida 15% royalty on AVINZA net sales during the Salk Institute (“Salk”) $1.1first 20 months after the Closing Date, February 26, 2007. Subsequent royalty payments will be based upon calendar year net sales. If calendar year net sales are less than $200.0 million, to exercise an option to buy outthe royalty payment will be 5% of all net sales. If calendar year net sales are greater than $200.0 million, the royalty payment will be 10% of all net sales less than $250.0 million, plus 15% of net sales greater than $250.0 million.
Product Candidates
     The Company has in the past and in the future may receive milestone payments and royalties on product candidates resulting from its research and development collaboration arrangements with third party pharmaceutical companies if and to the extent any such product candidate achieves certain milestones and is ultimately approved by the FDA and successfully marketed. The ability of the Company to receive and maintain milestone payments and royalties will depend on the Company’s ability and the ability of the Company’s partners to avoid infringing the proprietary rights of others, both in the United States and in foreign countries. In addition, disputes with licensors under the Company’s license agreements have arisen and may arise in the future which could result in (i) additional financial liability which could be material, (ii) a material loss of important technology and potential products, and (iii) future or past related revenue, if any. Further, the manufacture, use or sale of the Company’s potential products or the Company’s partners’ products or potential products may infringe the patent rights of others. This could impact AVINZA, eltrombopag, bazedoxifene, lasofoxifene, LGD-4665 and any other payment-sharing obligationsproducts or potential products of the Company or the Company’s partners. The Company’s product candidates include drugs being developed by GlaxoSmithKline, Wyeth and royalty payments due on futurePfizer, as discussed below.
GlaxoSmithKline Collaboration – Eltrombopag
     Eltrombopag is an oral, small molecule drug that mimics the activity of thrombopoietin, a protein factor that promotes growth and production of blood platelets. Eltrombopag is a product candidate that resulted from the Company’s collaboration with SmithKline Beecham (now GlaxoSmithKline). GlaxoSmithKline has announced that eltrombopag is currently in Phase III trials for Idiopathic Thrombocytopenia Purpura (ITP) and that it plans to initiate a Phase III trial in 2007 for hepatitis C.
     If annual net sales of lasofoxifene for vaginal atrophy. This paymenteltrombopag are less than $100.0 million, the Company will earn a royalty of 5% on such net sales. If eltrombopag’s annual net sales are between $100.0 million and $200.0 million, the Company will earn a royalty of 7% on the portion of net sales between $100.0 million and $200.0 million, and if annual net sales are between $200.0 million and $400 million, the Company will earn a royalty of 8% on the portion of net sales between $200.0 million and $400.0 million. If annual sales exceed $400.0 million, the Company will earn a royalty of 10% on the portion of net sales exceeding $400.0 million.
Wyeth Collaboration – bazedoxifene and bazedoxifene in combination with PREMARIN
     Bazedoxifene (Viviant) is a product candidate that resulted from the Company’s collaboration with Wyeth. Bazedoxifene is a supplemental lasofoxifenesynthetic drug that was specifically designed to increase bone density and reduce cholesterol levels while at the same time protecting breast and uterine tissue. In June 2006, Wyeth announced that a new drug application (“NDA”) filingfor bazedoxifene had been submitted to the FDA for the prevention of postmenopausal osteoporosis. In April 2007, Wyeth announced that the FDA had issued an approvable letter for bazedoxifene for this indication subject to the FDA’s receipt and consideration of certain final safety and efficacy data and the FDA’s completion of an evaluation of the manufacturing and testing facilities for bazedoxifene. Wyeth has also disclosed plans to submit additional Phase III data to the FDA by Pfizer. Asmid-summer and expects FDA action on the osteoporosis prevention NDA towards the end of 2007. Wyeth also announced plans for the submission of the osteoporosis treatment NDA to the FDA and a European submission later this year. Wyeth has previously announced that it is also developing bazedoxifene in combination with PREMARIN (Aprela) as a progesterone-free treatment for menopausal symptoms and that an NDA submission for Aprela is expected by the end of 2007

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     The Company had previously sold rights to Royalty Pharma AG (“Royalty Pharma”) the rights to a total of approximately 50%3.0% of any royalties to be received from Pfizer fornet sales of lasofoxifene, it recorded approximately 50%bazedoxifene for a period of ten years following the first commercial sale of each product. After giving effect to the royalty sale, the Company will receive 0.5% of the payment made to Salk, approximately $0.6first $400.0 million as development expense in the first quarter of 2005. The balance of approximately $0.5net annual sales. If net annual sales are between $400.0 million was capitalized to be amortized over the period any such royalties were to be received from Pfizer for the vaginal atrophy indication. In connection with Pfizer’s receipt of a non-approvable letter from the FDA for the vaginal atrophy indication in February 2006, however,and $1.0 billion, the Company wrote-offwill receive a royalty of 1.5% on the remaining capitalized balanceportion of $0.5net sales between $400.00 million inand $1.0 billion, and if annual sales exceed $1.0 billion, the fourth quarterCompany will receive a royalty of 2005.2.5% on the portion of net sales exceeding $1.0 billion. Additionally, the royalty owed to Royalty Pharma may be reduced by one third if net product sales exceed certain thresholds across all indications.
     In August 2006, Ligandthe Company paid Salk $0.8 million to exercise an option to buy out milestone payments, other payment sharing obligations and royalty payments due on future sales of bazedoxifene. The submission of the bazedoxifene in combination with PREMARIN NDA will trigger an additional option for the Company to buy out its royalty obligation on future sales of bazedoxifene in combination with PREMARIN to Salk. In April 2007, Salk made a claim that there are additional patents issued to Salk that increase the amount of royalty buy-out payments. Based on the context of the claim, the Company believes that Salk is not raising this claim with respect to the bazedoxifene royalty buy-out payment.
Pfizer Collaboration – Lasofoxifene
     Lasofoxifene is a product candidate that resulted from the Company’s collaboration with Pfizer. In August 2004, Pfizer submitted a new drug application (NDA) to the FDA for lasofoxifene for the prevention of osteoporosis in postmenopausal women. In September 2005, Pfizer announced the receipt of a non-approvable letter from the FDA for the prevention of osteoporosis. In December 2004, Pfizer filed a supplemental NDA for the use of lasofoxifene for the treatment of vaginal atrophy. In February 2006, Pfizer announced the receipt of a non-approvable letter from the FDA for vaginal atrophy. Pfizer has also announced that lasofoxifene is being developed by Wyeth. This payment resulted from a bazedoxifenefor the treatment of osteoporosis. In April 2007, Pfizer announced plans for re-filing the lasofoxifene NDA filed by Wyethwith the FDA towards the end of 2007.
     Under the terms of the agreement between Ligand and Pfizer, the Company is entitled to receive royalty payments equal to 6% of net sales of lasofoxifene worldwide for postmenopausal osteoporosis therapy.any indication. The Company recognizedpreviously sold to Royalty Pharma the $0.8rights to a total of 3% of net sales of lasofoxifene for a period of ten years following the first commercial sale. Accordingly, the Company will receive approximately 3% of worldwide net annual sales of lasofoxifene.
     In March 2004, the Company paid Salk approximately $1.1 million paymentto buy out royalty payments due on total sales of lasofoxifene for the prevention of osteoporosis. In connection with Pfizer’s filing of the supplemental NDA in December 2004 for the use of lasofoxifene for the treatment of vaginal atrophy, the Company exercised its option to pay Salk $1.1 million to buy out royalty payments due on sales in this additional indication.
TAP Collaboration – LGD-2941
     LGD-2941, a selective androgen receptor modulator (SARM), was selected as a clinical candidate during Ligand’s collaboration with TAP Pharmaceuticals. SARMs, such as LGD-2941, may contribute to the prevention and treatment of diseases including hypogonadism (low testosterone), sexual dysfunction, osteoporosis, and frailty. Phase I development expenseLGD-4665 commenced in 2005 for osteoporosis and frailty. The agreement further provides for milestones moving through the three months ended September 30, 2006.development stage and royalties ranging from 6.0% to 12.0% on annual net sales of drugs resulting from the collaboration.

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5. AVINZA Co-Promotion
     In February 2003, Ligand and Organon Pharmaceuticals USA Inc. (“Organon”) announced that they had entered into an agreement for the co-promotion of AVINZA. Under the terms of the agreement, Organon committed to a specified minimum number of primary and secondary product calls delivered to certain high prescribing physicians and hospitals beginningSubsequently in March 2003. Organon’s compensation was structured as a percentage of net sales based on generally accepted accounting principles (“GAAP”), which paid Organon for their efforts and also provided Organon an economic incentive for performance and results. In exchange, Ligand paid Organon a percentage of AVINZA net sales based on the following schedule:
% of Incremental Net Sales
Annual Net Sales of AVINZAPaid to Organon by Ligand
$0-150 million30% (0% for 2003)
$150-300 million40%
$300-425 million50%
> $425 million45%
     In January 2006, Ligand signed an agreement with Organon that terminated the AVINZA co-promotion agreement between the two companies and returned AVINZA co-promotion rights to Ligand. The termination was effective dateas of the termination agreement is January 1, 2006; however, the parties agreed to continue to cooperate during a transition period that ended September 30, 2006 (the “Transition Period”) to promote the product. The Transition Period co-operation included a minimum number of product sales calls per quarter (100,000 for Organon and 30,000 for Ligand with an aggregate of 375,000 and 90,000, respectively, for the Transition Period) as well as the transition of ongoing promotions, managed care contracts, clinical trials and key opinion leader relationships to Ligand. During the Transition Period, Ligand was responsible for payingpaid Organon an amount equal to 23% of AVINZA net sales as reported by Ligand.sales. Ligand also paid and was also responsible for the design and execution of all clinical, advertising and promotion expenses and activities.
     Additionally, in consideration of the early termination and return of rights under the terms of the agreement, Ligand agreed to payand paid Organon $37.8 million on or beforein October 15, 2006. Ligand will further payagreed to and paid Organon $10.0

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$10.0 million on or beforein January 15, 2007, provided that Organon has made its minimum required level of sales calls. Under certain conditions, including closingin consideration of the planned sale of AVINZA to King as further discussed below,minimum sales calls during the $10.0 million payment will accelerate.Transition Period. In addition, afterfollowing the termination,Transition Period, Ligand agreed to make quarterly royalty payments to Organon equal to 6.5% of AVINZA net sales through December 31, 2012 and thereafter 6.0% through patent expiration, currently anticipated to be November of 2017.
     The unconditional payment of $37.8 million to Organon and the estimated fair value of the amounts to be paid to Organon after the termination ($95.2 million as of January 1, 2006), based on the estimated net sales of the product (currently anticipated to be paid quarterly through November 2017), were recognized as liabilities and expensed as costs of the termination as of the effective date of the agreement, January 2006. Additionally, the conditional payment of $10.0 million, which represents an approximation of the fair value of the service element of the agreement during the Transition Period (when the provision to pay 23% of AVINZA net sales is also considered), was recognized ratably as additional co-promotion expense over the Transition Period. For
     As more fully described in Note 2, on February 26, 2007, Ligand and King closed an agreement pursuant to which King acquired all of the threeCompany’s rights in and nine months ended September 30,to AVINZA, assumed certain liabilities, and reimbursed Ligand the $47.8 million previously paid to Organon (comprised of the $37.8 million paid in October 2006 and the pro-rata recognition of this element of co-promotion expense amounted to $3.3 million and $10.0 million respectively.
     Althoughthat the quarterlyCompany paid in January 2007). King also assumed the Company’s co-promote termination obligation to make payments to Organon will be based on net sales of AVINZA. For the fourth quarter of 2006 and through the closing of the AVINZA sale transaction, amounts owed by Ligand to Organon on net reported sales of AVINZA product sales, such payments willdid not result in current period expense, in the period upon which the payment is based, but instead will bewere charged against the co-promote termination liability. The liability will bewas adjusted at each reporting period to fair value and will bewas recognized, utilizing the interest method, as additional co-promote termination charges for that period at a rate of 15%, the discount rate used to initially value this component of the termination liability. Note that
     In connection with King’s assumption of this obligation, Organon did not consent to the legal assignment of the co-promote termination obligation to King. Accordingly, Ligand remains liable to Organon in the event of King’s default of the obligation. Therefore, Ligand recorded an asset as of February 26, 2007 to recognize King’s assumption of the obligation, while continuing to carry the co-promote termination liability in the Company’s consolidated financial statements to recognize Ligand’s legal obligation as primary obligor to Organon as required under SFAS No. 140,Accounting for the three month periods endedTransfers and Servicing of Financial Assets and Extinguishments of Liabilities. This asset represents a non-interest bearing receivable for future payments to be made by King and is recorded at its fair value. As of March 31, 20062007, the current portion of the co-promote termination liability includes approximately $1.2 million owed to Organon on net product sales recognized through February 26, 2007. Thereafter, the receivable and June 30, 2006, this adjustment was presented as a componentliability will remain equal and adjusted each quarter for changes in the fair value of interest expense. For the nine months ended September 30, 2006, such amounts previously reported as interest expense were properly reclassified to “co-promote termination charges”obligation including for any changes in accordance with SFAS 146,Accounting

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for Costs Associated with Exit or Disposal Activities. Any changes to the Company’s estimatesestimate of future net AVINZA product sales will result in a change to the liability whichsales. This receivable will be recognized as an increase or decrease to co-promote termination chargesassessed on a quarterly basis for impairment (e.g. in the period such changes are identified. The adjustmentevent King defaults on the assumed obligation to recognizepay Organon). As of March 31, 2007, the fair value of the co-promote termination liability for(and the three and nine months ended September 30, 2006corresponding receivable) was $3.6 million and $10.4 million, respectively.determined using a discount rate of 15%.
     On a quarterly basis, management reviews the carrying value of the co-promote termination liability. Due to assumptions and judgments inherent in determining the estimates of future net AVINZA sales through November 2017, the actual amount of net AVINZA sales used to determine the current fair value of the Company’s co-promote termination asset and liability may be materially different from its current estimates. In addition, because of the inherent difficulties of predicting possible changes to the estimates and assumptions used to determine the estimate of future AVINZA product sales, the Company is unable to quantify an estimate of the reasonably likely effect of any such changes on its results of operations or financial position. For the three months ended June 30, 2006, the Company recorded a reduction in the co-promote termination liability and a corresponding credit to “co-promote termination charges” of approximately $0.4 million based on the Company’s updated estimate of future AVINZA net sales.

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     The componentsA summary of the co-promote termination liability as of September 30, 2006 areMarch 31, 2007 is as follows (in thousands):
     
Payment due October 15, 2006 $37,750 
Net present value of payments based on estimated future net AVINZA product sales as of January 1, 2006  95,191 
Reduction in net present value of liability resulting from updated estimate of net AVINZA product sales  (404)
Fair value adjustment to payments based on net AVINZA product sales as of September 30, 2006  10,443 
    
   142,980 
Less: current portion of co-promote termination liability  (47,722)
    
Long-term portion of co-promote termination liability $95,258 
    
     
Net present value of payments based on estimated future net AVINZA product sales as of December 31, 2006 $93,328 
Payment made in February 2007 to Organon for net AVINZA sales from October 1, 2006 through December 31, 2006  (2,218)
March 31, 2007 fair value adjustment of estimated future payments based on estimated net AVINZA product sales  2,988 
    
Total co-promote termination liability as of March 31, 2007  94,098 
Less: payment to be made in May 2007 to Organon for net AVINZA sales from January 1, 2007 through February 26, 2007  (1,202)
Less: remaining current portion of co-promote termination liability as of March 31, 2007  (11,881)
    
Long-term portion of co-promote termination liability as of March 31, 2007 $81,015 
    
6. Sale Leaseback
     On September 6,October 25, 2006, Ligand and Kingthe Company, along with its wholly-owned subsidiary Nexus, entered into a Purchase Agreement (the “Purchase Agreement”), pursuant to which King agreed to acquire allan agreement with Slough for the sale of the Company’s rightsreal property located in San Diego, California for a purchase price of approximately $47.6 million. This property, with a net book value of approximately $14.5 million, included one building totaling approximately 82,500 square feet, the land on which the building is situated, and to AVINZA and to assume certain liabilities, includingtwo adjacent vacant lots. As part of the product-related liabilities owed bysale transaction, the Company agreed to Organonleaseback the building for a period of approximately $47.8 million (or reimbursement to Ligand at closing of the asset sale to the extent any such amounts have been paid). King will also assume the Company’s co-promote termination obligation to make payments to Organon based on net sales of AVINZA (approximately $105.2 million as of September 30, 2006).15 years. In connection with the sale transaction, King committed to loanon November 6, 2006, the Company atalso paid off the Company’s option, $37.8existing mortgage on the building of approximately $11.6 million. The early payment triggered a prepayment penalty of approximately $0.4 million to be used to paywhich was recognized in the portionfourth quarter of 2006. The sale transaction subsequently closed on November 9, 2006.
     Under the terms of the Company’s co-promote termination obligationlease, the Company pays a basic annual rent of $3.0 million (subject to Organon due October 15, 2006. This loan was drawn,an annual fixed percentage increase, as set forth in the agreement), plus a 1% annual management fee, property taxes and other normal and necessary expenses associated with the lease such as utilities, repairs and maintenance, etc. The Company has the right to extend the lease for two five-year terms and the $37.8first right of refusal to lease, at market rates, any facilities built on the sold lots.
     In accordance with SFAS No. 13,Accounting for Leases, the Company recognized an immediate pre-tax gain on the sale transaction of approximately $3.1 million co-promote liability settled in October 2006. As more fully described in Note 13, $38.6the fourth quarter of 2006 and deferred a gain of approximately $29.5 million on the sale of the funds received from Eisai have been deposited intobuilding. The deferred gain is recognized on a restricted account to be used to repaystraight-line basis over the loan, plus interest. If15 year term of the transaction to selllease at a rate of approximately $2.0 million per year. The amortization of the AVINZA product line closes as expected,deferred gain was $0.5 million for the principal and interest will be forgiven.three months ended March 31, 2007.
6.7. Litigation
Securities Litigation
     Since August 2004, theThe Company has beenwas involved in several securities class action and shareholder derivative actions which followed announcements by the Company in 2004 and the subsequent restatement of its financial results in 2005. In June 2006, the Company announced that these lawsuits had been settled, subject to certain conditions such as court approval.
Background
     Beginning in August 2004, several purported class action stockholder lawsuits were filed in the United States District Court for the Southern District of California against the Company and certain of its directors and officers.

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The actions were brought on behalf of purchasers of the Company’s common stock during several time periods, the longest of which runs from July 28, 2003 through August 2, 2004. The complaints generally allege that the Company violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission by making false and misleading statements, or concealing information about the Company’s business, forecasts and financial performance, in particular statements and information related to drug development issues and AVINZA inventory levels. These lawsuits have been consolidated and lead plaintiffs appointed. A consolidated complaint was filed by the plaintiffs in March 2005. On September 27, 2005, the court granted the Company’s motion to dismiss the consolidated complaint, with leave for plaintiffs to file an amended complaint within 30 days. In December 2005, the plaintiffs filed a second amended complaint again alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act against the Company, David Robinson and Paul Maier. The amended complaint asserts an expanded Class Period of March 19, 2001 through May 20, 2005 and includes allegations arising from the Company’s announcement on May 20, 2005 that it would restate certain financial results. Defendants filed their motion to dismiss plaintiffs’ second amended complaint in January 2006.
     Beginning on or about August 13, 2004, several derivative actions were filed on behalf of the Company by individual stockholders in the Superior Court of California. The complaints name the Company’s directors and certain of its officers as defendants and name the Company as a nominal defendant. The complaints are based on the same facts and circumstances as the purported class actions discussed in the previous paragraph and generally allege breach of fiduciary duties, abuse of control, waste and mismanagement, insider trading and unjust enrichment. These actions were in the discovery phase.
     In October 2005, a shareholder derivative action was filed on behalf of the Company in the United States District Court for the Southern District of California. The complaint names the Company’s directors and certain of its officers as defendants and the Company as a nominal defendant. The action was brought by an individual stockholder. The complaint generally alleges that the defendants falsified Ligand’s publicly reported financial results throughout 2002 and 2003 and the first three quarters of 2004 by improperly recognizing revenue on product sales. The complaint generally alleges breach of fiduciary duty by all defendants and requests disgorgement, e.g., under Section 304 of the Sarbanes-Oxley Act of 2002. In January 2006, the defendants filed a motion to dismiss plaintiffs’ verified shareholder derivative complaint. Plaintiffs’ opposition was filed in February 2006.
The Settlement Agreements
In June 2006, the Company entered into agreements to resolve all claims by the parties in each of these matters, including those asserted against the Company and the individual defendants in these cases. Under the agreements, the Company agreed to pay a total of $12.2 million in cash for a release and in full settlement of all claims. $12.0 million of the settlement amount and a portion of the Company’s total legal expenses waswere funded by the Company’s Directors and Officers Liability insurance carrier while the remainder of the legal fees incurred ($1.4 million for the three months ended June 30, 2006) was paid by the Company. Of the $12.2 million settlement liability, $4.0 million was paid in October 2006 to the Company directly from theLigand’s insurance carrier and then disbursed to the claimants’ attorneys, while $8.0 million will be was

26


paid in July 2006 by the insurance carrier directly to an independent escrow agent responsible for disbursing the funds to the class action suit claimants. In July 2006, the Company’s insurance carrier funded the escrow account with the $8.0 million to be disbursed to the claimants. Under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, funding of the escrow account represents the extinguishment of the Company’s liability to the claimants. Accordingly, the Company derecognized the $8.0 million receivable and accrued liability in its consolidated financial statements as of September 30, 2006.
As part of the settlement of the state derivative action, the Company has agreed to adopt certain corporate governance enhancements including the formalization of certain Board practices and responsibilities, a Board self-evaluation process, Board and Board Committee term limits (with gradual phase-in) and one-time enhanced independence requirements for a single director to succeed the current shareholder representatives on the Board. Neither the Company nor any of its current or former directors and officers has made any admission of liability or wrongdoing. On October 12, 2006, the Superior Court of California approved the settlement of the state and federal derivative actions and entered final judgment of dismissal. The United States District Court has preliminarily approved the

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settlement of the Federal class action however, that settlement and the settlement of the Federal derivative actions are all subject to final approval and orders of the court.in October 2006.
SEC Investigation and Other Matters
     In connection withThe SEC issued a formal order of private investigation dated September 7, 2005, which was furnished to Ligand’s legal counsel on September 29, 2005, to investigate the circumstances surrounding Ligand’s restatement of the Company’sits consolidated financial statements for the years ended December 31, 2002 and 2003, and for the first three quarters of 2004. The SEC instituted a formalhas issued subpoenas for the production of documents and for testimony pursuant to that investigation concerning the consolidated financial statements. These matters were previously the subject of an informal SEC inquiry.to Ligand has beenand others. The SEC’s investigation is ongoing and Ligand is cooperating fully with the SEC and will continue to do so in order to bring the investigation to a conclusion as promptly as possible.investigation.
Other Matters
     The Company’s subsidiary, Seragen, Inc. and Ligand, were named parties toSergio M. Oliver, et al. v. Boston University, et al., a putative shareholder class action filed on December 17, 1998 in the Court of Chancery in the State of Delaware in and for New Castle County, C.A. No. 16570NC, by Sergio M. Oliver and others against Boston University and others, including Seragen, its subsidiary Seragen Technology, Inc. and former officers and directors of Seragen. The complaint, as amended, alleged that Ligand aided and abetted purported breaches of fiduciary duty by the Seragen related defendants in connection with the acquisition of Seragen by Ligand and made certain misrepresentations in related proxy materials and seeks compensatory and punitive damages of an unspecified amount. On July 25, 2000, the Delaware Chancery Court granted in part and denied in part defendants’ motions to dismiss. Seragen, Ligand, Seragen Technology, Inc. and the Company’s acquisition subsidiary, Knight Acquisition Corporation, were dismissed from the action. Claims of breach of fiduciary duty remain against the remaining defendants, including the former officers and directors of Seragen. The court certified a class consisting of shareholders as of the date of the acquisition and on the date of the proxy sent to ratify an earlier business unit sale by Seragen. On January 20, 2005, the Delaware Chancery Court granted in part and denied in part the defendants’ motion for summary judgment. Prior to trial, several of the Seragen director-defendants reached a settlement with the plaintiffs. The trial in this action then went forward as to the remaining defendants and concluded on February 18, 2005. On April 14, 2006, the court issued a memorandum opinion finding for the plaintiffs and against Boston University and individual directors affiliated with Boston University on certain claims. The opinion awards damages on these claims in the amount of approximately $4.8 million plus interest. Judgment, however, has not been entered and the matter is subject to appeal. While Ligand and its subsidiary Seragen have been dismissed from the action, such dismissal is also subject to appeal and Ligand and Seragen may have possible indemnification obligations with respect to certain defendants. As of September 30, 2006,March 31, 2007, the Company has not accrued an indemnification obligation based on its assessment that the Company’s responsibility for any such obligation is not probable or estimable.
     The Company received a letter in March 2007 from counsel to The Salk Institute for Biological Studies (“Salk”) alleging the Company owes Salk royalties on prior product sales of Targretin as well as a percentage of the amounts received from Eisai Co., Ltd. (Tokyo) and Eisai inc. (New Jersey) in the asset sale transaction completed with Eisai in October 2006. Salk alleges that they are owed at least 25% of the consideration paid by Eisai for that portion of our oncology product line and associated assets attributable to Targretin. In an April 11, 2007 request for mediation, Salk repeated these claims and asserted additional claims that allegedly increase the amount of royalty buy-out payments. The Company intends to vigorously oppose any claim that Salk may bring for payment related to these matters.
     The Company recorded approximately $7.2 million in transaction fees and other costs associated with the sale of AVINZA to King (see Note 2). This amount includes approximately $3.6 million for investment banking services

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and related expenses which have not yet been paid. The Company is disputing that these fees are owed to the investment banking firm. The investment banking firm has filed suit against the Company in New York on April 17, 2007 seeking recovery of these fees, plus interest, attorneys’ fees and costs.
     In addition, the Company is subject to various lawsuits and claims with respect to matters arising out of the normal course of business. Due to the uncertainty of the ultimate outcome of these matters, the impact on future financial results is not subject to reasonable estimates.
7.8. New Accounting Pronouncements
     In November 2005, the FASB issued Staff Positions (“FSPs”) Nos. FSPs 115-1 and 124-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, in response to EITF 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments(“EITF 03-1”). FSPs 115-1 and 124-1 provide guidance regarding the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. FSPs 115-1 and 124-1 also include accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than temporary-impairments. These requirements are effective for annual reporting periods beginning after December 15, 2005. The adoption of the impairment guidance contained in FSPs 115-1 and 124-1 did not have a material impact on the Company’s results of operations or financial position.
     In November 2004, the FASB issued SFAS No. 151,Inventory Pricing(“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This statement requires that those items be recognized as current-period charges. In addition, SFAS 151 requires that allocation of fixed production overheads

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to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a material impact on the Company’s results of operations or financial position.
     In February 2006, the FASB issued SFAS No. 155,Accounting for Certain Hybrid Financial Instruments(“SFAS 155”) which amends SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities(“SFAS 133”) and SFAS 140,Accounting or the Impairment or Disposal of Long-Lived Assets(“SFAS 140”).140. Specifically, SFAS 155 amends SFAS 133 to permit fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided the whole instrument is accounted for on a fair value basis. Additionally, SFAS 155 amends SFAS 140 to allow a qualifying special purpose entity to hold a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 applies to all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006, with early application allowed. The adoption of SFAS 155 isdid not expected to have a material impact on the Company’s consolidated results of operations or financial position.
     In March 2006, the FASB issued SFAS No. 156,Accounting for Servicing of Financial Assets (SFAS 156)(“SFAS 156”) to simplify accounting for separately recognized servicing assets and servicing liabilities. SFAS 156 amends SFAS No. 140Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Additionally, SFAS 156 applies to all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, althoughwith early adoption is permitted.application allowed. The adoption of SFAS 156 isdid not expected to have a material impact on the Company’sCompany���s consolidated results of operations or financial position.
     In July 2006, the FASB issuedFASB Interpretation No. 48, (“FIN 48”) Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109.109(“FIN 48”).FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No.SFAS 109. It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. TheAs further discussed in Note 14, the adoption of FIN 48 isdid not expected to have a material impact on the Company’s consolidated results of operations or financial position.
     In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(SFAS 157)157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements where fair value has previously been concluded to be the relevant measurement attribute. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company will adopt SFAS 157 in the first interim period of fiscal 2008 and is evaluating the impact, if any, that the adoption of SFAS No. 157 is not expected tothis statement will have a material impact on the Company’sits consolidated results of operations orand financial position.
     In September 2006,February 2007, the FASB issued SFAS No. 158,159,Employers’ AccountingThe Fair Value Option for Defined Benefit PensionFinancial Assets and Other Postretirement Plans,Financial Liabilities-Including an amendment of FASB Statement No. 87, 88, 106115(“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and 132(R) (“FAS 158”). Under FAS 158, companies must recognize a net liability or assetcertain other items at fair value. Most of the provisions of SFAS 159 apply only to reportentities that elect the funded statusfair value option; however, the amendment to FASB Statement No. 115,Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company will adopt SFAS 159 in the first interim period of their defined benefit pensionfiscal 2008 and other postretirement benefit plans (collectively referred to herein as “benefit plans”) on their balance sheets, starting with balance sheets as of December 31, 2006is evaluating the impact, if they are calendar year-end public company. FAS 158 also changed certain disclosures related to benefit plans. Theany, that the adoption of FAS 158 is not expected tothis statement will have a material impact on the Company’sits consolidated results of operations orand financial position.
     In September 2006, the SEC released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on how the effects of prior-year uncorrected financial statement misstatements should be considered in quantifying a current year misstatement. SAB 108 requires registrants to quantify misstatements using both an income statement (rollover) and balance sheet (iron curtain) approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial are now considered material based on either approach, no restatement is required as long as management properly applied its previous approach and all relevant

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facts9. Employment and circumstances were considered. If prior years are not restated, the cumulative effect adjustment is recorded in opening retained earnings as of the beginning of the fiscal year of adoption. SAB 108 is effective for fiscal years ending on or after November 15, 2006. The Company does not expect the adoption of SAB 108 to have a material impact on our consolidated financial condition or results of operations.
8. CommitmentsSeverance and Contingencies
Stockholders Agreement
     In October 2005, a lawsuit was filed in the Court of Chancery in the State of Delaware by Third Point Offshore Fund, Ltd. requesting the Court to order Ligand to hold an annual meeting for the election of directors within 60 days of an order by the Court. Ligand’s annual meeting had been delayed as a result of the previously announced restatement. The complaint sought payment of plaintiff’s costs and attorney’s fees. Ligand agreed on November 11, 2005 to settle this lawsuit and schedule the annual meeting for January 31, 2006. On December 2, 2005, Ligand and Third Point also entered into a stockholders agreement under which, among other things, Ligand agreed to expand its board from eight to eleven, elect three designees of Third Point to the new board seats and pay certain of Third Point’s expenses, not to exceed approximately $0.5 million. Of such amount, approximately 50% was paid and expensed in the fourth quarter of 2005. A second payment of approximately $0.2 million was made and expensed in the second quarter of 2006. Unless approved by the Board of Directors of the Company, Third Point may not purchase additional shares of Ligand, sell its Ligand shares, solicit proxies or take certain other stockholder actions as long as its designees remain on the board.
9. Employee Retention and SeveranceBonus Agreements
     In March 2006, the Company entered into letter agreements with approximately 67 of its key employees, including a number of its executive officers. In September 2006, the Company entered into letter agreements with ten additional key employees and modified existing agreements with two employees. These letter agreements provideprovided for certain retention or stay bonus payments to be paid in cash under specified circumstances as an additional incentive to remain employed in good standing with the Company.Company through December 31, 2006. The Compensation Committee of the Board of Directors has approved the Company’s entry into these agreements. The retention or stay bonus payments generally vest at the end of 2006 and total payments to employees of approximately $3.0 million would be made in January 2007 if all participants qualify for the payments. In accordance with the SFAS 146,Accounting for Costs Associated with Exit or Disposal Activities, the cost of the plan iswas ratably accrued over the term of the agreements. For the three and nine months ended September 30, 2006, theThe Company recognized approximately $1.0$2.6 million and $2.1 million, respectively, of expense under the plan. As an additional retention incentive, certain employees were also granted stock options totaling approximately 122,000 shares at an exercise price of $11.90 per share.
     In Augustplan in 2006 and October 2006, the Company’s Compensation Committee approved and ratified, and the Company provided additional severance agreements to certain of its officers and executive officers as additional retention incentives and to provide severance benefits to these officers that are more closely equivalent to severance benefits already in place for other executive officers.
     These additional agreements consist of a) change of control severance agreements (“Change of Control Severance Agreement”) and b) “ordinary” severance agreements that apply regardless of a change of control (“Ordinary Severance Agreement”). Each Change of Control Severance Agreement provides for payment of certain benefits to the officer in the event their employment is terminated without cause in connection with a change of control of the Company.
     These benefits include one year of salary, plus the average bonus (if any)including $0.3 for the prior two years and payment of health care premiums for one year. With certain exceptions, the officer must be available for consulting services for one year and must abide by certain restrictive covenants, including non-competition and non-solicitation of the Company’s employees. Each Ordinary Severance Agreement provides for payment of sixthree months salary in the event the officer’s employment is terminated without cause, regardless of a change of control.ended March 31, 2006.

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     Additionally, in October 2006, the Company implemented a 2006 Employee Severance Plan for those employees who were not covered by another severance arrangement. The plan provides that if such an employee is involuntarily terminated without cause, and not offered a similar or better job by one of the purchasers of the Company’s product lines (i.e. King or Eisai) such employee will be eligible for severance benefits. The benefits consist of two months’ salary, plus one week of salary for every full year of service with the Company plus payment of COBRA health care coverage premiums for that same period.
10. Lilly Collaboration Update
     In May 2006, after review of all preclinical and clinical data including recently completed two year animal safety studies, Lilly informed the Company that it had decided not to pursue further development at this time of LY818 (“Naveglitazar”), a compound in Phase II development for the treatment of Type II diabetes. Naveglitazar, a dual PPAR agonist was developed through the Company’s collaborative research and development agreement with Lilly. This decision is specific with regard to Naveglitazar.
     In September 2006, Lilly informed the Company that it had suspended an ongoing mid-stage human trial of LY674 in order to assess unexpected findings noted during animal safety studies of the same compound and evaluate collective clinical efficacy and safety from the human data already gathered. LY674, a PPAR alpha agonist compound in Phase II development for the treatment of atherosclerosis, was developed through the Company’s collaborative research and development agreement with Lilly. This decision is specific with regard to LY674.
11. NASDAQ Relisting
     On June 12, 2006, NASDAQ approved the Company’s application for relisting its common stock on the NASDAQ Global Market (formerly National Market). The Company commenced trading on the NASDAQ Global Market on June 14, 2006, under the symbol “LGND.” The Company’s common stock was previously delisted from the NASDAQ National Market on September 7, 2005.
12. Resignation of CEO and Appointment of New Interim CEO
     On July 31, 2006, the Company entered into a separation agreement with David Robinson providing for Mr. Robinson’s resignation as Chairman, President, and Chief Executive Officer of the Company. Under the separation agreement, Mr. Robinson will receive his base salary and certain benefits for 24 months, payable in five equal monthly installments beginning August 1, 2006 and ending December 1, 2006. In addition, the agreement provides for the immediate vesting of Mr. Robinson’s unvested stock options and an extension of the exercise period of his options to January 15, 2007. In connection with the resignation, the Company recognized expense of approximately $1.9 million for the three months ended September 30, 2006, comprised of cash payments of $1.4 million and stock-based compensation of $0.5 million associated with the modification of the vesting and exercise period of the stock options.
     On August 1, 2006, the Company announced that current director Henry F. Blissenbach had been named Chairman and interim Chief Executive Officer. The Company has agreed to pay Dr. Blissenbach $40,000 per month, commencing August 1, 2006 subject to cancellation by either party on thirty days’ notice, for his services as Chairman and interim Chief Executive Officer. In addition, Dr. Blissenbach will bewas eligible to receive incentive compensation of up to 50% of his base salary, but not more than $100,000, based upon his performance of certain objectives incorporated within the employment agreement which the Company and Dr. Blissenbach have entered into. As those performance objectives were achieved, the Company paid the $100,000 in incentive compensation to Dr. Blissenbach in February 2007. Also, Dr. Blissenbach received a stock option grant to purchase 150,000 shares of the Company’s common stock at an exercise price of $9.20 per share. These stock options will vest 50% at the end of six months and the remaining 50% will vest at the end of one year, except that all of these stock options will vestvested upon the appointment of a new chief executive officer.officer in January 2007 as further discussed below. Finally, the Company will reimbursereimbursed Dr. Blissenbach for all reasonable expenses incurred in discharging his duties as interim Chief Executive Officer, including, but not limited to commuting costs to San Diego and living and related costs during the time he spendsspent in San Diego.
     On January 15, 2007, the Company announced that John L. Higgins had joined the Company as Chief Executive Officer and President. Mr. Higgins succeeded Dr. Blissenbach, who continued to serve as Chairman of the Board of Directors until March 1, 2007. The Company has agreed to pay Mr. Higgins an annual salary of $400,000, with his employment commencing as of January 10, 2007. In addition, Mr. Higgins has a performance bonus opportunity with a target of 50% of his salary, up to a maximum of 75%, and received a restricted stock grant of 150,000 shares of the Company’s common stock vesting over two years. The Company also provided Mr. Higgins with a lump-sum relocation benefit of $100,000. Mr. Higgins’ employment agreement provides for severance payments and benefits in the event that employment is terminated under various scenarios, such as a change in control of the Company.
11. Reductions in Workforce
     In December 2006, and following the sale of the Company’s Oncology Product Line to Eisai, the Company entered into a plan to eliminate 40 employee positions, across all functional areas, which were no longer deemed necessary considering the Company’s decision to sell its commercial assets. Additionally, the Company terminated 23 AVINZA sales representatives and regional business managers who were not offered positions with King or declined King’s offer of employment. The affected employees were informed of the plan in December 2006 with an effective termination date of January 2, 2007. In connection with the termination plan, the Company recognized operating expenses of approximately $2.9 million in the fourth quarter of 2006, comprised of one-time severance benefits of $2.3 million, stock compensation of $0.3 million, and other costs of $0.3 million. The stock compensation charge resulted from the accelerated vesting and extension of the exercise period of stock options in accordance with severance arrangements of certain senior management members. The Company paid $0.5 million in December 2006 and the remaining balance in January 2007.

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13. Sale     On January 31, 2007, the Company announced a restructuring plan calling for the elimination of AVINZA Product Line
     On September 6, 2006, Ligand and King Pharmaceuticals, Inc. (“King”), entered into a purchase agreement (the “AVINZA Purchase Agreement”), pursuant to which King agreed to acquireapproximately 204 positions across all offunctional areas. This reduction was made in connection with the Company’s rights in andefforts to AVINZA inrefocus the United States, its territories and Canada, including, among other things, all AVINZA inventory, equipment, records and related intellectual property, and assume certain liabilities as set forth in the AVINZA Purchase Agreement (collectively, the “Transaction”). In addition, King has, subject to the terms and conditions of the AVINZA Purchase Agreement, agreed to offer employmentCompany, following the closingsale of the Transaction (the “Closing”) to certain of the Company’s existing AVINZA sales representatives or otherwise reimburse the Company for agreed upon severance arrangements offered to any such non-hired representatives.
     Pursuant to the AVINZA Purchase Agreement, at Closing, the Company will be paidits commercial assets, as a $265.0 million cash payment, $15.0 million of which will be funded into an escrow account to support any indemnification claims made by King following the Closingsmaller, highly focused research and King will assume certain liabilities, including product-related liabilities owed by the Company to Organon of approximately $47.8 milliondevelopment and all other existing product royalty obligations including the Organon co-promote termination obligation to Organon ($105.2 million as of September 30, 2006). The closing payment is subject to adjustment based on the Company’s ability to reduce wholesale and retail inventory levels of AVINZA to certain targeted levels by Closing in accordanceroyalty-driven biotech company. Associated with the AVINZA Purchase Agreement.
     In addition to the assumptionrestructuring and refocused business model, several of existing royalty obligations, King will pay Ligand a 15% royalty on AVINZA net sales during the first 20 months after Closing. Subsequent royalty payments will be based upon calendar year net sales. If calendar year net sales are less than $200 million, the royalty payment will be 5% of all net sales. If calendar year net sales are greater than $200 million, the royalty payment will be 10% of all net sales less than $250 million, plus 15% of net sales greater than $250 million.
its executive officers stepped down including its Chief Financial Officer, Chief Scientific Officer and General Counsel. In connection with the Transaction, King committed to loan the Company, at the Company’s option, $37.8 million (the “Loan”) to be used to pay the Company’s co-promote termination obligation to Organon due October 15, 2006. This loan was drawn,of its officers and the $37.8 million co-promote liability settled in October 2006. Amounts due under the loan are subject to certain market terms, including a 9.5% interest rate. In addition, and as a conditionpayment of the $37.8 million loan received from King, $38.6 million of the funds received from Eisai was deposited into a restricted account to be used to repay the loan to King, plus interest, due January 1, 2007. If the Transaction closes as contemplated by the AVINZA Purchase Agreement, the interest and principal will be forgiven.
     The AVINZA Purchase Agreement may be terminated by either King or the Company if the Closing has not occurred by December 31, 2006, or upon the occurrence of certain customary matters. In addition, if the AVINZA Purchase Agreement is terminated under certain circumstances, including a determination by the Company’s Board of Directors to accept an acquisition proposal it deems superior, the Company has agreed to pay King a termination fee of $12.0 million. The Closing is subject to certain closing conditions, including, but not limited to, Ligand stockholder approval of the transaction, the expiration or early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or HSR, the conversion or redemption prior to Closing of all of our outstanding 6% Convertible Subordinated Notes due 2007 of the Company, and certain other customary closing conditions. Early termination of the waiting period under HSR occurred on October 5, 2006.
     Also on September 6, 2006,severance, the Company entered into a contract sales force agreement (the “Sales Agreement”)one-year consulting agreements with King, pursuant to which King agreed to conduct a sales detailing program to promoteeach officer at hourly rates commensurate with the sale of AVINZA for an agreed upon fee, subject to the terms and conditionsofficer’s salary compensation in effect as of the Sales Agreement. Pursuantdate of termination. Amounts owed to these officers for services provided in the Sales Agreement, King agreed to perform certain minimum monthly product details (i.e. sales calls), which commenced effective October 1, 2006 and will continue for a periodfirst quarter of six months following such date or until the Closing or earlier termination of the AVINZA Purchase Agreement.2007 were not material. The Company estimatesalso announced that assuming the Closing wereits primary operations are expected to occur at the end of December 2006, the amount due to King under the Sales Agreement would be approximately $4.0 million.

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14. Subsequent Events
Sale and Leaseback of Premises
     On October 25, 2006, the Company, along with its wholly-owned subsidiary Nexus enteredconsolidated into an agreement with Slough for the sale of the Company’s real property located in San Diego, California for a purchase price of approximately $47.6 million. This property, with a net book value of approximately $14.5 million, includes one building totaling approximately 82,500 square feet,with the land on which the building is situated, and two adjacent vacant lots. As part of the sale transaction, the Company agreedgoal to leaseback the building for a period of 15 years, as further described below.sublet unutilized space. In connection with the sale transaction, on November 6, 2006,restructuring, the Company paid offrecorded severance and other related charges in the existing mortgage onfirst quarter of 2007 totaling $10.2 million, comprised of one-time severance benefits of $7.1 million, stock compensation of $2.3 million, and other costs of $0.8 million. Of the buildingone-time severance benefits of approximately $11.6 million.$7.1 million, $2.1 million is included in general and administrative expenses, $4.4 million is included in research and development expenses, and $0.6 million is included in discontinued operations. Of the stock compensation charges of $2.3 million, $1.0 million is included in general and administrative expenses and $1.3 million is included in research and development expenses. The early payment triggered a prepayment penalty of approximately $0.4 million. The sale transaction subsequently closed on November 9, 2006.
     Understock compensation charge results from the termsaccelerated vesting and extension of the lease, the Company will pay a basic annual rentexercise period of $3.0 million (subject to an annual fixed percentage increase, as set forthstock options in the agreement), plus a 1% annual management fee, property taxes and other normal and necessary expenses associated with the lease such as utilities, repairs and maintenance, etc. The Company will have the right to extend the lease for two five-year terms and will have the first right of refusal to lease, at market rates, any facilities built on the sold lots.
     In accordance with SFAS 13,Accounting for Leases,severance arrangements of certain senior management members. In addition, the Company expects to recognize an immediate pre-tax gain on the sale transactionadditional $0.8 million, comprised of approximately $2.9one-time severance benefits of $0.6 million and deferother costs of $0.2 million, primarily during the second quarter of 2007.
12. Change in Board of Directors/Funding of Legacy Director Indemnity Fund
     On March 1, 2007, the Company announced the resignation of directors John Groom, Irving S. Johnson, Ph.D., Daniel Loeb, Carl C. Peck, M.D. and Brigette Roberts, M.D. and the appointment of four new directors, John L. Higgins, our President and Chief Executive Officer, Todd C. Davis, Elizabeth M. Greetham and David M. Knott. The Company subsequently announced the resignation of director Alexander Cross effective March 17, 2007.
     On March 1, 2007, the Company entered into an indemnity fund agreement, which established in a gaintrust account with Dorsey & Whitney LLP, (“Dorsey”) counsel to the Company’s independent directors and to the Audit Committee of approximately $29.5 million on the sale of the building. The deferred gain will be recognized on a straight-line basis over the 15 year term of the lease at a rate of approximately $2.0 million per year.
Stockholder Rights Plan
     In October 2006, the Company’s Board of Directors, reneweda $10.0 million indemnity fund to support the Company’s stockholder rights plan, which was originally adoptedexisting indemnification obligations to continuing and departing directors in connection with the ongoing SEC investigation and related matters. Ligand has agreed to supplement the indemnity fund upon Dorsey’s request should the fund become insufficient to cover liabilities and defense costs required to be paid under the Company’s indemnification agreements. Upon the earlier of (i) the resolution of the SEC investigation and related matters, (ii) the expiration of 24 months after receipt of any written or oral communication initiated by the SEC regarding the investigation, (iii) written communications from the SEC that the investigation has been in place since September 2002, and which expired on September 13, 2006, throughdiscontinued, or (iv) otherwise by the adoption of a new 2006 Stockholder Rights Plan (the “2006 Rights Plan”). The 2006 Rights Plan provides for a dividend distribution of one preferred share purchase right (a “Right”) on each outstanding sharemutual agreement of the Company’s common stock. Each Right entitles stockholdersparties to buy 1/1000th of a share of Ligand Series A Participating Preferred Stock at an exercise price of $100. The Rightsterminate the indemnity fund agreement, Dorsey will become exercisable if a person or group announces an acquisition of 20% or moreremit the remaining balance of the Company’s common stock, or announces commencementfund to Ligand. The balance of a tender offer for 20% or more of the common stock. In that event, the Rights permit stockholders, other than the acquiring person, to purchase the Company’s common stock having a market value of twice the exercise price of the Rights, in lieu of the Preferred stock. In addition,this fund has been recorded as restricted indemnification account in the eventaccompanying condensed consolidated balance sheet as of certain business combinations,March 31, 2007.
13. Return of Cash to Shareholders/Equitable Adjustment of Employee Stock Options
     On March 22, 2007, the Rights permit the purchase ofCompany declared a cash dividend on the common stock of an acquiring person at a 50% discount. Rights held by the acquiring person become null and void in each case. The 2006 Rights Plan expires in 2016.
Conversion/Redemption of 6% Convertible Subordinated Notes
     On October 30, 2006, the Company announced that it had given notice of redemption$2.50 per share. As the Company has an accumulated deficit, the dividend was recorded as a charge against additional paid-in capital in the first quarter of 2007. The aggregate amount of $252.7 million was paid on April 19, 2007 to shareholders of record as of April 5, 2007. In addition to the noteholders of its 6% convertible subordinated notes due November 2007. The redemption date ofcash dividend, the notes has been set for November 29, 2006. The noteholders may elect to convert the 6% notes, on or before November 29, 2006, into shares of the Company’s common stock at a conversion rate of 161.9905 shares per $1,000 principal amount of the notes (approximately $6.17 per share). Based on the Company’s current stock price, the Company expects that the majority of the notes will be converted into shares of Ligand common stock. The $128.2 million of principal amount of the notes outstanding may be converted into approximately 20.8 million shares of common stock. The Company will pay the holders of those notes that are not converted into shares a redemption price equal to 101.2% of the outstanding principal amount plus accrued and unpaid interest.

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Potential Dividend/Modification to 2002 Stock Incentive Plan
     The Company’s Board of Directors is evaluatingauthorized up to $100.0 million in share repurchases over the distribution of a substantial portion of the net cash proceeds from the asset sales transactions tosubsequent 12 months.
     In February 2007, the Company’s stockholders inshareholders approved a modification to the form of a special dividend following the consummation of the AVINZA sale transactions. Additionally, the Company is seeking stockholder approval to modify its 2002 Stock Incentive Plan (the “2002 Plan”) to allow equitable adjustments to be made to options outstanding under the 2002 Plan inPlan. Effective April 2007, following the event of a special cash dividend. Assuming stockholder approvalex-dividend date, the Company reduced the exercise price $2.50 (or to the par value of the change tostock for those options with an exercise price below $2.50 per share), as an equitable adjustment, for all options then outstanding under the 2002 Plan, any such adjustments to outstanding options would be considered a modification and result inPlan. Under the recognitionrequirements of SFAS 123(R), the Company will recognize approximately $2.0 million of stock compensation expense in connection with the equitable adjustment, of which

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$1.8 million was recognized in the first quarter of 2007 effective March 28, 2007, the date the Company’s Compensation Committee of the Board of Directors approved the equitable adjustment. The remaining $0.2 million will be recognized over the remaining vesting period of the options which were unvested as of the modification date.
14. Income Taxes
     The Company had losses from continuing operations and income from discontinued operations for the three months ended March 31, 2007. In accordance with SFAS No. 109,Accounting for Income Taxes, the income tax benefit generated by the loss from continuing operations for the three months ended March 31, 2007 was $9.2 million. This income tax benefit captures the deemed use of losses from continuing operations used to offset the income and gain from the Company’s AVINZA product line that was sold on February 26, 2007.
     Net income tax expense combining both continuing and discontinued operations was $15.7 million for the three months ended March 31, 2007. This expense reflects the net tax due on taxable income for the three months ended March 31, 2007 that was not fully offset by net operating loss and research and development credit carryforwards due to federal and state alternative minimum tax requirements. Net income tax expense combining both continuing and discontinued operations was $0.02 million for the three months ended March 31, 2006.
     After giving effect to the AVINZA sale transaction, the Company expects that Ligand NOLs will be approximately $102.0 million, against which a full valuation allowance has been provided as of March 31, 2007. This amount excludes NOLs of the Company’s Seragen and Glycomed subsidiaries. The information necessary to determine if an ownership change related to Seragen and Glycomed occurred prior to their acquisition by Ligand is not currently available. Accordingly, the Company’s ability to utilize such net tax operating loss carryforwards is uncertain and therefore such NOLs are not reflected in the Company’s deferred tax assets.
     The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $0.4 million increase in the liability for unrecognized income tax benefits, which was accounted for as an adjustment to the beginning balance of accumulated deficit on the condensed consolidated statementbalance sheet. In connection with the sale of the Company’s AVINZA product line in February 2007, the circumstances giving rise to this unrecognized income tax benefit were resolved. Accordingly, this liability was adjusted down through a credit to the Company’s tax provision from discontinued operations underin the requirementsfirst quarter of Statement2007. At the adoption date of Financial Accounting Standard No 123(R)Share-Based Payment(“SFAS 123(R)”). Any such expense could beJanuary 1, 2007, the Company had $0.4 million of unrecognized tax benefits, all of which affected the Company’s effective tax rate when recognized during the quarter ended March 31, 2007. At March 31, 2007, the Company has no unrecognized tax benefits.
     The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of March 31, 2007, accrued interest related to uncertain tax positions is not material.
     The tax years 2003-2006 remain open to examination by the major taxing jurisdictions to which the Company is subject.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis of Financial Condition and Results of Operations
CautionCaution:: 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 Part II. Item 1A. “Risk Factors.” This outlook represents our current judgment on the future direction of our business. These statements include those related to our products,restructuring process, AVINZA royalty revenues, product salesreturns, product development, and other revenues, expenses, our revenue recognition models and policies, material weaknesses or deficiencies in internal control over financial reporting, revenue recognition, and strategic alternatives, including the pending sale of our AVINZA assets and related restructuring.2005 restatement. Actual events or results may differ materially from Ligand’s expectations. For example, there can be no assurance that our product sales efforts or recognized revenues or expenses will meet any expectations or follow any trend(s), that our internal control over financial reporting will be effective or produce reliable financial information on a timely basis, or that our pending sale of the AVINZA assets and subsequent company restructuring process will be timelysuccessful or successfully completed.yield preferred results. We cannot assure you that the Company will be able to successfully remediate any identified material weakness or significant deficiencies,timely complete its restructuring, that we will receive expected AVINZA royalties to support our ongoing business, or that our internal or partnered pipeline products will progress in their development, gain marketing approval or success in the sell-through revenue recognition models will not require adjustment and not result in a subsequent restatement.market. In addition, the Company’s ongoing SEC investigation related to the Company’s 2005 restatement of financial results or future litigation may have an adverse effect on the Company, and our corporate or partner pipeline products may not gain approval or success in the market.Company. Such risks and uncertainties, and others, could cause actual results to differ materially from any future performance suggested. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this quarterly report. This caution is made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934 as amended.
     Our trademarks, trade names and service marks referenced herein include Ligand® and AVINZA.Ligand. Each other trademark, trade name or service mark appearing in this quarterly report belongs to its owner.
     References to Ligand Pharmaceuticals Incorporated (“Ligand”, the “Company”, “we” or “our”) include our wholly owned subsidiaries Ligand Pharmaceuticals (Canada) Incorporated; Ligand Pharmaceuticals International, Inc.; Seragen, Inc. (“Seragen”); and Nexus Equity VI LLC (“Nexus”).
Overview
     We discover, developare an early-stage biotech company that focuses on discovering and marketdeveloping new drugs that address patients’ critical unmet medical needs in the areas of thrombocytopenia, cancer, pain, men’s and women’s health or hormone-related health issues, skinhepatitis C, hormone related diseases, osteoporosis blood disorders and metabolic, cardiovascular and inflammatory diseases. Our drug discoveryWe strive to develop drugs that are more effective and/or safer than existing therapies, that are more convenient to administer and development programsthat are based oncost effective. We plan to build a profitable company by generating income from research, milestone and royalty and co-promotion revenues resulting from 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.collaborations with pharmaceutical partners.
     As of September 30, 2006, we marketed 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 (CTCL); Targretin capsules, for the treatment of CTCL in patients who are refractory to at least one prior systemic therapy; Targretin gel, for the topical treatment of cutaneous lesions in patients with early stage CTCL; and Panretin gel, for the treatment of Kaposi’s sarcoma in AIDS patients. In Europe, we held marketing authorizations for PanretinÒ gel and Targretin capsules and marketed these products under arrangements with local distributors.
     As further discussed below under “Recent Developments,” onOn September 7, 2006, we announced the sale of ONTAK, Targretin capsules, Targretin gel, and Panretin to Eisai, Inc. (“Eisai”) and the sale of AVINZA to King Pharmaceuticals, Inc. (“King”). The Eisai sales transaction subsequently closed on October 25, 2006. The AVINZA sale transaction subsequently closed on February 26, 2007. Accordingly, the results for the Oncology businessand AVINZA product lines have been presented in our condensed consolidated statements of operations and cash flows for the three and nine months ended September 30,March 31, 2007 and 2006 and 2005 as “Discontinued Operations”. Likewise, assets
     We are a party to a number of collaboration arrangements that are in the development phase including with Eli Lilly and liabilities relatedCompany, GlaxoSmithKline, Pfizer, TAP, and Wyeth. We receive funding during the research phase of the arrangements, and milestone and royalty payments as products are developed and marketed by our corporate partners. See “Potential Future Revenue Sources” below. 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 and expect to incur net losses in the future. To be profitable, we must successfully develop, clinically test, market and sell our products. Even if we 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 and amounts of revenues, including royalties expected to be earned in the future from King on sales of AVINZA, expenses incurred, collaborative arrangements and other sources. Some of these fluctuations may be significant.

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Potential Future Revenue Sources
     We may receive royalties on product candidates resulting from our research and development collaboration arrangements with third party pharmaceutical companies if and to the operationsextent any such product candidate is ultimately approved by the FDA and successfully marketed. As further discussed below, these product candidates include drugs being developed by GlaxoSmithKline, Wyeth and Pfizer.
GlaxoSmithKline Collaboration – Eltrombopag
     Eltrombopag is an oral, small molecule drug that mimics the activity of thrombopoietin, a protein factor that promotes growth and production of blood platelets. Eltrombopag is a product candidate that resulted from our collaboration with SmithKline Beecham (now GlaxoSmithKline). GlaxoSmithKline has announced that eltrombopag is currently in Phase III trials for Idiopathic Thrombocytopenia Purpura (ITP) and that it plans to initiate a Phase III trial in 2007 for hepatitis C.
     If annual net sales of eltrombopag are less than $100.0 million, we will earn a royalty of 5% on such net sales. If eltrombopag’s annual net sales are between $100.0 million and $200.0 million, we will earn a royalty of 7% on the portion of net sales between $100.0 million and $200.0 million, and if annual net sales are between $200.0 million and $400 million, we will earn a royalty of 8% on the portion of net sales between $200.0 million and $400.0 million. If annual sales exceed $400.0 million, we will earn a royalty of 10% on the portion of net sales exceeding $400.0 million.
Wyeth Collaboration – bazedoxifene and bazedoxifene in combination with PREMARIN
     Bazedoxifene (Viviant) is a product candidate that resulted from our collaboration with Wyeth. 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 June 2006, Wyeth announced that a new drug application (“NDA”) for bazedoxifene had been submitted to the FDA for the prevention of postmenopausal osteoporosis. In April 2007, Wyeth announced that the FDA had issued an approvable letter for bazedoxifene for this indication subject to the FDA’s receipt and consideration of certain final safety and efficacy data and the FDA’s completion of an evaluation of the manufacturing and testing facilities for bazedoxifene. Wyeth has also disclosed plans to submit additional Phase III data to the FDA by mid-summer and expects FDA action on the osteoporosis prevention NDA towards the end of 2007. Wyeth also announced plans for the submission of the osteoporosis treatment NDA to the FDA and a European submission later this year. Wyeth has previously announced that it is also developing bazedoxifene in combination with PREMARIN (Aprela) as a progesterone-free treatment for menopausal symptoms and that an NDA submission for Aprela is expected by the end of 2007
     We previously sold to Eisai have been presentedRoyalty Pharma AG (“Royalty Pharma”) the rights to a total of 3.0% of net sales of bazedoxifene for a period of ten years following the first commercial sale of each product. After giving effect to the royalty sale, we will receive 0.5% of the first $400.0 million in net annual sales. If net annual sales are between $400.0 million and $1.0 billion, we will receive a royalty of 1.5% on the portion of net sales between $400.00 million and $1.0 billion, and if annual sales exceed $1.0 billion, we will receive a royalty of 2.5% on the portion of net sales exceeding $1.0 billion. Additionally, the royalty owed to Royalty Pharma may be reduced by one third if net product sales exceed certain thresholds across all indications.
     In August 2006, we paid Salk $0.8 million to exercise an option to buy out milestone payments, other payment sharing obligations and royalty payments due on future sales of bazedoxifene. The submission of the bazedoxifene in combination with PREMARIN NDA will trigger an additional option for us to buy out our condensed consolidated balance sheet asroyalty obligation on future sales of September 30, 2006 as “assets held for sale” and “liabilities relatedbazedoxifene in combination with PREMARIN to assets heldSalk. In April 2007, Salk made a claim that there are additional patents issued to Salk that increase the amount of royalty buy-out payments. Based on the context of the claim, we believe that Salk is not raising this claim with respect to the bazedoxifene royalty buy-out payment.

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Pfizer Collaboration – Lasofoxifene
     Lasofoxifene is a product candidate that resulted from our collaboration with Pfizer. In August 2004, Pfizer submitted a new drug application (NDA) to the FDA for sale”lasofoxifene for the prevention of osteoporosis in postmenopausal women. In September 2005, Pfizer announced the receipt of a non-approvable letter from the FDA for the prevention of osteoporosis. In December 2004, Pfizer filed a supplemental NDA for the use of lasofoxifene for the treatment of vaginal atrophy. In February 2006, Pfizer announced the receipt of a non-approvable letter from the FDA for vaginal atrophy. Pfizer has also announced that lasofoxifene is being developed for the treatment of osteoporosis. In April 2007, Pfizer announced plans for re-filing the lasofoxifene NDA with the FDA towards the end of 2007.
     Under the terms of the agreement between Ligand and Pfizer, we are entitled to receive royalty payments equal to 6% of net sales of lasofoxifene worldwide for any indication. We previously sold to Royalty Pharma the rights to a total of 3% of net sales of lasofoxifene for a period of ten years following the first commercial sale. Accordingly, we will receive approximately 3% of worldwide net annual sales of lasofoxifene.
     In March 2004, we paid Salk approximately $1.1 million to buy out royalty payments due on total sales of lasofoxifene for the prevention of osteoporosis. In connection with Pfizer’s filing of the supplemental NDA in December 2004 for the use of lasofoxifene for the treatment of vaginal atrophy, we exercised our option to pay Salk $1.1 million to buy out royalty payments due on sales in this additional indication.
TAP Collaboration – LGD-2941
     LGD-2941, a selective androgen receptor modulator (SARM), was selected as a clinical candidate during Ligand’s collaboration with TAP Pharmaceuticals. SARMs, such as LGD-2941, may contribute to the prevention and treatment of diseases including hypogonadism (low testosterone), sexual dysfunction, osteoporosis, and frailty. Phase I development LGD-4665 commenced in 2005 for osteoporosis and frailty. The agreement further provides for milestones moving through the development stage and royalties ranging from 6.0% to 12.0% on annual net sales of drugs resulting from the collaboration.
Recent Developments
Sale of AVINZA Product Line
     On September 6, 2006, Ligand and King entered into a purchase agreement (the “AVINZA Purchase Agreement”), pursuant to which King agreed to acquire all of our rights in and to AVINZA in the United States, its territories and Canada, including, among other things, all AVINZA inventory, records and related intellectual property, and assume certain liabilities as set forth in the AVINZA Purchase Agreement (collectively, the “Transaction”). The AVINZA sale transaction isIn addition, subject to shareholder approval. Accordingly,the terms and conditions of the AVINZA Purchase Agreement, King agreed to offer employment following the closing of the Transaction (the “Closing”) to certain of our existing AVINZA sales representatives or otherwise reimburse us for certain agreed upon severance arrangements offered to any such non-hired representatives. The Transaction closed on February 26, 2007.
     Pursuant to the terms of the AVINZA Purchase Agreement, we received $281.9 million in net cash proceeds, which represents the purchase price of $247.8 million, which is net of certain inventory adjustments of approximately $17.2 million as set forth in the AVINZA Purchase Agreement, as amended, plus approximately $49.1 million in reimbursement of payments previously made to Organon Pharmaceuticals USA Inc. (“Organon”) (See “Organon Co-promote Termination” below) and others. Additionally, the net proceeds are less $15.0 million that was funded into an escrow account to support potential indemnity claims by King following the Closing. Of the escrowed amounts not required for claims to King, 50% of the then existing amount will be released on August 26, 2007 with the remaining available balance to be released on February 26, 2008. King also assumed our co-promote termination obligation to make payments to Organon based on net sales of AVINZA (approximately $93.2 million as of February 26, 2007). As Organon has not consented to the legal assignment of the co-promote termination obligation from Ligand to King, we remain liable to Organon in the event of King’s default of this obligation. We also incurred approximately $7.2 million in transaction fees and other costs associated with the sale that are not reflected in the net cash proceeds. This amount includes approximately $3.6 million for investment banking services and related expenses which have not yet been paid. We are disputing that these fees are owed to the investment banking firm. The investment banking firm filed suit against us in New York on April 17, 2007 seeking recovery of these fees, plus interest, attorney fees and costs.
     In addition to the assumption of existing royalty obligations, King will pay us a 15% royalty on AVINZA net sales during the first 20 months after Closing. Subsequent royalty payments will be based upon calendar year net sales. If calendar year net sales are less than $200.0 million, the royalty payment will be 5% of all net sales. If

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calendar year net sales are greater than $200.0 million, the royalty payment will be 10% of all net sales less than $250.0 million, plus 15% of net sales greater than $250.0 million.
     In connection with the Transaction, King committed to loan us, at our option, $37.8 million (the “Loan”) to be used to pay a co-promote termination obligation to Organon which was due October 15, 2006. This loan was drawn, and the $37.8 million co-promote liability settled in October 2006. Amounts due under the loan were subject to certain market terms, including a 9.5% interest rate. In addition, and as a condition of the $37.8 million loan received from King, $38.6 million of the funds received from Eisai was deposited into a restricted account to be used to repay the loan to King, plus interest. We repaid the loan plus interest on January 8, 2007. Pursuant to the AVINZA Purchase Agreement, King refunded the interest to us on the Closing Date.
     Also on September 6, 2006, we entered into a contract sales force agreement (the “Sales Call Agreement”) with King, pursuant to which King agreed to conduct a sales detailing program to promote the sale of AVINZA for an agreed upon fee, subject to the terms and conditions of the Sales Call Agreement. Pursuant to the Sales Call Agreement, King agreed to perform certain minimum monthly product details (i.e. sales calls), which commenced effective October 1, 2006 and continued until the Closing Date. Co-promotion expense recognized under the Sales Call Agreement for the three months ended March 31, 2007 was $2.8 million and is included in results of operations fordiscontinued operations. The amount due to King under the AVINZA product are included inSales Call Agreement as of March 31, 2007 is approximately $1.7 million. The Sales Call Agreement terminated effective on the continuing operations of the Company.Closing Date.
Organon Co-Promote Termination
     In February 2003, we entered into an agreement for the co-promotion of AVINZA with Organon Pharmaceuticals USA Inc. (Organon)(“Organon”). Under the terms of the agreement, Organon committed to a specified minimum number of primary and secondary product calls delivered to certain high prescribing physicians and hospitals beginningSubsequently, in March 2003. Organon’s compensation through 2005 was structured as a percentage of net sales, which paid Organon for their efforts and also provided Organon an economic incentive for performance and results. In exchange, we paid Organon a percentage of AVINZA net sales based on the following schedule:
% of Incremental Net Sales
Annual Net Sales of AVINZAPaid to Organon by Ligand
$0-150 million30% (0% for 2003)
$150-300 million40%
$300-425 million50%
> $425 million45%
     In January 2006, we signed an agreement with Organon that terminated the AVINZA co-promotion agreement between the two companies and returned AVINZA rights to Ligand. The termination was effective dateas of the termination agreement is January 1, 2006; however, the parties agreed to continue to cooperate during a transition period that ended September 30, 2006 (the “Transition Period”) to promote the product. The Transition Period co-operation included a minimum number of product sales calls per quarter (100,000 for Organon and 30,000 for Ligand with an aggregate of 375,000 and 90,000, respectively, for the Transition Period) as well as the transition of ongoing promotions, managed care contracts, clinical trials and key opinion leader relationships to Ligand. During the Transition Period, we were responsible for payingpaid Organon an amount equal to 23% of AVINZA net sales as reported. We also paid and were also responsible for the design and execution of all AVINZA clinical, advertising and promotion expenses and activities.
     Additionally, in consideration of the early termination and return of co-promotion rights to AVINZA under the terms of the agreement, we agreed to unconditionally paypaid Organon $37.8 million on or beforein October 15, 2006. We will further payalso agreed to and paid Organon $10.0 million on or beforein January 15, 2007, provided that Organon has made itsin consideration of the minimum required level of sales calls. Under certain conditions, including closingcalls during the planned sale of AVINZA to King, as further discussed below, the $10.0 million cash payment will accelerate.Transition Period. In addition, afterfollowing the termination,Transition Period, we agreed to make quarterly royalty payments to Organon equal to 6.5% of AVINZA net sales through December 31, 2012 and thereafter 6.0% through patent expiration, currently anticipated to be November of 2017.
     The unconditional payment of $37.8 millionIn connection with the AVINZA sale transaction, King assumed our obligation to make payments to Organon and the estimatedbased on net sales of AVINZA (the fair value of the amounts to be paid to Organon after the termination ($95.2which approximated $93.2 million as of January 1, 2006), based onFebruary 26, 2007). As Organon has not consented to the net saleslegal assignment of the product (currently anticipatedco-promote termination obligation from us to King, we remain liable to Organon in the event of King’s default of this obligation. Therefore, we recorded an asset on February 26, 2007 to recognize King’s assumption of the obligation, while continuing to carry the co-promote termination liability in our consolidated financial statements to recognize our legal obligation as primary obligor to Organon as required under SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This asset represents a non-interest bearing receivable for future payments to be paid quarterly through November 2017) were recognized as liabilitiesmade by King and expensed as costsis recorded at its fair value. As of March 31, 2007, the current portion of the co-promote termination as ofliability includes approximately $1.2 million owed to Organon on net product sales recognized through February 26, 2007. Thereafter, the effective date of the agreement, January 2006. Additionally, the conditional payment of $10.0 million, which represents an approximation ofasset and liability will remain equal and adjusted each quarter for changes in the fair value of the service element ofobligation. The receivable will be assessed on a quarterly basis for impairment (e.g. in the agreement duringevent King defaults on the Transition Period (when the provisionassumed obligation to pay 23%Organon). On a quarterly basis, management also reviews the carrying value of AVINZA net sales is also considered), was recognized ratably as additional co-promotion expense over the Transition Period. For the three and nine months ended September 30, 2006, the pro-rata recognition of this element of co-promotion expense amounted to $3.3 million and $10.0 million, respectively.
     Although the quarterly payments to Organon will be based on net reported AVINZA product sales, such payments will not result in current period expense in the period upon which the payment is based, but instead will be charged against the co-promote termination liability. TheDue to assumptions and judgments inherent in determining

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the estimates of future net AVINZA sales through November 2017, the actual amount of net AVINZA sales used to determine the amount of the liability for a particular period may be materially different from current estimates. Any resulting changes to the co-promote termination liability will be adjusted at each reporting period tohave a corresponding impact on the co-promote termination asset. As of March 31, 2007, the fair value and will be recognized, utilizingof the interest method, as ”co-promoteco-promote termination charge” for that period atliability was determined using a discount rate of 15%, the discount rate used to initially value this component of the termination liability. The accretion expense to the fair value of the termination liability for the three and nine months ended September 30, 2006 totaled $3.6 million and $10.4 million, respectively. Additionally, any changes to our estimates of future net AVINZA product sales will result in a change to the liability which will be recognized as an increase or decrease to co-promote

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termination charges in the period such changes are identified. Any such changes could be material and potentially result in adjustments to our consolidated statement of operations that are inconsistent with the underlying trend in net AVINZA product sales.
     In June 2006, we concluded the research phase of a research and development collaboration with TAP Pharmaceutical Products Inc. (“TAP”). Collaborations in the development phase are being pursued by Eli Lilly and Company, GlaxoSmithKline, Pfizer, TAP, and Wyeth. We receive funding during the research phase of the arrangements and milestone and royalty payments as products are developed and marketed by our corporate partners. 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 of $17.3 million during the fourth quarter of fiscal 2004, which was primarily the result of recognizing approximately $31.3 million from the sale of royalty rights to Royalty Pharma. However, we have incurred a net loss in each of the subsequent quarters including the three months ended September 30, 2006, for which we incurred a net loss of $14.9 million. We expect to incur net losses in the future. To be profitable, we must successfully develop, clinically test, market and sell our products. Even if we achieve profitability, we cannot predict the level of that profitability or whether we will be able to sustain profitability. We expect that our operating results will fluctuate from period to period as a result of differences in the timing of revenues, expenses incurred, collaborative arrangements and other sources. Some of these fluctuations may be significant.
Recent Developments
Sale of Oncology Product Line
     On September 7, 2006, the Company,we, Eisai Inc., a Delaware corporation and Eisai Co., Ltd., a Japanese company (together with Eisai Inc., “Eisai”), entered into a purchase agreement (the “Oncology Purchase Agreement”) pursuant to which Eisai agreed to acquire all of our worldwide rights in and to our oncology products, including, among other things, all related inventory, equipment, records and intellectual property, and assume certain liabilities (together “Oncology” or the(the “Oncology Product Line”) as set forth in the Oncology Purchase Agreement. The Oncology Product Line includes the Company’sincluded our four marketed oncology drugs: ONTAK, Targretin capsules, Targretin gel and Panretin gel. Pursuant to the Oncology Purchase Agreement, at closing on October 25, 2006, we received approximately $205.0$185.0 million in net cash and Eisai assumed certain liabilities. Asproceeds which is net of the closing date, we were also required to transfer manufactured product to Eisai of at least $9.8 million. To the extent the actual inventory amount is less than $9.8 million, the Oncology Purchase Agreement provides for a corresponding decrease to the purchase price. We believe that oncology inventory on October 25, 2006 exceeded $9.8 million. Until Eisai agrees with the determination of the amount transferred, however, there can be no assurance that the final purchase price will not be adjusted. Of the $205.0 million, $20.0 million that was funded into an escrow account to support any indemnification claims made by Eisai following the closing of the sale.
     In addition,sale, and as a condition ofEisai assumed certain liabilities. Of the $37.8escrowed amounts not required for claims to Eisai, $10.0 million loan received from King Pharmaceuticals, Inc. (“King”) in connectionwas released on April 25, 2007 with the proposedremaining available balance to be released on October 25, 2007. We incurred approximately $1.7 million of transaction fees and costs associated with the sale of AVINZA to King (as discussed below),that are not reflected in the net cash proceeds.
     Additionally, $38.6 million of the fundsproceeds received from Eisai waswere deposited into a restricted account to berepay a loan received from King, the proceeds of which were used to repaypay our co-promote termination obligation to Organon in October 2006. Such amounts were released and the loan plus interest, duerepaid to King in January 1, 2007. If the transaction with King closes as contemplated by the AVINZA Purchase Agreement, the interest will be forgiven and the principal will be credited against the purchase price.
     After closing of the Oncology purchase, we will receive no further direct cash flows related to the oncology products. We have, however, inIn connection with the Oncology Purchase Agreement with Eisai, we entered into a transition services agreement with Eisai whereby we willagreed to perform certain transition services for Eisai, in order to effect, as rapidly as practicable, the transition of purchased assets from usLigand to Eisai. In exchange for these services, Eisai will paypays us a monthly service fee. The term of the transition services provided is generally three months,months; however, certain services will be provided for a period of up to eight months. Fees earned under the transition services agreement during the first quarter of 2007, which were recorded as an offset to operating expenses, were approximately $1.8 million.
Return of Cash to Shareholders/Equitable Adjustment of Employee Stock Options
     On March 22, 2007, we declared a cash dividend on our common stock of $2.50 per share. As we have an accumulated deficit, the dividend was recorded as a charge against additional paid-in capital in the first quarter of 2007. The aggregate amount of $252.7 million was paid on April 19, 2007 to shareholders of record as of April 5, 2007. In addition to the cash dividend, the Board of Directors authorized up to $100.0 million in share repurchases over the subsequent 12 months.
     In February 2007, our shareholders approved a modification to the 2002 Stock Incentive Plan (the “2002 Plan”) to allow equitable adjustments to be made to options outstanding under the 2002 Plan. Effective April 2007, following the ex-dividend date, we reduced the exercise price $2.50, (or to par value for those options with an exercise price below $2.50 per share) as an equitable adjustment, for all options then outstanding under the 2002 Plan. Under the requirements of SFAS 123(R), we will recognize approximately $2.0 million of stock compensation expense in connection with the equitable adjustment, of which $1.8 million was recognized in the first quarter of 2007 effective March 28, 2007, the date our Compensation Committee of the Board of Directors approved the equitable adjustment. The remaining $0.2 million will be recognized over the remaining vesting period of the options which were unvested as of the modification date.
The Salk Institute for Biological Studies (“Salk”) Allegations
     In March 2007, we received a letter from legal counsel to The Salk Institute for Biological Studies alleging that we owe Salk royalties on prior product sales of Targretin as well as a percentage of the amounts received from Eisai Co., Ltd. (Tokyo) and Eisai Inc. (New Jersey) that are attributable to Targretin with respect to our sale of the

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SaleOncology Product Line to Eisai that was completed in October 2006. Salk alleges that they are owed at least 25% of AVINZA Productthe consideration paid by Eisai for that portion of Ligand’s oncology product line and associated assets attributable to Targretin. In an April 11, 2007 request for mediation, Salk has repeated these claims and asserted additional claims that allegedly increase the amount of royalty buy-out payments. We have reviewed these matters and do not believe we have financial obligations to Salk pertaining to Targretin or these claims. Accordingly, we intend to vigorously oppose any Salk claim for payment related to these matters.
Appointment of New CEO
     On September 6,August 1, 2006, we entered into a purchase agreement (the “AVINZA Purchase Agreement”) with King, pursuant to which King agreed to acquire all of our rights inannounced that current director Henry F. Blissenbach had been named Chairman and to AVINZA in the United States, its territories and Canada, including, among other things, all AVINZA inventory, equipment, records and related intellectual property, and assume certain liabilities as set forth in the AVINZA Purchase Agreement. In addition, King has, subject to the terms and conditions of the AVINZA Purchase Agreement, agreed to offer employment following the closing of the transaction (the “Closing”) to certain of our existing AVINZA sales representatives or otherwise reimburse us for agreed upon severance arrangements offered to any such non-hired representatives.
     Pursuant to the AVINZA Purchase Agreement, at Closing, we will be paid a $265.0 million cash payment, $15.0 million of which will be funded into an escrow account to support any indemnification claims made by King following the Closing and King will assume certain liabilities, including product-related liabilities owed by us to Organon of approximately $47.8 million and all other existing product royalty obligations including the ongoing co-promote termination obligation to Organon ($105.2 million as of September 30, 2006). The Closing payment is subject to adjustment based on our ability to reduce wholesale and retail inventory levels of AVINZA to certain targeted levels by Closing in accordance with the AVINZA Purchase Agreement.
     In addition to the assumption of existing royalty obligations, King will pay us a 15% royalty on AVINZA net sales during the first 20 months after Closing. Subsequent royalty payments will be based upon calendar year net sales. If calendar year net sales are less than $200 million, the royalty payment will be 5% of all net sales. If calendar year net sales are greater than $200 million, the royalty payments will be 10% of all net sales less than $250 million, plus 15% of net sales greater than $250 million.
     In connection with the transaction, King committed to loan us, at our option, $37.8 million (the “Loan”) to be used to pay our co-promote termination obligation to Organon due October 15, 2006. This loan was drawn, and the $37.8 million co-promote liability settled in October 2006. Amounts due under the loan are subject to certain market terms, including a 9.5% interest rate. In addition, and as a condition of the $37.8 million loan received from King, $38.6 million of the funds received from Eisai was deposited into a restricted account to be used to repay the loan to King, plus interest, due January 1, 2007. If the transaction with King closes as contemplated by the AVINZA Purchase Agreement, the interest and principal will be forgiven.
     The AVINZA Purchase Agreement may be terminated by either King or us if the Closing has not occurred by December 31, 2006, or upon the occurrence of certain customary matters. In addition, if the AVINZA Purchase Agreement is terminated under certain circumstances, including a determination by our Board of Directors to accept an acquisition proposal it deems superior, we haveinterim Chief Executive Officer. We agreed to pay KingDr. Blissenbach $40,000 per month, commencing August 1, 2006 for his services as Chairman and interim Chief Executive Officer. In addition, Dr. Blissenbach was eligible to receive incentive compensation of up to 50% of his base salary, but not more than $100,000, based upon his performance of certain objectives incorporated within the employment agreement which we and Dr. Blissenbach entered into. As those performance objectives were achieved, we paid the $100,000 in incentive compensation to Dr. Blissenbach in February 2007. Also, Dr. Blissenbach received a termination feestock option grant to purchase 150,000 shares of $12.0 million. The Closing is subject to certain closing conditions,our common stock. These stock options vested upon the appointment of a new chief executive officer in January 2007 as further discussed below. Finally, we reimbursed Dr. Blissenbach for all reasonable expenses incurred in discharging his duties as interim Chief Executive Officer, including, but not limited to Ligand stockholder approvalcommuting costs to San Diego and living and related costs during the time he spent in San Diego.
     On January 15, 2007, we announced that John L. Higgins had joined the Company as Chief Executive Officer and President. Mr. Higgins succeeded Dr. Blissenbach, who continued to serve as Chairman of the transaction, the conversion or redemption priorBoard of Directors until March 1, 2007. We agreed to Closingpay Mr. Higgins an annual salary of all$400,000, with his employment commencing as of January 10, 2007. In addition, Mr. Higgins has a performance bonus opportunity with a target of 50% of his salary, up to a maximum of 75%, and received a restricted stock award grant of 150,000 shares of our outstanding 6% Convertible Subordinated Notes due 2007,common stock which vests over two years. We also provided Mr. Higgins with a lump-sum relocation benefit of $100,000. Mr. Higgins’ employment agreement provides for severance payments and benefits in the expiration or early terminationevent that his employment is terminated under various scenarios, such as a change in control of the waiting period underCompany.
Reductions in Workforce
     In December 2006, and following the Hart-Scott-Rodino Antitrust Improvements Actsale of 1976, as amended, or HSR, and certain other customary closing conditions. Early termination of the waiting period under HSR occurred on October 5, 2006.
     Also on September 6, 2006,our Oncology Product Line to Eisai, we entered into a contractplan to eliminate 40 employee positions, across all functional areas, which were no longer deemed necessary considering our decision to sell our commercial assets. Additionally, we terminated 23 AVINZA sales force agreement (the “Sales Agreement”)representatives and regional business managers who were not offered positions with King pursuantor declined King’s offer of employment. The affected employees were informed of the plan in December 2006 with an effective termination date of January 2, 2007. In connection with the termination plan, we recognized operating expenses of approximately $2.9 million in the fourth quarter of 2006, comprised of one-time severance benefits of $2.3 million, stock compensation of $0.3 million, and other costs of $0.3 million. The stock compensation charge resulted from the accelerated vesting and extension of the exercise period of stock options in accordance with severance arrangements of certain senior management members. We paid $0.5 million in December 2006 and the remaining balance in January 2007.
     On January 31, 2007, we announced a restructuring plan calling for the elimination of approximately 204 positions across all functional areas. This reduction was made in connection with our efforts to which King agreed to conduct a sales detailing program to promoterefocus the Company, following the sale of AVINZA for an agreed upon fee, subject toour commercial assets, as a smaller, highly focused research and development and royalty-driven biotech company. Associated with the termsrestructuring and conditionsrefocused business model, several of our then executive officers stepped down including our Chief Financial Officer, Chief Scientific Officer and General Counsel. In connection with the termination of these officers and the payment of severance, we entered into one-year consulting agreements with each officer at hourly rates commensurate with the officer’s salary compensation in effect as of the Sales Agreement. Pursuantdate of termination. Amounts owed to these officers for services provided in the Sales Agreement, King agreedfirst quarter of 2007 were not material. We also announced that our primary operations are expected to perform certain minimum monthly product details (i.e. sales calls), which commenced effective October 1, 2006be consolidated into one building with the goal to sublet unutilized space. In connection with the restructuring, we recorded severance and will continue for aother related charges in the first quarter of 2007 totaling $10.2 million, comprised of one-time severance benefits of $7.1 million, stock compensation of $2.3 million, and other costs of $0.8 million. Of the one-time severance

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benefits of $7.1 million, $2.1 million is included in general and administrative expenses, $4.4 million is included in research and development expenses, and $0.6 million is included in discontinued operations. Of the stock compensation charges of $2.3 million, $1.0 million is included in general and administrative expenses and $1.3 million is included in research and development expenses. The stock compensation charge resulted from the accelerated vesting and extension of the exercise period of six months following such date or untilstock options in accordance with severance arrangements of certain senior management members. In addition, we expect to recognize an additional $0.8 million, comprised of one-time severance benefits of $0.6 million and other costs of $0.2 million, primarily during the Closing or earlier terminationsecond quarter of the AVINZA Purchase Agreement. We estimate that, assuming the Closing were to occur at the end of December 2006, the amount due to King under the Sales Agreement would be approximately $4.0 million.2007.
Sale and Leaseback of Premises
     On October 25, 2006, we, along with our wholly-owned subsidiary Nexus Equity VI, LLC (“Nexus”) entered into an agreement with Slough Estates USA, Inc. (“Slough”) for the sale of our real property located in San Diego, California for a purchase price of approximately $47.6 million. This property, with a net book value of

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approximately $14.5 million, includes one building totaling approximately 82,500 square feet, the land on which the building is situated, and two adjacent vacant lots. As part of the sale transaction, we agreed to leaseback the building for a period of 15 years, as further described below.years. In connection with the sale transaction, on November 6, 2006, we also paid off the existing mortgage on the building of approximately $11.6 million. The early payment triggered a prepayment penalty of approximately $0.4 million. The sale transaction subsequently closed on November 9, 2006.
     Under the terms of the lease, we will pay a basic annual rent of $3.0 million (subject to an annual fixed percentage increase, as set forth in the agreement), plus a 1% annual management fee, property taxes and other normal and necessary expenses associated with the lease such as utilities, repairs and maintenance, etc. We will have the right to extend the lease for two five-year terms and will have the first right of refusal to lease, at market rates, any facilities built on the sold lots.
     In accordance with SFAS 13,Accounting for Leases, we expect to recognizerecognized an immediate pre-tax gain on the sale transaction of approximately $2.9$3.1 million in the fourth quarter of 2006 and deferdeferred a gain of approximately $29.5 million on the sale of the building. The deferred gain will beis recognized on a straight-line basis over the 15 year term of the lease at a rate of approximately $2.0 million per year.
Termination of Organon Co-promotion Agreement
     As further discussed under “Overview” above, in January 2006, we signed an agreement with Organon that terminates the AVINZA co-promotion agreement between the two companies and returns AVINZA rights to Ligand.
Accounting for Stock-Based Compensation
     Effective January 1, 2006, we adopted SFAS 123 (revised 2004),Share-Based Payment(“SFAS 123(R)”), using the modified prospective transition method. No stock-based employee compensation cost was recognized prior to January 1, 2006, as all options granted prior to 2006 had an exercise price equal to the market value of the underlying common stock on the date of the grant. Under the modified prospective transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted in the nine months ended September 30, 2006, based on grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for the three and nine months ended September 30, 2005 have not been retrospectively adjusted. The implementation of SFAS 123(R) resulted in employee compensation expense of approximately $2.0 million and $4.0 million for the three and nine months ended September 30, 2006.
Employee Retention Agreements and Severance Arrangements
     In March 2006, we entered into letter agreements with approximately 67 of our key employees, including a number of our executive officers. In September 2006, we entered into letter agreements with ten additional employees and modified existing agreements with two employees. These letter agreements provideprovided for certain retention or stay bonus payments to be paid in cash under specified circumstances as an additional incentive to remain employed in good standing with the Company.Company through December 31, 2006. The Compensation Committee of the Board of Directors has approved the Company’s entry into these agreements. The retention or stay bonus payments generally vest at the end of 2006 and total payments to employees of approximately $3.0 million would be made in January 2007 if all participants qualify for the payments. In accordance with the SFAS 146,Accounting for Costs Associated with Exit or Disposal Activities, the cost of the plan iswas ratably accrued over the term of the agreements. For the three and nine months ended September 30, 2006, weWe recognized approximately $1.0$2.6 million and $2.1 million, respectively, of expense under the plan. As an additional retention incentive, certain employees were also granted stock options totaling approximately 122,000 shares at an exercise price of $11.90 per share.
     In Augustplan in 2006 and October 2006, the Company’s Compensation Committee approved and ratified, and began entering into additional severance agreements with certain of our officers and executive officers as additional retention incentives and to provide severance benefits to these officers that are more closely equivalent to severance benefits already in place for other executive officers.

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     These additional agreements consist of (a) change of control severance agreements (“Change of Control Severance Agreement”) and b) “ordinary” severance agreements that apply regardless of a change of control (“Ordinary Severance Agreement”). Each Change of Control Severance Agreement provides for a payment of certain benefits to the officer in the event their employment is terminated without cause in connection with a change of control of the Company.
     These benefits include one year of salary, plus the average bonus (if any)including $0.3 for the prior two years and payment of health care premiums for one year. With certain exceptions, the officer must be available for consulting services for one year and must abide by certain restrictive covenants, including non-competition and non-solicitation of our employees. Each Ordinary Severance Agreement provides for payment of sixthree months salary in the event the officer’s employment is terminated without cause, regardless of change of control.ended March 31, 2006.
     Additionally, in October 2006, we implemented a 2006 Employee Severance Plan for those employees who were not covered by another severance arrangement. The plan provides that if such an employee is involuntarily terminated without cause, and not offered a similar or better job by one of the purchasers of our product lines (i.e. King or Eisai) such employee will be eligible for severance benefits. The benefits consist of two months’ salary, plus one week of salary for every full year of service with the Company plus payment of COBRA health care coverage premiums for that same period.
Conversion/Redemption of 6% Convertible Subordinated Notes
     On October 30, 2006, we gave notice of redemption to the noteholders of our 6% convertible subordinated notes due November 2007. The redemption date of the notes has been set for November 29, 2006. The noteholders may elect to convert the 6% notes, on or before November 29, 2006, into shares of our common stock at a conversion rate of 161.9905 shares per $1,000 principal amount of the notes (approximately $6.17 per share). Based on our current stock price, we expect that the majority of the notes will be converted into shares of Ligand common stock. The $128.2 million of principal amount of the notes outstanding may be converted into approximately 20.8 million shares of common stock. We will pay the holders of those notes that are not converted into shares a redemption price equal to 101.2% of the outstanding principal amount plus accrued and unpaid interest.
Lilly Collaboration Update
     In May 2006, after review of all preclinical and clinical data including recently completed two year animal safety studies, Lilly informed us that it had decided not to pursue further development at this time of LY818 (“Naveglitazar”), a compound in Phase II development for the treatment of Type II diabetes. Naveglitazar, a dual PPAR agonist, was developed through our collaborative research and development agreement with Lilly. This decision is specific with regard to Naveglitazar.
     In September 2006, Lilly informed us that it had suspended an ongoing mid-stage human trial of LY674 in order to assess unexpected findings noted during animal safety studies of the same compound and evaluate collective clinical efficacy and safety from the human data already gathered. LY674, a PPAR alpha agonist compound in Phase II development for the treatment of atherosclerosis, was developed through our collaborative research and development agreement with Lilly. This decision is specific with regard to LY674.
Agreements to Settle Securities Class Action and Derivative Lawsuits
     On June 29, 2006, we announced that we reached agreement to settle the securities class action litigation filed in the United States District Court for the Southern District of California against us and certain of our directors and officers. In addition, we also reached agreement to settle the shareholder derivative actions filed on behalf of the Company in the Superior Court of California and the United States District Court for the Southern District of California.
     The settlements resolve all claims by the parties, including those asserted against Ligand and the individual defendants in these cases. Under the agreements, we agreed to pay a total of $12.2 million in cash in full settlement of all claims. $12.0 million of the settlement amount and a portion of our total legal expenses was funded by our Directors and Officers Liability insurance carrier while the remainder of the legal fees incurred ($1.4 million for the

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three months ended June 30, 2006) was paid by us. Of the $12.2 million settlement liability, $4.0 million was paid in October 2006 to us directly from the insurance carrier and then disbursed to the claimants’ attorneys, while $8.0 million will be paid by the insurance carrier directly to an independent escrow agent responsible for disbursing the funds to the class action suit claimants. In July 2006, our insurance carrier funded the escrow account with the $8.0 million to be disbursed to the claimants. Under SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, funding of the escrow account represents the extinguishment of our liability to the claimants. Accordingly, we derecognized the $8.0 million receivable and accrued liability in our consolidated financial statements as of September 30, 2006. As part of the settlement of the state derivative action, we have agreed to adopt certain corporate governance enhancements including the formalization of certain Board practices and responsibilities, a Board self-evaluation process, Board and Board Committee term limits (with gradual phase-in) and one-time enhanced independent requirements for a single director to succeed the current shareholder representatives on the Board. Neither we nor any of our current or former directors and officers has made any admission of liability or wrongdoing. On October 12, 2006, the Superior Court of California approved the settlement of the state derivative actions and entered final judgment of dismissal. The United States District Court has preliminarily approved the settlement of the Federal class action, however, that settlement and the settlement of the Federal derivative actions are all subject to final approval and orders of the court.
     The related investigation by the Securities and Exchange Commission is ongoing and is not affected by the settlements discussed above.
Resignation of CEO and Appointment of New Interim CEO
     On July 31, 2006, we entered into a separation agreement with David Robinson providing for Mr. Robinson’s resignation as Chairman, President, and Chief Executive Officer of the Company. Under the separation agreement, Mr. Robinson will receive his base salary and certain benefits for 24 months, payable in five equal monthly installments beginning August 1, 2006 and ending December 1, 2006. In addition, the agreement provides for the immediate vesting of Mr. Robinson’s unvested stock options and an extension of the exercise period of his options to January 15, 2007. In connection with the resignation, we recognized expense of approximately $1.9 million for the three months ended September 30, 2006 comprised of cash payments of $1.4 million and stock-based compensation of $0.5 million associated with the modification of the vesting and exercise period of the stock options.
     On August 1, 2006, we announced that current director Henry F. Blissenbach had been named Chairman and interim Chief Executive Officer. We have agreed to pay Dr. Blissenbach $40,000 per month, commencing August 1, 2006, subject to cancellation by either party on thirty days’ notice, for his services as Chairman and interim Chief Executive Officer. In addition, Dr. Blissenbach will be eligible to receive incentive compensation of up to 50% of his base salary, but not more than $100,000, based upon his performance of certain objectives incorporated within the employment agreement which we and Dr. Blissenbach have entered into. Also, Dr. Blissenbach received a stock option grant to purchase 150,000 shares of our common stock at an exercise price of $9.20 per share. These stock options will vest 50% at the end of six months and the remaining 50% will vest at the end of one year, except that all of these stock options will vest upon the appointment of a new chief executive officer. Finally, we will reimburse Dr. Blissenbach for all reasonable expenses incurred in discharging his duties as interim Chief Executive Officer, including, but not limited to commuting costs to San Diego and living and related costs during the time he spends in San Diego.
Salk Royalty Buyout
     In August 2006, we paid the Salk Institute $0.8 million to exercise an option to buy out milestone payments, other payment sharing obligations and royalty payments due on future sales of bazedoxifene, a product being developed by Wyeth. This payment resulted from a bazedoxifene new drug application (“NDA”) filed by Wyeth for postmenopausal osteoporosis therapy. We recognized the $0.8 million payment as development expense in our third quarter 2006 consolidated financial statements.

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Results of Continuing Operations
     Total revenues from continuing operations for the three and nine months ended September 30, 2006March 31, 2007 were $36.7 million and $106.8$0.2 million compared to $32.0$2.9 million and $87.3 million, respectively, for the same 2005 periods.2006 period. Operating loss from continuing operations was $15.1 million and $173.7$29.0 million for the three and nine months ended September 30, 2006March 31, 2007 compared to $4.6$14.3 million and $20.1 million, respectively, for the same 2005 periods.2006 period. Loss from continuing operations for the three and nine months ended September 30, 2006March 31, 2007 was $16.1$16.9 million ($0.21 per share) and $176.5 million ($2.260.17 per share) compared to $7.3$13.7 million ($0.10 per share) and $27.8 million ($0.380.18 per share) for the same 2005 periods.
Product Sales
     Our product sales for any individual period can be influenced by a number of factors including changes in demand, competitive products, the timing of announced price increases, and the level of prescriptions subject to rebates and chargebacks. Additionally, AVINZA is 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 recognition of product sales. 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.
Net Product Sales
     Our AVINZA product sales are determined on a sell-through basis less allowances for rebates, chargebacks, discounts, and losses to be incurred on returns from wholesalers resulting from increases in the selling price of our products. In addition, we incur certain distributor service agreement fees related to the management of our product by wholesalers. These fees have been recorded within net product sales.
     Sales of AVINZA were $36.7 million and $102.9 million for the three and nine months ended September 30, 2006 compared to $29.9 million and $79.4 million, respectively, for the same 2005 periods. According to IMS data, quarterly prescription market share of AVINZA for the three months ended September 30, 2006 was 3.7% compared to 4.5% for the same 2005 period.
     The increase in sales for the three and nine months ended September 30, 2006 reflects the impact of a 7% price increase effective April 1, 2005, as well as a shift in the mix of prescriptions to the higher doses of AVINZA. Net sales for the three and nine months ended September 30, 2006 also benefited from the release of a $1.5 million accrual previously recorded for billings received from the Department of Veteran Affairs under the Department of Defense’s TriCare Retail Pharmacy refund program. In September 2006, the U.S. Court of Appeals for the Federal Circuit struck down the TriCare program. The increase in AVINZA net sales for the three and nine months ended September 30, 2006 further reflects a reduction in Medicaid rebates of approximately $4.3 million and $11.2 million, respectively. This reduction was partially offset by an increase in managed care rebates of approximately $1.0 million for the nine months ended September 30, 2006 under contracts with pharmacy benefit managers (“PBMs”), group purchasing organizations (“GPOs”), and health maintenance organizations (“HMOs”), and under Medicare Part D.
     The increases in AVINZA net sales for the 2006 periods was partially offset by decreases in prescriptions. Specifically, net sales for the nine months ended September 30, 2006 reflect an approximate 2% decrease in prescriptions compared to the prior year period while prescriptions for the three months ended September 30, 2006 experienced an 8% decrease compared to the three months ended September 30, 2005. Additionally, prescriptions for the three months ended September 30, 2006 were 3% lower compared to the three months ended June 30, 2006. These trends reflect a continuing decrease in prescriptions under Medicaid contracts as marginal Medicaid contracts are terminated, partially offset by increases in prescriptions under managed care contracts and Medicare Part D. We

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also believe that the decrease in prescriptions is due in part to a lower level of co-promote activity in the third quarter of 2006, as our co-promotion arrangement with Organon reached its conclusion effective September 30, 2006.
     AVINZA net sales for the nine months ended September 30, 2006 also reflect an approximate charge of $2.1 million for losses expected to be incurred on product returns resulting from a 6% price increase effective July 1, 2006. This compares to a charge of $3.5 million recorded for the three months ended March 31, 2005 in connection with a 7% AVINZA price increase effective April 1, 2005. Upon an announced price increase, we revalue our estimate of deferred product revenue to be returned to recognize the potential higher credit a wholesaler may take upon product return determined as the difference between the new price and the previous price used to value the allowance. The decrease in the charge for the 2006 period reflects lower rates of return on lots that closed out in 2006, thereby lowering the historical weighted average rate of return used for estimating the allowance for return losses. AVINZA net sales for the three and nine months ended September 30, 2006, also benefited from a reduction in the existing allowance for return losses of $0.5 million and $3.5 million, respectively, due to the lower rates of return on lots that closed in 2006.
     Any changes to our estimates for Medicaid prescription activity or prescriptions written under our managed care contracts may have an impact on our rebate liability and a corresponding impact on AVINZA net product sales. For example, a 20% variance to our estimated Medicaid and managed care contract rebate accruals for AVINZA as of September 30, 2006 could result in adjustments to our Medicaid and managed care contract rebate accruals and net product sales of approximately $0.1 million and $0.8 million, respectively.
     As discussed under “Recent Developments”, we entered into an agreement to sell the AVINZA product to King following Ligand shareholder approval. In connection with that agreement, the Company entered into a Contract Sales Force Agreement (the “Sales Agreement”) with King, pursuant to which King agreed to conduct a detailing program to promote the sale of AVINZA for an agreed upon fee, subject to the terms and conditions of the Sales Agreement. Pursuant to the Sales Agreement, King agreed to perform certain minimum monthly product details (i.e. sales calls), which commenced effective October 1, 2006 and will continue for a period of six months following such date or until the closing or earlier termination of the purchase agreement. We estimate that, assuming the Closing were to occur at the end of December 2006, the amount due to King under the Sales Agreement would be approximately $4.0 million.
Collaborative Research and Development and Other Revenue
     We earned no collaborativeCollaborative research and development and other revenues for the three months ended September 30, 2006,March 31, 2007 were $0.2 million compared to $2.1$2.9 million for the same 2005 period. For the nine months ended September 30, 2006 collaborative research and development and other revenues were $4.0 million, compared to $7.9 million for the same 2005 period. Collaborative research and development and other revenues include reimbursement for ongoing research activities, earned development milestones, and recognition of prior years’ up-front fees previously deferred in accordance with Staff Accounting Bulletin (“SAB”)SAB No. 101,Revenue Recognition”,Recognition, as amended by SAB 104. 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.
     A comparison of collaborative research and development and other revenues is as follows (in thousands):
                 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2006  2005  2006  2005 
Collaborative research and development $  $894  $1,678  $2,618 
Development milestones and other   1,201  2,299  5,326 
  $  $2,095  $3,977  $7,944 
             

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Collaborative Research and Development
         
  Three Months Ended March 31, 
  2007  2006 
Collaborative research and development $¾  $894 
Development milestones and other  235   2,020 
       
  $235  $2,914 
       
     The decrease in collaborative research and development revenue for the three and nine months ended September 30, 2006 compared to the prior year periods is due to the completion of the research phase of our collaborative arrangement with TAP, which concluded in June 2006.
Development milestones and other
. Development milestones for the nine months ended September 30,2007 period reflect $0.2 earned from Wyeth. This compares to a $2.0 milestone earned from GlaxoSmithKline in the 2006 period reflect a milestone of $2.0 million earned in the three months ended March 31, 2006 from GlaxoSmithKline in connection with the commencement of Phase III studies of eltrombopagPromacta. Collaborative research and a $0.3 million milestone earned in the three months ended June 30, 2006 from Wyeth in connection with the filing of an NDA for bazedoxifene. This compares to milestones earned in the nine months ended September 30, 2005 of $3.0 million from GlaxoSmithKline, $1.2 million from Lilly and $1.1 million from TAP.
Gross Margin
     Gross margin on product sales was 84.2%development revenues for the three months ended September 30,March 31, 2006 comparedrepresent fees earned under our collaboration agreement with TAP, which concluded in June 2006.
Royalty RevenueAVINZA. As discussed under “Recent Developments – Sale of AVINZA Product Line”, in connection with the sale of AVINZA, King will pay us a royalty on net sales of AVINZA. In accordance with the AVINZA Purchase Agreement, royalties are required to 78.5% forbe reported and paid to us within 45 days of quarter-end during the same 2005 period. For20 month period following the nine months ended September 30, 2006, gross marginclosing of the sale transaction (February 26, 2007). Thereafter, royalties will be paid on product sales was 83.7% compared to 77.3% for the same 2005 period. The improvementa calendar year basis. Such royalties will be recognized in the gross margin percentages for the 2006 periods reflects the impact ofquarter reported. Since there is a 7% price increase effective April 1, 2005. Under the sell-through revenue recognition method, changesone quarter lag from when King recognizes AVINZA net sales to prices do not impact net productwhen King reports those sales and therefore gross margins until the product sells through the distribution channel. Accordingly, the price increases did not have a full period impact on the margins for the three and nine months ended September 30, 2005. Additionally, as further discussed above under “Net Product Sales”, net sales and therefore the gross margin percentage benefited from: 1) the impact of lower Medicaid rebates; 2) lower net charges relatedcorresponding royalties to the impact of price increases on expected returns; and 3) the release of an accrualus, we will begin recognizing AVINZA royalty revenue in the thirdsecond quarter of 2006 related to a court ruling by the U.S. Court of Appeals against the Department of Defense’s TriCare Retail Pharmacy refund program.2007.

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     Furthermore, cost of sales in terms of absolute dollars decreased in the 2006 periods compared to the 2005 periods due primarily to a decrease in the number of prescriptions of 8% and 2% for the three and nine months ended September 30, 2006 relative to the prior year periods.
Research and Development Expenses
     Research and development expenses were $10.5$15.6 million and $29.0 million, respectively, for the three and nine months ended September 30, 2006March 31, 2007 compared to $7.9 million and $23.8$8.4 million for the same 2005 periods.2006 period. The major components of research and development expenses are as follows (in thousands):
                        
 Three Months Ended Nine Months Ended  Three Months Ended 
 September 30, September 30,  March 31, 
 2006 2005 2006 2005  2007 2006 
Research
 
Research:
 
Research performed under collaboration agreements $ $816 $1,968 $2,777  $¾ $924 
Internal research programs 5,631 5,133 15,522 15,498  7,350 4,735 
              
Total research 5,631 5,949 17,490 18,275  7,350 5,659 
         
 
Development
 
New product development 3,709 53 8,610 746 
Existing product support (1) 1,128 1,918 2,913 4,766 
          
Total development 4,837 1,971 11,523 5,512  8,252 2,758 
              
  
Total research and development $10,468 $7,920 $29,013 $23,787  $15,602 $8,417 
              
(1)Includes costs incurred to comply with post-marketing regulatory commitments.
     Spending for research expenses was $5.6$7.4 million and $17.5 million, respectively, for the three and nine months ended September 30, 2006March 31, 2007 compared to $5.9 million and $18.3$5.7 million for the same 2005 periods.2006 period. The decreaseincrease in internal research program expenses for the three and nine months ended September 30, 2006March 31, 2007 compared to the same 2005 periods

42


primarily2006 period reflects decreasedincreased research expenses incurred under our collaboration arrangement with TAP which concludedperformed in June 2006.the area of thrombopoietin (TPO) agonists.
     Spending for development expenses increased to $4.8$8.3 million and $11.5 million, respectively, for the three and nine months ended September 30, 2006March 31, 2007 compared to $2.0 million and $5.5$2.8 million for the same 2005 periods. These increases reflect a higher level of expense for new product development partially offset by a lower level of expense in existing product support. The increase in2006 period reflecting increased spending on new productLGD4665 TPO, our leading drug candidate in this area which is in Phase I clinical trials.
     Research and development was primarily due toexpenses for the increasethree months ended March 31, 2007 also includes one-time severance benefits and stock compensation charges of approximately $5.7 million incurred in LGD4665 thrombopoietin (TPO)connection with our restructuring and LGD5552 (Glucocorticoid agonist) expensesone-time stock compensation charges of approximately $0.8 million incurred in connection with the equitable adjustment of stock options as our lead drug candidates in these areas were moved to IND track. The decreases in the 2006 periods for existing product support are due to lower product support for our AVINZA product.discussed under “Recent Developments” above.
     A summary of our significant internal research and development programs for continuing operationsas of March 31, 2007 is as follows:
     
Program Disease/Indication Development Phase
AVINZAChronic, moderate-to-severe painMarketed in U.S.
Phase IV
LGD4665 (Thrombopoietin oral mimic)mimetic) Idiopathic
Thrombocytopenia (“ITP”),
Purpura; other Thrombocytopeniasthrombocytopenias
 IND Track
LGD5552 (Glucocorticoid agonists)Inflammation, cancerIND TrackPhase I
     
Selective androgen receptor modulators, e.g., LGD3303 (agonist/antagonist)(agonists) Male hypogonadism, female & maleHypogonadism, osteoporosis, male & female sexual dysfunction, frailty. Prostate cancer, hirsutism, acne, androgenetic alopecia.frailty, cachexia. Pre-clinical
Selective glucocorticoid receptor modulatorsInflammation, cancerResearch
Selective androgen receptor modulators, (antagonists)Prostate cancerResearch
     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-partythird- party research organizations with the necessary knowledge and skills to perform certain research. Refer to “Risk“Item

40


1A. Risk Factors” below for additional discussion of the uncertainties surrounding our research and development initiatives.
Selling, General and Administrative ExpenseExpenses
     Selling, general and administrative expense was $20.1 million and $58.1 million, respectively, for the three and nine months ended September 30, 2006 compared to $14.5 million and $43.1 million for the same 2005 periods. The increase is due primarily to legal costs (incurred in connection with the ongoing SEC investigation, shareholder litigation and our strategic alternatives process) which increased by approximately $2.0 million and $6.0 million for the three and nine months ended September 30, 2006 compared to the prior year periods. In June 2006, we announced that we had reached a settlement with the plaintiffs in the Company’s shareholder litigation. The amounts to be paid to the plaintiffs and the plaintiffs’ attorneys and a portion of our legal expenses incurred in connection with the shareholder litigation were covered by proceeds provided under our Directors and Officers (D&O) Liability insurance.
     General and administrative expenses were also higher$14.2 million for the three and nine months ended September 30,March 31, 2007 compared to $8.8 million for the same 2006 period. The increase for the three months ended March 31, 2007 is primarily due to higher auditone-time severance benefits and consultant feesstock compensation charges of approximately $3.2 million incurred in connection with our restructuring and one-time stock compensation charges of approximately $1.0 million incurred in connection with the completionequitable adjustment of the Company’s assessment of internal controls as of December 31, 2005stock options discussed under the Sarbanes-Oxley Act and consultant costs incurred in the second and third quarters of 2006 in connection with our 2006 SOX compliance program. A significant portion of the

43


Company’s 2005 assessment of internal controls was performed in 2006 due to the fact that the restatement of our financial statements was not completed until late 2005.
     In addition, general“Recent Developments” above. General and administrative expenses for the three months ended September 30, 2006March 31, 2007 also include expenses of approximately $1.6 million for investment banker fees related to the oncology product sale transaction with Eisai and the AVINZA product sale transaction with King, as well as approximately $1.9$0.8 million of expenseslegal and related costs incurred in connection with the resignationongoing SEC investigation of the Company’s CEO. (Refer to “Recent Developments” above)our financial statement restatement (See Part II, Item 1 “Legal Proceedings”).
     In addition, AVINZA advertisingAmortization of Deferred Gain on Sale Leaseback
     On October 25, 2006, we, along with our wholly-owned subsidiary Nexus, entered into an agreement with Slough for the sale of our real property located in San Diego, California for a purchase price of approximately $47.6 million. This property, with a net book value of approximately $14.5 million, includes one building totaling approximately 82,500 square feet, the land on which the building is situated, and promotion expenses increased in the three and nine months ended September 30, 2006 compared to the prior year periods when Ligand and Organon shared equally all AVINZA promotion expenses.two adjacent vacant lots. As part of the AVINZA terminationsale transaction, we agreed to lease back the building for a period of 15 years. The sale transaction subsequently closed on November 9, 2006.
     In accordance with SFAS 13,Accounting for Leases, we recognized an immediate pre-tax gain on the sale transaction of approximately $3.1 million in the fourth quarter of 2006 and returndeferred a gain of rights agreement entered into in Januaryapproximately $29.5 million on the sale of the building. The deferred gain is recognized as an offset to operating expense on a straight-line basis over the 15 year term of the lease at a rate of approximately $2.0 million per year. The amortization of the deferred gain was $0.5 million for the three months ended March 31, 2007.
Interest Income
     Interest income was $3.3 million for the three months ended March 31, 2007 compared to $0.6 million for the same 2006 discussed under “Overview” above, we are now responsibleperiod. The increase for all AVINZA advertising and promotion expenses. This increase was partially offset by lower selling expensesthe three months ended March 31, 2007 is primarily due to a reduction in our AVINZA primary care sales force.
     We expect selling, generalhigher cash and administrative expenses to continue to be higher through the remainder of 2006 compared to the prior year due to the ongoing cost of compliance with the Sarbanes-Oxley Act, legal and consultant expenses in connection with the SEC investigation and strategic alternatives process and the expenses to be recognized in connection with the employee retention agreements discussed under “Recent Developments” above. These increases are expected to be partially offset by lower sales force expensesinvestment balances as a result of the reduction in ourproceeds from the sales of the Oncology Product Line on October 25, 2006 and the AVINZA primary care sales force.Product Line on February 26, 2007 discussed under “Recent Developments” above.
Co-promotion Expense and Co-promote Termination ChargesIncome Taxes
     Co-promotion expense due Organon amounted to $11.8 millionThe Company had losses from continuing operations and $33.7 million, respectively,income from discontinued operations for the three and nine months ended September 30, 2006 comparedMarch 31, 2007. In accordance with SFAS No. 109,Accounting for Income Taxes, the income tax benefit generated by the loss from continuing operations for the three months ended March 31, 2007 was $9.2 million. This income tax benefit captures the deemed use of losses from continuing operations used to $7.8 millionoffset the income and $22.5gain from the Company’s AVINZA product line that was sold on February 26, 2007.
     Net income tax expense combining both continuing and discontinued operations was $15.7 million for the same 2005 periods. As discussed under “Overview” above, in connection withthree months ended March 31, 2007. This expense reflects the AVINZA termination and return of co-promote rights agreement with Organon, we agreed to pay Organon 23% of net AVINZA product sales through September 30, 2006 as compensation for promotion of the product during the Transition Period. This compares to co-promote expense in the prior year period which was basedtax due on 30% of net sales, as per the original co-promotion agreement, determined using the sell-in method of revenue recognition.
     Co-promotion expensetaxable income for the three and nine months ended September 30, 2006 also includes $3.3March 31, 2007 that was not fully offset by net operating loss and research and development credit carryforwards due to federal and state alternative minimum tax requirements. Net income tax expense combining both continuing and discontinued operations was $0.02 million and $10.0 million, respectively, which represents the pro-rata accrual of a $10.0 million payment we agreed to make to Organon, provided that Organon achieves its required level of sales calls during the Transition Period. This payment represents an approximation of the fair value of the service element under the agreement during the Transition Period (when the provision to pay 23% of AVINZA net sales is also considered) and, therefore, is recognized as an additional component of co-promotion expense ratably over the Transition Period.
     Co-promote termination charges recognized for the three and nine months ended March 31, 2006.
Discontinued Operations
Oncology Product Line.On September 30,7, 2006, were $3.6 millionwe and $143.0 million, respectively. The expense forEisai entered into the nine months ended September 30, 2006 includes a $37.8 million payment weOncology Purchase Agreement pursuant to which Eisai agreed to makeacquire all of our worldwide rights in and to our oncology products, including, among other things, all related inventory, equipment, records and intellectual property, and assume certain liabilities (the “Oncology Product Line”) as set forth in the Oncology Purchase Agreement. The Oncology Product Line

41


included our four marketed oncology drugs: ONTAK, Targretin capsules, Targretin gel and Panretin gel. Pursuant to the Oncology Purchase Agreement, at closing on October 25, 2006, we received approximately $185.0 million in net cash proceeds, which is net of $20.0 million that was funded into an escrow account to support any indemnification claims made by Eisai following the closing of the sale. Eisai also assumed certain liabilities. Of the escrowed amounts not required for claims to Eisai, $10.0 was released on April 25, 2007, with the remaining available balance to be released on October 25, 2007. We also recorded approximately $1.7 million in transaction fees and costs associated with the sale that are not reflected in net cash proceeds. We recorded a pre-tax gain on the sale of $135.8 million in the fourth quarter of 2006. We recorded a $0.1 million pre-tax reduction to the gain on the sale in the first quarter of 2007 due to subsequent changes in certain estimates of assets and liabilities recorded as of the sale date.
     Additionally, $38.6 million of the proceeds received from Eisai were deposited into an escrow account to repay a loan received from King Pharmaceuticals, Inc. (“King”), the proceeds of which were used to pay our co-promote termination obligation to Organon in October 20062006. The escrow amounts were released and the fair value of subsequent quarterly payments, estimated at approximately $95.2 million as ofloan repaid to King in January 1, 2006, that we will make to Organon based on net product sales of AVINZA, through November 2017. The co-promote termination charge for the three and nine months ended September 30, 2006 also includes expense of approximately $3.6 million and $10.4 million, respectively, to reflect the fair value of the liability as of September 30, 2006. Note that for the three month periods ended March 31, 2006 and June 30, 2006, this adjustment was presented as a component of interest expense. For the nine months ended September 30, 2006, such amounts previously reported as interest expense were properly reclassified to “co-promote termination charges” in accordance with SFAS 146,Accounting for Costs Associated with Exit or Disposal Activities.2007.
     In connection with the plannedOncology Purchase Agreement with Eisai, we entered into a transition services agreement whereby we agreed to perform certain transition services for Eisai, in order to effect, as rapidly as practicable, the transition of purchased assets from Ligand to Eisai. In exchange for these services, Eisai pays us a monthly service fee. The term of the transition services provided is generally three months; however, certain services are being provided for a period of up to eight months. Fees earned under the transition services agreement during the first quarter of 2007, which were recorded as an offset to operating expenses, were approximately $1.8 million.
     Prior to the Oncology sale, we recorded accruals for rebates, chargebacks, and other discounts related to Oncology products when product sales were recognized as revenue under the sell-through method. Upon the Oncology sale, we accrued for rebates, chargebacks, and other discounts related to Oncology products in the distribution channel which had not sold-through at the time of the Oncology sale and for which we retained the liability subsequent to the Oncology sale. Our accruals for Oncology rebates, chargebacks, and other discounts total $1.6 million as of March 31, 2007 and is included in accrued liabilities in the accompanying condensed consolidated balance sheet.
     Additionally, and pursuant to the terms of the Oncology Purchase Agreement, we retained the liability for returns of product from wholesalers that had been sold by us prior to the close of the transaction. Accordingly, as part of the accounting for the gain on the sale of the Oncology Product Line, we recorded a reserve for Oncology product returns. Under the sell-through revenue recognition method, we previously did not record a reserve for returns from wholesalers. Our reserve for Oncology returns, including estimated losses on returns due to changes in price, is $5.6 million as of March 31, 2007 and is included in accrued liabilities in the accompanying condensed consolidated balance sheet.
AVINZA Product Line. On September 6, 2006, we and King entered into the AVINZA Purchase Agreement pursuant to which King agreed to acquire all of our rights in and to AVINZA in the United States, its territories and Canada, including, among other things, all AVINZA inventory, records and related intellectual property, and assume certain liabilities as set forth in the AVINZA Purchase Agreement (collectively, the “Transaction”). In addition, King, subject to the terms and conditions of the AVINZA Purchase Agreement, agreed to offer employment following the closing of the Transaction (the “Closing”) to certain of our existing AVINZA sales representatives or otherwise reimburse us for agreed upon severance arrangements offered to any such non-hired representatives.
     Pursuant to the AVINZA Purchase Agreement, at Closing on February 26, 2007 (the “Closing Date”), we received $280.4 million in net cash proceeds, which is net of $15.0 million that was funded into an escrow account to support potential indemnification claims made by King following the Closing. The purchase price reflected a reduction of $12.7 million due to the preliminary estimate of retail inventory levels of AVINZA at the Closing Date exceeding targeted levels. After final studies and review by King, the final retail inventory-level adjustment was determined to be $11.2 million. We subsequently received the additional $1.5 million in sale proceeds in April 2007. The purchase price also reflects a reduction of $6.0 million for anticipated higher cost of goods for King

42


related to the Cardinal Health PTS, LLC (“Cardinal”) manufacturing and packaging agreement. At the closing, we agreed to not assign the Cardinal agreement to King, as further discussed under “Recent Developments”, King will assume responsibilitywind down the contract, and remain responsible for any resulting liabilities. The costs of winding down the $37.8Cardinal agreement were not material.
     The net cash received also includes reimbursement of $47.8 million for co-promote termination payments which had previously been paid to Organon, $0.9 million of interest Ligand paid King on a loan that was repaid in October 2006January 2007, and $0.5 million of severance expense for AVINZA sales representatives not offered positions with King. A summary of the royaltyfinal net cash proceeds, exclusive of $7.2 million in transaction costs and adjusted to reflect the final results of the retain inventory study, is as follows (in thousands):
     
Purchase price $265,000 
Reimbursement of Organon payments  47,750 
Repayment of interest on King loan  883 
Reimbursement of sales representative severance costs  453 
    
   314,086 
     
Less retail pharmacy inventory adjustment  (11,225)
Less cost of goods manufacturing adjustment  (6,000)
    
   296,861 
Less funds placed into escrow  (15,000)
    
     
Net cash proceeds $281,861 
    
     King also assumed our co-promote termination obligation to make payments to Organon based on net sales of AVINZA (approximately $93.2 million as of February 26, 2007). As Organon has not consented to the legal assignment of the co-promote termination obligation from us to King, we remain liable to Organon in the event of King’s default of this obligation. We also incurred approximately $7.2 million in transaction fees and other costs associated with the sale that are not reflected in the net cash proceeds, of which $3.6 million was recognized in 2006. The $7.2 million also includes approximately $3.6 million recognized in the first quarter of 2007 for investment banking services and related expenses which have not yet been paid. We are disputing that these fees are owed to the investment banking firm. The investment banking firm has filed suit against us in New York on April 17, 2007 seeking recovery of these fees, plus interest, attorneys’ fees and costs. We recorded a pre-tax gain on the sale of $310.1 million in the first quarter of 2007.
     In addition to the assumption of existing royalty obligations, King will pay Ligand a 15% royalty on AVINZA net sales during the first 20 months after Closing. Subsequent royalty payments will be based upon calendar year net sales. If calendar year net sales are less than $200.0 million, the royalty payment will be 5% of all net sales. If calendar year net sales are greater than $200.0 million, the royalty payment will be 10% of all net sales less than $250.0 million, plus 15% of net sales greater than $250.0 million.
     Also on September 6, 2006,we entered into a contract sales force agreement (the “Sales Call Agreement”) with King, pursuant to which King agreed to conduct a sales detailing program to promote the sale of AVINZA for an agreed upon fee, subject to the terms and conditions of the Sales Call Agreement. Pursuant to the Sales Call Agreement, King agreed to perform certain minimum monthly product sales.details (i.e. sales calls), which commenced effective October 1, 2006 and continued until the Closing Date. The total co-promote expense incurred during the first quarter of 2007 through the Closing Date was approximately $2.8 million. The amount due to King under the Sales Call Agreement as of March 31, 2007 is approximately $1.7 million.
     Prior to the AVINZA sale, we recorded accruals for rebates, chargebacks, and other discounts related to AVINZA products when product sales were recognized as revenue under the sell-through method. Upon the AVINZA sale, we accrued for rebates, chargebacks, and other discounts related to AVINZA products in the distribution channel which had not sold-through at the time of the AVINZA sale and for which we retained the

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Interest Expenseliability subsequent to the sale. Our accruals for AVINZA rebates, chargebacks, and other discounts total $6.7 million as of March 31, 2007 and are included in accrued liabilities in the accompanying condensed consolidated balance sheet.
     Interest expense was $2.5 millionAdditionally, and $7.9 millionpursuant to the terms of the AVINZA Purchase Agreement, we retained the liability for returns of product from the distribution channel that had been sold by us prior to the close of the transaction. Accordingly, as part of the accounting for the three and nine months ended September 30, 2006, respectively, compared to $3.1 million and $9.2 million for the same 2005 periods. A comparison of interest expense is as follows (in thousands):
                 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2006  2005  2006  2005 
Interest on 6% Convertible Subordinated Notes $1,922  $2,329  $5,857  $6,987 
Other interest  625   789   2,063   2,260 
             
Total $2,547  $3,118  $7,920  $9,247 
             
     The lower interest expensegain on the 6% Convertible Subordinated Notes is due to the conversion of a portion of such notes during the six months ended June 30, 2006 as discussed further under “Recent Developments.” There were no conversions during the three months ended September 30, 2006.
     In connection with the planned sale of AVINZA, we recorded a reserve for AVINZA product returns. Under the sell-through revenue recognition method, we previously did not record a reserve for returns. Our reserve for AVINZA returns, including estimated losses on returns due to King, we are required to redeem or convert to common stock the outstanding 6% convertible subordinated notes, whichchanges in price, $16.7 million as of March 31, 2007 and is expected to occur on or before November 29, 2006. Accordingly, we expect interest expense on the notes to be lowerincluded in accrued liabilities in the fourth quarteraccompanying condensed consolidated balance sheet.
Summary of 2006 compared to prior period quarters. If the notes are redeemed, however, we will record a charge related to the premium to be paid upon redemption of approximately $1.5 million.
Results from Discontinued Operations
. Income from discontinued operations before income taxes was $1.2 million and $3.4 million for the three and nine months ended September 30, 2006, respectively, compared to $1.0$6.0 million for the three months ended September 30, 2005 andMarch 31, 2007 compared to a loss from discontinued operations before income taxes of $5.9$128.5 million for the nine months ended September 30, 2005.same 2006 period. The following table summarizes results from discontinued operations for the three and nine months ended September 30, 2006 and 2005March 31, 2007 included in the condensed consolidated statements of operations (in thousands):
     
  AVINZA 
  Product 
  Line 
Product sales $18,256 
    
Operating costs and expenses:    
Cost of products sold  3,608 
Research and development  120 
Selling, general and administrative  3,709 
Co-promotion  2,814 
Co-promote termination charges  2,012 
    
Total operating costs and expenses  12,263 
    
Income from operations  5,993 
Interest expense   
    
Income before income taxes $5,993 
    

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     The following table summarizes results from discontinued operations for the three months ended March 31, 2006 included in the condensed consolidated statements of operations (in thousands):
             
  Oncology  AVINZA    
  Product  Product    
  Line  Line  Total 
Product sales $15,489  $32,495  $47,984 
Collaborative research and development and other revenues  58      58 
          
Total revenues  15,547   32,495   48,042 
          
Operating costs and expenses:            
Cost of products sold  4,146   5,594   9,740 
Research and development  3,893      3,893 
Selling, general and administrative  4,518   8,780   13,298 
Co-promotion     10,957   10,957 
Co-promote termination charges     136,241   136,241 
          
Total operating costs and expenses  12,557   161,572   174,129 
          
Income (loss) from operations  2,990   (129,077)  (126,087)
Interest expense  (25)  (2,414)  (2,439)
          
Income (loss) before income taxes $2,965  $(131,491) $(128,526)
          
     Product sales were $18.3 million for the three months ended March 31, 2007 compared to $48.0 million for the same 2006 period. Total operating costs and expenses were $12.3 million for the three months ended March 31, 2007 compared to $174.1 million for the same 2006 period. The decrease in product sales and total operating costs and expenses for the three months ended March 31, 2007 compared to the same 2006 period is primarily due to the sales of the Oncology and AVINZA product lines effective October 25, 2006 and February 26, 2007, respectively.
     Co-promotion expense of $2.8 million for the three months ended March 31, 2007 represents fees paid to King for contract sales expenses incurred under the Sales Call Agreement prior to the closing of the Transaction on February 26, 2007. This compares to $11.0 million of co-promotion expense recognized under our co-promotion arrangement with Organon that concluded September 30, 2006 (Refer to “Recent Developments – Organon Co-Promote Termination”).
     For the three months ended March 31, 2006, we recognized $136.2 million of co-promote termination costs in connection with the termination of our AVINZA co-promote arrangement with Organon effective January 1, 2006. For the three months ended March 31, 2007, we recognized $2.0 million of co-promote termination expense which represents the accretion of the termination liability to fair value as of February 26, 2007, the closing of the AVINZA product line sale Transaction (Refer to “Recent Developments – Organon Co-Promote Termination”).
     Interest expense for the three months ended March 31, 2006 of $2.4 million primarily represents interest on our then outstanding convertible subordinated notes. As part of the terms of the AVINZA Purchase Agreement, we were required to redeem the outstanding notes. All of the notes converted into shares of common stock in 2006 prior to redemption. In accordance with EITF 87-24,Allocation of Interest to Discontinued Operations,the interest on the notes was allocated to discontinued operations because the debt was required to be repaid in connection with the disposal transaction.

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  Three Months  Nine Months 
  Ended September 30,  Ended September 30, 
  2006  2005  2006  2005 
  (unaudited) 
Product sales $13,292  $12,676  $42,457  $39,997 
Collaborative research and development and other revenues  75   77   188   232 
             
Total revenues  13,367   12,753   42,645   40,229 
             
Operating costs and expenses:                
Cost of products sold  3,410   3,385   12,448   13,552 
Research and development  4,166   4,991   11,734   18,383 
Selling, general and administrative  3,722   3,303   12,688   14,018 
             
Total operating costs and expenses  11,298   11,679   36,870   45,953 
             
Income (loss) from operations  2,069   1,074   5,775   (5,724)
Interest expense  (1)  (54)  (51)  (82)
             
Income (loss) before income taxes  2,068   1,020   5,724   (5,806)
Income tax expense  (845)  (17)  (2,342)  (54)
             
Net income (loss) $1,223  $1,003  $3,382  $(5,860)
             
     Product sales were $13.3 million and $42.5 million for the three and nine months ended September 30, 2006 compared to $12.7 million and $40.0 million, respectively, for the same 2005 periods. The increase in product sales for each period is primarily due to increases in sales of Targretin capsules from increased demand and the effect of prices increases. These increases are partially offset by lower net product sales of ONTAK due to lower demand.
     Total operating costs and expenses were $11.3 million and $36.9 million for the three and nine months ended September 30, 2006 compared to $11.7 million and $46.0 million, respectively, for the same 2005 periods. These decreases are primarily due to decreased research expenses across several Oncology research programs, decreased development expenses for existing Oncology product support (primarily a reduced level of spending on Phase III clinical trials for Targretin capsules in non-small cell lung cancer (“NSCLC”)), and lower promotion expenses for the Oncology products compared to the prior year periods.
     The net loss from discontinued operations for the nine months ended September 30, 2005 reflects the significant development costs incurred on the NSCLC trials for Targretin capsules which concluded in early 2005.
Liquidity and Capital Resources
     We have financed our operations through private and public offerings of our equity securities, collaborative research and development and other revenues, issuance of convertible notes, product sales and the subsequent sales of our commercial assets, capital and operating lease transactions, accounts receivable factoring and equipment financing arrangements, and investment income.
     Working capital was a deficit of $161.9$87.4 million at September 30, 2006March 31, 2007 compared to a deficit of $102.2$64.7 million at December 31, 2005.2006. Cash, cash equivalents, short-term investments and restricted cash and investments totaled $33.7$412.1 million at September 30, 2006March 31, 2007 compared to $88.8$212.5 million at December 31, 2005.2006. Working capital as of March 31, 2007 includes dividend payable of $252.7 million for a special dividend we declared on March 22, 2007 and subsequently paid on April 19, 2007. We primarily invest our cash in United States government and investment grade corporate debt securities. Restricted investments at March 31, 2007 consist of certificates of deposit held with a financial institution as collateral under equipment financing and third-party service provider arrangements.

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Operating Activities
     Operating activities used cash of $54.5$45.3 million for the ninethree months ended September 30, 2006March 31, 2007 compared to $3.7$20.0 million for the same 20052006 period. The use of cash for the ninethree months ended September 30, 2006March 31, 2007 reflects a higher net loss includingincome of $274.3 million, adjusted by $302.4 million in items to reconcile net income to net cash used in operations. These reconciling items primarily reflect the effectgain on the sale of a higher adjustment for non-cash operating expenses forour AVINZA Product Line of $310.1 million and the 2006 period. Non-cash operating expense for the nine months ended September 30, 2006 includesamortization of deferred gain on sale leaseback of building of $0.5 million, partially offset by the recognition of $4.0$5.6 million of stock-based compensation expense, in connection withdepreciation and amortization of assets of $1.4 million, and the adoptionwrite-off of SFAS123(R) and option grants to non-employees.assets of $1.0 million.
     The higher use of cash for the 2006 periodthree months ended March 31, 2007 is further impacted by changes in operating assets and liabilities due primarily to decreases in deferred revenues, net of $50.5 million and accounts payable and accrued liabilities of $5.8$13.0 million and to deferred revenue, net of $8.7 million and an increase in inventories, netthe restricted indemnity account of $0.5$10.0 million, partially offset by decreases in accounts receivable, net of $13.9$10.3 million, and other current assets of $2.0$3.5 million, and inventories, net of $0.9 million. The decreasedecreases in deferred revenue and accounts receivable through February 26, 2007, the closing of the AVINZA sale transaction with King, are primarily due to lowera reduction in shipments of Avinza during the three months endedAVINZA starting in September 30, 2006. The AVINZA Purchase Agreement with King providesprovided for a reduction in the purchase price to the extent that product inventories in the wholesale and retail distribution channels arewere in excess of specified amounts. Accordingly, we reduced shipments of AVINZA starting in September 2006. The decrease in accounts payable and accrued liabilities is primarily due to the January 2007 payment of $10.0 million in accrued fees for co-promotion services to Organon during and following the co-promote transition period which terminated effective September 30, 2006, and lower headcount costs and operational expenses following the sale of our AVINZA Product Line to King in February 2007, partially offset by an increase in accrued income taxes of $15.5 million primarily due to income taxes due on the gain of the AVINZA Product Line. The increase in the monthrestricted indemnity account is due to the funding of September 2006. We expect that shipments of AVINZA$10.0 million to support our existing indemnification obligations to continuing and departing directors in connection with the fourth quarter of 2006 will likewise be lower until the targeted inventory levels are achieved.ongoing SEC investigation and related matters.
     As further discussed below, the reconciliation of net loss to net cashCash used in operating activities for the ninethree months ended September 30,March 31, 2006 comparedof $20.0 million reflects a net loss of $142.2 million, non-cash adjustments to the prior year period also reflects the accrualoperating activities of the AVINZA$141.5 million (primarily non-cash co-promote termination liability due Organonexpense of $143.0 million in connection with the termination$136.2 million), and return of rights agreement entered into in January 2006. In consideration of the early termination and return of rights under the terms of the agreement, we agreed to pay Organon $37.8 million on or before October 15, 2006. We will further pay Organon $10.0 million on or before January 15, 2007, provided that Organon has made its minimum required level of sales calls. Under certain conditions, including closing of the planned sale of AVINZA to King, the $10.0 million cash payment will accelerate. In addition, after the termination, we agreed to make quarterly payments to Organon equal to 6.5% of AVINZA net sales through December 31, 2012 and thereafter 6.0% through patent expiration, currently anticipated to be November 2017. In connection with the planned AVINZA purchase by King, King will assume our outstanding obligations to Organon including reimbursing us for the $37.8 million paid to Organon in October 2006.
     For the same 2005 period, use of operating cash was impacted by the changes in operating assets and liabilities primarily due tothat comprise a net cash outflow of $19.2 million. Changes in operating assets and liabilities for the three months ended March 31, 2006 include decreases in accounts receivable, net of $6.5 million and other current assets of $5.0 million and increases in deferred revenue, net of $5.5 million and accounts payable and accrued liabilities of $2.3$14.9 million and in deferred revenue, net of $6.6 million, partially offset by an increasedecreases in inventories, net of $3.1$1.5 million and accounts receivable, net of $0.9 million.
     The use of cash fromCash used in operating activities of $54.5$45.3 million for the ninethree months ended September 30, 2006March 31, 2007 includes $4.5$26.7 million used in discontinued operations. The use of cash fromCash used in operating activities of $3.7$20.0 million for the ninesame 2006 period includes $7.5 million provided by discontinued operations.

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Investing Activities
     Investing activities provided cash of $326.3 million for the three months ended September 30, 2005March 31, 2007 compared to $3.0 million for the same 2006 period. Cash provided for the three months ended March 31, 2007 primarily reflects proceeds from the sale of our AVINZA Product Line of $280.4 million, the decrease of restricted cash of $38.8 million which was held in escrow as of December 31, 2006 and released in January 2007 to repay our loan with King, and net proceeds from sales of short-term investments of $7.1 million. The loan amount including interest was subsequently reimbursed to us in February 2007 in connection with the closing of the AVINZA Product Line sale to King. Cash provided for the three months ended March 31, 2006 primarily reflects proceeds of $3.2 million from the net sale of short-term investments.
     Cash provided by investing activities of $289.6 million for the three months ended March 31, 2007 includes $3.8$280.4 million provided by discontinued operations from the sale of the AVINZA Product Line. Cash provided by investing activities of $3.0 million for the same 2006 period includes $0.02 million used in discontinued operations.
InvestingFinancing Activities
     InvestingCash used in financing activities used cash of $2.9 million for the ninethree months ended September 30, 2006March 31, 2007 was $35.4 compared to the usecash provided by financing activities of cash of $38.8$0.04 million for the same 20052006 period. The use of cashCash used for the ninethree months ended September 30, 2006March 31, 2007 primarily reflects purchasesthe repayment of property and equipmentdebt of $1.6$37.8 million and purchasesnet payments under equipment financing obligations of short-term investments of $18.3 million,$0.5 million. These amounts are partially offset by proceeds from the saleissuance of short-term investments of $17.0 million. The use of cash for the nine months ended September 30, 2005 reflects a $33.0 million payment for the buy-down of ONTAK royalty payments in connection with the amended royalty agreement entered into in November 2004 between the Company and Lilly, $3.5 million of net purchases of short-term investments, $1.8 million of purchases of property and equipment, and a $0.6 million capitalized payment to The Salk Institute forcommon stock, primarily the exercise of an option to buy out royalty payments due on future sales of lasofoxifene for a second indication.
     The use of cash from investing activitiesemployee stock options, of $2.9 million for the nine months ended September 30, 2006 includes $0.1 million used in discontinued operations. The use of cash from investing activities of $38.8 million for the nine months ended September 30, 2005 includes $33.0 million used in discontinued operations for the buy-down of the ONTAK royalty payments.

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Financing Activities
     Financing activities provided cash of $0.6 million for the nine months ended September 30, 2006 compared to the use of cash of $0.2 million for the same 2005 period.million. Cash provided by financing activities for the ninethree months ended September 30,March 31, 2006 includes proceeds from the issuance of common stock of $2.0 million (primarily from the exercise of employee stock options)options of $0.5 million partially offset by net payments under equipment financing arrangements of $1.0 million and$0.4 million.
     None of the repayment of long-term debt of $0.3 million. Cashcash used in financing activities of $35.4 million for the ninethree months ended September 30, 2005 includes net payments under equipment financing arrangements of $0.8 million and the repayment of long-term debt of $0.2 million, partially offsetMarch 31, 2007 relates to discontinued operations. Cash provided by proceeds from the exercise of employee stock options of $0.9 million. None of the changes in cash from financing activities of $0.04 million for the nine months ended September 30,same 2006 and 2005 pertain toperiod includes $0.1 million used in discontinued operations.
     Certain of our property and equipment is pledged as collateral under various equipment financing arrangements. As of September 30, 2006, $4.9March 31, 2007, $3.8 million was outstanding under such arrangements with $2.2 million classified as current. Our equipment financing arrangements have terms of 3 to 4four years with interest ranging from 7.35% to 10.11%.
     On October 25, 2006, we, along with our wholly-owned subsidiary Nexus entered into an agreement with Slough for the sale of the Company’s real property located in San Diego, California. In connection with the sale transaction, on November 6, 2006, we paid off the existing mortgage on the building of approximately $11.6 million. The early payment triggered a prepayment penalty of approximately $0.4 million. The sale transaction subsequently closed on November 9, 2006.
     On October 30, 2006, we gave notice of redemption to the noteholders of our 6% convertible subordinated notes due November 2007. The redemption date of the notes has been set for November 29, 2006. The noteholders may elect to convert the 6% notes, on or before November 29, 2006, into shares of our common stock at a conversion rate of 161.9905 shares per $1,000 principal amount of the notes (approximately $6.17 per share). Based on our current stock price, we expect that the majority of the notes will convert into shares of Ligand common stock in lieu of cash. The $128.2 million of principal amount of the notes outstanding may be converted into approximately 20.8 million shares of common stock. We will pay the holders of those notes that are not converted into shares a redemption price equal to 101.2% of the outstanding principal amount plus accrued and unpaid interest.
     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 during the transition period of our contract sales agreement with King, which was initiated on October 1, 2006; 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 amount of royalties on sales of AVINZA we receive from King; and the efforts of our collaborators; and the cost of production.collaborators. We will also consider additional equipment financing arrangements similar to arrangements currently in place.
     PursuantOn March 22, 2007, we announced a return of cash on our common stock in the form of a $2.50 per share special cash dividend. The aggregate amount of $252.7 million was paid on April 19, 2007 to shareholders of record as of April 5, 2007. In addition to the Oncology Purchase Agreement, at closing on October 25, 2006, we received approximately $205.0 million in cash of which $20.0 million was funded into an escrow account to support any indemnification claims made by Eisai following the closing of the sale. In addition, and as a condition of the $37.8 million loan received from King, $38.6 million of the funds received from Eisai was deposited into a restricted account to be used to repay the loan plus interest, due January 1, 2007.
     Pursuant to the AVINZA Purchase Agreement, at Closing, we expect to receive a cash payment of approximately $265.0 million, subject to adjustment based on certain closing conditions. Of the amount received, $15.0 million will be funded into an escrow account to support any indemnification claims made by King.
     We have announced thatdividend, the Board of Directors is considering an extraordinary dividend of a substantial portion ofauthorized up to $100.0 million in share repurchases over the net proceeds from our product line asset sales. However, other than this extraordinary dividend, we do not anticipate paying cash dividends on any of our securities in the foreseeable future.subsequent 12 months.

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Leases and Off-Balance Sheet Arrangements
     We lease certain of our office and research facilities under operating lease arrangements with varying terms through July 2015.November 2021. The agreements provide for increases in annual rents based on changes in the Consumer Price Index or fixed percentage increases ranging from 3% to 7%.
     In connection with our sale of real property discussed above, we entered into an agreement with Slough to leaseback the building for a period of 15 years. Under the terms of the lease, we will pay a basic annual rent of $3.0 million (subject to an annual fixed percentage increase, as set forth in the agreement), plus a 1% annual management fee, property taxes and other normal and necessary expenses associated with the lease such as utilities, repairs and maintenance, etc. We will have the right to extend the lease for two five-year terms and will have the first right of refusal to lease, at market rates, any facilities built on the sold lots.
     As of September 30, 2006, we are not involved in any off-balance sheet arrangements.
Contractual Obligations
     As of September 30, 2006,March 31, 2007, future minimum payments due under our contractual obligations are as follows (in thousands):
                     
  Payments Due by Period 
  Total  Less than 1 year  1-3 years  3-5 years  After 5 years 
Capital lease obligations (1) $5,394  $2,483  $2,732  $179  $¾ 
Operating lease obligations (11)  19,159   2,888   4,163   3,919   8,189 
Loan payable to bank (2)(8)  13,107   1,191   11,916   ¾   ¾ 
6% Convertible Subordinated Notes (3)(9)  137,035   7,689   129,346   ¾   ¾ 
Organon termination liability (4)(5)(10)  271,371   48,833   30,304   41,518   150,716 
Other liabilities (6)(11)  538   106   211   211   10 
Retention bonus obligation (7)(11)  2,979   2,979   ¾   ¾   ¾ 
Distribution service agreements (11)  10,003   10,003   ¾   ¾   ¾ 
Consulting agreements (11)  1,086   1,086   ¾   ¾   ¾ 
Manufacturing agreements (11)  8,351   8,351   ¾   ¾   ¾ 
                
Total contractual obligations $469,023  $85,609  $178,672  $45,827  $158,915 
                
                         
(1)  Includes interest payments as follows $546  $333  $206  $7  $ 
(2)  Includes interest payments as follows  1,523   828   695       
(3)  Includes interest payments as follows  8,885   7,689   1,196       
(4)  Includes estimated accretion adjustment to fair value as follows  128,392   1,111   8,110   18,272   100,899 
                     
  Payments Due by Period 
  Total  Less than 1 year  1-3 years  3-5 years  After 5 years 
Capital lease obligations (1) $4,151  $2,397  $1,699  $55  $ 
Operating lease obligations  70,848   4,844   10,036   10,648   45,320 
Retention bonus obligation  457   457          
Severance obligation  788   788          
Consulting agreements  920   920          
Co-promote termination liability (2)               
Manufacturing agreements (3)               
                
Total contractual obligations $77,164  $9,406  $11,735  $10,703  $45,320 
                
 
(1)        Includes interest payments as follows:
 $358  $246  $111  $1  $ 
(5)
(2) Includes $37,750 paidOur co-promote termination obligation to Organon was assumed by King pursuant to the AVINZA Purchase Agreement. However, as Organon did not consent to the legal assignment of the obligation to King, Ligand remains liable to Organon in October 2006.the event of King’s default of the obligation. As of March 31, 2007, the total estimated amount of the obligation is approximately $192.8 on an undiscounted basis.
 
(6)(3) Includes a liability under a royalty financing agreement.
(7)See “Recent Developments – Employee RetentionIn May 2006, Ligand and Severance Agreements.”
(8)Does not include impactCardinal Health PTS, LLC (“Cardinal”) entered into the First Amendment to the Manufacturing and Packaging Agreement for the manufacturing of repaymentAVINZA. The amendment principally adjusted certain contract dates, near-term minimum commitments and contract prices. Under the terms of mortgage note on November 6, 2006 in connection with salethe amended agreement, we committed to minimum annual purchases ranging from $0.8 million to $1.2 million for 2006; $2.2 million to $3.3 million for 2007; and leaseback$2.4 million to $3.6 million for 2008 through 2010. As part of premises as discussed in “Recent Developments – Sale and Leasebackthe closing of Premises.”
(9)Does not include impact of conversion of notes as discussed in “Recent Developments – Conversion/Redemption of 6% Convertible Subordinated Notes.”
(10)Does not include loan received from, or liabilities assumed by King in connection withthe AVINZA sale as discussedtransaction, we and King agreed that the Cardinal agreement would not be assigned or transferred to King and that we would be responsible for winding down the contract and any resulting liabilities. The contract was subsequently terminated in “Recent Developments – SaleApril 2007. The costs of AVINZA Product.”
(11)Included inwinding down the table above are obligations related to discontinued operations totaling approximately $9.3 million, comprised of distribution service agreements of $3.6 million, consulting agreements of $0.5 million, manufacturing agreements of $3.0 million, auto leases of $1.5 million, other liabilities of $0.5 million and retention bonus obligation of $0.2 million.Cardinal agreement were not material.

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     As of September 30, 2006,March 31, 2007, we have net open purchase orders (defined as total open purchase orders at quarter end less any accruals or invoices charged to or amounts paid against such purchase orders) totaling approximately $15.0$6.4 million. For the 12twelve months ended December 31, 2006,2007 we plan to spend approximately $2.4$0.6 million on capital expenditures.
     In January 2006, we signed an agreement with Organon that terminated the AVINZA co-promotion agreement between the two companies and returned AVINZA co-promotion rights to Ligand. In connection with this agreement, Organon was paid $37.8 million in October 2006. We are obligated to pay Organon an additional $10.0 million on or beforeOn January 15, 2007, providedwe announced that Organon has made its minimum required level of sales calls. After termination, we will make quarterly royalty paymentsJohn L. Higgins had joined the Company as Chief Executive Officer and President. Mr. Higgins succeeded Henry F. Blissenbach, who continued to Organon equal to 6.5% of AVINZA net sales through December 31, 2012 and thereafter 6.0% through patent expiration, currently anticipated to be November 2017. In connection with the planned AVINZA purchase by King, King will assume our outstanding obligations to Organon including reimbursing us for the $37.8 million paid to Organon in October 2006.
     In connection with the AVINZA sale transaction discussed under “Overview”, King committed to loan us, at our option, $37.8 million (the “Loan”) to be used to pay our co-promote termination obligation to Organon due in October 2006. This loan was drawn, and the $37.8 million co-promote liability settled in October 2006. Amounts due under the loan are subject to certain market terms, including a 9.5% interest rate and a security interest in the Company’s assets other than those related to AVINZA. In addition, andserve as a condition of the $37.8 million loan received from King, $38.6 million of the funds received from Eisai was deposited into a restricted account to be used to repay the loan to King, plus interest, due January 1, 2007. If the transaction with King closes as contemplated by the AVINZA Purchase Agreement, the interest will be forgiven and the principal will be credited against the purchase price.
     In March 2006, we entered into letter agreements with approximately 67 of our key employees, including a number of our executive officers. In September 2006, we entered into letter agreements with ten additional key employees and modified existing agreements with two employees. These letter agreements provide for certain retention or stay bonus payments to be paid in cash under specified circumstances as an additional incentive to remain employed in good standing with the Company. The Compensation CommitteeChairman of the Board of Directors has approved the Company’s entry into these Agreements. The retention or stay bonus payments generally vest at the end of 2006 and total payments to employees of approximately $3.0 million would be made in January 2007 if all participants qualify for the payments. In accordance with SFAS 146,Accounting for Costs Associated with Exit or Disposal Activities, the cost of the plan is ratably accrued over the term of the agreements. For the three and nine months ended September 30, 2006, we recognized approximately $1.0 million and $2.1 million, respectively, of expense under the plan. As an additional retention incentive, certain employees were also granted stock options totaling approximately 122,000 shares at an exercise price of $11.90 per share.
     In May 2006, Ligand and Cardinal Health PTS, LLC (“Cardinal”) entered into the First Amendment to the Manufacturing and Packaging Agreement for the manufacturing of AVINZA. The amendment principally adjusted certain contract dates, near-term minimum commitments and contract prices. Under the terms of the amended agreement, we committed to minimum annual purchases ranging from $0.8 million to $1.2 million for 2006; $2.2 million to $3.3 million for 2007; and $2.4 million to $3.6 million for 2008 through 2010.
     On June 29, 2006, we announced that we reached agreement to settle the securities class action litigation filed in the United States District Court for the Southern District of California against us and certain of our directors and officers. In addition, we also reached agreement to settle the shareholder derivative actions filed on behalf of the Company in the Superior Court of California and the United States District Court for the Southern District of California.
     The settlements resolve all claims by the parties, including those asserted against Ligand and the individual defendants in these cases. Under the agreements, weuntil March 1, 2007. We agreed to pay a totalMr. Higgins an annual salary of $12.2 million in cash in full settlement of all claims. $12.0 million of the settlement amount and a portion of our total legal expenses was funded by our Directors and Officers Liability insurance carrier while the remainder of the legal fees incurred ($1.4 million for the three months ended June 30, 2006) was paid by us. Of the $12.2 million settlement liability, $4.0 million was paid in

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October 2006 to us directly from the insurance carrier and then disbursed to the claimants’ attorneys, while $8.0 million will be paid by the insurance carrier directly to an independent escrow agent responsible for disbursing the funds to the class action suit claimants. In July 2006, our insurance carrier funded the escrow account$400,000, with the $8.0 million to be disbursed to the claimants. Under SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, funding of the escrow account represents the extinguishment of our liability to the claimants. Accordingly, we derecognized the $8.0 million receivable and accrued liability in our consolidated financial statementshis employment commencing as of September 30, 2006.
     As part of the settlement of the state derivative action, we have agreed to adopt certain corporate governance enhancements including the formalization of certain Board practices and responsibilities, a Board self-evaluation process, Board and Board Committee term limits (with gradual phase-in) and one-time enhanced independence requirements for a single director to succeed the current shareholder representatives on the Board. Neither we nor any of our current or former directors and officers have made any admission of liability or wrongdoing. On October 12, 2006, the Superior Court of California approved the settlement of the state derivative actions and entered final judgment of dismissal. The United States District Court has preliminarily approved the settlement of the Federal class action, however, that settlement and the settlement of the Federal derivative actions are all subject to final approval and orders of the court. The related investigation by the Securities and Exchange Commission is ongoing and is not affected by the settlements discussed above.
     On July 31, 2006, we entered into a separation agreement with David Robinson providing for Mr. Robinson’s resignation as Chairman, President, and Chief Executive Officer of the Company. Under the separation agreement, Mr. Robinson will receive his base salary and certain benefits for 24 months, payable in five equal monthly installments beginning August 1, 2006 and ending December 1, 2006.January 10, 2007. In addition, the agreement provides for the immediate vestingMr. Higgins has a performance bonus opportunity with a target of Mr. Robinson’s unvested stock options and an extension of the exercise period of his options to January 15, 2007. In connection with the resignation, we recognized expense of approximately $1.9 million in our third quarter 2006 financial statements, comprised of cash payments of $1.4 million and stock-based compensation of $0.5 million associated with the modification of the vesting and exercise period of the stock options.
     On August 1, 2006, we announced that current director Henry F. Blissenbach had been named Chairman and interim Chief Executive Officer. We have agreed to pay Dr. Blissenbach $40,000 per month, commencing August 1, 2006, subject to cancellation by either party on thirty days’ notice, for his services as Chairman and interim Chief Executive Officer. In addition, Dr. Blissenbach will be eligible to receive incentive compensation of up to 50% of his base salary, but not more than $100,000, based upon his performanceup to a maximum of certain objectives incorporated within the employment agreement which the Company75%, and Dr. Blissenbach have entered into. Also, Dr. Blissenbach received a restricted stock option grant to purchaseof 150,000 shares of our common stock at an exercise pricevesting over two years. We also provided Mr. Higgins with a lump-sum relocation benefit of $9.20 per share. These stock options will vest 50% at$100,000. Mr. Higgins’ employment agreement provides for severance payments and benefits in the endevent that employment is terminated under various scenarios, such as a change in control of six months and the remaining 50% will vest at the end of one year, except that all of these stock options will vest upon the appointment of a new chief executive officer. Finally, we will reimburse Dr. Blissenbach for all reasonable expenses incurred in discharging his duties as interim Chief Executive Officer, including, but not limited to commuting costs to San Diego and living and related costs during the time he spends in San Diego.Company.
Critical Accounting Policies
     Certain of our accounting policies require the application of management judgment in making estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience and various other factors deemed to be applicable and reasonable under the circumstances. The use of judgment in determining such

48


estimates and assumptions is by nature, subject to a degree of uncertainty. Accordingly, actual results could differ from the estimates made. Management believes that the only material changes during the nine monthsquarter ended September 30, 2006March 31, 2007 to the critical accounting policies reported in the Management’s Discussion and Analysis section of our 20052006 Annual Report are related to 1) ourrevenue recognition for AVINZA royalties, 2) AVINZA product returns and 3) co-promote termination accounting pursuant to the sale of AVINZA.
Revenue Recognition – AVINZA Royalties
     In accordance with the AVINZA Purchase Agreement, royalties are required to be reported and paid to us within 45 days of quarter-end during the 20 month period following the closing of the sale transaction (February 26, 2007). Thereafter, royalties will be paid on a calendar year basis. Royalties on sales of AVINZA due from King will be recognized in the quarter reported. Since there is a one quarter lag from when King recognizes AVINZA net sales to when King reports those sales and the corresponding royalties to us, we will begin recognizing AVINZA royalty revenue in the second quarter of 2007.
AVINZA Product Returns
     In connection with the sale of the AVINZA product line to King, we retained the obligation for returns of product that we shipped to wholesalers prior to the close of the transaction on February 26, 2007. The accrual for AVINZA product returns, which was recorded as part of the accounting for the terminationAVINZA sale transaction, is based on historical experience. While our obligation is for returns of product from our wholesaler customers, retail pharmacies may also return AVINZA to the wholesalers who in turn could return the product to us. As of March 31, 2007, we believe that the majority of AVINZA in the distribution channel is held at the retail pharmacy level. Due to the estimates and returnassumptions inherent in determining the amount of product returns, and that following the sale of the AVINZA co-promotion rights enteredproduct line to King we will have limited visibility into with Organonthe amount of Ligand shipped product in January 2006 and 2)the distribution channel, we are unable to quantify an estimate of the reasonably likely effect of any changes to the returns accrual, including the timing of any such changes, on our accountingfinancial position. Any such changes will be recorded as a component of discontinued operations in the period identified. For reference purposes, a 10% to 20% variance to our estimated allowance for stock-based compensation.returns on the AVINZA products would result in an approximate $1.7 million to $3.3 million adjustment to the reserve for AVINZA product returns.

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Co-Promote Termination Accounting
     As part of the termination and return of co-promotion rights agreement that we entered into with Organon in January 2006, we agreed to pay Organon $37.8 million on or before October 15, 2006, and after the termination, we will make quarterly payments to Organon, effective for the fourth quarter of 2006, equal to 6.5% of AVINZA net sales through December 31, 2012 and thereafter 6% through patent expiration, currently anticipated to be November 2017. The unconditional payment of $37.8 million to Organon and the estimated fair value of the amounts to be paid to Organon after the termination ($105.295.2 million as of September 30,January 2006), based on the future net sales of the product, (currently anticipated to be paid quarterly through November 2017) werewas recognized as liabilitiesa liability and expensed as costsa cost of the termination as of the effective date of the agreement, January 2006.
     AlthoughIn connection with the quarterlyAVINZA sale transaction, King assumed our obligation to make payments to Organon will be based on net reportedsales of AVINZA product sales, such payments will(the fair value of which approximated $93.2 million as of February 26, 2007). As Organon has not result in current period expense inconsented to the period upon which the payment is based, but instead will be charged againstlegal assignment of the co-promote termination liability. Any changesobligation from us to King, we remain liable to Organon in the event of King’s default of this obligation. Therefore, we recorded an asset on February 26, 2007 to recognize King’s assumption of the obligation, while continuing to carry the co-promote termination liability in our estimatesconsolidated financial statements to recognize our legal obligation as primary obligor to Organon as required under SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This asset represents a non-interest bearing receivable for future payments to be made by King and is recorded at its fair value. As of March 31, 2007, the current portion of the co-promote termination liability includes approximately $1.2 million owed to Organon on net AVINZA product sales however,recognized through February 26, 2007. Thereafter, the receivable and liability will resultremain equal and adjusted each quarter for changes in a change to the liability which will be recognized as an increase or decrease to co-promote termination charges in the period such changes are identified. We also recognize additional co-promote termination charges each period to reflect the fair value of the termination liability.obligation. On a quarterly basis, management reviews the carrying value and assesses the co-promote termination receivable for impairment (e.g. in the event King defaults on the assumed obligation to pay Organon). On a quarterly basis, management also reviews the carrying value of the co-promote termination liability. Due to assumptions and judgments inherent in determining the estimates of future net AVINZA sales through November 2017, the actual amount of net AVINZA sales used to determine the current fair valueamount of our co-promote terminationthe asset and liability for a particular period may be materially different from our current estimates. In addition, because of the inherent difficulties of predicting possibleAny resulting changes to the estimates and assumptions used to determineco-promote termination liability will have a corresponding impact on the estimateco-promote termination payments receivable. As of future AVINZA product sales, we are unable to quantify an estimate of the reasonably likely effect of any such changes on our results of operations or financial position.
Stock-Based Compensation
     Effective January 1, 2006, our accounting policy related to stock option accounting changed upon our adoption of SFAS No. 123(R),Share-Based Payment.SFAS 123(R) requires us to expenseMarch 31, 2007, the fair value of employee stock options and other formsthe co-promote termination liability (and the corresponding receivable) was determined using a discount rate of stock-based compensation. Under the fair value recognition provisions of SFAS 123(R), stock-based compensation cost is estimated at the grant date based on the value of the award and is recognized as expense ratably over the service period of the award. Determining the appropriate fair value model and calculating the fair value of stock-based awards requires judgment, including estimating stock price volatility, the risk-free interest rate, forfeiture rates and the expected life of the equity instrument. Expected volatility utilized in the model is based on the historical volatility of the Company’s stock price and other factors. The risk-free interest rate is derived from the U.S. Treasury yield in effect at the time of the grant. The model incorporates forfeiture assumptions based on an analysis of historical data. The expected life of the 2006 grants is derived in accordance with the safe harbor expected term assumptions under SAB No. 107. For the three and nine months ended September 30, 2006, we recorded $2.0 million and $4.0 million, respectively, of stock-based compensation for awards granted to employees and non-employee directors.
     Prior to January 1, 2006, we accounted for options granted to employees in accordance with APB No. 25,Accounting for Stock Issued to Employees, and related interpretations and followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation.” Therefore, prior to the first quarter of 2006, we did not record any compensation cost related to stock-based awards, as all options granted prior to 2006 had an exercise price equal to the market value of the underlying common stock on the date of grant. Periods prior to our first quarter of 2006 were not restated to reflect the fair value method of expensing stock options. The impact of expensing stock awards on our earnings may be significant and is further described in Note 1 to the notes to the unaudited condensed consolidated financial statements.15%.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     At September 30, 2006,March 31, 2007, our investment portfolio included fixed-income securities of $22.8$8.1 million. 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 wouldis not expected to have noa material impact on our financial condition, results of operations or cash flows. At September 30, 2006,March 31, 2007, we also have certain equipment financing arrangements with variable rates of interest. Due to the relative insignificance of such arrangements, however, 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 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 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures.
     The Company is required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Company’s Chief Executive Officer (“CEO”)our principal executive officer and Chief Financial Officer (“CFO”)principal financial officer, as appropriate, to allow timely decisions regardingensure that information required disclosure.to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms.
     In connection withThe Company’s exiting interim chief accounting officer, who was employed by the preparation ofCompany until May 15, 2007 executed Exhibits 31.2 and 32.2 for the Company’s quarterly report on Form 10-Q for the periodquarter ended SeptemberMarch 31, 2007. While this individual was the Company’s principal financial officer during the quarter ended March 31, 2007 and up until the Company’s chief financial officer was hired on April 30, 2006, management, under the supervision2007, Sections 302 and 906 of the CEO and CFO, conducted an evaluationSarbanes-Oxley Act of disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded2002 require that the Company’s disclosure controlsnew principal financial officer execute Exhibits 31.2 and procedures were32.2 for the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2007. The amendment to include the new certificates is not effective asconsidered the result of September 30, 2006 as they cannot assert the effective remediation of certain material weaknesses described in the Company’s management report on internal controlcontrols over financial reporting included in Item 9A to its Annual Reportreporting.
     Based on Form 10-K for the year ended December 31, 2005, as filed on March 31, 2006 and described below. As of September 30, 2006, certain of the material weaknesses identified in the 2005 Form 10-K have not been fully remediated. Additionally, since the material weaknesses described below have not been fully remediated, the CEO and CFO conclude that the Company’s disclosure controls and procedures are not effective at a reasonable assurance leveltheir most recent evaluation, as of the end of the fiscal quarterperiod covered by this quarterly report on Form 10-Q and its amendment, our chief executive officer and new chief financial officer have concluded that our disclosure controls and procedures, as defined inRules 13a-15(e) and 15d-15(e) of the filing date of the Form 10-Q.Exchange Act, are effective.
      As of September 30, 2006, management identified the continued existence of the following material weaknesses, which were identifiedThere was no change in our 2005 Annual Report, in connection with its assessment of the effectiveness of the Company’s internal control over financial reporting. Although changes have been implementedreporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to our internal controls over financial reporting to address certain of these matters, as further discussed in Item (b) below, management has not completed their own assessment of these control deficiencies and their impact onmaterially affect, our internal control over financial reporting.
Spreadsheet Controls. In connection with the change in the Company’s revenue recognition for product sales from the sell-in method to the sell-through method, the use of spreadsheets has become a pervasive and integral part of the Company’s financial accounting, quarter-end close, and financial reporting processes. The Company did not have effective end user general controls over the access, change management and validation of spreadsheets used in its financial processes, nor did the Company have formal policies and procedures in place relating to the use of spreadsheets. As more fully discussed below, management has commenced the implementation of policies and procedures relating to spreadsheet management which are designed to ensure that adequate control activities exist surrounding significant spreadsheets. These policies and procedures, which include controls relating to data integrity, version control, and restricted access to such spreadsheets, were implemented and are considered to be operating effectively for the Company’s key revenue recognition spreadsheets as of September 30, 2006. These policies and procedures were not fully implemented for all other key (non-revenue recognition) spreadsheets until the third quarter of 2006 which precluded management’s ability to test, assess, and conclude as to the effectiveness of such remediated internal controls for a reasonable period of time prior to September 30, 2006. Considering the significant reliance on spreadsheets in the current period and given that management is not able to conclude as to the operating effectiveness of all key spreadsheet controls, the continuing deficiencies discussed above surrounding the use of spreadsheets have been assessed to be a material weakness as of September 30, 2006.
Segregation of Duties. Management identified certain members of the Company’s accounting and finance department who had accounting system access rights that are incompatible with the current roles and duties of such individuals. This control deficiency was identified as of December 31, 2004. However, when considered in conjunction with the material weaknesses surrounding internal audit and monitoring controls discussed herein, this control deficiency was elevated to a material weakness as of December 31, 2005. In the first, second, and third quarters of 2006, the Company terminated access rights for those individuals who were determined to have system access incompatible with their job functions. While management believes the controls with respect to segregation of duties were appropriately designed and effective at September 30, 2006, the timing of the implementation of the remediation efforts and the Company’s program to test, assess,

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and conclude as to the effectiveness of such remediation efforts resulted in management’s inability to conclude that such controls were operating effectively for a reasonable period of time prior to September 30, 2006.
Monitoring Controls.As a result of the demands placed on the Company’s accounting and finance department with respect to the Company’s accounting restatement in 2005, management did not properly maintain the Company’s documentation of internal control over financial reporting during 2005 to reflect changes in internal control over financial reporting and as a result did not substantively commence the process to update such documentation and complete its assessment until December 2005. Further, the restatement process which occurred in 2005 resulted in the delayed performance of certain control procedures in the period-end close process. Accordingly, management determined that this control deficiency constituted a material weakness as of December 31, 2005. As discussed below, management has implemented procedures to ensure more timely maintenance of internal control documentation and execution of its monitoring controls over its internal controls over financial reporting. However, such procedures were not fully implemented until the second quarter 2006 which precluded management’s ability to test, assess, and conclude as to the effectiveness of such remediated internal controls for a reasonable period of time prior to September 30, 2006.
     As of September 30, 2006, certain of the material weaknesses identified in the 2005 Form 10-K, as listed below, have been assessed, as further discussed in Item (b) below, by management to be fully remediated. BDO Seidman LLP, our independent registered public accountants, has not performed any procedures to review our remediation efforts.
Revenue Recognition. The Company previously reported that it did not have effective controls and procedures to ensure that revenues were recognized in accordance with generally accepted accounting principles. As further discussed below, the Company has implemented new revenue recognition models and related internal controls to remediate this weakness. Such remediation efforts, however, were not fully implemented until the fourth quarter of 2005. Management believes the controls with respect to revenue recognition were appropriately designed and effective at June 30, 2006 and continued to be effective at September 30, 2006, as further discussed in Item (b) below.
Record Keeping and Documentation. The Company previously reported that it did not have adequate record keeping and documentation supporting the decisions made and the accounting for complex transactions. As further discussed below, the Company has implemented new procedures and controls to remediate this weakness. Such remediation efforts, however, were not fully implemented until the fourth quarter of 2005. Management believes the controls with respect to record keeping were appropriately designed and effective at June 30, 2006 and continued to be effective at September 30, 2006, as further discussed in Item (b) below.
Lack of Sufficient Qualified Accounting Personnel.The Company previously reported that it did not have adequate manpower in its accounting and finance department and lacked sufficient qualified accounting personnel to identify and resolve complex accounting issues in accordance with generally accepted accounting principles. As further discussed below, the Company has appropriately designed the organization structure of its accounting and finance department and staffed key positions to remediate this weakness. Such remediation efforts, however, were not fully implemented until the second and third quarters of 2006. Management believes the controls, with respect to qualified accounting personnel, were appropriately designed and effective at September 30, 2006, as further discussed in Item (b) below.
Financial Statement Close Procedures.The Company did not have adequate financial reporting and close procedures. As further discussed below, the Company previously reported that it has implemented new procedures and controls to remediate this weakness. Such remediation efforts, however, were not fully implemented until the fourth quarter of 2005. Management believes the controls with respect to financial statement close procedures were appropriately designed and effective at September 30, 2006, as further discussed in Item (b) below.

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Internal Audit. The Company previously reported that it did not maintain an independent effective Internal Audit department. As further discussed below, in the second and third quarters of 2006 the Company hired three internal audit personnel, including a Director of Internal Audit, and received Audit Committee approval for its internal audit plan and the internal audit charter. Effective the third quarter of 2006, the Company’s internal audit department was operating in accordance with the approved charter and began executing the approved internal audit plan. Accordingly, management believes that controls with respect to the existence of an independent, effective internal audit department are in place and operating at September 30, 2006, as further discussed in Item (b) below.
b) Remediation Steps to Address Material Weaknesses
Revenue Recognition
During 2005, the Company’s finance and accounting department, with the assistance of outside expert consultants, developed accounting models to recognize sales of its domestic products, except Panretin, under the sell-through revenue recognition method in accordance with generally accepted accounting principles. In connection with the development of these models, the Company also implemented a number of new and enhanced controls and procedures to support the sell-through revenue recognition accounting models. These controls and procedures include approximately 35 revenue models used in connection with the sell-through revenue recognition method including related contra-revenue models and demand reconciliations to support and assess the reasonableness of the data and estimates, which includes information and estimates obtained from third-parties.
During the fourth quarter of 2005, the accounting and finance department completed the implementation of procedures surrounding the month-end close process to ensure that the information and estimates necessary for reporting product revenues under the sell-through method to facilitate a timely period-end close were available.
A training program for employees and consultants involved in the revenue recognition accounting has been developed and took place during the fourth quarter of 2005. In 2006, additional training has been provided and updated as considered necessary.
The Company staffed the position of Senior Revenue Recognition Analyst in the second quarter of 2006 and has implemented additional reviews over the revenue recognition area by senior accounting and finance personnel. The Company has not filled the position of Manager of Revenue Recognition. However, given the sale of the Company’s revenue-producing assets, filling this position is not a significant priority and management believes that the measures identified above are sufficient to address the control considerations surrounding revenue recognition.
Certain of the remediation efforts described above relating to the new revenue recognition models and related controls were not implemented until the fourth quarter of 2005. Management believes the controls with respect to revenue recognition were appropriately designed and effective since June 30, 2006.
Record Keeping and Documentation
The Company has implemented improved procedures for analyzing, reviewing, and documenting the support for significant and complex transactions. Documentation for all complex transactions is now maintained by the Corporate Controller.
The Company’s accounting and finance and legal departments developed a formal internal policy during the fourth quarter of 2005 entitled “Documentation of Accounting Decisions,” regarding the preparation and maintenance of contemporaneous documentation supporting accounting transactions and contractual interpretations. The formal policy provides for enhanced communication between the Company’s finance and legal personnel.

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The remediation efforts described above were not implemented until the fourth quarter of 2005. Management believes the controls with respect to record keeping and documentation were appropriately designed and effective since June 30, 2006.
Lack of Sufficient Qualified Accounting Personnel
The Company’s previous Director of Internal Audit resigned effective December 2, 2005. In December 2005, the Company retained a nationally recognized external consulting firm to assist the Internal Audit department and oversee the Company’s ongoing compliance effort under Section 404 of the Sarbanes Oxley Act of 2002 until a permanent replacement for the Company’s Director of Internal Audit was hired. During the second quarter of 2006, the Company hired a Director of Internal Audit, who is a certified public accountant and who commenced employment in May 2006.
During 2005, the Company engaged expert accounting consultants to assist the Company’s accounting and finance department with a number of activities, including the management and implementation of controls surrounding the Company’s new sell-through revenue recognition models, the administration of existing controls and procedures, preparation of the Company’s SEC filings and the documentation of complex accounting transactions.
During the second quarter of 2006, the Company hired additional senior accounting personnel who are certified public accountants including, a Director of Corporate Accounting, a Senior Accounting Manager, and a Director of Internal Audit, as discussed above. The Company also staffed the position of Senior Revenue Recognition Analyst through an internal transfer in the second quarter of 2006 and hired a senior internal auditor and internal audit staff member in the third quarter of 2006. Additionally, the Company hired a Director of Budget and Financial Analysis in August 2006 to replace the Senior Manager, Budget and Financial Analysis who left the Company in June 2006. Lastly, other open positions below the manager level have been sufficiently staffed with qualified consulting personnel.
The remediation efforts described above were not implemented until the second and third quarters of 2006. Management believes the controls with respect to qualified accounting personnel were appropriately designed and effective at September 30, 2006.
Financial Statement Close Procedures
The Company has designed and implemented process improvements concerning the Company’s financial reporting and close procedures. A training session for all finance department employees and consultants involved in the financial statement close process took place during the fourth quarter of 2005. Additionally, an ongoing periodic training update/program has been implemented to conduct training sessions on a regular quarterly basis to provide training to its finance and accounting personnel and to review procedures for timely and accurate preparation and management review of documentation and schedules to support the Company’s financial reporting and period-end close process. As discussed above, the additional management personnel hired by the finance department will also help ensure that all documentation necessary for the financial reporting and period-end close procedures is properly prepared and reviewed.
The remediation efforts described above were not implemented until the fourth quarter of 2005 (and the remediation efforts described above in qualified accounting personnel was not substantially completed until the second and third quarters of 2006). Management believes the controls with respect to financial statement close procedures were appropriately designed and effective at September 30, 2006.
Internal Audit
As discussed under the captionLack of Sufficient Qualified Accounting Personnelabove, the Company hired a Director of Internal Audit, who commenced employment in the second quarter of 2006 and hired a senior internal auditor and internal audit staff member in the third quarter of 2006. Additionally, until the Director

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of Internal Audit commenced employment, the Company engaged a nationally recognized external consulting firm to perform the functions of the Internal Audit department.
The internal audit charter and the internal audit plan for 2006 were approved by the Company’s Audit Committee during the third quarter of 2006. The Company’s internal audit department commenced execution of the approved internal audit plan during the third quarter of 2006.
Based on the actions described above, management believes that controls related to the existence of an independent, effective internal audit department are in place and operating at September 30, 2006.
Spreadsheet Controls
Revenue Spreadsheet Controls.The Company has implemented new revenue recognition models and related internal controls to remediate this weakness. Such remediation efforts, however, were not fully implemented until the fourth quarter of 2005. Since June 30, 2006, the Company believes that the controls surrounding the revenue spreadsheets were appropriately designed and have been effective.
Non-Revenue Spreadsheet Controls.In the first, second, and third quarters of 2006, management identified and categorized significant spreadsheets using qualitative measures of financial risk and complexity. After being inventoried, the spreadsheets were subject to standardized control activity testing, ensuring that any deficiencies in such spreadsheets relating to security, change management, input validation, documentation, and segregation of duties were addressed. Management has completed the implementation of policies and procedures relating to spreadsheet management which are designed to ensure that adequate control activities exist surrounding significant spreadsheets. These policies and procedures, which include controls relating to data integrity, version control, and restricted access to such spreadsheets were fully implemented in the third quarter of 2006 and will be tested for operating effectiveness during the third and fourth quarters of 2006.
Segregation of Duties
In the first, second, and third quarters of 2006, management identified those members of the Company’s accounting and finance department who had accounting system access rights that were incompatible with the current roles and duties of such individuals and subsequently terminated the access rights for those individuals. On a quarterly basis, commencing with the first quarter of 2006, management monitors the accounting system access rights of those employees with access to the accounting software systems to identify any grants of incompatible user access rights or any user access rights resulting from subsequent changes or modifications to the Company’s internal control structure.
Monitoring Controls
As discussed under the captionInternal Auditabove, the Company hired a Director of Internal Audit, who commenced employment in the second quarter of 2006. Additionally, prior to the Director of Internal Audit commencing employment, the Company engaged and continues to use a nationally recognized external consulting firm to assist with internal audit services. As part of this service, these consultants are responsible for assisting management with updating and maintaining the Company’s documentation of internal control over financial reporting. The consultants are also assisting with the testing of such internal controls and in monitoring the progress of any ongoing and newly identified remediation efforts to help ensure the timely completion of the Company’s 2006 monitoring program.
Independent Registered Public Accountants
     BDO Seidman LLP, our independent registered public accountants, has not performed any procedures to review our remediation efforts.

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c) Changes in Internal Control Over Financial Reporting
     Except for the changes in connection with the remediation efforts performed in regard to the material weaknesses described above, there were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Securities Litigation
     Since August 2004, theThe Company has beenwas involved in several securities class action and shareholder derivative actions which followed announcements by the Company in 2004 and the subsequent restatement of its financial results in 2005. In June 2006, we announced that these lawsuits had been settled, subject to certain conditions such as court approval.
Background
     Beginning in August 2004, several purported class action stockholder lawsuits were filed in the United States District Court for the Southern District of California against the Company and certain of its directors and officers. The actions were brought on behalf of purchasers of the Company’s common stock during several time periods, the longest of which runs from July 28, 2003 through August 2, 2004. The complaints generally allege that the Company violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission by making false and misleading statements, or concealing information about the Company’s business, forecasts and financial performance, in particular statements and information related to drug development issues and AVINZA inventory levels. These lawsuits have been consolidated and lead plaintiffs appointed. A consolidated complaint was filed by the plaintiffs in March 2005. On September 27, 2005, the court granted the Company’s motion to dismiss the consolidated complaint, with leave for plaintiffs to file an amended complaint within 30 days. In December 2005, the plaintiffs filed a second amended complaint again alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act against the Company, David Robinson and Paul Maier. The amended complaint asserts an expanded Class Period of March 19, 2001 through May 20, 2005 and includes allegations arising from the Company’s announcement on May 20, 2005 that it would restate certain financial results. Defendants filed their motion to dismiss plaintiffs’ second amended complaint in January 2006.
     Beginning on or about August 13, 2004, several derivative actions were filed on behalf of the Company by individual stockholders in the Superior Court of California. The complaints name the Company’s directors and certain of its officers as defendants and name the Company as a nominal defendant. The complaints are based on the same facts and circumstances as the purported class actions discussed in the previous paragraph and generally allege breach of fiduciary duties, abuse of control, waste and mismanagement, insider trading and unjust enrichment. These actions were in the discovery phase.
     In October 2005, a shareholder derivative action was filed on behalf of the Company in the United States District Court for the Southern District of California. The complaint names the Company’s directors and certain of its officers as defendants and the Company as a nominal defendant. The action was brought by an individual stockholder. The complaint generally alleges that the defendants falsified Ligand’s publicly reported financial results throughout 2002 and 2003 and the first three quarters of 2004 by improperly recognizing revenue on product sales. The complaint generally alleges breach of fiduciary duty by all defendants and requests disgorgement, e.g., under Section 304 of the Sarbanes-Oxley Act of 2002. In January 2006, the defendants filed a motion to dismiss plaintiffs’ verified shareholder derivative complaint. Plaintiffs’ opposition was filed in February 2006.
The Settlement Agreements
In June 2006, the Company entered into agreements to resolve all claims by the parties in each of these matters, including those asserted against the Company and the individual defendants in these cases. Under the agreements, the Company agreed to pay a total of $12.2 million in cash for a release and in full settlement of all claims. $12.0 million of the settlement amount and a portion of ourthe Company’s total legal expenses waswere funded by ourthe Company’s Directors and Officers Liability insurance carrier while the remainder of the legal fees incurred ($1.4 million for the three months ended June 30, 2006) was paid by us.the Company. Of the $12.2 million settlement liability, $4.0 million was paid in October 2006 to us directly from theLigand’s insurance carrier and then disbursed to the claimants’ attorneys, while $8.0 million will bewas paid in July 2006 by the insurance carrier directly to an independent escrow agent responsible for disbursing the funds to the class action suit claimants. In July 2006, our insurance carrier funded the escrow account with the $8.0 million to be disbursed to the claimants. Under SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and

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Extinguishments of Liabilities, funding of the escrow account represents the extinguishment of our liability to the claimants. Accordingly, we derecognized the $8.0 million receivable and accrued liability in our consolidated financial statements as of September 30, 2006. As part of the settlement of the state derivative action, we havethe Company agreed to adopt certain corporate governance enhancements including the formalization of certain Board practices and responsibilities, a Board self-evaluation process, Board and Board Committee term limits (with gradual phase-in) and one-time enhanced independentindependence requirements for a single director to succeed the current shareholder representatives on the Board. Neither wethe Company nor any of ourits current or former directors and officers havehas made any admission of liability or wrongdoing. On October 12, 2006, the Superior Court of California approved the settlement of the state and federal derivative actions and entered final judgment of dismissal. The United States District Court has preliminarily approved the settlement of the Federal class action however, that settlement and the settlement of the Federal derivative actions are all subject to final approval and orders of the court.in October 2006.
SEC Investigation and Other Matters
     In connection withThe SEC issued a formal order of private investigation dated September 7, 2005, which was furnished to Ligand’s legal counsel on September 29, 2005, to investigate the circumstances surrounding Ligand’s restatement of the Company’sits consolidated financial statements for the years ended December 31, 2002 and 2003, and for the first three quarters of 2004. The SEC instituted a formalhas issued subpoenas for the production of documents and for testimony pursuant to that investigation concerning the consolidated financial statements. These matters were previously the subject of an informal SEC inquiry.to Ligand has beenand others. The SEC’s investigation is ongoing and Ligand is cooperating fully with the SEC and will continue to do so in order to bring the investigation to a conclusion as promptly as possible.investigation.
Other Matters
     The Company’s subsidiary, Seragen, Inc. and Ligand, were named parties toSergio M. Oliver, et al. v. Boston University, et al., a putative shareholder class action filed on December 17, 1998 in the Court of Chancery in the State of Delaware in and for New Castle County, C.A. No. 16570NC, by Sergio M. Oliver and others against Boston University and others, including Seragen, its subsidiary Seragen Technology, Inc. and former officers and directors of Seragen. The complaint, as amended, alleged that Ligand aided and abetted purported breaches of fiduciary duty by the Seragen related defendants in connection with the acquisition of Seragen by Ligand and made certain misrepresentations in related proxy materials and seeks compensatory and punitive damages of an unspecified amount. On July 25, 2000, the Delaware Chancery Court granted in part and denied in part defendants’ motions to dismiss. Seragen, Ligand, Seragen Technology, Inc. and the Company’s acquisition subsidiary, Knight Acquisition Corporation, were dismissed from the action. Claims of breach of fiduciary duty remain against the remaining defendants, including the former officers and directors of Seragen. The court certified a class consisting of shareholders as of the date of the acquisition and on the date of the proxy sent to ratify an earlier business unit sale by Seragen. On January 20, 2005, the Delaware Chancery Court granted in part and denied in part the defendants’ motion for summary judgment. Prior to trial, several of the Seragen director-defendants reached a settlement with the plaintiffs. The trial in this action then went forward as to the remaining defendants and concluded on February 18, 2005. On April 14, 2006, the court issued a memorandum opinion finding for the plaintiffs and against Boston University and individual directors affiliated with Boston University on certain claims. The opinion awards damages on these claims in the amount of approximately $4.8 million plus interest. Judgment, however, has not been entered and the matter is subject to appeal. While Ligand and its subsidiary Seragen have been dismissed from

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the action, such dismissal is also subject to appeal and Ligand and Seragen may have possible indemnification obligations with respect to certain defendants. As of September 30, 2006,March 31, 2007, the Company has not accrued an indemnification obligation based on its assessment that the Company’s responsibility for any such obligation is not probable or estimable.
     The Company received a letter in March 2007 from counsel to The Salk Institute for Biological Studies (“Salk”) alleging the Company owes Salk royalties on prior product sales of Targretin as well as a percentage of the amounts received from Eisai Co., Ltd. (Tokyo) and Eisai inc. (New Jersey) in the asset sale transaction completed with Eisai in October 2006. Salk alleges that they are owed at least 25% of the consideration paid by Eisai for that portion of our oncology product line and associated assets attributable to Targretin. In an April 11, 2007 request for mediation, Salk repeated these claims and asserted additional claims that allegedly increase the amount of royalty buy-out payments. The Company intends to vigorously oppose any claim that Salk may bring for payment related to these matters.
     The Company recorded approximately $7.2 million in transaction fees and other costs associated with the sale of AVINZA to King. This amount includes approximately $3.6 million for investment banking services and related expenses which have not yet been paid. The Company is disputing that these fees are owed to the investment banking firm. The investment banking firm has filed suit against the Company in New York on April 17, 2007 seeking recovery of these fees, plus interest, attorneys’ fees and costs.
     In addition, the Company is subject to various lawsuits and claims with respect to matters arising out of the normal course of business. Due to the uncertainty of the ultimate outcome of these matters, the impact on future financial results is not subject to reasonable estimates.

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ITEM 1A. RISK FACTORS
     The following is a summary description of some of the many risks we face in our business including any risk factors as to which there may have been a material change from those set forth in our Annual Report onForm 10-K for the year ended December 31, 2005.2006. You should carefully review these risks in evaluating our business, including the businesses of our subsidiaries. You should also consider the other information described in this report.
Risks Related To Us and Our Business.
Failure to timely complete our AVINZA product line sale or to successfully restructure our business could have adverse consequences for the Company.
     We have announced agreements to sell bothcompleted the sale of our commercial product lines and our real estate assets. These agreements contemplate that we will complete those asset sales andbusinesses in return receive substantial cash consideration by the end of the 2006 calendar year. We completed the oncology asset sale in October 2006 and the real estate asset sale in November 2006, but have not completed the pending AVINZA product line sale, which is the largest of the three. The AVINZA asset sale agreement contains a number of conditions to closing, including stockholder approval of the sale, and a number of other legal and operational requirements. Failure to timely satisfy these conditions, among other causes, could delay or prevent the closing of the transaction. For example, in order to obtain the required stockholder approval, we prepared and filed with the SEC a proxy statement, which may be reviewed by the SEC and subject to comments and revisions prior to mailing the proxy materials and scheduling the stockholder meeting. If we are unable to complete this process and close the transaction by December 31, 2006, neither King nor Ligand would be required to complete the transaction. Failure for any reason to complete the transaction could, e.g., prevent or delay the receipt of cash we need to run our business, cause us to have to use substantial cash to repay a loan from the purchaser of AVINZA, cause confusion and dissatisfaction among customers, suppliers and stockholders, subject us to legal action and harm our business in a number of other ways. In addition, any such delay or failure could depress our stock price.
February 2007. In connection with these asset sales we are also planning a restructuring of our remaining businesses, principally our research and development.development including the consolidation of our staff and facilities. If we are unable to successfully and timely complete this restructuring, our remaining assets could lose value, we may not be able to retain key employees, we may not have sufficient resources to successfully manage those assets or our business, and we may not be able to perform our obligations under various contracts and commitments. Any of these could have substantial negative impacts on our business and our stock price.
The restatement ofWe are substantially dependent on AVINZA royalties for our consolidated financial statements has had a material adverse impact on us, including increased costs and the increased possibility of legal or administrative proceedings.revenues.
     We determined that our consolidated financial statements for the years ended December 31, 2002 and 2003, and for the first three quarters of 2004, as described in more detail in our 2004 10-K, should be restated. As a result of these events, we have become subject to a number of additional risks and uncertainties, including:
We incurred substantial unanticipated costs for accounting and legal fees in 2005 in connection with the restatement. Although the restatement is complete, we expect to continue to incur unanticipated accounting and legal costs as noted below.
We were named in a number of lawsuits that began in August 2004 and an additional lawsuit filed in October 2005 claiming to be class actions and shareholder derivative actions. While we have agreed to settle this litigation, the settlements are subject to court approval. If not approved we could face substantial additional legal fees or judgments in excess of our insurance policy limits and management distraction.
The SEC has instituted a formal investigation of the Company’s consolidated financial statements. This investigation will likely divert more of our management’s time and attention and cause us to incur substantial costs. Such investigations can also lead to fines or injunctions or orders with respect to future activities, as well as further substantial costs and diversion of management time and attention.

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Material weaknesses or deficiencies in our internal control over financial reporting could harm stockholder and business confidence on our financial reporting, our ability to obtain financing and other aspects of our business.
     Maintaining an effective system of internal control over financial reporting is necessary for us to provide reliable financial reports. As disclosed in the Company’s 2005 Annual Report on Form 10-K, management’s assessment of the Company’s internal control over financial reporting identified material weaknesses in the Company’s internal controls surrounding (i) the accounting for revenue recognition; (ii) record keeping and documentation; (iii) accounting personnel; (iv) financial statement close procedures; (v) the inability of the Company to maintain an effective independent Internal Audit Department; (vi) the existence of ineffective spreadsheet controls used in connection with the Company’s financial processes, including review, testing, access and integrity controls; (vii) the existence of accounting system access rights granted to certain members of the Company’s accounting and finance department that are incompatible with the current roles and duties of such individuals (i.e., segregation of duties); and (viii) the inability of management to properly maintain the Company’s documentation of the internal control over financial reporting during 2005 or to substantively commence the process to update such documentation and assessment until December 2005. We have not fully remediated these material weaknesses and as a result, management continues to conclude that we did not maintain effective internal control over financial reporting as of September 30, 2006.
     Because we have concluded that our internal control over financial reporting is not effective as of September 30, 2006 and our independent registered public accounting firm issued a disclaimer opinion on the effectiveness of our internal controls as of December 31, 2005 due to our inability to make a timely assessment of the effectiveness of our internal controls, and to the extent we identify future weaknesses or deficiencies, there could be material misstatements in our consolidated financial statements and we could fail to meet our financial reporting obligations. As a result, we could be delisted from the NASDAQ Global Market, our ability to obtain additional financing, or obtain additional financing on favorable terms, could be materially and adversely affected, each of which, in turn, could materially and adversely affect our business, our strategic alternatives, our financial condition and the market value of our securities. In addition, perceptions of us could also be adversely affected among customers, lenders, investors, securities analysts and others. Current material weaknesses or any future weaknesses or deficiencies could also hurt confidence in our business and consolidated financial statements and our ability to do business with these groups.
Our revenue recognition policy has changed to the sell-through method which is currently not used by most companies in the pharmaceutical industry which will make it more difficult to compare our results to the results of our competitors.
     Because our revenue recognition policy has changed to the sell-through method which reflects products sold through the distribution channel, we do not recognize revenue for the domestic product shipments of AVINZA, and prior torecently completed the sale of our two commercial product lines, oncology products to Eisai,and pain, which in recent years provided substantially all of our continuing revenue. In each sale we received a one-time upfront cash payment. The consideration for the sale of the pain (AVINZA) franchise also included royalties that we will receive in the future from sales of AVINZA by King Pharmaceuticals, Inc. in October 2006,, who acquired the AVINZA rights from us. These consist of a 15% royalty on AVINZA sales for ONTAK, Targretin capsulesthe first 20 months, and Targretin gel. Underthen royalty payments ranging from 5-15% of AVINZA sales, depending on the level of total annual sales. These royalties represent and will represent substantially all of our previous method of accounting, product sales were recognized at time of shipment.
     Underongoing revenue for the sell-through revenue recognition method, future product sales and gross margins may be affected by the timing of certain gross to net sales adjustments including the cost of certain services provided by wholesalers under distribution service agreements, and the impact of price increases. Cost of products sold and therefore gross margins for our productsforeseeable future. Although we may also be further impacted by changesreceive royalties and milestones from our partners in various past and future collaborations, the timingamount of revenue recognition. Additionally, our revenue recognition models incorporate a significant amount of third party data from our wholesalers and IMS. Such data is subject to estimates and as such, any changes or corrections to these estimates identified in later periods, such as changes or corrections occurring as a result of natural disasters or other disruptions could affect the revenue that we report in future periods.
     As a result of our change in revenue recognition policy and the fact that the sell-through method is not widely used by our competitors, it may be difficult for potential and current stockholders to assess our financial results and compare these results to others in our industry. This may have an adverse effect on our stock price.

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Our new revenue recognition models under the sell-through method are extremely complex and depend upon the accuracy and consistency of third party data as well as dependence upon key finance and accounting personnel to maintain and implement the controls surrounding such models.
     We have developed revenue recognition models under the sell-through method that are unique to the Company’s business and therefore are highly complex and not widely used in the pharmaceutical industry. The revenue recognition models incorporate a significant amount of third party data from our wholesalers and IMS. To effectively maintain the revenue recognition models, we depend to a considerable degree upon the timely and accurate reporting to us of such data from these third partiesroyalties and our key accountingmilestones is unknown and finance personnel to accurately interpolate such data into the models. If the third party data is not calculated on a consistent basis and reported to us on an accurate or timely basis or we losehighly uncertain.
     Thus, any of our key accounting and finance personnel, the accuracy of our consolidated financial statements could be materially affected. This could cause future delays in our earnings announcements, regulatory filings with the SEC, and potential delisting from the NASDAQ Global Market.
Changes in the estimated liability recognized under the termination and return of rights transaction with Organon could be material in future periods and potentially result in adjustments to our consolidated statements of operationssetback that are inconsistent with the underlying trend in AVINZA product sales.
     As previously disclosed, on January 17, 2006, we signed an agreement with Organon that terminated the AVINZA co-promotion agreement between the two companies and returned AVINZA rights to Ligand. However, the parties agreed to continue to cooperate during a transition period that ended September 30, 2006 (the “Transition Period”) to promote the product.
     In consideration of the early termination and return of rights under the terms of the agreement, Ligand agreed to pay Organon $37.8 million on or before October 15, 2006. We will further pay Organon $10.0 million on or before January 15, 2007, provided that Organon has made its minimum required level of sales calls. In addition, after the termination, we will make quarterly payments to Organon equal to 6.5% of AVINZA net sales through December 31, 2012 and thereafter 6% through patent expiration, currently anticipated to be November 2017.
     The unconditional payment of $37.8 million to Organon and the estimated fair value of the amounts to be paid to Organon after the termination ($105.2 million as of September 30, 2006), based on the net sales of the product (currently anticipated to be paid quarterly through November 2017) were recognized as liabilities and expensed as costs of the termination as of the effective date of the agreement, January 2006. Additionally, the conditional payment of $10.0 million, which represents the approximation of the fair value of that service element of the agreement, is being recognized ratably as additional co-promotion expense over the Transition Period.
     Although the quarterly payments to Organon will be based on net reported AVINZA product sales, such payments will not result in current period expense in the period upon which the payment is based, but instead will be charged against the co-promote termination liability. The accretion to the current fair value for each reporting period will, however, be recognized as additional co-promote termination charges for that period at a rate of 15%, the discount rate used to initially value this component of the termination liability. Additionally, any changes to our estimates of future net AVINZA product sales (including for events, circumstances, changes in trends, and/or strategic decisions takenmay occur with respect to the product) will be recognized as an increase or decrease to co-promote termination charges in the period such changes are identified. Any such changes could be material and potentially result in adjustments to our consolidated statements of operations that are inconsistent with the underlying trend in AVINZA product sales.
Our single marketed product and our dependence on partners and other third parties mean our results are vulnerable to setbacks with respect to any one product.
     We currently only market one product, AVINZA, and we have only a handful of other partnered products that have made significant progress through development. Because these numbers are small, especially the single marketed product, any significant setback with respect to any one of them could significantly impair our operating results and/or reduce the market price for our securities. Setbacks could include problems with shipping, distribution, manufacturing, product safety, marketing, government licenses and approvals, intellectual property rights, competition with existing or new products and physician or patient acceptance of the product, as well as higher than expected total rebates, returns or discounts.

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     In particular, AVINZA now accounts for all of our product revenues. Thus, any setback with respect to AVINZA could significantly impact our financial results and our stock price.     AVINZA was licensed from Elan Corporation which was previouslyis its sole manufacturer. We have contracted with Cardinal to provide additional manufacturing capacity and we began to receive product from them in the second quarter of 2006. However, we expect Elan will continue to be a significant supplier over the next several years. Any problems with Elan’s or Cardinal’s manufacturing operations or capacity could reduce sales of AVINZA, as could any licensing or other contract disputes with these suppliers.Elan, raw materials suppliers, or others.
     Similarly, King, our contract sales partner, executes a large part of the marketing andKing’s AVINZA sales efforts for AVINZA and those efforts maycould be affected by our partner’sa number of factors and decisions regarding its organization, operations, and activities andas well as events both related and unrelated to AVINZA. Historically, ourAVINZA sales efforts, including our own orand our prior partner’s,co-promotion partners, have encountered and continue to encounter a number of difficulties, uncertainties and challenges, including sales force reorganizations and lower than expected sales call and prescription volumes, which have hurt and could continue to hurt AVINZA sales growth. AVINZA could also face stiffer competition from existing or future pain products. The negative impact on the product’s sales growth in turn has caused and may continue to cause our royalties, revenues and earnings to be disappointing. Any failure to fully optimize this new contract sales arrangement and the AVINZA brand, by either partner, could also cause
     AVINZA sales and our financial resultsalso may be susceptible to be disappointing and hurt our stock price. Any disputes with our contract sales partner could harm the promotion and sales of AVINZA and could result in substantial costs to us. In addition, the prior co-promotion arrangement ended in September 2006. Failure to successfully transition our prior partner’s efforts and functions back to Ligand and/or our new contract sales partner could adversely affect the sales of the product.
     AVINZA is a relatively new product and therefore the predictability of its commercial results is relatively low. Higherhigher than expected discounts (especially PBM/GPO rebates and Medicaid rebates, which can be substantial), returns and chargebacks and/or slower than expected market penetration that could reduce sales. Other setbacks that AVINZA could face in the sustained-release opioid market include product safety and abuse issues, regulatory action, intellectual property disputes and the inability to obtain sufficient quotas of morphine from the Drug Enforcement Agency (“DEA”) to support our production requirements.

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     In particular, with respect to regulatory action and product safety issues, the FDA recentlypreviously requested that we expand theexpanded warnings on the AVINZA label to alert doctors and patients to the dangers of using AVINZA with alcohol. We haveChanges were made changes to the label, after consultation and agreement withhowever, the FDA. The FDA also requested clinical studies to investigate the risks associated with taking AVINZA with alcohol. We have submitted protocols to the FDA and are awaiting their comments on these protocol designs. TheseAny additional warnings, studies and any further regulatory action could have significant adverse affectseffects on AVINZA sales.
Significant returns of products we sold prior to selling our commercial businesses could harm our operating results.
     Under our agreements to sell our commercial businesses, we remain financially responsible for returns of our products sold before those businesses were transferred to their respective buyers. Thus if returns of those products are higher than expected, we could incur substantial expenses for processing and issuing refunds for those returns which, in turn, could hurt our financial results. The amount of returns could be affected by a number of factors including ongoing product demand, product rotation at distributors and wholesalers, and product stability issues.
Return from any dividend is speculative; you may not receive a return on your securities.
     In general, we intend to retain any earnings to support the expansion of our business. We have paid a special dividend of a substantial portion of the net proceeds from our product line asset sales. However, other than this special dividend, we do not anticipate paying cash dividends on any of our securities in the foreseeable future. Any returns you receive from our stock will be highly dependent on increases in the market price for our securities, if any. The price for our common stock has been highly volatile and may decrease.
We will have continuing obligations to indemnify the buyers of our commercial businesses, and may be subject to other liabilities related to the sale of our commercial product lines.
     In connection with the sale of our AVINZA product line, we have agreed to indemnify King for a period of 16 months after the closing for a number of specified matters including the breach of our representations, warranties and covenants contained in the asset purchase agreement, and in some cases for a period of 30 months following the closing of the asset sale. In addition, we have agreed to indemnify Eisai, the purchaser of our oncology product line, after the closing of the asset sale, for damages suffered by Eisai arising for any breach of any of the representations, warranties, covenants or obligations we have made in the asset purchase agreement. Our obligation to indemnify Eisai survives the closing in some cases up to 18 or 36 months following the closing, and in other cases, until the expiration of the applicable statute of limitations. In a few instances, our obligation to indemnify Eisai survives in perpetuity. Under our agreement with King, $15.0 million of the total upfront cash payment was deposited into an escrow account to secure our indemnification obligations to King following the closing. Similarly, our agreement with Eisai required that $20.0 million of the total upfront cash payment be deposited into an escrow account to secure our indemnification obligations to Eisai after the closing.
     Our indemnification obligations under the asset purchase agreements could cause us to be liable to King or Eisai under certain circumstances, in excess of the amounts set forth in the escrow accounts. The AVINZA asset purchase agreement also allows King, under certain circumstances, to set off indemnification claims against the royalty payments payable to us. Under the asset purchase agreements, our liability for any indemnification claim brought by King and Eisai is generally limited to $40.0 million and $30.0 million, respectively. However, our obligation to provide indemnification on certain matters is not subject to these indemnification limits. For example, we agreed to retain, and provide indemnification without limitation to King, for all liabilities arising under certain agreements with Cardinal Health PTS, LLC related to the manufacture of AVINZA. Similarly, we agreed to retain, and provide indemnification without limitation to Eisai, for all liabilities related to certain claims regarding promotional materials for the ONTAK and Targretin drug products. We cannot predict the liabilities that may arise as a result of these matters. Any liability claims related to these matters or any indemnification claims made by King or Eisai could materially and adversely affect our financial condition.
     We may also be subject to other liabilities related to the products we recently sold. For example, we received a letter in March 2007 from counsel to the Salk Institute for Biological Studies alleging that we owe The Salk Institute royalties on prior sales of Targretin as well as a percentage of the amounts received from Eisai. Salk

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alleges that they are owed at least 25% of the consideration paid by Eisai for that portion of our oncology product line and associated assets attributable to Targretin. In an April 11, 2007 request for mediation, Salk repeated these claims and asserted additional claims that allegedly increase the amount of royalty buy-out payments. The Company intends to vigorously oppose any claim that Salk may bring for payment related to these matters. Also, the Company recorded approximately $7.2 million in transaction fees and other costs associated with the sale of AVINZA to King. This amount includes approximately $3.6 million for investment banking services and related expenses which have not yet been paid. The Company is disputing that these fees are owed to the investment banking firm. The investment banking firm has filed suit against the Company in New York on April 17, 2007 seeking recovery of these fees, plus interest, attorneys’ fees and costs. Also, as previously disclosed, in connection with the AVINZA sale transaction, King assumed our obligation to make payments to Organon based on net sales of AVINZA (the fair value of which approximated $93.2 million as of February 26, 2007). As Organon has not consented to the legal assignment of the co-promote termination obligation from us to King, we remain liable to Organon in the event of King’s default of this obligation. Any successful claim brought against us by Salk, the investment banking firm mentioned above or others or any requirement to pay a material amount to Organon in the event of King’s default on its assumed obligation to Organon could cause our stock price to fall and could decrease our cash or otherwise adversely affect our business.
Our product development and commercialization involveinvolves a number of uncertainties, and we may never generate sufficient revenues from the sale of products to become profitable.
     We were founded in 1987. We have incurred significant losses since our inception. At September 30, 2006,March 31, 2007, our accumulated deficit was approximately $1.0 billion.$588.9 million. We began receivinggenerating commercial product revenues fromin 1999; however, we completed the sale of pharmaceuticalall of our commercial products in 1999. To consistently be profitable, we must successfully develop, clinically test, marketFebruary 2007 and sellare now focused on 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.development pipeline.
     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 developed with our partners will be approved for marketing. For example, lasofoxifene (Oporia), a partner product being developed by Pfizer recently received a “non-approvable” decision from the FDA and trials of our previously marketed product Targretin failed to meet endpoints in Phase III trials in which we were studying its use in non small cell lung cancer.FDA. There are many reasons thatwhy we or our collaborative partners may fail in our efforts to develop our other potential products, including the possibility that:

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 Ø preclinical testing or human studies may show that our potential products are ineffective or cause harmful side effects;
 
 Ø the products may fail to receive necessary regulatory approvals from the FDA or foreign authorities in a timely manner, or at all;
 
 Ø the products, if approved, may not be produced in commercial quantities or at reasonable costs;
 
 Ø the products, onceif approved, may not achieve commercial acceptance;
 
 Ø regulatory or governmental authorities may apply restrictions to our products, which could adversely affect their commercial success; or
 
 Ø the proprietary rights of other parties may prevent us or our partners from marketing the products.
     Any product development failures for these or other reasons, whether with our products or our partners’ products, may reduce our expected revenues, profits, and stock price.
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.
     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. 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.
Our revenues are dependent on maintaining an effective marketing and sales capability in the United States which is expensive and time-consuming and may increase our operating losses.
     Maintaining an effective sales force to market and sell products is difficult, expensive and time-consuming. We have a US sales force of approximately 97 people as of October 26, 2006. We also rely on third-party distributors to distribute our products. The distributors are responsible for providing many support services, including customer service, order entry, shipping and billing and customer reimbursement assistance. 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 contract sales or licensing arrangements, for example our contract sales 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.

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The cash flows from our product shipments may significantly fluctuate each period based on the nature of our products.
     The purchasing and stocking patterns of our wholesaler customers for our AVINZA products are influenced by a number of factors that vary from wholesaler to wholesaler and even between individual distribution centers, including but not limited to overall level of demand, periodic promotions, required minimum shipping quantities and wholesaler competitive initiatives. Although we have distribution services contracts in place to maintain stable inventories at our major wholesalers, if any of them were to substantially reduce the inventory they carry in a given period, e.g. due to circumstances beyond their reasonable control, or contract termination or expiration, our shipments and cash flow for that period could be substantially lower than historical levels.
     We have entered into fee-for-service or distributor services agreements with the majority of our wholesaler customers. Under these agreements, in exchange for a set fee, the wholesalers have agreed to provide us with certain services. The agreements typically have a one-year initial term and are renewable.
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:
 Ø conduct research, preclinical testing and human studies;
 
 Ø establish pilot scale and commercial scale manufacturing processes and facilities; and
 
 Ø 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:
Our future operating and capital needs will depend on many factors, including:
 Ø the pace of scientific progress in our research and development programs and the magnitude of these programs;
 
 Ø the scope and results of preclinical testing and human studies;
 
 Ø the time and costs involved in obtaining regulatory approvals;
 
 Ø the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
 
 Ø competing technological and market developments;
 
 Ø our ability to establish additional collaborations;
 
 Ø changes in our existing collaborations;
 
 Ø the cost of manufacturing scale-up; and
 
 Ø the effectiveness of our commercialization activities.
     We currently estimate our research and development expenditures over the next 3three years to range between $90$110 million and $150$135 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, possible sale of assets or other transactions resulting from our strategic alternatives evaluation process which is ongoing, 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.requirements.
     While we expect to fund our research and development activities primarily from cash generated from internal operationsAVINZA royalties 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. These financings could depress our stock price. 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.

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We may require additional money to run our business and may be required to raise this money on terms which are not favorable or which reduce our stock price.
     We have incurred losses since our inception and may not generate positive cash flow to fund our operations for one or more years. As a result, we may need to complete additional equity or debt financings to fund our operations. Our inability to obtain additional financing could adversely affect our business. Financings may not be available at all or on favorable terms. In addition, these financings, if completed, still may not meet our capital needs and could result in substantial dilution to our stockholders. For instance, in April 2002 and September 2003 we issued an aggregate of 7.7 million shares of our common stock in private placement offerings. 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, that were convertible into 25,149,025 shares of our common stock. Approximately $125.15 million of principal amount of those notes remain outstanding and could be converted into approximately 20.8 million common shares. We announced the redemption of the notes in October 2006 and if noteholders do not convert into common stock, we would have to pay those noteholders cash equal to 101.2% of the principal amount of their notes.
     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 productsproduct candidates face significant regulatory hurdles prior to marketing which could delay or prevent sales.
     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

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moving toward or currently in clinical trials, including lasofoxifene for which Pfizer announced receipt of non-approval letters from the FDA, and two products in Phase III trials by one of our partners involving bazedoxifene. Failure to show any product’s safety and effectiveness would delay or prevent regulatory approval of the product and could adversely affect our business. The clinical trials process is complex and uncertain. The results of preclinical studies and initial clinical trials may not necessarily predict the results from later large-scale clinical trials. In addition, clinical trials may not demonstrate a product’s safety and effectiveness to the satisfaction of the regulatory authorities. A number of companies have suffered significant setbacks in advanced clinical trials or in seeking regulatory approvals, despite promising results in earlier trials. The FDA may also require additional clinical trials after regulatory approvals are received, which could be expensive and time-consuming, and failure to successfully conduct those trials could jeopardize continued commercialization.
     The rate at which we complete our clinical trials depends on many factors, including our ability to obtain adequate supplies of the products to be tested and patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites and the eligibility criteria for the trial. Delays in patient enrollment for our other trials may result in increased costs and longer development times. In addition, our collaborative partners have rights to control product development and clinical programs for products developed under the collaborations. As a result, these collaborators may conduct these programs more slowly or in a different manner than we had expected. Even if clinical trials are completed, we or our collaborative partners still may not apply for FDA approval in a timely manner or the FDA still may not grant approval.
We face substantial competition which may limitThe restatement of our revenues.consolidated financial statements has had a material adverse impact on us, including increased costs and the increased possibility of legal or administrative proceedings.
     SomeWe determined that our consolidated financial statements for the years ended December 31, 2002 and 2003, and for the first three quarters of 2004, as described in more detail in our 2004 Annual Report on Form 10-K, should be restated. As a result of these events, we have become subject to a number of additional risks and uncertainties, including:
We incurred substantial unanticipated costs for accounting and legal fees in 2005 in connection with the restatement. Although the restatement is complete, we expect to continue to incur unanticipated accounting and legal costs as noted below.
The SEC has instituted a formal investigation of the Company’s restated consolidated financial statements identified above. This investigation will likely divert more of our management’s time and attention and cause us to incur substantial costs. Such investigations can also lead to fines or injunctions or orders with respect to future activities, as well as further substantial costs and diversion of management time and attention.
Material weaknesses or deficiencies in our internal control over financial reporting could harm stockholder and business confidence on our financial reporting, our ability to obtain financing and other aspects of our business.
     As disclosed in the Company’s 2005 Annual Report on Form 10-K, management’s assessment of the drugsCompany’s internal control over financial reporting identified material weaknesses in the Company’s internal controls surrounding (i) the accounting for revenue recognition; (ii) record keeping and documentation; (iii) accounting personnel; (iv) financial statement close procedures; (v) the inability of the Company to maintain an effective independent Internal Audit Department; (vi) the existence of ineffective spreadsheet controls used in connection with the Company’s financial processes, including review, testing, access and integrity controls; (vii) the existence of accounting system access rights granted to certain members of the Company’s accounting and finance department that are incompatible with the current roles and duties of such individuals (i.e., segregation of duties); and (viii) the inability of management to properly maintain the Company’s documentation of the internal control over financial reporting during 2005 or to substantively commence the process to update such documentation and assessment until December 2005. As of December 31, 2006, these material weaknesses have been fully remediated.
     While no material weaknesses were identified as of December 31, 2006, we are developingcannot assure you that material weaknesses will not be identified in future periods. The existence of one or more material weakness or significant deficiency could result in errors in our consolidated financial statements, and marketing will compete with existing treatments. In addition, several companies are developing new drugs that target the same diseases that we are targetingsubstantial costs and are taking IR-related approaches to drug development. Products that compete with AVINZA include Purdue Pharma L.P.’s OxyContin and MS Contin, Janssen Pharmaceutica L.P.’s Duragesic, aai Pharma’s Oramorph SR, Alpharma’s Kadian, and generic sustained release morphine sulfate, oxycodone and fentanyl. New generic, A/B substitutable or other competitive products may also come to market and compete with our products, reducing our market share and revenues. Many of our existing or potential competitors, particularly large drug companies, have greater financial, technical and human resources than we do 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

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FDArequired to rectify any internal control deficiencies. If we fail to achieve and other regulatory approvalsmaintain the adequacy of our internal controls in accordance with applicable standards, we may be unable to conclude on an ongoing basis that we have effective internal controls over financial reporting. If we cannot produce reliable financial reports, our business and manufacturing and marketing pharmaceutical products.financial condition could be harmed, investors could lose confidence in our reported financial information, or the market price of our stock could decline significantly. In addition, academic institutions, governmental agenciesour ability to obtain additional financing to operate and other publicexpand our business, or obtain additional financing on favorable terms, could be materially and adversely affected, which, in turn, could materially and adversely affect our business, our financial condition and the market value of our securities. Also, perceptions of us could also be adversely affected among customers, lenders, investors, securities analysts and others. Any future weaknesses or deficiencies could also hurt our ability to do business with these groups.
We may require additional money to run our business and may be required to raise this money on terms which are not favorable or which reduce our stock price.
     We have incurred losses since our inception and may not generate positive cash flow to fund our operations for one or more years. As a result, we may need to complete additional equity or debt financings to fund our operations. Our inability to obtain additional financing could adversely affect our business. Financings may not be available at all or on favorable terms. In addition, these financings, if completed, still may not meet our capital needs and could result in substantial dilution to our stockholders. For instance, in April 2002 and September 2003 we issued an aggregate of 7.7 million shares of our common stock in private research organizations are developing productsplacement offerings. 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, that may compete with the products we are developing. These institutions are becoming more awareconverted into approximately 25.1 million shares of our common stock. The conversion of all of the commercial valuenotes was completed in November 2006.
     If adequate funds are not available, we may be required to delay, reduce the scope of their findingsor eliminate one or more of our research or drug development programs, or our marketing and are seeking patent protection and licensingsales initiatives. We may also be required to liquidate our business or file for bankruptcy protection. Alternatively, we may be forced to attempt to continue development by entering into arrangements with collaborative partners or others that require us to collect payments for the userelinquish some or all of their technologies. These institutions also may market competitive products on their ownour rights to technologies or through joint ventures and will compete with us in recruiting highly qualified scientific personnel.drug candidates that we would not otherwise relinquish.
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

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disagreements could delay, interrupt or terminate the collaborative research, development and commercialization of certain potential products, or could result in litigation or arbitration. The occurrence of any of these problems could be time-consuming and expensive and could adversely affect our business.
Challenges to or failure to secure patents and other proprietary rights may significantly hurt our business.
     Our success will depend on our ability and the ability of our licensors to obtain and maintain patents and proprietary rights for our potential products and to avoid infringing the proprietary rights of others, both in the United States and in foreign countries. Patents may not be issued from any of these applications currently on file, or, if issued, may not provide sufficient protection. In addition, disputes with licensors under our license agreements may arise which could result in additional financial liability or loss of important technology and potential products and related revenue, if any.
     Our patent position, like that of many biotech and 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

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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.
     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 manufacturersThird party intellectual property may prevent us or our partners from developing our potential products and we may owe a portion of any payments we receive from our collaboration partners to supply our products risks supply interruptionone or contamination and difficulty controlling costs.more third parties.
     We currently have no manufacturing facilities,Our success will depend on our ability and we rely on others for clinical or commercial productionthe ability of our marketedpartners to avoid infringing the proprietary rights of others, both in the United States and potential products.in foreign countries. In addition, some raw materials necessary for the commercial manufacturing of AVINZA are custom and can be obtained only fromdisputes with licensors under our manufacturers, Elan and Cardinal.
     To be successful, we will need to ensure continuity of the manufacture of AVINZA, 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 andlicense agreements may arise which could result in inventoryadditional financial liability or loss of important technology and product shortages. Ifpotential products and related revenue, if any. Further, the manufacture, use or sale of our potential products or our partners’ products or potential products may infringe the patent rights of others. This could impact AVINZA, eltrombopag, Bazedoxifene, lasofoxifene, LGD-4665 and any other products or potential products of ours or our partners. See note 4 of the consolidated financial statements, “Collaboration Agreements and Royalty Matters”.
     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 are unablehave licensed for our use, either by claiming the same methods or compounds or by claiming methods or compounds that could dominate those licensed to reliably manufacture our products our revenues could be adversely affected.
us. In addition, if we are unable to supply products in development,may not be aware of all patents or patent applications that may impact our

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ability to conduct preclinical testingmake, use or sell any of our potential products. For example, US patent applications may be kept confidential while pending in the Patent and human clinical trials willTrademark Office and patent applications filed in foreign countries are often first published six months or more after filing.
     While we periodically receive communications or have conversations with the owners of other patents or other intellectual property, none of these third parties have directly threatened an action or claim against us other than the Salk claim described herein. If others obtain patents with conflicting claims, we may 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 on a commercial scale, werequired to obtain licenses to those patents or to develop or obtain alternative technology. We may not be able to translateobtain 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 core technologies or other technologies into drugs that can be manufactured at costs or in quantities to make marketablepotential 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.

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Our business exposeslegacy commercial businesses expose 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 exposesWe completed the sale of our commercial businesses in February 2007. Nevertheless, products we sold prior to divesting these businesses expose us to potential product liability risks. OurFor example, such 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 theour business. Some
     In addition, some of the compounds we are investigating may be harmful to humans. For example, retinoids as a class are known to contain compounds which can cause birth defects. We may not be able to maintain our insurance on acceptable terms, or our insurance may not provide adequate protection in the case of a product liability claim. To the extent that product liability insurance, if available, does not cover potential claims, we will be required to self-insure the risks associated with such claims. We believe that we carry reasonably adequate insurance for product liability claims.
We use hazardous materials which requires us to incur substantial costs to comply with environmental regulations.
     In connection with our research and development activities, we handle hazardous materials, chemicals and various radioactive compounds. To properly dispose of these hazardous materials in compliance with environmental regulations, we are required to contract with third parties at substantial cost to us. Our annual cost of compliance with these regulations is approximately $0.7 million. 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.
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. In general, we intend to retain any earnings to support the expansion of our business. We have announced that the Board of Directors is considering an extraordinary dividend of a substantial portion of the net proceeds from our product line asset sales. However, other than this extraordinary dividend, we do not anticipate paying cash dividends on any of our securities in the foreseeable future. Thus any returns you receive will be highly dependent on increases in the market price for our securities, if any. The price for our common stock has been highly volatile and may decrease.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     We held a Special Meeting of Stockholders on February 12, 2007. The following proposals were approved at the Special Meeting:
                 
  Votes Votes Votes Broker
  For Against Abstaining Non Votes
1. Approval of the sale of our rights in and to AVINZA  72,236,440   45,351   9,330    
                 
2. Amendment of the 2002 Stock Incentive Plan to allow equitable adjustments to be made to options outstanding under the plan in the event of the payment of a large non-recurring cash dividend  71,576,022   696,639   18,460    

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ITEM 6. EXHIBITS
   
Exhibit Number Description
3.1 (1) Amended and Restated Certificate of Incorporation of the Company.Company (Filed as Exhibit 3.2).
   
3.2 (1) Bylaws of the Company, as amended.amended (Filed as Exhibit 3.3).
   
3.3 (2) Amended Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of the Company.
   
3.53.4 (3) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company dated June 14, 2000.
   
3.63.5 (4) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company dated September 30, 2004.
   
3.73.6 (5) Amendment to the Bylaws dated November 13, 2005 (Filed as Exhibit 3.1).
   
4.1 (6) Specimen stock certificate for shares of Common Stock of the Company.
   
4.2 (18)2006 Preferred Shares Rights Agreement, dated as of October 13, 2006, by and between the Company and Mellon Investor Services, LLC (Filed as Exhibit 4.1).
4.3 (11)(7) Indenture dated November 26, 2002, between Ligand Pharmaceuticals Incorporated and J.P. Morgan Trust Company, National Association, as trustee, with respect to the 6% convertible subordinated notes due 2007.2007 (Filed as Exhibit 4.3).
   
4.4 (11)4.3 (7) Form of 6% Convertible Subordinated Note due 2007.2007 (Filed as Exhibit 4.4).
   
4.5 (11)4.4 (7) Pledge Agreement dated November 26, 2002, between Ligand Pharmaceuticals Incorporated and J.P. Morgan Trust Company, National Association.Association (Filed as Exhibit 4.5).
   
4.6 (11)4.5 (7) Control Agreement dated November 26, 2002, among Ligand Pharmaceuticals Incorporated, J.P. Morgan Trust Company, National Association and JP Morgan Chase Bank.Bank (Filed as Exhibit 4.6).
   
10.294 (13)4.6 (8) Purchase Agreement, by and between Ligand Pharmaceuticals Incorporated, King Pharmaceuticals, Inc. and King Pharmaceuticals Research and Development, Inc., dated as of September 6, 2006. (Filed as Exhibit 2.1)
10.295 (14)Contract Sales Force2006 Preferred Shares Rights Agreement, by and between Ligand Pharmaceuticals Incorporated and King Pharmaceuticals, Inc.Mellon Investor Services LLC, dated as of September 6, 2006.October 13, 2006 (Filed as Exhibit 10.1)
10.296 (15)Purchase Agreement, by and among Ligand Pharmaceuticals Incorporated, Seragen, Inc., Eisai Inc. and Eisai Co., Ltd., dated as of September 7, 2006. (Filed as Exhibit 2.1)
10.297 (16)Separation Agreement dated as of July 31, 2006 by and between the Company and David E. Robinson. (Filed as Exhibit 10.1)
10.298Offer letter/employment agreement by and between the Company and Henry F. Blissenbach, dated as of August 1, 2006.
10.299 (17)Form of Letter Agreement (Change of Control Severance Agreement) by and between the Company and certain officers dated as of August 25, 2006. (Filed as Exhibit 10.1)
10.300 (17)Form of Letter Agreement (Ordinary Severance Agreement) by and between the Company and certain officers dated as of August 25, 2006. (Filed as Exhibit 10.2)4.1).
   
31.1 Certification byof Principal Executive Officer, Pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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Exhibit NumberDescription
31.2 Certification byof Principal Financial Officer, Pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification byof Principal Executive Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 Certification byof Principal Financial Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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(1) This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with the Company’s Registration Statement on Form S-4 (No. 333-58823) filed on July 9, 1998.
 
(2) This exhibit was previously filed as part of and is hereby incorporated by reference to same numbered exhibit filed with the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 1999.
 
(3) This exhibit was previously filed as part of, and are hereby incorporated by reference to the same numbered exhibit filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.
 
(4) This exhibit was previously filed as part of, and is hereby incorporated by reference to the same numbered exhibit filed with the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2004.
 
(5) This exhibit was previously filed as part of, and is being incorporated by reference to the number and exhibit filed with the Company’s current reportCurrent Report on Form 8-K filed on November 14, 2005.
 
(6) This exhibit was previously filed as part of, and is hereby incorporated by reference to the same numbered exhibit filed with the Company’s Registration Statement on Form S-1 (No. 33-47257) filed on April 16, 1992 as amended.
 
(7) This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with the Company’s Registration Statement on Form S-3 (No. 333-12603) filed on September 25, 1996, as amended.
(8)This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with the Registration Statement on Form 8-A/A Amendment No. 1 (No. 0-20720) filed on November 10, 1998.
(9)This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with the Registration Statement on Form 8-A/A Amendment No. 2 (No. 0-20720) filed on December 24, 1998.
(10)This exhibit was previously filed as part of, and is hereby incorporated by reference to the same numbered exhibit filed with the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2002.
(11)This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with the Company’s Registration Statement on Form S-3 (No. 333-102483) filed on January 13, 2003, as amended.
 
(12)This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with the Company’s Form 8-A 12G/A, filed on April 6, 2004.
(13)(8) This exhibit was previously filed as part of, and is being incorporated by reference to the numbered exhibit filed with the Company’s current report on Form 8-K filed on September 11, 2006.
(14)This exhibit was previously filed as part of, and is being incorporated by reference to the numbered exhibit filed with the Company’s current report on Form 8-K filed on September 12, 2006.

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(15)This exhibit was previously filed as part of, and is being incorporated by reference to the numbered exhibit filed with the Company’s current report on Form 8-K filed on September 11, 2006.
(16)This exhibit was previously filed as part of, and is being incorporated by reference to the numbered exhibit filed with the Company’s current report on Form 8-K filed on August 4, 2006.
(17)This exhibit was previously filed as part of, and is being incorporated by reference to the numbered exhibit filed with the Company’s current report on Form 8-K filed on August 30, 2006.
(18)This exhibit was previously filed as part of, and is being incorporated by reference to the numbered exhibit filed with the Company’s current reportCurrent Report on Form 8-K filed on October 27,17, 2006.

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LIGAND PHARMACEUTICALS INCORPORATED
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
     
   
Date: November 14, 2006May 23, 2007
 By: /s/ Paul V. MaierJohn P. Sharp  
  Paul V. Maier  
  Senior Vice President, Chief Financial OfficerJohn P. Sharp  
 Vice President of Finance and Chief Financial Officer

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