La Jolla Pharmaceutical Company Annual Report 2007

Plain-text annual report

Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549FORM 10-K þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 For the fiscal year ended DECEMBER 31, 2007OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934For the transition period from to Commission file number: 0-24274LA JOLLA PHARMACEUTICAL COMPANY(Exact name of registrant as specified in its charter) Delaware(State or other jurisdiction of incorporation or organization) 33-0361285(I.R.S. EmployerIdentification Number)6455 Nancy Ridge Drive, San Diego, CA 92121(Address of principal executive offices, including Zip Code)Registrant’s telephone number, including area code: (858) 452-6600Securities registered pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant to Section 12(g) of the Act: Title of each class: Name of each exchange on which registered:Common Stock, par value $0.01 per share The Nasdaq Global Market Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ 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 1934during 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 filingrequirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to thisForm 10-K. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2007 totaled approximately$120,881,000 based on the closing price of $4.48 as reported by the Nasdaq Global Market. As of February 29, 2008, there were 39,630,757 shares of theCompany’s common stock ($0.01 par value) outstanding.DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual stockholders’ report for the year ended December 31, 2007 are incorporated by reference into Parts I and II. Portions of the proxystatement for the 2008 annual stockholders’ meeting are incorporated by reference into Part III. TABLE OF CONTENTS PART I Item 1. Business 1 Item 1A. Risk Factors 14 Item 1B. Unresolved Staff Comments 26 Item 2. Properties 26 Item 3. Legal Proceedings 26 Item 4. Submission of Matters to a Vote of Security Holders 26 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 27 Item 6. Selected Financial Data 29 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38 Item 8. Financial Statements and Supplementary Data 38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 38 Item 9A. Controls and Procedures 39 Item 9B. Other Information 41 PART III Item 10. Directors, Executive Officers and Corporate Governance 41 Item 11. Executive Compensation 41 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 41 Item 13. Certain Relationships and Related Transactions, and Director Independence 41 Item 14. Principal Accountant Fees and Services 41 PART IV Item 15. Exhibits, Financial Statement Schedules 42 Signatures 43 EXHIBIT 10.71 EXHIBIT 23.1 EXHIBIT 31.1 EXHIBIT 31.2 EXHIBIT 32.1 Table of ContentsFORWARD-LOOKING STATEMENTS The forward-looking statements in this report involve significant risks, assumptions and uncertainties, and a number of factors, both foreseen andunforeseen, could cause actual results to differ materially from our current expectations. Forward-looking statements include those that express a plan, belief,expectation, estimation, anticipation, intent, contingency, future development or similar expression. The analyses of clinical results of Riquent® (abetimussodium), previously known as LJP 394, our drug candidate for the treatment of systemic lupus erythematosus (lupus), and any other drug candidate that wemay develop, including the results of any trials or models that are ongoing or that we may initiate in the future, could result in a finding that these drugcandidates are not effective in large patient populations, do not provide a meaningful clinical benefit, or may reveal a potential safety issue requiring us todevelop new candidates. The analysis of the data from our previous Phase 3 trial of Riquent showed that the trial did not reach statistical significance withrespect to its primary endpoint, time to renal flare, or with respect to its secondary endpoint, time to treatment with high-dose corticosteroids orcyclophosphamide. The results from our clinical trials of Riquent, including the results of any trials that are ongoing or that we may initiate in the future, maynot ultimately be sufficient to obtain regulatory clearance to market Riquent either in the United States or any other country, and we may be required toconduct additional clinical studies to demonstrate the safety and efficacy of Riquent in order to obtain marketing approval. There can be no assurance,however, that we will have the necessary resources to complete any current or future trials or that any such trials will sufficiently demonstrate the safety andefficacy of Riquent. Our ability to develop and sell our products in the future may be adversely affected by the intellectual property rights of third parties orthe validity or enforceability of our intellectual property rights. Additional risk factors include the uncertainty and timing of: our ability to raise additionalcapital; obtaining required regulatory approvals, including delays associated with any approvals that we may obtain; the timely supply of drug product forclinical trials; our ability to pass all necessary regulatory inspections; the increase in capacity of our manufacturing capabilities for possiblecommercialization; successfully marketing and selling our products; our lack of manufacturing, marketing and sales experience; our ability to make use ofthe orphan drug designation for Riquent; generating future revenue from product sales or other sources such as collaborative relationships; futureprofitability; and our dependence on patents and other proprietary rights. Accordingly, you should not rely upon forward-looking statements as predictionsof future events. The outcome of the events described in these forward-looking statements are subject to the risks, uncertainties and other factors described in“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the “Risk Factors” contained in this Annual Report onForm 10-K, and in other reports and registration statements that we file with the Securities and Exchange Commission from time to time. We expresslydisclaim any intent to update forward-looking statements. Table of ContentsPART I In this report, all references to “we,” “our,” and “us” refer to La Jolla Pharmaceutical Company, a Delaware corporation, and our wholly owned subsidiary.Item 1. BusinessOverview La Jolla Pharmaceutical Company was incorporated in Delaware in 1989. In October 2004, we established a subsidiary, La Jolla Limited, in England inconnection with potential development efforts for Riquent® in Europe. We are a biopharmaceutical company dedicated to improving and preserving humanlife by developing innovative pharmaceutical products. Our leading product in development is Riquent, which is designed to treat patients with lupus. Lupus is an antibody-mediated disease caused by abnormal B cell production of antibodies that attack healthy tissues. Current treatments for thisautoimmune disorder often address only symptoms of the disease, or nonspecifically suppress the normal operation of the immune system, which can result insevere, negative side effects and hospitalization. We believe that Riquent has the potential to be an effective lupus therapy without these severe, negativeside effects.Recent Developments On February 11, 2008, we announced that we had made significant progress in our current double-blind, placebo-controlled randomized Phase 3 clinicalstudy of Riquent, referred to as the “Phase 3 ASPEN study” (Abetimus Sodium in Patients with a History of Lupus Nephritis), in that we had enrolled 607patients and 130 clinical trial sites were open to enroll patients in 23 countries. In addition, we also announced that our current enrollment target of at least740 patients was expected to be completed around the end of the second quarter of 2008.Developments in 2007 On February 1, 2007, we announced that we had made continued progress in enrolling patients in our Phase 3 ASPEN study of Riquent in that we hadenrolled 202 patients in the study and 74 clinical trial sites were open to enroll patients, including newly added sites in Europe and Mexico. In addition, wealso announced that following recent discussions with the U.S. Food and Drug Administration (the “FDA”), we implemented several enhancements to furtherstrengthen the current Phase 3 ASPEN study, which remains under Special Protocol Assessment. These enhancements included a focus on higher doses and anincrease in sample size. On March 8 and March 20, 2007, we announced positive interim antibody results from our Phase 3 ASPEN study of Riquent. Analyses of interim antibodydata indicated that patients treated with 900 mg or 300 mg per week doses of Riquent had greater reductions in antibodies to double-stranded DNA(“dsDNA”) than patients treated with 100 mg per week or placebo. The results showed a significant dose response when comparing all Riquent-treatedpatients to placebo-treated patients (p = 0.0001), and each Riquent dose group to the placebo dose group (p < 0.0032 for 100 mg, p < 0.0001 for 300 mg and 900 mg). On March 29, 2007, we announced the pricing of an underwritten public offering of 5,800,000 shares of our common stock at $6.00 per share. Inconnection with this offering, we granted the underwriters an option to purchase up to an additional 870,000 shares to cover over-allotments. On April 10,2007, we announced that we had completed the public offering for total net proceeds of approximately $37.9 million, including the proceeds from the over-allotment shares. On April 26, 2007, we announced that composition of matter patents covering Riquent were issued in both Europe and in the People’s Republic of China.If the full five years of patent term extension under a Supplemental Protection Certificate is granted, the term of the European patent would extend toDecember 2, 2018. The Chinese patent will be in effect until September 8, 2014.1Table of Contents On May 10, 2007, we announced that Niv E. Caviar had joined the Company as Executive Vice President, Chief Business Officer and Chief FinancialOfficer. On May 24, 2007, we announced that we had presented three papers related to Riquent at the 8th International Congress on SLE. The first presentationreviewed recently announced safety and interim antibody data from the Phase 3 ASPEN study which highlighted the statistically significant dose responseobserved between the 100 mg, 300 mg and 900 mg doses of Riquent compared with placebo (p=0.0001). The second presentation reviewed the safety anddrug levels of Riquent at doses of up to 2,400 mg in healthy volunteers and the third, cardiovascular safety in healthy volunteers.Business Strategy Our near term objective is to focus on the development of Riquent, our therapeutic drug candidate for the treatment of lupus renal disease. Additionally,we will also seek to expand our drug development programs. Our strategy includes the following key elements:Seek additional funding, including through collaborative arrangements and through public and/or private financings, to develop and commercializeproduct candidates. In order to continue our development and potential commercialization of Riquent and other product candidates, we will need significantadditional funding. Our choice of financing alternatives may vary depending on a number of factors, including the interest of other entities in strategictransactions with us, the market price of our securities and conditions in the financial markets. There can be no guarantee that additional financing will beavailable on favorable terms, if at all, whether through collaborative arrangements, the issuance of securities, or otherwise.Complete clinical studies of Riquent to satisfy regulatory requirements. Based on the FDA’s approvable letter we received in October 2004, we are requiredto complete an additional, randomized, double-blind study that demonstrates the clinical benefit of Riquent prior to any potential approval in the UnitedStates. The letter indicated that the successful completion of our ongoing clinical trial, which we initiated in August 2004, would appear to satisfy thisrequirement. Our primary goal is to complete this study in order to satisfy the requirement set forth in the FDA’s letter. We restarted enrollment in the UnitedStates for this study in the third quarter of 2006, after a final review of the revised protocol by the FDA, and expanded the study to Europe and Asia later in2006. We further expanded the study globally in 2007 and currently target enrolling at least 740 patients, to achieve the required number of renal flares,around the end of the second quarter of 2008.Continue commercialization planning activities. During 2008, we expect to continue development of a commercialization plan for the United States marketincluding marketing, sales and manufacturing activities. If Riquent is ultimately approved in the United States, as to which we can provide no assurance, weexpect to market Riquent ourselves or in collaboration with a commercial partner using a specialty pharmaceutical sales force which would target therheumatology and nephrology specialists who treat the majority of lupus patients with renal disease. If Riquent is approved outside of the United States, as towhich we can provide no assurance, we currently expect to seek a marketing collaboration with one or more partners. We also expect to enter intoarrangements with contract manufacturing companies to expand our own production capacity in order to meet potential commercial demand.Develop additional therapeutics for other life-threatening diseases. We seek to expand our drug development pipeline with products that are commerciallysynergistic with Riquent by licensing or acquiring rights to compounds and drug candidates that have been developed outside of the Company as well as bycollaborating with third parties to further our efforts on drug candidates developed internally. In recent years, we have focused our product development efforts on our programs for lupus and anti-inflammatory disorders. In the years endedDecember 31, 2007, 2006 and 2005, we incurred expenses of approximately $46.6 million, $32.9 million and $22.6 million, respectively, for productresearch and development on these programs.2Table of ContentsRiquent Program Lupus is a life-threatening, antibody-mediated disease in which disease-causing antibodies damage various tissues. According to recent statistics compiledby the Lupus Foundation of America, epidemiological studies and other sources, the number of lupus patients in the United States is estimated to be between500,000 and 1,000,000, and approximately 16,000 new cases are diagnosed each year. Approximately nine out of 10 lupus patients are women, who usuallydevelop the disease during their childbearing years. Lupus is characterized by a multitude of symptoms that can include kidney inflammation, which canlead to kidney failure (lupus nephritis), serious episodes of cardiac and central-nervous-system inflammation, as well as extreme fatigue, arthritis and rashes.Approximately 80% of all lupus patients progress to serious symptoms. Approximately 40-45% of lupus patients will develop kidney disease, which is aleading cause of death in lupus. Antibodies to dsDNA can be detected in up to 85% of lupus patients who are not receiving immunosuppressive therapy. Antibodies to dsDNA are widelybelieved to cause kidney disease (nephritis), often resulting in morbidity and mortality in lupus patients. Lupus nephritis is characterized by periods ofextreme, acute inflammation called “renal flares” which often require aggressive treatment with high-dose corticosteroids, immunosuppressive agents, andhospitalization. Patients not experiencing a renal flare often have less severe, chronic inflammation which can also contribute to the morbidity and mortalityof lupus nephritis. Patients experiencing a renal flare have more severe inflammation as evidenced by indicators of diminished kidney function such aselevated serum creatinine or increased proteinuria. Proteinuria, or protein in the urine, is believed to be a pathological indicator of renal disease. Thereduction of proteinuria is one of the goals for the treatment of lupus patients with renal disease. Monitoring the level of a patient’s proteinuria is a routineand important way to help determine the severity and progression of renal disease. Over time, lupus nephritis can lead to deterioration of kidney function andto end-stage kidney disease, requiring long-term renal dialysis or kidney transplantation to sustain a patient’s life. Current treatments for lupus patients who have a renal flare often involve repeated administration of corticosteroids, often at high levels, that can lead toserious side effects when used long-term. Many patients with renal flares are also treated with immunosuppressive therapy, including anti-cancer ortransplantation drugs, which can have a general suppressive effect on the immune system, may be carcinogenic and/or can cause birth defects. Treatment withimmunosuppressive therapies can leave patients vulnerable to serious infection, which is a significant cause of sickness and death in these patients.Importantly, many patients do not respond adequately to treatment with immunosuppressive therapies and fail to achieve full remission, a return to normalrenal function or the level of renal function prior to the flare. As a result, low to moderate levels of inflammation remain as evidenced by elevated urineprotein (proteinuria), elevated serum creatinine, and other markers of abnormal kidney function. This incomplete response to treatment withimmunosuppressive therapies increases the risk of additional renal flares as well as the risk of end-stage kidney disease and death. Riquent was developed based on our patented Tolerance Technology® and comprises a lupus disease specific epitope attached to a carrier platform. Thefamily of molecules based on this technology are called Toleragens®. The design of Riquent is based on scientific evidence of the role of antibodies todsDNA in lupus. We have designed Riquent to suppress the production of antibodies to dsDNA in lupus patients without suppressing the normal function ofthe immune system. Published studies of lupus patients indicate that a rise in the level of antibodies to dsDNA may be predictive of renal flares in lupuspatients with renal involvement, and that reducing antibodies to dsDNA by treating with corticosteroids can prevent relapse. Furthermore, based onpublished data from our own previous studies, a reduction in the levels of antibodies to dsDNA significantly correlated with a reduced risk of renal flare andimproved health-related quality of life. Based on these same published data, a rise in antibodies to dsDNA significantly correlated with an increased risk ofrenal flare and no change or deterioration in health-related quality of life. In a mouse model of lupus nephritis that generates elevated levels of antibodies todsDNA, administration of Riquent reduced the production of antibodies to dsDNA, reduced the number of antibody-forming cells, reduced kidney diseaseand extended the life of the animals.3Table of Contents We believe that our own and other studies provide evidence that reducing levels of antibodies to dsDNA may provide an effective therapy for lupusnephritis. Based on this rationale, the Phase 3 ASPEN study is designed to assess the ability of Riquent to provide or maintain a remission in lupus nephritis.This is evidenced by the prevention of renal flares and by reductions in proteinuria, which are both important measures of damage to the kidney leading toabnormal kidney function.Riquent Clinical Trial HistoryPhase 1 trial Based on our pre-clinical findings, we filed an Investigational New Drug application for Riquent with the FDA in August 1994. In a double-blind,placebo-controlled Phase 1 clinical trial conducted in December 1994, healthy volunteers received Riquent and displayed no drug-related adverse effects.Upon completion of our Phase 1 trial, we began four Phase 2 clinical trials.Phase 2 trials Our Phase 2 clinical trials included a single-dose trial, a repeat dose-escalating trial and two dose-ranging trials. In 1994, we initiated a single-dose clinical trial to evaluate the safety of a single, 100 mg intravenous dose of Riquent in four female lupus patients.Riquent was well tolerated by all four patients, with no drug-related adverse clinical symptoms and no clinically significant complement (inflammation-promoting proteins) level changes. In 1995, we initiated a repeat dose-escalating clinical trial in which two female lupus patients each received doses of 10, 10, 50, 50, 100 and 100 mg ofRiquent at two-week intervals. After the 10-week dosing regimen was completed, the patients were monitored for six weeks. Riquent was well tolerated byboth patients. Six weeks after the last dose, the antibodies to dsDNA levels in both patients remained suppressed below baseline levels. Also in 1995, we conducted a double-blind, placebo-controlled dose-ranging trial, in which 58 lupus patients with mild lupus symptoms were treated for afour-month period with Riquent or placebo, and then were monitored for two months. Patients in the weekly treatment groups showed a dose-responsecorrelation between increasing doses of Riquent and reductions of levels of antibodies to dsDNA. The drug was well tolerated with no clinically significantdose-related adverse reactions observed. In 1999, we completed a second double-blind, placebo-controlled dose-ranging trial, in which 74 lupus patients received weekly injections of 10, 50 or100 mg of Riquent or placebo for a 12-week period. In patients treated weekly with placebo, 10 mg or 50 mg of Riquent, antibodies to dsDNA increased by100%, 53% and 10%, respectively, while in patients treated weekly with 100 mg of Riquent, antibodies to dsDNA decreased by 43%, a statisticallysignificant difference from placebo. Seven Riquent-treated patients had serious adverse events, but none were considered related to Riquent treatment.Phase 2/3 trial In December 1996, we initiated a double-blind, placebo-controlled, multi-center Phase 2/3 clinical trial of Riquent in which lupus patients with a historyof lupus nephritis received placebo or weekly doses of 100 mg of Riquent for the first 16 weeks of the trial. The trial design was then changed whereby,patients received alternating eight week drug holidays followed by 12 weeks of weekly treatments with 50 mg of Riquent or placebo. Patients were in thetrial for up to 18 months. More than 200 patients at more than 50 sites in North America and Europe enrolled in the trial. This trial was conducted withAbbott Laboratories as part of our former joint development agreement.4Table of Contents In May 1999, an interim analysis of the Phase 2/3 trial indicated that the trial was unlikely to reach statistical significance for the primary endpoint, timeto renal flare, and the trial was stopped. In September 1999, our joint development agreement for Riquent with Abbott Laboratories was terminated. In November 1999, we announced results from retrospective analyses of the data from the Phase 2/3 clinical trial, which showed that a certain group ofpatients treated with Riquent with “high affinity” antibodies had fewer renal flares and longer time to treatment with high-dose corticosteroids and/orcyclophosphamide (“HDCC”). These results were based on an analysis of the trial using a blood test that we developed and that appears to predict whichpatients will respond to treatment with Riquent at the doses being administered at that time. The “high-affinity” patients treated with Riquent experienced significantly longer time to renal flare (p = 0.007), the primary endpoint of the trial, fewerrenal flares (p = 0.008), longer time to treatments with HDCC (p = 0.0003) and fewer exposures to HDCC (p < 0.001) when compared to the placebo-treatedgroup. Also in the Phase 2/3 trial, mean levels of circulating antibodies to dsDNA in patients treated with Riquent were reduced by a statistically significantamount relative to placebo during drug treatment (p < 0.0001). Further, in a group of high-affinity patients with impaired renal function (defined as serumcreatinine > 1.5 mg/dL), there were six renal flares in 11 patients treated with placebo and no renal flares in 11 patients treated with Riquent (p = 0.012).Previous Phase 3 trial Based on the observations from our Phase 2/3 trial and following discussions with the FDA, we initiated a Phase 3 clinical trial in September 2000 tofurther evaluate the safety and efficacy of Riquent in the treatment of lupus renal disease. The double-blind, placebo-controlled study was conducted at 91sites in North America and Europe and was designed to evaluate the potential of Riquent to delay and reduce the number of renal flares and to delay andreduce the need for treatment with HDCC and/or other immunosuppressive drugs in high-affinity patients. Patients in the trial were treated weekly with either100 mg of Riquent or placebo for a period of up to 22 months. Following the completion of the trial in February 2003, we announced that Riquent appeared to be well tolerated with no apparent differences in theoverall incidence of serious adverse events or adverse events between Riquent-treated and placebo-treated patients. The trial data indicated that treatmentwith Riquent did not increase length of time to renal flare, the primary endpoint, or time to treatment with HDCC, the secondary endpoint, in a statisticallysignificant manner when compared with placebo through the end of the study. In the trial, there were fewer renal flares, fewer treatments with HDCC and fewer Major SLE flares in Riquent-treated patients compared with placebo-treated patients, but the differences were not statistically significant. There was a 25% reduction in the incidence of renal flare and a 21% reduction in theincidence of Major SLE flare. The estimated median time to renal flare was 123 months in the Riquent-treated group and 89 months in the placebo-treatedgroup. There was a statistically significant reduction in antibodies to dsDNA in the Riquent-treated group compared with the placebo-treated group (p <0.0001). In patients with impaired renal function at baseline, Riquent-treated patients had fewer renal flares, treatments with HDCC and Major SLE flarescompared with patients on placebo, but the sample size of this subgroup was small and the differences were not statistically significant. In March 2003, we announced results from several retrospective analyses of trial data indicating that renal flares occurred approximately one-fifth as oftenin patients with sustained reductions in antibodies to dsDNA compared with patients with unchanged or increasing antibodies (Phase 3: p < 0.0001; Phase2/3: p = 0.0004). Patients with sustained reductions in antibodies to dsDNA also reported improved or maintained health-related quality of life comparedwith patients that did not have sustained reductions, regardless of treatment group. In November 2003, we announced analyses using Cox’s ProportionalHazards Regression Model demonstrating that a 50% reduction in antibodies to dsDNA from baseline was associated with a 52% lower risk of renal flare inthe Phase 2/3 trial (p = 0.0007) and a 53% lower risk in the Phase 3 trial (p < 0.0001).5Table of Contents Further, in March 2004, we announced statistically significant but retrospective results from the Phase 2/3 and Phase 3 trials showing that, after one year oftreatment, the proportion of lupus patients with a reduction in proteinuria of at least 50% from baseline was significantly greater in the Riquent-treated groupthan in the placebo-treated group. In 2004, we filed a New Drug Application (“NDA”) for Riquent with the FDA. Our NDA submission was prepared on our understanding that the FDA couldpotentially approve Riquent on the basis of our clinical trial results or under the accelerated approval regulation known as Subpart H. Under Subpart H, drugsin development for serious, life-threatening diseases with an unmet medical need can be approved on an accelerated basis if the FDA determines that theeffect of the drug on a surrogate endpoint is reasonably likely to predict clinical benefit and that a post-marketing clinical trial can be successfully completedfollowing drug approval which confirms the clinical benefit. As previously described, in our Phase 3 and Phase 2/3 trials, patients treated with Riquent hadsignificantly reduced levels of antibodies to dsDNA compared with patients treated with placebo. In October 2004, we received a letter from the FDAindicating that Riquent is approvable, but that an additional, randomized, double-blind study demonstrating the clinical benefit of Riquent would need to becompleted prior to approval. The FDA letter indicated that the successful completion of the clinical trial that we initiated in August 2004 would appear tosatisfy this requirement.Current Phase 3 ASPEN trial A placebo controlled Phase 3 clinical benefit trial, designed to meet the FDA’s requirement that we conduct an additional randomized, double-blind study,was initiated in August 2004 under a Special Protocol Assessment (“SPA”). The SPA process is a formal procedure that results in a binding written agreementbetween a company and the FDA concerning the design of a clinical trial or other study. While we delayed additional patient enrollment in March 2005 toconserve cash, in the third quarter of 2006 we reinitiated enrollment in the trial and, on February 11, 2008, announced that 607 patients had been enrolled inthe study and 130 clinical trial sites were open to enroll patients in 23 countries. Our current enrollment target of at least 740 patients is expected to becompleted around the end of the second quarter of 2008. In the current Phase 3 ASPEN trial compared to the previous Phase 3 study, virtually all patients are being treated with one of two higher doses of Riquentor placebo, the number of patients to be studied was more than doubled, the primary endpoint was refined, the use of immunosuppressive agents was furtherrestricted, and the treatment duration was changed to 12 months. As in the previous Phase 3 study, patients in the current study all have a history of lupusrenal disease. The primary endpoint, time to renal flare, was refined in order to eliminate the hematuria component, which appears to be less specific for lupusrenal disease. These changes were all based on results of the previous Phase 2/3 and Phase 3 trials of Riquent. Secondary endpoints in the current Phase 3ASPEN study include reduction in proteinuria, an indicator of renal function, as well as time to major SLE flare, a measure of SLE disease activity. On February 1, 2007, following further discussions with the FDA, we announced that all new patients entering the study will be randomized in equalnumbers to receive weekly doses of either 300 mg or 900 mg of Riquent or placebo, with no further patients randomized to the 100 mg dose group. Currently,approximately 50 patients are being treated with 100 mg and will continue at that dose through the completion of the study. The FDA confirmed that theprimary endpoint required to establish efficacy is the time to renal flare for the combined population of patients treated with weekly Riquent doses of 300 mgand 900 mg, compared with placebo. This study is an event-driven trial requiring us to accrue a specified number of renal flares to complete the study. We currently target enrolling at least 740patients to achieve the required number of renal flares. The study’s sample size has been increased to at least 740 patients, which is expected to increase thelikelihood of achieving a statistically significant outcome for the overall dose group as well as individual dose groups when compared with placebo. Thenumber of patients targeted to be enrolled is more than twice the approximately 300 patients in the previous Phase 3 study. The trial design is based on theresults from the last Phase 3 study, where all drug-treated patients received a dose of 100 mg per week of Riquent. In determining how many patients shouldbe enrolled in the current Phase 3 ASPEN study, no additional clinical benefit from treatment with the higher doses was assumed.6Table of Contents In other changes to the study design, the study entry criteria further restricts the use of immunosuppressive agents that, in the previous Phase 3 study, mayhave reduced the renal flare rate. Also, the current design was changed to a fixed 12-month patient evaluation period. In the previous Phase 3 trial, patientswere treated for up to 22 months. Also, the primary endpoint will be assessed in all patients and will no longer be restricted to the high-affinity subpopulation. We believe that the increasedbinding capability of higher doses will eliminate the need for an affinity measurement prior to treatment. To increase efficiency and enhance the quality of data, we also combined the Phase 2 clinical pharmacokinetic study with the Phase 3 ASPEN study sothat Riquent blood levels will be collected in the same patient population as the definitive efficacy data. These changes were all incorporated into theapproved SPA. Previously, in January 2006, we had reached an agreement with the FDA to assess the dose response of the treatment with Riquent on antibodies to dsDNAby conducting an interim analysis to evaluate the effect of higher doses on the reduction of these antibodies. In March 2007, we performed an interimantibody analysis of our current Phase 3 ASPEN study of Riquent. The analyses assessed the impact of treatment with Riquent eight weeks after the start oftreatment on reducing antibodies to dsDNA in 101 patients by measuring the percent of antibody reduction from baseline compared with placebo followingweekly treatment with 100 mg, 300 mg or 900 mg of Riquent or placebo. All demographics and baseline characteristics were comparable across dosinggroups and there were 16 to 30 patients per treatment group. The analyses of interim antibody data indicated that patients treated with 900 mg or 300 mg per week doses of Riquent had greater reductions inantibodies to dsDNA than patients treated with 100 mg per week or placebo. The results showed a significant dose response when comparing all Riquent-treated patients to placebo-treated patients (p < 0.0001), and each Riquent dose group to the placebo dose group (p < 0.0015 for 100 mg, p < 0.0001 for 300 mg and 900 mg). The median percent reduction in antibodies to dsDNA for Riquent-treated patients compared with placebo-treated patients was 36% (100 mg), 48% (300mg), and 66% (900 mg). Antibody reduction for each dose group was significantly better than placebo. Approximately three times as many patients treatedwith 900 mg of Riquent (38%) had at least a 50% or greater antibody reduction at week 8 compared with patients treated with 100 mg (13%). Patientsreached their maximum reduction after four weeks of treatment at which time separation between doses was also seen. As indicated in our earlier studies, maintaining antibody reductions over time in individual patients was associated with a significantly reduced renal flarerate. The data from the interim antibody analysis indicate that the higher the Riquent dose, the greater the consistency of response and the greater themagnitude of this response. While more than twice as many 900 mg-treated patients (58%) as 100 mg-treated patients (25%) had a consistent 20% reduction,six times as many 900 mg-treated patients (39%) had a consistent 40% reduction, compared with 100 mg-treated patients (6%). Twice as many patients on900 mg as 300 mg had a consistent 50% reduction, but no patients on 100 mg or placebo achieved this level of consistent reduction. A consistent reductionis defined as a patient whose percent antibody reduction exceeded a specified level at weeks 4, 6 and 8. To date, Riquent has been well tolerated in the current Phase 3 ASPEN study with no overall difference in the adverse event profiles for Riquent-treatedpatients compared with placebo-treated patients. Furthermore, the adverse event profile for all patients in the study to date, including those treated with the300 mg and 900 mg doses, does not appear to differ from that seen in previous studies where 100 mg of Riquent was the treatment dose. As of February 11,2008, more than 350 patients have been treated in the trial with either the 300 mg or 900 mg dose.7Table of Contents We also plan to conduct two interim efficacy analyses. The first interim efficacy analysis is expected to occur around the end of the second quarter of 2008and the second interim efficacy analysis is expected to occur around the end of 2008. The overall statistical significance level of the study for testing theprimary endpoint is adjusted for these interim analyses. To assess the tolerability of higher doses, a safety study in healthy volunteers was completed in 2005. Subjects received a single dose of Riquent at 600mg, 1200 mg, or 2400 mg. Riquent appeared to be well tolerated in these subjects.Riquent Regulatory StatusOrphan drug designation for Riquent In September 2000, the FDA granted us orphan drug designation for Riquent for the treatment of lupus nephritis. The Orphan Drug Act potentially enablesus to obtain research funding, tax credits for certain research expenses and a waiver of the application user fees. In addition, the Orphan Drug Act allows forseven years of exclusive marketing rights to a specific drug for a specific orphan indication. Exclusivity is conferred upon receipt of marketing approval fromthe FDA to the first sponsor who obtains such approval for a designated drug. The marketing exclusivity prevents FDA approval during the seven-year periodof the “same” drug, as defined in the FDA regulations, from another company for the same orphan indication. Whether we will be able to take advantage ofsome of the benefits afforded by the orphan drug designation will ultimately be determined by the FDA only after further review of our NDA. In November 2001, the European Commission granted us orphan medicinal product designation in the European Union for Riquent for the treatment oflupus nephritis. Orphan designation in Europe provides for 10 years of marketing exclusivity in the European Union and enables us to receive significant feereductions for scientific advice from the Committee for Orphan Medicinal Products, marketing authorization and inspections.FDA fast track designation for Riquent In May 2005, the FDA granted fast track designation for Riquent for the treatment of lupus renal disease. The FDA’s fast track program is designed tofacilitate the development and to expedite the review of new drugs that are intended to treat serious or life-threatening conditions and that demonstrate thepotential to address an unmet medical need.Inflammatory and Autoimmune ProgramsSSAO Inflammation Program Because substantially all of our resources are currently being devoted to the development of Riquent, further development of the SSAO program dependson our ability to obtain third-party financing for this program through a joint venture, partnership or other collaborative arrangement on acceptable terms tous. On December 2, 2003, we announced the discovery of novel, orally-active small molecules for the treatment of autoimmune diseases and acute andchronic inflammatory disorders. Our scientists have generated highly selective inhibitors of SSAO, an enzyme that has been implicated in inflammatoryresponses in many tissues and organs. SSAO, also known as vascular adhesion protein-1 or VAP-1, was recently discovered to be a dual-function moleculewith enzymatic and cell adhesion activities. SSAO on blood vessels contributes to inflammation by helping white blood cells leave the blood and penetrateinflamed tissue. The enzyme also contributes to the production of molecules that exacerbate inflammation, including formaldehyde and oxygen free radicals.SSAO inhibitors are designed to reduce inflammation by blocking the white blood cells and reducing the levels of inflammatory mediators.8Table of Contents Increases in the levels of plasma or membrane-associated SSAO have been reported for many inflammation-associated diseases including rheumatoidarthritis, inflammatory bowel disease, diabetes, atherosclerosis psoriasis and chronic heart failure. In addition, treatment of animals with SSAO inhibitors hasbeen shown to provide significant benefit in several inflammation-based diseases. Data published by our scientists in 2005 and 2006 in peer-reviewed articles show that these novel, orally-active small molecule inhibitors of SSAO/VAP-1may provide clinical benefit for the treatment of stroke, ulcerative colitis, and other autoimmune diseases and inflammatory disorders. Peer-reviewed datapublished in 2007 identified and characterized a lead compound and described its role in inhibiting inflammation in the lungs of rodents.Collaborative Arrangements In circumstances where we believe that a collaborative agreement is necessary or strategically beneficial to us, we intend to pursue collaborativearrangements with other pharmaceutical companies to assist in our research programs and the clinical development and commercialization of our drugcandidates and to access their research, drug development, manufacturing, marketing and financial resources. There can be no assurance that we will be ableto negotiate arrangements with any collaborative partner on acceptable terms, or at all. If a collaborative relationship is established, there can be no assurancethat the collaborative partner will continue to fund any particular program or that it will not pursue alternative technologies or develop alternative drugcandidates, either individually or in collaboration with others, including our competitors, as a means for developing treatments for the diseases we havetargeted. Furthermore, competing products, either developed by a collaborative partner or to which a collaborative partner has rights, may result in thewithdrawal of support by the collaborative partner with respect to all or a portion of our technology. Failure to establish or maintain collaborative arrangements will require us to fund our own research and development activities, resulting in significantexpenditure of our own capital, and will require us to develop our own marketing capabilities for any drug candidate that may receive regulatory approval.The failure of any collaborative partner to continue funding any particular program, or to commercialize successfully any product, could delay or halt thedevelopment or commercialization of any products involved in such program. As a result, the failure to establish or maintain collaborative arrangementscould hurt our business, financial condition and results of operations.Manufacturing We currently operate a production facility that we believe provides sufficient capacity to meet our anticipated requirements for research, clinical trial andany initial commercial launch of Riquent. If Riquent is approved, we expect to have the capacity to manufacture approximately 100 kg of Riquent per year. IfRiquent is approved, and if future demand for Riquent exceeds our current capacity, we expect to increase our manufacturing capacity by improving ourmanufacturing processes, making capital investments in our current facilities and engaging third party contract manufacturers. We are required to comply with the FDA’s and other regulatory agencies’ current Good Manufacturing Practices (“cGMPs”) when we manufacture our drugcandidates for clinical trials. We will also be required to comply with the cGMPs if Riquent, or our other drug candidates, are manufactured for commercialpurposes. We have limited manufacturing experience and we can provide no assurance that we will be able to successfully transition to commercialproduction.9Table of Contents In order to meet the demand for any of our drugs that may be approved or to attempt to improve our manufacturing efficiency, we may enter intoarrangements with third party contract manufacturers. If we choose to contract for manufacturing services, the FDA and comparable foreign regulators willhave to approve the contract manufacturers prior to our use, and these contractors would be required to comply with strictly enforced manufacturingstandards. Currently, we also enter into agreements with contractors to prepare our drug candidates for use by patients. If we encounter delays or difficulties inestablishing or maintaining relationships with contractors to produce, package or distribute finished products, clinical trials, market introduction andsubsequent sales of such products would be adversely affected. Our dependence on others for production, packaging or distribution of our products mayadversely affect our profit margins and our ability to develop and deliver our products on a timely and competitive basis. There are currently a limited number of suppliers that produce the raw materials that are necessary to make Riquent. In order to manufacture Riquent insufficient quantities for our clinical trials and possible commercialization, our suppliers will be required to provide us with an adequate supply of chemicalsand reagents. If we are unable to obtain sufficient quantities of chemicals or reagents, our ability to develop and deliver products on a timely and competitivebasis will be negatively affected.Marketing and Sales If we obtain FDA approval in the United States, we currently anticipate that we would market Riquent ourselves or in collaboration with a commercialpartner using a specialty pharmaceutical sales force of 40 to 60 sales representatives who would initially target the rheumatology and nephrology specialistswho treat the majority of lupus patients with renal disease. We estimate that the majority of these patients are treated by 3,000 lupus specialty physiciansprimarily at approximately 1,000 clinical centers. If we obtain approval outside of the United States, we currently expect to seek a marketing collaborationwith a partner. While we are actively seeking a marketing collaboration with a partner, we currently have no arrangements with others for the marketing of any of ourdrug candidates. There can be no assurance that we will be able to enter into any marketing agreements on favorable terms, if at all, or that any suchagreements that we may enter into will result in payments to us. Under any co-promotion or other marketing and sales arrangements that we may enter intowith other companies, any revenues that we may receive will be dependent on the efforts of others and there can be no assurance that such efforts will besuccessful. To the extent that we choose to attempt to develop our own marketing and sales capability (whether domestic or international), we will compete withother companies that have experienced and well-funded marketing and sales operations. Furthermore, there can be no assurance that we, or any collaborativepartner, will be able to establish sales and distribution capabilities without undue delays or expenditures, or gain market acceptance for any of our drugcandidates. The ultimate size of the markets for our products is uncertain and difficult to estimate. Moreover, we may not earn as much income as we hopedue to possible changes in healthcare reimbursement policies by governments and other third party payers.Patents and Proprietary Technologies We file patent applications in the United States and in foreign countries for the protection of our proprietary technologies and drug candidates as wedeem appropriate. We currently own 135 issued patents and have 40 pending patent applications in the United States and in foreign countries coveringvarious technologies and drug candidates, including our lupus drug candidates (Toleragens), our SSAO inhibitor technology (currently there are no issuedpatents to our SSAO inhibitor technology), our antibody-mediated thrombosis drug candidates (Toleragens), our Tolerance Technology, and our carrierplatform and linkage technologies for our Toleragens. Our issued patents include: • Lupus Toleragens — seven issued United States patents, three issued Australian patents, one granted Portuguese patent, two granted Norwegianpatents, one granted European patent (which has been unbundled as 13 European national patents), a second granted European patent (which hasbeen unbundled as 15 European national patents), two granted Chinese patents, one granted Hong Kong patent, one granted SouthKorean patent, two granted Canadian patents, two granted Finnish patents, one granted Irish patent, and one granted Japanese patent (expiringbetween 2010 and 2020); and10Table of Contents • Tolerance Technology — five issued United States patents, one issued Australian patent, one granted European patent (which has been unbundledas 15 European national patents), one granted Japanese patent, two granted Canadian patents, one granted South Korean patent and one grantedIrish patent (expiring between 2011 and 2012).Competition The biotechnology and pharmaceutical industries are subject to rapid technological change. Competition from domestic and foreign biotechnologycompanies, large pharmaceutical companies and other institutions is intense and expected to increase. A number of companies are pursuing the developmentof pharmaceuticals in our targeted areas. These include companies that are conducting clinical trials and pre-clinical studies for the treatment of lupus. In addition, there are a number of academic institutions, both public and private, engaged in activities relating to the research and development oftherapeutics for autoimmune, inflammatory and other diseases. Most of these companies and institutions have substantially greater facilities, resources,research and development capabilities, regulatory compliance expertise, and manufacturing and marketing capabilities than we do. In addition, othertechnologies may in the future be the basis of competitive products. There can be no assurance that our competitors will not develop or obtain regulatoryapproval for products more rapidly than we can, or develop and market technologies and products that are more effective than those we are developing or thatwould render our technology and proposed products obsolete or noncompetitive. Many of the currently used pharmacological interventions along with new drugs in development for lupus are broad based immunosuppresants thatcause varying degrees of toxicity and tolerability issues for patients. Riquent is designed to be highly specific by targeting antibodies to dsDNA.Additionally, Riquent is one of the few drugs being studied as a therapy to maintain remission of lupus nephritis. We believe that our ability to competesuccessfully will depend on our ability to secure additional capital resources to fund anticipated net losses for at least the next several years, developpatented or proprietary technologies and products, obtain regulatory approvals, effectively manufacture and market products either alone or through thirdparties, and attract and retain experienced scientists. If Riquent is commercialized, we expect that competition among marketed products will be based inlarge part on product safety, efficacy, reliability, availability, price and patent position.Government RegulationUnited States Our research and development activities and the future manufacturing and marketing of any products we develop are subject to significant regulationby numerous government authorities in the United States and other countries. In the United States, the Federal Food, Drug and Cosmetic Act and the PublicHealth Service Act govern the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion, and distributionof our drug candidates and any products we may develop. In addition to FDA regulations, we are subject to other federal, state and local regulations, such asthe Occupational Safety and Health Act and the Environmental Protection Act, as well as regulations governing the handling, use and disposal of radioactiveand other hazardous materials used in our research activities. Product development and approval within this regulatory framework takes a number of yearsand involves the expenditure of substantial resources. In addition, this regulatory framework is subject to changes that may adversely affect approval, delayan application or require additional expenditures.11Table of Contents The steps required before a pharmaceutical compound may be marketed in the United States include: pre-clinical laboratory and animal testing;submission to the FDA of an Investigational New Drug application, which must become effective before clinical trials may commence; conducting adequateand well-controlled clinical trials to establish the safety and efficacy of the drug; submission to the FDA of an NDA or Biologic License Application (“BLA”)for biologics; satisfactory completion of an FDA preapproval inspection of the manufacturing facilities to assess compliance with cGMPs; and FDA approvalof the NDA or BLA prior to any commercial sale or shipment of the drug. In addition to obtaining FDA approval for each product, each drug-manufacturingestablishment must be registered with the FDA and be operated in conformity with cGMPs. Drug product manufacturing facilities located in California alsomust be licensed by the State of California in compliance with separate regulatory requirements. Pre-clinical testing includes laboratory evaluation of product chemistry and animal studies to assess the safety and efficacy of the product and itsformulation. The results of pre-clinical testing are submitted to the FDA as part of an Investigational New Drug Application and, unless the FDA objects, theInvestigational New Drug Application becomes effective 30 days following its receipt by the FDA. Clinical trials involve administration of the drug to healthy volunteers and to patients diagnosed with the condition for which the drug is being testedunder the supervision of a qualified clinical investigator. Clinical trials are conducted in accordance with protocols that detail the objectives of the study, theparameters to be used to monitor safety, and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA as part of the Investigational NewDrug application. Each clinical trial is conducted under the auspices of an independent Institutional Review Board (“IRB”) in the United States or EthicsCommittee (“EC”) outside the United States for each trial site. The IRB or EC considers, among other matters, ethical factors and the safety of humansubjects. Clinical trials are typically conducted in three sequential phases, but the phases may overlap or be repeated. In Phase 1, the phase in which the drug isinitially introduced into healthy human subjects or patients, the drug is tested for adverse effects, dosage tolerance, metabolism, distribution, excretion andclinical pharmacology. Phase 2 trials involve the testing of a limited patient population in order to characterize the actions of the drug in targetedindications, to determine drug tolerance and optimal dosage, and to identify possible adverse side effects and safety risks. When a compound appears to beeffective and to have an acceptable safety profile in Phase 2 clinical trials, Phase 3 clinical trials are undertaken to further evaluate and confirm clinicalefficacy and safety within an expanded patient population at multiple clinical trial sites. The FDA reviews the clinical plans and monitors the results of thetrials and may discontinue the trials at any time if significant safety issues arise. Similarly, an IRB may suspend or terminate a trial at a study site which is notbeing conducted in accordance with the IRB’s requirements or which has been associated with unexpected serious harm to subjects. The results of pre-clinical testing and clinical trials are submitted to the FDA in the form of an NDA or BLA for marketing approval. The submission of anNDA or BLA also is subject to the payment of user fees, but a waiver of the fees may be obtained under specified circumstances. The testing and approvalprocess is likely to require substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all, or thatconditions of any approval, such as warnings, contraindications, or scope of indications will not materially impact the potential market acceptance andprofitability of the drug product. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret thesame data. The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether the application should beapproved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it generally follows suchrecommendations. The approval process is affected by a number of factors, including the severity of the disease, the availability of alternative treatments, andthe risks and benefits of the product demonstrated in clinical trials. Additional pre-clinical testing or clinical trials may be requested during the FDA review period and may delay any marketing approval. After FDAapproval for the initial indications, further clinical trials may be necessary to gain approval for the use of the product for additional indications. In addition,after approval, some types of changes to the approved product, such as manufacturing changes, are subject to further FDA review and approval. The FDAmandates that adverse effects be reported to the FDA and may also require post-marketing testing to monitor for adverse effects, which can involve significantexpense. Adverse effects observed during the commercial use of a drug product or which arise in the course of post-marketing testing can result in the needfor labeling revisions, including additional warnings and contraindications, and, if the findings significantly alter the risk/benefit assessment, the potentialwithdrawal of the drug from the market.12Table of Contents Among the conditions for FDA approval is the requirement that the prospective manufacturer’s quality control and manufacturing procedures conform tothe FDA’s cGMP requirements. Domestic manufacturing facilities are subject to biannual FDA inspections and foreign manufacturing facilities are subject toperiodic inspections by the FDA or foreign regulatory authorities. If the FDA finds that a company is not operating in compliance with cGMPs, the continuedavailability of the product can be interrupted until compliance is achieved and, if the deficiencies are not corrected within a reasonable time frame, the drugcould be withdrawn from the market. In addition, the FDA strictly regulates labeling, advertising and promotion of drugs. Failure to conform to requirementsrelating to licensing, manufacturing, and promoting drug products can result in informal or formal sanctions, including warning letters, injunctions, seizures,civil and criminal penalties, adverse publicity and withdrawal of approval.Foreign We are also subject to numerous and varying foreign regulatory requirements governing the design and conduct of clinical trials and marketing approvalfor pharmaceutical products to be marketed outside of the United States. The approval process varies among countries and regions and can involve additionaltesting, and the time required to obtain approval may differ from that required to obtain FDA approval. The steps to obtain approval to market Riquent in the European Union include: pre-clinical laboratory and animal testing; conducting adequate and wellcontrolled clinical trials to establish safety and efficacy; submission of a Marketing Authorization Application (the “MAA”); and the issuance of a productmarketing license by the European Commission prior to any commercial sale or shipment of drug. In addition to obtaining a product marketing license foreach product, each drug manufacturing establishment must be registered with the European Medicines Agency (the “EMEA”) must operate in conformitywith European good manufacturing practice, and must pass inspections by the European health authorities. Upon receiving the MAA, the Committee for Human Medicinal Products (the “CHMP”), a division of the EMEA, will review the MAA and may respondwith a list of questions or objections. The answers to the questions posed by the CHMP may require additional tests to be conducted. Responses to the list ofquestions or objections must be provided to and deemed sufficient by the CHMP within a defined timeframe. Ultimately, a representative from each of theEuropean Member States will vote whether to approve the MAA. Foreign regulatory approval processes include all of the risks associated with obtaining FDA approval, and approval by the FDA does not ensure approvalby the health authorities of any other country.Employees As of February 29, 2008, we employed 86 regular full-time employees (including seven people who have a Ph.D. and three people who have an M.D., oneof which also has a Ph.D.), 68 of whom are involved full-time in clinical, development and manufacturing activities. All members of our senior managementteam have had prior experience with pharmaceutical, biotechnology or medical product companies. We believe that we have been successful in attractingskilled and experienced personnel, but competition for personnel is intense and there can be no assurance that we will be able to attract and retain theindividuals needed. None of our employees are covered by collective bargaining agreements and management considers relations with our employees to begood.Available Information Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with or furnished tothe Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, as amended, are available free of charge throughour website at www.ljpc.com as soon as reasonably practicable after we electronically file or furnish the reports with or to the Securities and ExchangeCommission.13Table of ContentsItem 1A. Risk FactorsI. RISK FACTORS RELATING TO LA JOLLA PHARMACEUTICAL COMPANY AND THE INDUSTRY IN WHICH WE OPERATE.We do not have sufficient financial resources to complete the current Phase 3 ASPEN study of Riquent and may not have sufficient resources to continue tooperate unless we are able to raise sufficient additional capital. We will need to successfully complete the current Phase 3 ASPEN study prior to any FDA or any foreign regulatory approvals. The current Phase 3 ASPENstudy is an event-driven trial requiring us to accrue a specified number of renal flares to complete the study. We currently target enrolling at least 740 patientsto achieve the required number of renal flares and the trial could take several years to complete. We expect that the actual costs of completing the currentPhase 3 ASPEN study will exceed our current cash resources. If we expend all of the funds that we have raised and do not receive funding from a collaborativeagreement with a corporate partner or obtain other financing, we would not have the financial resources to complete the current Phase 3 ASPEN study or tocontinue the development of Riquent, and we may not be able to continue to operate.We may need to sell stock or assets, enter into collaborative agreements, significantly reduce our operations, or merge with another entity to continueoperations. Our business is highly cash-intensive and we will need a significant amount of additional cash to continue our operations. There can be no guarantee thatadditional financing will be available to us on favorable terms, or at all, whether through issuance of additional securities, entry into collaborativearrangements, or otherwise. If adequate funds are not available, we may halt the current Phase 3 ASPEN study, significantly reduce the size of our workforce,sell or license our technologies or obtain funds through other arrangements with collaborative partners or others that require us to relinquish rights to ourtechnologies or potential products. We also may merge with another entity to continue our operations. Any one of these outcomes could have a negativeimpact on our ability to develop products or achieve profitability if our products are brought to market. If, and to the extent, we obtain additional fundingthrough sales of securities, any previous investment in us will be diluted, and dilution can be particularly substantial when the price of our common stock islow. Moreover, capital markets have experienced a period of instability recently and this instability may make it harder for us to raise capital within the timeperiods needed or on terms we consider acceptable, if at all. In the current economic environment, our need for additional capital and limited capitalresources may force us to accept financing terms that could be significantly more dilutive than if we were raising capital when the capital markets were morestable.Negative conditions in the global credit markets may impair the liquidity of a portion of our investment portfolio. Our investment securities consist primarily of government-asset-backed securities, obligations of government agencies and money market funds. As ofDecember 31, 2007, our short-term investments included $28.0 million of AAA rated asset-backed securities (student loan auction rate securities) issuedprimarily by state governments. Subsequent to December 31, 2007, we sold $18.0 million of these asset-backed auction rate securities at par value. The recent negative conditions in the global credit markets have prevented some investors from liquidating their holdings, including their holdings ofstudent loan auction rate securities. As of March 6, 2008, there was insufficient demand at auction for three of our AAA rated U.S. government-backed studentloan auction rate securities, representing approximately $6.0 million of the remaining $10.0 million we currently hold in asset-backed auction rate securities.As a result of the insufficient demand, these three securities are currently not liquid and unless a future auction (which occurs approximately every 28 days)for these investments is successful, we could be required to hold them until they are redeemed by the issuer or to maturity, which ranges between 20-30 years.14Table of ContentsWe may experience a similar situation with our other remaining asset-backed student loan auction rate security, which comes up for auction on March 24,2008. In the event we need to access the funds that are in an illiquid state, we will not be able to do so without a loss of principal, until a future auction onthese investments is successful, the securities are redeemed by the issuer or they mature. At this time, management has not obtained sufficient evidence toconclude that these investments are impaired or that they will not be settled in the short-term, although the market for these investments is presentlyuncertain. If the credit ratings of the security issuers deteriorate and any decline in market value is determined to be other-than-temporary, we would berequired to adjust the carrying value of the investment through an impairment charge.Our independent registered public accounting firm has issued an unqualified opinion with an explanatory paragraph, to the effect that there is substantialdoubt about our ability to continue as a going concern. Our independent registered public accounting firm has issued an unqualified opinion with an explanatory paragraph, to the effect that there is substantialdoubt about our ability to continue as a going concern. This unqualified opinion with an explanatory paragraph could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows. See “Liquidity and Capital Resources” in Part II, Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and note 1 to our consolidated financial statements included elsewhere in this Annual Report onForm 10-K. We have no committed sources of capital and do not know whether additional financing will be available when needed on terms that are acceptable, if atall. Our current lack of resources is exacerbated by our inability to liquidate holdings of certain student loan auction rate securities. The addition of thisgoing concern statement from our independent registered public accounting firm may discourage some investors from purchasing our stock or providingalternative capital financing. The failure to satisfy our capital requirements will adversely affect our business, financial condition, results of operations andprospects. Unless we raise additional funds, either through the sale of equity securities or one or more collaborative arrangements, we will need to halt the Phase 3ASPEN study and significantly reduce our workforce and our operating expenses. If we do not take these actions, we will not have sufficient funds tocontinue operations. Even if we take these actions, they may be insufficient, particulary if our costs are higher than projected or unforeseen expenses arise.Halting our Phase 3 ASPEN study or significantly reducing our workforce or operating expenses will adversely affect our business and prospects.In order to complete our current Phase 3 ASPEN study, we will need to accrue a sufficient number of renal flares by enrolling a sufficient number ofpatients who meet the trial criteria. If we are unable to successfully complete the trial, our business will be adversely affected and it may be difficult orimpossible for us to continue to operate. The current Phase 3 ASPEN study is an event-driven trial requiring us to accrue a specified number of renal flares to complete the study. We currentlytarget enrolling at least 740 patients to achieve the required number of renal flares. We may need to enroll more patients in order to reach the required numberof renal flares. We may have difficulty enrolling patients because, among other matters, there are specific limitations on the medications that a patient may betaking upon entry into the trial and intense competition for available lupus patients. If we are unable to accrue a sufficient number of renal flares or to timelyenroll a sufficient number of patients, we will not be able to successfully complete the current Phase 3 ASPEN study. As a result, it may be difficult orimpossible for us to continue to operate.Results from our clinical trials may not be sufficient to obtain regulatory approvals to market Riquent or our other drug candidates in the United States orother countries on a timely basis, if at all. Our drug candidates are subject to extensive government regulations related to development, clinical trials, manufacturing and commercialization. Inorder to sell any product that is under development, we must first receive regulatory approval. To obtain regulatory approval, we must conduct clinical trialsand toxicology studies that demonstrate that our drug candidates are safe and effective. The process of obtaining FDA and foreign regulatory approvals iscostly, time consuming, uncertain and subject to unanticipated delays. The FDA and foreign regulatory authorities have substantial discretion in the approval process and may not agree that we have demonstrated that Riquentis safe and effective. If Riquent is ultimately not found to be safe and effective, we would be unable to obtain regulatory approval to manufacture, market andsell Riquent. Although we have received an approvable letter from the FDA, the analysis of the data from our previous Phase 3 trial of Riquent showed thatthe trial did not reach statistical significance with respect to its primary endpoint, time to renal flare, or with respect to its secondary endpoint, time totreatment with high-dose corticosteroids or cyclophosphamide. In a preliminary assessment of the MAA submitted in March 2006, the EMEA reviewersindicated that additional clinical data would be needed prior to potential approval. Based on our review of the EMEA assessment, we believe that the currentPhase 3 ASPEN study should provide the necessary data; however, since the data would not be available within the timeframe that the EMEA regulationsallow for review of the Riquent application we submitted, we withdrew the application. We plan to refile the MAA after the completion of the current Phase 3ASPEN study, if it is successful. We can provide no assurances that the FDA or foreign regulatory authorities will ultimately approve Riquent or, if approved,what the indication for Riquent will be.15Table of Contents As designed, our current Phase 3 ASPEN study contains multiple dosing levels. Even if the Phase 3 ASPEN study is successful, the FDA or foreignregulatory authorities may require additional studies to define dosing recommendations before we can obtain approval to market Riquent. Because substantially all of our resources are currently being devoted to Riquent, our inability to obtain any regulatory approval of Riquent as a resultof the current Phase 3 ASPEN study would have a severe negative effect on our business, and, in the future, we may not have the financial resources tocontinue the development of Riquent or any other potential drug candidates.We are currently devoting nearly all of our resources to the development and approval of Riquent. Accordingly, our efforts with respect to other drugcandidates have significantly diminished. Future development of our small molecules for the treatment of autoimmune diseases and acute and chronic inflammatory disorders depends on ourability to obtain third-party financing for this program through a joint venture, partnership or other collaborative arrangement. As a result, progress withrespect to drug candidates other than Riquent, if any, will be significantly delayed and our success and ability to continue to operate depends on whether weobtain regulatory approval to market Riquent.Current and future clinical trials may be delayed or halted. Current and future clinical trials of Riquent, trials of drugs related to Riquent, or clinical trials of other drug candidates may be delayed or halted. Forexample, in 2005, for a period of time we limited patient enrollment in our Phase 3 ASPEN trial in an effort to reduce costs. In addition, our Phase 2/3 clinicaltrial of Riquent was terminated before planned patient enrollment was completed. Current and future trials may be delayed or halted for various reasons,including: • we do not have sufficient financial resources; • supplies of drug product are not sufficient to treat the patients in the studies; • patients do not enroll in the studies at the rate we expect; • the products are not effective; • patients experience negative side effects or other safety concerns are raised during treatment; • the trials are not conducted in accordance with applicable clinical practices; or • there is political unrest at foreign clinical sites; or • there are natural disasters at any of our clinical sites. If any current or future trials are delayed or halted, we may incur significant additional expenses, and our potential approval of Riquent may be delayed,which could have a severe negative effect on our business.We may be required to design and conduct additional trials for Riquent. We may be required to design and conduct additional studies to further demonstrate the safety and efficacy of Riquent, either before or after a potentialapproval, which may result in significant expense and delay. The FDA and foreign regulatory authorities may require new or additional clinical trials becauseof inconclusive results from current or earlier clinical trials (including the previous Phase 2/3 and Phase 3 trials of Riquent), a possible failure to conductclinical trials in complete adherence to FDA good clinical practice standards and similar standards of foreign regulatory authorities, the identification of newclinical trial endpoints, or the need for additional data regarding safety or efficacy. It is possible that the FDA or foreign regulatory authorities may notultimately approve Riquent or our other drug candidates for commercial sale in any jurisdiction, even if we believe future clinical results are positive.16Table of ContentsWe may experience shortages of Riquent for use in our clinical studies. We may experience shortages of Riquent for use in our clinical studies. We are implementing a commercial scale manufacturing process for Riquent,but we have manufactured only a limited number of lots of Riquent at this commercial scale. In addition, the drug supply needed for our current Phase 3ASPEN study may require us to manufacture significant quantities of Riquent in a compressed time frame. If we are unable to manufacture Riquent inaccordance with applicable FDA good manufacturing practices at this commercial scale, or if we incur production delays our ability to timely completeclinical trials of Riquent will be negatively affected.If we encounter delays or difficulties in establishing or maintaining relationships with manufacturing or distribution contractors, our ability to timelycomplete necessary clinical trials and potentially deliver commercial products may be negatively affected. We may enter into arrangements with contract manufacturing companies to expand our own production capacity in order to meet demand for ourproducts or to attempt to improve manufacturing efficiency. If we choose to contract for manufacturing services, the FDA and comparable foreign regulatorswould have to approve the contract manufacturers prior to our use, and these contractors would be required to comply with strictly enforced manufacturingstandards. We may also enter into agreements with contractors to prepare and distribute our drug candidates for use by patients in clinical trials orcommercially. If we encounter delays or difficulties in establishing or maintaining relationships with contractors to produce, package or distribute our drugcandidates, if they are unable to meet our needs, if they are not approved by the regulatory authorities, or if they fail to adhere to applicable manufacturingstandards, our ability to timely complete necessary clinical trials and to introduce our products into the market would be negatively affected.Our limited manufacturing capabilities and experience could result in shortages of drugs for future sale, and our revenues and profit margin could benegatively affected. We have never operated a commercial manufacturing facility and we will be required to manufacture Riquent pursuant to applicable FDA goodmanufacturing practices. Our inexperience could result in manufacturing delays or interruptions and higher manufacturing costs. This could negatively affectour ability to supply the market on a timely and competitive basis. The sales of our products, if any, and our profit margins may also be negatively affected.In addition, substantial capital investment in the expansion and build-out of our manufacturing facilities and/or the engagement of third party contractmanufacturers will be required to enable us to manufacture Riquent, if approved, in sufficient commercial quantities. We have limited manufacturingexperience, and we may be unable to successfully transition to commercial production.Our suppliers may not be able to provide us with sufficient quantities of materials that we need to manufacture our products. We rely on outside suppliers to provide us with specialized chemicals and reagents that we use to manufacture our drugs. In order to manufactureRiquent and our other drug candidates in sufficient quantities for our clinical trials and possible commercialization, our suppliers will be required to provideus with an adequate supply of chemicals and reagents. Our ability to obtain these chemicals and reagents is subject to the following risks: • our suppliers may not be able to increase their own manufacturing capabilities in order to provide us with a sufficient amount of material for our use;17Table of Contents • some of our suppliers may be required to pass FDA inspections or validations or to obtain other regulatory approvals of their manufacturingfacilities or processes, and they may be delayed or unable to do so; • the materials that our suppliers use to manufacture the chemicals and reagents that they provide us may be costly or in short supply; and • there are a limited number of suppliers that are able to provide us with the chemicals or reagents that we use to manufacture our drugs. If we are unable to obtain sufficient quantities of chemicals or reagents, our ability to produce products for clinical studies and, therefore, to introduceproducts into the market on a timely and competitive basis, will be impeded. The subsequent sales of our products, if any, and our profit margins may also benegatively affected.An interruption in the operation of our sole manufacturing facility could disrupt our operations. We have only one drug manufacturing facility. A significant interruption in the operation of this facility, whether as a result of a natural disaster or othercauses, could significantly impair our ability to manufacture drugs for our clinical trials or possible commercialization.Retaining our current personnel and recruiting additional personnel will be critical to our success. We are highly dependent on the principal members of our clinical development, manufacturing and management staff, the loss of whose services maydelay the achievement of our research and development objectives. Retaining our current key personnel to perform clinical development, manufacturing,regulatory, and business development activities will be critical to our near term success. We expect that recruiting additional qualified personnel to conductclinical development, manufacturing, regulatory, and marketing and sales activities will be required to successfully further develop Riquent and anyadditional drug candidates. Because competition for experienced clinical, manufacturing, regulatory, and marketing and sales personnel among numerouspharmaceutical and biotechnology companies and research and academic institutions is intense, we may not be able to attract and retain these people. If wecannot attract and retain qualified people, our ability to conduct necessary clinical trials, manufacture drug, comply with regulatory requirements, enter intocollaborative agreements and develop and sell potential products may be negatively affected because, for instance, the trials may not be conducted properly,or the manufacturing or sales of our products may be delayed. In addition, we rely on consultants and advisors to assist us in formulating our clinical,manufacturing, regulatory, business development, and marketing and sales strategies. All of our consultants and advisors have outside employment and mayhave commitments or consulting or advisory contracts with other entities that may limit their ability to contribute to our business.We will need additional funds to support our operations. Our operations to date have consumed substantial capital resources. Before we can obtain FDA or foreign regulatory approval for Riquent, we will needto successfully complete the current Phase 3 ASPEN study and possibly additional trials. Therefore, we expect to expend substantial amounts of capitalresources for additional product development and clinical trials of Riquent. We may also devote substantial additional capital resources to establishcommercial-scale manufacturing capabilities and to market and sell potential products. These expenses may be incurred prior to or after any regulatoryapprovals that we may receive. Even with the net proceeds of approximately $37.9 million from our common stock offering in April 2007, we will needadditional funds to finance our future operations. Our future capital requirements will depend on many factors, including: • the scope and results of our clinical trials;18Table of Contents • our ability to manufacture sufficient quantities of drug to support clinical trials; • our ability to obtain regulatory approval for Riquent; • the time and costs involved in applying for regulatory approvals; • continued scientific progress in our development programs; • the size and complexity of our development programs; • the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; • competing technological and market developments; • our ability to establish and maintain collaborative research and development arrangements; • our need to establish commercial manufacturing capabilities; and • our ability to develop effective marketing and sales programs. We expect to incur substantial losses each year for at least the next several years as we continue our planned clinical trial, manufacturing, regulatory,and development activities. If we receive regulatory approval for Riquent, or any of our other drug candidates, our manufacturing, marketing and salesactivities are likely to substantially increase our expenses and our need for additional working capital. In the future, it is possible that we will not be able toobtain additional funds and thus not have adequate resources to support continuation of our business activities.Our freedom to operate our business or profit fully from sales of our products may be limited if we enter into collaborative agreements. We may need to collaborate with other pharmaceutical companies to gain access to their financial, research, drug development, manufacturing, ormarketing and sales resources. However, we may not be able to negotiate arrangements with any collaborative partners on favorable terms, if at all. Anycollaborative relationships that we enter into may include restrictions on our freedom to operate our business or may limit our revenues from potentialproducts. If a collaborative arrangement is established, the collaborative partner may discontinue funding any particular program or may, either alone or withothers, pursue alternative technologies or develop alternative drug candidates for the diseases we are targeting. Competing products, developed by acollaborative partner or to which a collaborative partner has rights, may result in the collaborative partner withdrawing support as to all or a portion of ourtechnology. Without collaborative arrangements, we must fund our own clinical development, manufacturing, and marketing and sales activities, which acceleratesthe depletion of our cash and requires us to develop our own manufacturing and marketing and sales capabilities. Therefore, if we are unable to establish andmaintain collaborative arrangements and if other sources of cash are not available, we will experience a severe adverse effect on our ability to developproducts and, if developed and approved, to manufacture, market and sell them successfully.Any regulatory approvals that we may obtain for our product candidates may be limited and subsequent issues regarding safety or efficacy could cause usto remove products from the market. If the FDA or foreign regulatory authorities grant approval of Riquent or any of our other drug candidates, the approval may be limited to specificconditions or patient populations, or limited with respect to its distribution, including to specified facilities or physicians with special training or experience.The imposition of any of these restrictions or other restrictions on the marketing and use of Riquent could adversely affect any future sales of Riquent.Furthermore, even if a drug candidate is approved, it is possible that a subsequent issue regarding its safety or efficacy would require us to remove the drugfrom the market.19Table of ContentsEven if we receive regulatory approval for our product candidates, we will be subject to ongoing regulatory obligations and review, including validationof our manufacturing facilities and processes. Following any regulatory approval of our product candidates, we will be subject to continuing regulatory obligations such as safety reportingrequirements and additional post-marketing obligations, including regulatory oversight of the promotion and marketing of our products. In addition, we, andany third-party manufacturers, will be required to adhere to regulations setting forth cGMPs. These regulations cover all aspects of the manufacturing, testing,quality control and record keeping relating to our product candidates. Furthermore, we, and any third-party manufacturers, will be subject to periodicinspection by regulatory authorities. These inspections may result in compliance issues that would require the expenditure of significant financial or otherresources to address. If we, or any third-party manufacturers that we may engage, fail to comply with applicable regulatory requirements, we may be subject tofines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. Although a successful pre-approval inspection was conducted by the FDA in July 2004, we have never operated a commercial manufacturing facility. Ifwe are unable to maintain validated conditions at our manufacturing facilities or fail to successfully validate our manufacturing processes to the satisfactionof the regulatory authorities, they will not approve Riquent for commercial use.The size of the market for our potential products is uncertain. We estimate that the number of people who suffer from lupus in the United States and Europe is potentially more than 1,000,000 and those with renalimpairment, which Riquent is designed to treat, is approximately 300,000. However, there is limited and differing information available regarding the actualsize of these patient populations. In addition, it is uncertain whether the results from previous or future clinical trials of Riquent will be observed in broaderpatient populations, and the number of patients who may benefit from Riquent may be significantly smaller than the estimated patient populations.Furthermore, management of patients with renal disease by specialists other than nephrologists and rheumatologists is likely to reduce our ability to accesspatients who may benefit from Riquent.Our drugs may not achieve market acceptance. Even if Riquent or our other drug candidates receive regulatory approval, patients and physicians may not readily or quickly accept our proposedmethods of treatment. In order for Riquent or our other drug candidates to be commercially successful, we will need to increase the awareness and acceptanceof our drug candidates among physicians, patients and the medical community. Riquent is designed to be administered weekly by intravenous injection. It ispossible that providers and patients may resist an intravenously administered therapeutic. It is also possible that physician treatment practices may changeand that the use of other drugs, either newly approved or currently on the market for other conditions, may become widely utilized by clinicians for thetreatment of patients with lupus and reduce the potential use of Riquent in this patient population. In addition, if we are unable to manufacture drugs at anacceptable cost, physicians may not readily prescribe drugs that we may manufacture due to cost-benefit considerations when compared to other methods oftreatment. If we are unable to achieve market acceptance for approved products, our revenues and potential for profitability will be negatively affected.We lack experience in marketing products for commercial sale. In order to commercialize any drug candidate approved by the FDA or foreign regulatory authorities, we must either develop marketing and salesprograms or enter into marketing arrangements with others. If we cannot do either of these successfully, we will not generate meaningful sales of any productsthat may be approved. If we develop our own marketing and sales capabilities, we will be required to employ a sales force,20Table of Contentsestablish and staff a customer service department, and create or identify distribution channels for our drugs. We will compete with other companies that haveexperienced and well-funded marketing and sales operations. In addition, if we establish our own sales and distribution capabilities, we will incur materialexpenses and may experience delays or have difficulty in gaining market acceptance for our drug candidates. We currently have no marketing arrangementswith others. There can be no guarantee that, if we desire to, we will be able to enter into any marketing agreements on favorable terms, if at all, or that anysuch agreements will result in payments to us. If we enter into co-promotion or other marketing and sales arrangements with other companies, any revenuesthat we may receive will be dependent on the efforts of others. There can be no guarantee that these efforts will be successful.We may not earn as much revenue as we hope due to possible changes in healthcare reimbursement policies. The continuing efforts of government and healthcare insurance companies to reduce the costs of healthcare may reduce the amount of revenue that wecan generate from sales of future products, if any. For example, in certain foreign markets, pricing and profitability of prescription drugs are subject togovernment control. In the United States, we expect that there will continue to be a number of federal and state proposals to implement similar governmentcontrols. In addition, an increasing emphasis on managed care in the United States will continue to put pressure on drug manufacturers to reduce prices. Pricecontrol initiatives could reduce the revenue that we receive for any products we may develop and sell in the future. Moreover, even if Riquent were approvedwe cannot predict what the dosage requirements or degree of efficacy would be and therefore whether or not healthcare reimbursement policies would enablea sales price that allows us to be profitable.We have a history of losses and may not become profitable. We have incurred operating losses each year since our inception in 1989 and had an accumulated deficit of approximately $352.8 million as ofDecember 31, 2007. We expect to incur substantial losses each year for at least the next several years as we conduct clinical trials of our drug candidates, seekregulatory approval and continue our clinical development, manufacturing, and regulatory activities. In addition, assuming we ultimately receive approvalfrom the FDA or foreign regulatory authorities for Riquent or our other drug candidates, we will be required to establish commercial manufacturingcapabilities and marketing and sales programs which may result in substantial additional losses. To achieve profitability we must, among other matters,complete the development of our products, obtain all necessary regulatory approvals and establish commercial manufacturing, marketing and salescapabilities. The amount of losses and the time required by us to reach sustained profitability are highly uncertain and we may never achieve profitability.We do not expect to generate revenues from the sale of Riquent, if approved, or our other products, if any, in the near term, and we may never generateproduct revenues.Our success in developing and marketing our drug candidates depends significantly on our ability to obtain patent protection for Riquent and any otherdeveloped products. In addition, we will need to successfully preserve our trade secrets and operate without infringing on the rights of others. We depend on patents and other unpatented intellectual property to prevent others from improperly benefiting from products or technologies that wemay have developed. We currently own 135 issued patents and have 40 pending patent applications in the United States and in foreign countries. Thesepatents and patent applications cover various technologies and drug candidates, including Riquent. There can be no assurance, however, that any additionalpatents will be issued, that the scope of any patent protection will be sufficient to protect us or our technology, or that any current or future issued patent willbe held valid if subsequently challenged. We are currently involved in an opposition proceeding in Europe challenging the validity of certain claims in ourEuropean patent relating to our antibody-mediated thrombosis drug technology. There is a substantial backlog of biotechnology patent applications at theUnited States Patent and Trademark Office that may delay the review and issuance of any patents. The patent position of biotechnology firms like ours ishighly uncertain and involves complex legal and factual questions, and no consistent policy has emerged regarding the breadth of claims covered inbiotechnology patents or the protection afforded by these patents. We intend to continue to file patent applications as believed appropriate for patentscovering both our products and processes. There can be no assurance that patents will be issued from any of these applications, or that the scope of any issuedpatents will protect our technology.21Table of Contents We do not necessarily know if others, including competitors, have patents or patent applications pending that relate to compounds or processes thatoverlap or compete with our intellectual property or which may affect our freedom to operate. We are aware of certain families of patents and patentapplications that contain claims covering subject matter that may affect our ability to develop, manufacture and sell our products in the future. We haveconducted investigations into these patent families to determine what impact, if any, the patent families could have on our continued development,manufacture and, if approved by the FDA, sale of our drug candidates, including Riquent. Based on our investigations to date, we currently do not believethat these patent families are likely to impede the advancement of our drug candidates, including Riquent. However, there can be no assurance that upon our further investigation, these patent families or other patents will not ultimately be found to impact theadvancement of our drug candidates, including Riquent. If the United States Patent and Trademark Office or any foreign counterpart issues or has issuedpatents containing competitive or conflicting claims, and if these claims are valid, the protection provided by our existing patents or any future patents thatmay be issued could be significantly reduced, and our ability to prevent competitors from developing products or technologies identical or similar to ourscould be negatively affected. In addition, there can be no guarantee that we would be able to obtain licenses to these patents on commercially reasonableterms, if at all, or that we would be able to develop or obtain alternative technology. Our failure to obtain a license to a technology or process that may berequired to develop or commercialize one or more of our drug candidates may have a material adverse effect on our business. In addition, we may have toincur significant expenses and management time in defending or enforcing our patents. We also rely on unpatented intellectual property such as trade secrets and improvements, know-how, and continuing technological innovation. Whilewe seek to protect these rights, it is possible that: • others, including competitors, will develop inventions relevant to our business; • our confidentiality agreements will be breached, and we may not have, or be successful in obtaining, adequate remedies for such a breach; or • our trade secrets will otherwise become known or be independently discovered by competitors. We could incur substantial costs and devote substantial management time in defending suits that others might bring against us for infringement ofintellectual property rights or in prosecuting suits that we might bring against others to protect our intellectual property rights.The technology underlying our products is uncertain and unproven. All of our product development efforts are based on unproven technologies and therapeutic approaches that have not been widely tested or used. Todate, no pharmaceutical products that use our technology have been commercialized. The FDA has not determined that we have proven Riquent to be safeand effective in humans, and the technology on which it is based has been used only in our pre-clinical tests and clinical trials. Clinical trials of Riquent maybe viewed as a test of our entire approach to developing therapies for antibody-mediated diseases. If Riquent does not work as intended, or if the data fromour clinical trials indicates that Riquent is not safe and effective, the applicability of our technology for successfully treating antibody-mediated diseases willbe highly uncertain. As a result, there is a significant risk that our therapeutic approaches will not prove to be successful, and there can be no guarantee thatour drug discovery technologies will result in any commercially successful products.22Table of ContentsBecause a number of companies compete with us, many of which have greater resources than we do, and because we face rapid changes in technology inour industry, we cannot be certain that our products will be accepted in the marketplace or capture market share. Competition from domestic and foreign biotechnology companies, large pharmaceutical companies and other institutions is intense and is expected toincrease. A number of companies and institutions are pursuing the development of pharmaceuticals in our targeted areas. Many of these companies are verylarge, and have financial, technical, sales and distribution and other resources substantially greater than ours. The greater resources of these competitors couldenable them to develop competing products more quickly than we are able to, and to market any competing product more quickly or effectively so as tomake it extremely difficult for us to develop a share of the market for our products. These competitors also include companies that are conducting clinicaltrials and pre-clinical studies for the treatment of lupus. Our competitors may develop or obtain regulatory approval for products more rapidly than we do. Ifthe FDA were to approve a drug that is significantly similar in structure to Riquent for the same indication that Riquent is designed to treat, and such drugreceived marketing exclusivity under the Orphan Drug Act, the FDA may be prevented from approving Riquent. Also, the biotechnology and pharmaceuticalindustries are subject to rapid changes in technology. Our competitors may develop and market technologies and products that are more effective or lesscostly than those we are developing, or that would render our technology and proposed products obsolete or noncompetitive.We may not be able to take advantage of the orphan drug designation for Riquent. In September 2000, the FDA granted us orphan drug designation for Riquent for the treatment of lupus nephritis. The Orphan Drug Act potentiallyenables us to obtain research funding and tax credits for certain research expenses. In addition, the Orphan Drug Act allows for seven years of exclusivemarketing rights to a specific drug for a specific orphan indication. Exclusivity is conferred upon receipt of marketing approval from the FDA to the firstsponsor who obtains such approval for a designated drug. The marketing exclusivity prevents FDA approval during the seven-year period of the same drug,as defined in the FDA regulations, from another company for the same orphan indication. Whether we will be able to take advantage of some of the benefitsafforded by the orphan drug designation will ultimately be determined by the FDA only after further review of our NDA.The use of Riquent or other potential products in clinical trials, as well as the sale of any approved products, may expose us to lawsuits resulting from theuse of these products. The use and possible sale of Riquent or other potential products may expose us to legal liability and negative publicity if we are subject to claims thatour products harmed people. These claims might be made directly by patients, pharmaceutical companies, or others. We currently maintain $10.0 million ofproduct liability insurance for claims arising from the use of our products in clinical trials. However, product liability insurance is becoming increasinglyexpensive. In addition, in the event of any commercialization of any of our products, we will likely need to obtain additional insurance, which will increaseour insurance expenses. There can be no guarantee that we will be able to maintain insurance or that insurance can be acquired at a reasonable cost, insufficient amounts, or with broad enough coverage to protect us against possible losses. Furthermore, it is possible that our financial resources would beinsufficient to satisfy potential product liability or other claims. A successful product liability claim or series of claims brought against us could negativelyimpact our business and financial condition.We face environmental liabilities related to certain hazardous materials used in our operations. Due to the nature of our manufacturing processes, we are subject to stringent federal, state and local laws governing the use, handling and disposal ofcertain materials and wastes. We may have to incur significant costs to comply with environmental regulations if and when our manufacturing increases tocommercial volumes. Current or future environmental laws may significantly affect our operations because, for instance, our production process may berequired to be altered, thereby increasing our production costs. In our research and23Table of Contentsmanufacturing activities, we use radioactive and other materials that could be hazardous to human health, safety or the environment. These materials andvarious wastes resulting from their use are stored at our facility pending ultimate use and disposal. The risk of accidental injury or contamination from thesematerials cannot be eliminated. In the event of such an accident, we could be held liable for any resulting damages, and any such liability could exceed ourresources. Although we maintain general liability insurance, we do not specifically insure against environmental liabilities.II. RISK FACTORS RELATED SPECIFICALLY TO OUR STOCK.The ownership of our common stock is concentrated. As of February 29, 2008, our three largest stockholders beneficially owned approximately 47% of our currently outstanding shares of common stock.Investors who purchase our common stock may be subject to certain risks due to the concentrated ownership of our common stock. For example, the sale byany of our large stockholders of a significant portion of that stockholder’s holdings could have a material adverse effect on the market price of our commonstock. In addition, two of these stockholders have the ability, either alone or jointly, to appoint four members of our board of directors. Accordingly, thesetwo stockholders, either directly or indirectly, have the ability to significantly influence the outcome of all matters submitted to a vote of our stockholders.Our common stock price is volatile and may decline even if our business is doing well. The market price of our common stock has been and is likely to continue to be highly volatile. Market prices for securities of biotechnology andpharmaceutical companies, including ours, have historically been highly volatile, and the market has from time to time experienced significant price andvolume fluctuations that are unrelated to the operating performance of particular companies. The following factors, among others, can have a significanteffect on the market price of our securities: • limited financial resources; • our clinical trial results; • future sales of significant amounts of our common stock by us or our stockholders; • actions or decisions by the FDA and other comparable agencies; • announcements of technological innovations or new therapeutic products by us or others; • developments in patent or other proprietary rights; • public concern as to the safety of drugs discovered or developed by us or others; • developments concerning potential agreements with collaborators; • comments by securities analysts and general market conditions; and • government regulation, including any legislation that may impact the price of any commercial products that we may seek to sell. The realization of any of the risks described in these “Risk Factors” could have a negative effect on the market price of our common stock.24Table of ContentsFuture sales of our stock by our stockholders could negatively affect the market price of our stock. Sales of our common stock in the public market, or the perception that such sales could occur, could result in a drop in the market price of our securities.As of February 29, 2008, there were: • Approximately 39,619,996 shares of common stock that have been issued in registered offerings or were otherwise freely tradable in the publicmarkets. • Approximately 10,761 shares of common stock eligible for resale in the public market pursuant to SEC Rule 144. • 4,399,992 shares of common stock underlying warrants which have been registered for resale under a Registration Statement on Form S-3. • 5,417,904 shares of common stock that may be issued on the exercise of outstanding stock options granted under our various stock option plans at aweighted average exercise price of $7.83 per share. • Approximately 417,949 shares of common stock reserved for future issuance pursuant to awards granted under our equity incentive and employeestock purchase plans, which shares are covered by effective registration statements under the Securities Act of 1933, as amended (the “SecuritiesAct”). • Pursuant to a registration statement on Form S-3 filed on December 10, 2002, we registered an aggregate amount of $125,000,000 of our commonstock for issuance from time to time. As of February 29, 2008, there was $13,917,500 of our common stock available for future issuance under thisregistration statement, which expires on December 1, 2008. • Pursuant to a registration statement on Form S-3 filed on August 20, 2007, we registered an aggregate amount of $77,000,000 of our common stockfor issuance from time to time. As of February 29, 2008, no shares of common stock had been issued under this registration statement, which expireson August 23, 2010. We cannot estimate the number of shares of common stock that may actually be resold in the public market because this will depend on the market pricefor our common stock, the individual circumstances of the sellers and other factors. We also have a number of stockholders that own significant blocks of ourcommon stock. If these stockholders sell significant portions of their holdings in a relatively short time, for liquidity or other reasons, the market price of ourcommon stock could drop significantly.Our stock may be removed from listing on the Nasdaq Global Market and may not qualify for listing on any stock exchange, in which case it may bedifficult to maintain a market in our stock. In 2005, we received a notice from the Nasdaq Stock Market that our stock price fell below the required minimum bid price. We have since regainedcompliance with the minimum bid price rule, but we are required to maintain compliance in order to maintain our listing. In addition to the minimum bidprice rule, the Nasdaq Global Market has several other continued listing requirements. Failure to maintain compliance with any Nasdaq listing requirementcould cause our stock to be removed from listing on Nasdaq. If this were to happen, we may not be able to secure listing on other exchanges or quotationsystems. If our stock is no longer traded on an exchange or quotation system, it may be difficult for our stockholders to sell the shares that they own. Thiswould have a negative effect on the price and liquidity of our stock.25Table of ContentsFailure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have amaterial adverse effect on our business and stock price. Section 404 of the Sarbanes-Oxley Act requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end ofeach fiscal year beginning in 2004 and to include a management report assessing the effectiveness of our internal control over financial reporting in all futureannual reports beginning with the annual report on Form 10-K for the fiscal year ended December 31, 2004. Section 404 also requires our independentregistered public accounting firm to report on our internal control over financial reporting. We evaluated our internal control over financial reporting as ofDecember 31, 2007 in order to comply with Section 404 and concluded that our disclosure controls and procedures were effective as of such date. If we fail tomaintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we cannot provide anyassurances that we will be able to conclude in the future that we have effective internal control over financial reporting in accordance with Section 404. If wefail to achieve and maintain a system of effective internal control over financial reporting, it could have a material adverse effect on our business and stockprice.Anti-takeover devices may prevent changes in our board of directors and management. We have in place several anti-takeover devices, including a stockholder rights plan, which may have the effect of delaying or preventing changes in ourmanagement or deterring third parties from seeking to acquire significant positions in our common stock. For example, one anti-takeover device provides fora board of directors that is separated into three classes, with their terms in office staggered over three year periods. This has the effect of delaying a change incontrol of our board of directors without the cooperation of the incumbent board. In addition, our bylaws require stockholders to give us written notice of anyproposal or director nomination within a specified period of time prior to the annual stockholder meeting, establish certain qualifications for a person to beelected or appointed to the board of directors during the pendency of certain business combination transactions, and do not allow stockholders to call aspecial meeting of stockholders. We may also issue shares of preferred stock without further stockholder approval and upon terms that our board of directors may determine in the future.The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding stock, and theholders of such preferred stock could have voting, dividend, liquidation and other rights superior to those of holders of our common stock.Item 1B. Unresolved Staff Comments. None.Item 2. Properties. We lease two adjacent buildings in San Diego, California covering a total of approximately 54,000 square feet. One building contains our research anddevelopment laboratories and clinical manufacturing facilities and the other contains our corporate offices and warehouse. Both building leases expire inJuly 2009. Each lease is subject to an escalation clause that provides for annual rent increases. We believe that these facilities will be adequate to meet ourneeds for the near term. Over the longer term, management believes that additional space can be secured at commercially reasonable rates.Item 3. Legal Proceedings. We are not currently a party to any legal proceedings.Item 4. Submission of Matters to a Vote of Security Holders. None.26Table of ContentsPART IIItem 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Information About Our Common Stock Our common stock trades on the Nasdaq Global Market under the symbol “LJPC.” Set forth below are the high and low sales prices for our commonstock for each full quarterly period within the two most recent fiscal years. Prices High LowYear Ended December 31, 2007 First Quarter $8.57 $2.80 Second Quarter 8.68 4.35 Third Quarter 5.59 3.15 Fourth Quarter 4.50 3.15 Year Ended December 31, 2006 First Quarter $5.65 $3.28 Second Quarter 4.95 3.47 Third Quarter 4.10 3.50 Fourth Quarter 3.79 2.77 We have never paid dividends on our common stock and we do not anticipate paying dividends in the foreseeable future. The number of record holdersof our common stock as of February 29, 2008 was approximately 207.Information About Our Equity Compensation Plans Information regarding our equity compensation plans is incorporated by reference in Item 12 of Part III of this annual report of Form 10-K.27Table of ContentsStock Performance Graph The following graph compares the cumulative total stockholder return on our common stock for the five years ended December 31, 2007 with theCenter for Research in Securities Prices (“CRSP”) Total Return Index for the Nasdaq Global Market (U.S. Companies) and the CRSP Total Return Index forNasdaq Pharmaceutical Stocks (comprising all companies listed in the Nasdaq Global Market under SIC 283). The graph assumes that $100 was invested onDecember 31, 2002 in our common stock and each index and that all dividends were reinvested. No cash dividends have been declared on our commonstock. The comparisons in the graph are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possiblefuture performance of our common stock. 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007 La Jolla Pharmaceutical Company* $100 $65.54 $25.69 $11.38 $9.32 $12.06 Nasdaq — US $100 $149.52 $162.72 $166.18 $182.57 $197.98 Nasdaq — Pharmaceuticals $100 $146.59 $156.13 $171.93 $168.29 $176.97 * La Jolla Pharmaceutical Company stock prices have been adjusted to reflect the one-for-five reverse stock split effective December 21, 2005.28Table of ContentsItem 6. Selected Financial Data. The following Selected Financial Data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” included in Item 7 beginning at page 30 and the consolidated financial statements of the Company and related notes thereto beginning atpage F-2 of this report. Years Ended December 31, 2007 2006 2005 2004 2003 (In thousands, except per share amounts)Consolidated Statements of Operations Data: Expenses: Research and development $46,635 $32,938 $22,598 $33,169 $32,385 General and administrative 9,058 9,287 5,405 7,568 6,908 Loss from operations (55,693) (42,225) (28,003) (40,737) (39,293) Interest expense (82) (46) (116) (190) (210)Interest income 2,699 2,826 756 383 665 Net loss $(53,076) $(39,445) $(27,363) $(40,544) $(38,838) Basic and diluted net loss per share $(1.40) $(1.21) $(1.77) $(3.40) $(4.24) Shares used in computing basic and diluted net loss per share(1) 37,818 32,588 15,446 11,941 9,161 Balance Sheet Data: Working capital $29,881 $37,673 $70,124 $17,539 $28,914 Total assets $44,405 $49,525 $80,928 $33,026 $41,944 Noncurrent portion of obligations under capital leases andnotes payable $388 $196 $142 $716 $1,341 Stockholders’ equity $33,521 $43,089 $77,130 $26,001 $36,427 (1) Shares have been adjusted to reflect the one-for-five reverse stock split effective December 21, 2005.29Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Introduction Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the accompanying consolidatedfinancial statements and footnotes to help provide an understanding of our financial condition, the changes in our financial condition and our results ofoperations. Our discussion is organized as follows: • Recent developments. This section provides a general description of recent events and significant transactions that we believe are important inunderstanding our financial condition and results of operations. • Overview. This section provides a general description of our business and operating history. • Critical accounting policies and estimates. This section contains a discussion of the accounting policies that we believe are important to ourfinancial condition and results of operations and that require significant judgment and estimates on the part of management in their application. Inaddition, all of our significant accounting policies, including the critical accounting policies and estimates, are summarized in Note 1 to theaccompanying consolidated financial statements. • Results of operations. This section provides an analysis of our results of operations presented in the accompanying consolidated statements ofoperations by comparing the results for the year ended December 31, 2007 to the results for the year ended December 31, 2006 and comparing theresults for the year ended December 31, 2006 to the results for the year ended December 31, 2005. • Liquidity and capital resources. This section provides an analysis of our cash flows and a discussion of our outstanding debt and commitments,both firm and contingent, that existed as of December 31, 2007. Included in the discussion of outstanding debt is a discussion of our financialcapacity to fund our future commitments and a discussion of other financing arrangements.Recent Developments2008 On February 11, 2008, we announced that we had made significant progress in our current Phase 3 ASPEN study in that we had enrolled 607 patientsand 130 clinical trial sites were open to enroll patients in 23 countries. In addition, we also announced that our current enrollment target of at least740 patients was expected to be completed around the end of the second quarter of 2008.2007 On February 1, 2007, we announced that we had made continued progress in enrolling patients in our Phase 3 ASPEN study in that we had enrolled 202patients in the study and 74 clinical trial sites were open to enroll patients, including newly added sites in Europe and Mexico. In addition, we alsoannounced that following discussions with the FDA, we implemented several enhancements to further strengthen the Phase 3 ASPEN study, which remainsunder Special Protocol Assessment. These enhancements included a focus on higher doses and increase in sample size. On March 8 and March 20, 2007, we announced positive interim antibody results from our current Phase 3 ASPEN study. Analyses of interim antibodydata indicated that patients treated with 900 mg or 300 mg per week doses of Riquent had greater reductions in antibodies to dsDNA than patients treatedwith 100 mg per week or placebo. The results showed a significant dose response when comparing all Riquent-treated patients to placebo-treated patients (p= 0.0001), and each Riquent dose group to the placebo dose group (p < 0.0032 for 100 mg, p < 0.0001 for 300 mg and 900 mg).30Table of Contents On March 29, 2007, we announced the pricing of an underwritten public offering of 5,800,000 shares of our common stock at $6.00 per share. Inconnection with this offering, we granted the underwriters an option to purchase up to an additional 870,000 shares to cover over-allotments. On April 10,2007, we announced that we had completed the public offering for total net proceeds of approximately $37.9 million, including the proceeds from the over-allotment shares. On April 26, 2007, we announced that composition of matter patents covering Riquent have issued in both Europe and in the People’s Republic ofChina. If the full five years of patent term extension under a Supplemental Protection Certificate is granted, the term of the European patent would extend toDecember 2, 2018. The Chinese patent will be in effect until September 8, 2014. On May 10, 2007, we announced that Niv E. Caviar had joined the Company as Executive Vice President, Chief Business Officer and Chief FinancialOfficer. On May 24, 2007, we announced that we had presented three papers related to Riquent at the 8th International Congress on SLE. The first presentationreviewed recently announced safety and interim antibody data from the current Phase 3 ASPEN study which highlighted the statistically significant doseresponse observed between the 100 mg, 300 mg and 900 mg doses of Riquent compared with placebo (p=0.0001). The second presentation reviewed thesafety and drug levels of Riquent at doses up to 2,400 mg in healthy volunteers and the third, cardiovascular safety in healthy volunteers.Overview Since our inception in May 1989, we have devoted substantially all of our resources to the research and development of technology and potential drugsto treat antibody-mediated diseases. We have never generated any revenue from product sales and have relied on public and private offerings of securities,revenue from collaborative agreements, equipment financings and interest income on invested cash balances for our working capital. We expect that ourresearch and development expenses will increase significantly in the future. For example, we are conducting and expanding a Phase 3 clinical trial of Riquentwhich the FDA has indicated appears to satisfy the requirement that we conduct an additional randomized, double-blind study. This study is an event drivetrial requiring us to accrue a specified number of renal flares to complete the study. We currently target enrolling at least 740 patients to achieve the requirednumber of renal flares and the trial could take several years to complete. Therefore, we expect to expend substantial amounts of capital resources for theclinical development and manufacturing of Riquent. We may also devote substantial additional capital resources to establish commercial-scalemanufacturing capabilities and to market and sell potential products. These expenses may be incurred prior to or after any regulatory approvals that we mayreceive. In addition, our research and development expenses may increase if we initiate any additional clinical studies of Riquent or if we increase ouractivities related to any additional drug candidates. We will need additional funds to finance our future operations. Our activities to date are not as broad indepth or scope as the activities we may undertake in the future, and our historical operations and the financial information included in this report are notnecessarily indicative of our future operating results or financial condition. We expect our net loss to fluctuate from quarter to quarter as a result of the timing of expenses incurred and the revenues earned from any potentialcollaborative arrangements that we may establish. Some of these fluctuations may be significant. As of December 31, 2007, our accumulated deficit wasapproximately $352.8 million.31Table of Contents Our business is subject to significant risks, including, but not limited to, the need for additional financing or a collaborative partner to continue ourclinical activities and continue to operate, the risks inherent in research and development efforts, including clinical trials, the lengthy, expensive anduncertain process of seeking regulatory approvals, uncertainties associated with both obtaining and enforcing patents, the potential enforcement of the patentrights of others against us, uncertainties regarding government reforms regarding product pricing and reimbursement levels, technological change,competition, manufacturing uncertainties, our lack of marketing experience, the uncertainty of receiving future revenue from product sales or other sourcessuch as collaborative relationships, and the uncertainty of future profitability. Even if our product candidates appear promising at an early stage ofdevelopment, they may not reach the market for numerous reasons, including the possibilities that the products will be ineffective or unsafe during clinicaltrials, will fail to receive necessary regulatory approvals, will be difficult to manufacture on a large scale, will be uneconomical to market or will be precludedfrom commercialization by the proprietary rights of third parties or competing products.Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have beenprepared in accordance with United States generally accepted accounting principles. The preparation of these consolidated financial statements requires us tomake estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets andliabilities. We evaluate our estimates on an ongoing basis, including those related to patent costs and clinical/regulatory expenses. We base our estimates onhistorical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from theseestimates under different assumptions or conditions. We believe the following critical accounting policies involve significant judgments and estimates used in the preparation of our consolidated financialstatements (see also Note 1 to our consolidated financial statements included in Part IV).Impairment and useful lives of long-lived assets We regularly review our long-lived assets for impairment. Our long-lived assets include costs incurred to file our patent applications. We evaluate therecoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them.At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value ofsuch assets, the assets are adjusted to their fair values. The estimation of the undiscounted future cash flows associated with long-lived assets requiresjudgment and assumptions that could differ materially from the actual results. While we believe our current and historical operating and cash flow losses areindicators of impairment, we believe the future cash flows to be received from the long-lived assets will exceed the assets’ carrying value. There were noimpairment losses recognized for the year ended December 31, 2007. We have recognized approximately $0.1 million in impairment losses for each of theyears ended December 31, 2006 and December 31, 2005. Costs related to successful patent applications are amortized using the straight-line method over the lesser of the remaining useful life of the relatedtechnology or the remaining patent life, commencing on the date the patent is issued. Legal costs and expenses incurred in connection with pending patentapplications have been capitalized. We expense all costs related to abandoned patent applications. If we elect to abandon any of our currently issued orunissued patents, the related expense could be material to our results of operations for the period of abandonment. The estimation of useful lives for long-lived assets requires judgment and assumptions that could differ materially from the actual results. In addition, our results of operations could be materiallyimpacted if we begin amortizing the costs related to unissued patents.32Table of ContentsAccrued clinical/regulatory expenses We review and accrue clinical trial and regulatory-related expenses based on work performed, which relies on estimates of total costs incurred based onpatient enrollment, sites activated and other events. We follow this method because reasonably dependable estimates of the costs applicable to various stagesof a clinical trial can be made. Accrued clinical/regulatory costs are subject to revisions as trials progress to completion. Revisions are charged to expense inthe period in which the facts that give rise to the revision become known. Historically, revisions have not resulted in material changes to research anddevelopment costs; however a modification in the protocol of a clinical trial or cancellation of a trial could result in a charge to our results of operations.Share-Based Compensation We adopted Statement of Financial Accounting Standard (“SFAS”) No. 123R, Share-Based Payments (“SFAS 123R”) using the modified prospectivetransition method, which requires the application of the accounting standard as of January 1, 2006, the first day of our 2006 fiscal year. Our ConsolidatedStatement of Operations as of and for the years ended December 31, 2007 and 2006 reflect the impact of SFAS 123R. In accordance with the modifiedprospective transition method, our Consolidated Statements of Operations for prior periods have not been restated to reflect, and do not include, the impact ofSFAS 123R. Share-based compensation expense recognized under SFAS 123R for the years ended December 31, 2007 and December 31, 2006 wasapproximately $4.8 million and $5.0 million, respectively. As of December 31, 2007, there was approximately $6.9 million of total unrecognizedcompensation cost related to non-vested share-based payment awards granted under all equity compensation plans. Total unrecognized compensation costwill be adjusted for future changes in estimated forfeitures. We currently expect to recognize the remaining unrecognized compensation cost over a weighted-average period of 1.1 years. Additional share-based compensation expense for any new share-based payment awards granted after December 31, 2007 underall equity compensation plans cannot be predicted at this time because it will depend on, among other matters, the amounts of share-based payment awardsgranted in the future. Prior to January 1, 2006, we had adopted the disclosure-only provision of SFAS No. 123, Accounting and Disclosure of Stock-Based Compensation(“SFAS 123”). Accordingly, we had not previously recognized compensation expense, except for compensation expense related to stock options granted toconsultants and restricted stock granted to certain members of management. Had we recognized compensation expense in accordance with SFAS 123 for theyear ended December 31, 2005, our net loss would have increased by approximately $3.8 million or $0.25 per basic and diluted share. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fullytransferable. Because the employee and director stock options granted by us have characteristics that are significantly different from traded options, andbecause changes in the subjective assumptions can materially affect the estimated value, in our opinion the existing valuation models may not provide anaccurate measure of the fair value of the employee and director stock options granted by us. Although the fair value of the employee and director stockoptions granted by us is determined in accordance with SFAS 123R using an option-pricing model, that value may not be indicative of the fair valueobserved in a willing-buyer/willing-seller market transaction.New Accounting Pronouncements In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from theapplication of SFAS 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair valuemeasurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currentlyassessing the impact of SFAS 157 on our consolidated results of operations and financial condition.33Table of Contents On January 1, 2007, we adopted FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which clarifies theaccounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.FIN 48 prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken in a taxreturn. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50%likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,disclosures and transition. See Note 8 to the consolidated financial statements for discussion on the impact of FIN 48 to our consolidated results of operationsand financial condition. In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASBStatement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gainsand losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning afterNovember 15, 2007. We are currently assessing the impact of SFAS 159 on our consolidated results of operations and financial condition. In June 2007, FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on EITF Issue No. 07-3, Accounting for NonrefundableAdvance Payments for Goods or Services to Be Used in Future Research and Development Activities (“ETF 07-3”). EITF 07-3 addresses the diversity thatexists with respect to the accounting for the non-refundable portion of a payment made by a research and development entity for future research anddevelopment activities. Under EITF 07-3, an entity would defer and capitalize non-refundable advance payments made for research and developmentactivities until the related goods are delivered or the related services are performed. EITF 07-3 is effective for fiscal years beginning after December 15, 2007.The adoption of EITF 07-3 is not expected to have a material effect on our consolidated financial statements.Results of OperationsYears Ended December 31, 2007, 2006 and 2005 Research and Development Expense. Our research and development expense increased to $46.6 million for the year ended December 31, 2007 from$32.9 million in 2006. The increase in research and development expenses in 2007 from 2006 resulted primarily from an increase in Riquent-related drugproduction and clinical trial expenses of approximately $16.0 million. This increase was partially offset by a decrease of approximately $3.2 million inexpenses in 2007 as compared to 2006 for the development of our SSAO program, as all of our resources are being devoted to the development of Riquentand further development of the SSAO program depends on our ability to enter into a joint venture, partnership or other collaborative arrangement for thisprogram. Research and development expense of $46.6 million for the year ended December 31, 2007 consisted of $46.0 million for lupus research and developmentrelated expense and $0.6 million for SSAO research and development related expense. Total lupus research and development expense consisted primarily ofRiquent related clinical trial expenses and clinical drug supply, salaries and other costs related to manufacturing, clinical and research personnel and fees forconsulting and professional outside services. Total SSAO research and development expense consisted primarily of salaries and other costs related to researchand development personnel, and depreciation expense. Our research and development expense increased to $32.9 million for the year ended December 31, 2006 from $22.6 million in 2005. The increase inresearch and development expenses in 2006 from 2005 resulted primarily from an increase in Riquent-related drug production and clinical trial expenses ofapproximately $8.2 million. In addition, the increase was due to share-based compensation expense recorded in connection with the adoption of SFAS 123Rof approximately $1.8 million and an increase in Riquent-related consulting expenses of approximately $0.6 million. These increases were partially offset bya decrease in termination benefits, mainly relating to severance, of approximately $1.0 million that was recorded in 2005 in connection with the terminationof 44 research and development personnel, and the savings in salaries and related expenses as a result of this reduction in personnel.34Table of Contents We expect that our research and development expense will increase significantly in the future. For example, we are conducting and expanding a clinicaltrial of Riquent that the FDA has indicated appears to satisfy the requirement that we conduct an additional randomized, double-blind study. The study iscurrently targeted to enroll at least 740 patients and could take several years to complete. As patient enrollment expands in our Phase 3 ASPEN study, ourexpenses for the manufacturing of Riquent will also increase. Additionally, our research and development expenses may increase significantly if we initiateany additional clinical studies of Riquent or if we increase our activities related to the development of additional drug candidates. General and Administrative Expense. Our general and administrative expense decreased to $9.1 million for the year ended December 31, 2007 from$9.3 million in 2006. The decrease in general and administrative expense in 2007 from 2006 resulted primarily from a decrease in termination benefits, whichfor 2006 were mainly severance of approximately $0.9 million and compensation expense of approximately $0.8 million for accelerated stock option vestingrelated to the former Chairman and Chief Executive Officer’s departure in the first quarter of 2006. This decrease was partially offset by the increase in thewrite-off of selected patent applications for technologies not related to Riquent or our small molecule SSAO inhibitors program of approximately$0.7 million, an increase in share-based compensation expense of approximately $0.5 million for stock options granted in 2006 and 2007 and an increase inconsulting expenses for business development and market research of approximately $0.4 million. Our general and administrative expense increased to $9.3 million for the year ended December 31, 2006 from $5.4 million in 2005. The increase in generaland administrative expense in 2006 from 2005 resulted primarily from share-based compensation expense recorded in connection with the adoption of SFAS123R of approximately $3.2 million. The increase was also due to the expense recorded in the first quarter of 2006 for severance paid to the former Chairmanand Chief Executive Officer of approximately $0.9 million and an increase in general corporate consulting and professional outside services ofapproximately $0.6 million. These increases were partially offset by a decrease in termination benefits, mainly relating to severance, of approximately$0.5 million that was recorded in 2005 in connection with the termination of 16 general and administrative personnel, and the savings in salaries and relatedexpenses as a result of this reduction in personnel. General and administrative expense will increase in the future to support our ongoing clinical trials as patient enrollment and the manufacturing ofRiquent increases. Additionally, general and administrative expense may increase in the future if there is an increase in research and development orcommercialization activities. Interest Income and Expense. Our interest income was comparable for the years ended December 31, 2007 and December 31, 2006. Our interest incomeincreased to $2.8 million for the year ended December 31, 2006 from $0.8 million for 2005 due to higher average balances of cash and short-term investmentsand higher average interest rates on our investments as compared to 2005. Interest expense was comparable for the years ended December 31, 2007, 2006 and2005. Net Operating Loss and Research Tax Credit Carryforwards. At December 31, 2007, we had federal and California income tax net operating losscarryforwards of approximately $316.1 million and $169.4 million, respectively. The difference between the federal and California tax loss carryforwards isprimarily attributable to the capitalization of research and development expenses for California income tax purposes. In addition, we had federal andCalifornia research and development tax credit carryforwards of $15.3 million and $8.9 million, respectively. The federal net operating loss and research taxcredit carryforwards will begin to expire in 2008 unless previously utilized. The California net operating loss carryforwards will begin to expire in 2009unless previously utilized. The California research and development credit carryforwards will carry forward indefinitely until utilized.35Table of Contents We are currently undergoing a Section 382/383 analysis regarding the limitation of net operating loss and research and development credit carryforwards.Until this analysis has been completed we have removed the deferred tax assets for net operating losses of $120.4 million and research and developmentcredits of $21.1 million generated through 2007 from our deferred tax asset schedule and have recorded a corresponding decrease to our valuation allowance.When this analysis is finalized, we plan to update unrecognized tax benefits under FIN No. 48. We expect the Section 382 analysis to be completed withinthe next twelve months. Due to the existence of the valuation allowance, future changes in our unrecognized tax benefits will not impact our effective taxrate. Liquidity and Capital Resources From inception through December 31, 2007, we have incurred a cumulative net loss of approximately $352.8 million and have financed our operationsthrough public and private offerings of securities, revenues from collaborative agreements, equipment financings and interest income on invested cashbalances. From inception through December 31, 2007, we had raised approximately $375.6 million in net proceeds from sales of equity securities. As of December 31, 2007, we had $39.4 million in cash, cash equivalents and short-term investments, as compared to $42.9 million as of December 31,2006. Our working capital as of December 31, 2007 was $29.9 million, as compared to $37.7 million as of December 31, 2006. The decrease in cash, cashequivalents and short-term investments resulted from the use of our financial resources to fund our clinical trial and manufacturing activities, research anddevelopment efforts, and for other general corporate purposes, offset by the net proceeds of $37.9 million from the sale of 6.7 million shares of our commonstock in April 2007. We invest our cash primarily in AAA rated government-asset-backed securities, obligations of government agencies, and money marketfunds. As of December 31, 2007, all of our investments are classified as available-for-sale securities because we expect to sell them in order to support ourcurrent operations regardless of their maturity dates. As of December 31, 2007, available-for-sale securities and cash equivalents of $9.0 million have statedmaturity dates of one year or less and $28.0 million have maturity dates after one year. Securities that have a maturity date greater than one year have theirinterest rate reset periodically within time periods not exceeding 92 days. Subsequent to December 31, 2007, we sold $18.0 million of our asset-backedauction rate securities at par value. As of March 6, 2008, there was insufficient demand at auction for three of our AAA rated U.S. government-backed studentloan auction rate securities, representing approximately $6.0 million of the remaining $10.0 million we currently hold in asset-backed auction rate securities.As a result of the insufficient demand, these three securities are currently not liquid and unless a future auction (which occurs approximately every 28 days)for these investments is successful, we could be required to hold them until they are redeemed by the issuer or to maturity, which ranges between 20-30 years.We may experience a similar situation with our other remaining asset-backed student loan auction rate security of $4.0 million, which comes up for auctionon March 24, 2008. In the event we need to access the funds that are in an illiquid state, we will not be able to do so without a loss of principal, until a futureauction on these investments is successful, the securities are redeemed by the issuer or they mature. At this time, management has not obtained sufficientevidence to conclude that these investments are impaired or that they will not be settled in the short-term, although the market for these investments ispresently uncertain. If the credit ratings of the security issuers deteriorate and any decline in market value is determined to be other-than-temporary, we wouldbe required to adjust the carrying value of the investment through an impairment charge. See note 9 to our consolidated financial statements for furtherinformation. As of December 31, 2007, approximately $0.9 million of equipment ($0.6 million net of depreciation) is financed under notes payable and capital leaseobligations. In December 2006, we entered into a credit facility to fund equipment purchases up to $1.8 million until the end of the second quarter of 2008.In addition, we lease our office and laboratory facilities and certain equipment under operating leases. We have also entered into non-cancelable purchasecommitments for an aggregate of $1.4 million with third-party manufacturers of materials to be used in the production of Riquent. We intend to use ourcurrent financial resources to fund our obligations under these purchase commitments. In the future, we may increase our investments in property andequipment if we expand our manufacturing and development facilities and capabilities.36Table of Contents The following table summarizes our contractual obligations as of December 31, 2007. Long-term debt and capital lease obligations include interest. Payment due by period (in thousands) Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years Long-term debt obligations $568 $179 $389 $— $— Operating lease obligations 1,424 830 594 — — Capital lease obligations 69 15 42 12 — Purchase obligations 1,412 1,412 — — — Total $3,473 $2,436 $1,025 $12 $— We intend to use our financial resources to fund the current clinical studies of Riquent, possible future clinical trials, manufacturing activities, researchand development efforts and for working capital and other general corporate purposes. The amounts that we actually spend for each purpose may varysignificantly depending on a number of factors, including the results from current and future clinical trials, the continued analysis of the clinical trial data ofRiquent, the outcome of our meetings with regulatory authorities, the timing of any regulatory applications and approvals, and technological developments.Expenditures also will depend on any establishment of collaborative arrangements and contract research as well as the availability of other funding orfinancings. We will continue to seek capital through any number of means, including by issuing our equity securities and by establishing one or more collaborativearrangements. However, there can be no assurance that additional financing will be available to us on acceptable terms, if at all, and our negotiating positionin capital-raising efforts may worsen as we continue to use existing resources or if the development of Riquent is delayed or terminated. There is also noassurance that we will be able to enter into further collaborative relationships. In the future, it is possible that we will not have adequate resources to supportcontinuation of our business activities. We have no current means of generating cash flow from operations. Our lead drug candidate, Riquent, will not generate revenues, if at all, until it hasreceived regulatory approval and has been successfully manufactured, marketed and sold. This process, if completed, will take a significant amount of time.Our other drug candidates are much less developed than Riquent. There can be no assurance that our product development efforts with respect to Riquent orany other drug candidate will be successfully completed, that required regulatory approvals will be obtained or that any product, if introduced, will besuccessfully marketed or achieve commercial acceptance. Accordingly, we must continue to rely on outside sources of financing to meet our capital needs forthe foreseeable future.Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our consolidated financial condition,changes in our consolidated financial condition, expenses, consolidated results of operations, liquidity, capital expenditures or capital resources.37Table of ContentsItem 7A. Quantitative and Qualitative Disclosures About Market Risk. We invest our excess cash in interest-bearing investment-grade securities which we sell from time to time to support our current operations. We do notutilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any materialfashion. We currently do not invest in any securities that are materially and directly affected by foreign currency exchange rates or commodity prices. All of our investment securities are classified as available-for-sale and are therefore reported on the balance sheet at market value. Our investmentsecurities consist primarily of government-asset-backed securities, obligations of government agencies, and money market funds. As of December 31, 2007,our short-term investments included $28.0 million of AAA rated student loan auction rate securities issued primarily by state governments. Subsequent toDecember 31, 2007, we sold $18.0 million of these asset-backed auction rate securities at par value. Our auction rate securities are debt instruments with along-term maturity and with an interest rate that is reset in short intervals through auctions. The recent conditions in the global credit markets have prevented some investors from liquidating their holdings of auction rate securities because theamount of securities submitted for sale has exceeded the amount of purchase orders for such securities. If there is insufficient demand for the securities at thetime of an auction, the auction may not be completed and the interest rates may be reset to the security’s maximum rate. When auctions for these securitiesfail, the investments may not be readily convertible to cash until a future auction of these investments is successful or they are redeemed or mature, whichcould be many years. If the credit ratings of the security issuers deteriorate and any decline in market value is determined to be other-than-temporary, thecarrying value of the investment would be required to be adjusted through an impairment charge. As of March 6, 2008, there was insufficient demand at auctions for three of our AAA rated U.S. government-backed student loan auction rate securities,representing approximately $6.0 million of our remaining $10.0 million auction rate securities then outstanding. As a result of this insufficient demand, thesethree securities may not be liquid and the interest rates have been reset to the security’s maximum rate. We may experience a similar situation with our otherremaining asset-backed student loan auction rate security of $4.0 million, which comes up for auction on March 24, 2008. To date, we have not recognizedany realized losses on these securities. See note 9 to our consolidated financial statement for further information. In the event we need to access the funds that are in an illiquid state, we will not be able to do so without the possible loss of principal, until a futureauction for these investments is successful or they are redeemed by the issuer. At this time, management has not obtained sufficient evidence to conclude thatthese investments are impaired or that they will not be settled in the short term, although the market for these investments is presently uncertain. If we areunable to sell these securities in the market or they are not redeemed, this could potentially impact our current business plan as we will need the ability toaccess these funds in the near future. Based on our cash, cash equivalents and short-term investments at December 31, 2007, a hypothetical 10% increase or decrease in interest rates wouldincrease or decrease our annual interest income and cash flows by approximately $0.2 million.Item 8. Financial Statements and Supplementary Data. The financial statements and supplementary data required by this item are set forth above under the caption “Quarterly Results of Operations” on page F-20 and at the end of this report beginning on page F-2 and is incorporated herein by reference.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.38Table of ContentsItem 9A. Controls and Procedures. (a) Disclosure Controls and Procedures; Changes in Internal Control Over Financial Reporting Our management, with the participation of our principal executive and principal financial officers, has evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of December 31,2007. Based on this evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effectiveas of December 31, 2007. There was no change in our internal control over financial reporting during the quarter ended December 31, 2007 that has materially affected, or isreasonably likely to materially affect, our internal control over financial reporting. (b) Management Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financialreporting is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, ourprincipal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles and includes those policies and procedures that: • Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management anddirectors; and • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could havea material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, ourmanagement used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-IntegratedFramework. Based on our assessment, management concluded that, as of December 31, 2007, our internal control over financial reporting was effective based onthose criteria. The independent registered public accounting firm that audited the consolidated financial statements that are included in this Annual Report on Form10-K has issued an audit report on our internal control over financial reporting. The report appears below.39Table of Contents (c) Report Of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersLa Jolla Pharmaceutical Company We have audited La Jolla Pharmaceutical Company’s internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). La JollaPharmaceutical Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting.Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures aswe considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate. In our opinion, La Jolla Pharmaceutical Company maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2007 based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets of La Jolla Pharmaceutical Company as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity,and cash flows for each of the three years in the period ended December 31, 2007 of La Jolla Pharmaceutical Company and our report dated March 17, 2008expressed an unqualified opinion and an explanatory paragraph thereon./s/ Ernst & Young LLP San Diego, CaliforniaMarch 17, 200840Table of ContentsItem 9B. Other Information. None.PART IIIItem 10. Directors, Executive Officers and Corporate Governance. Information required by this item will be contained in our Definitive Proxy Statement for our 2008 Annual Meeting of Stockholders, to be filed pursuantto Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2007. Such information is incorporated herein byreference. We have adopted a code of conduct that applies to our Chief Executive Officer, Principal Financial Officer, Principal Accounting Officer, and to all of ourother officers, directors, employees and agents. The code of conduct is available at the Corporate Governance section of the Investor Relations page on ourwebsite at www.ljpc.com. We intend to disclose future amendments to certain provisions of our code of conduct on the above website within four businessdays following the date of such amendment or waiver.Item 11. Executive Compensation. Information required by this item will be contained in our Definitive Proxy Statement for our 2008 Annual Meeting of Stockholders, to be filed pursuantto Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2007. Such information is incorporated herein byreference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Information required by this item will be contained in our Definitive Proxy Statement for our 2008 Annual Meeting of Stockholders, to be filed pursuantto Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2007. Such information is incorporated herein byreference.Item 13. Certain Relationships and Related Transactions, and Director Independence. Information required by this item will be contained in our Definitive Proxy Statement for our 2008 Annual Meeting of Stockholders, to be filed pursuantto Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2007. Such information is incorporated herein byreference.Item 14. Principal Accountant Fees and Services. Information required by this item will be contained in our Definitive Proxy Statement for our 2008 Annual Meeting of Stockholders, to be filed pursuantto Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2007. Such information is incorporated herein byreference.41Table of ContentsPART IVItem 15. Exhibits, Financial Statement Schedules. (a) Documents filed as part of this report. 1. The following consolidated financial statements of La Jolla Pharmaceutical Company are filed as part of this report under Item 8 — Financial Statements and Supplementary Data: Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets at December 31, 2007 and 2006 F-2 Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005 F-3 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2007, 2006 and 2005 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 F-5 Notes to Consolidated Financial Statements F-62. Financial Statement Schedules.These schedules are omitted because they are not required, or are not applicable, or the required information is shown in the consolidated financialstatements or notes thereto.3. Exhibits.The exhibit index attached to this report is incorporated by reference herein.42Table of ContentsSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. LA JOLLA PHARMACEUTICAL COMPANY By: /s/ Deirdre Y. Gillespie March 17, 2008 Deirdre Y. Gillespie, M.D. President, Chief Executive Officer and Assistant Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantand in the capacities and on the dates indicated. Signature Title Date /s/ Deirdre Y. GillespieDeirdre Y. Gillespie, M.D. President, Chief Executive Officer and Assistant Secretary(Principal Executive Officer) March 17, 2008 /s/ Niv E. CaviarNiv E. Caviar Executive Vice President, Chief Business Officer and ChiefFinancial Officer (Principal Financial Officer) March 17, 2008 /s/ Gail A. SloanGail A. Sloan Vice President of Finance and Secretary (Principal AccountingOfficer) March 17, 2008 /s/ Thomas H. Adams Director March 17, 2008Thomas H. Adams, Ph.D. /s/ Robert A. Fildes Director March 17, 2008Robert A. Fildes, Ph.D. /s/ Stephen M. Martin Director March 17, 2008Stephen M. Martin /s/ Nader J. Naini Director March 17, 2008Nader J. Naini /s/ Craig R. Smith Director March 17, 2008Craig R. Smith, M.D. /s/ Martin Sutter Director March 17, 2008Martin Sutter /s/ James N. Topper Director March 17, 2008James N. Topper, M.D., Ph.D. /s/ Frank E. Young Director March 17, 2008Frank E. Young, M.D., Ph.D. 43Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and Stockholders of La Jolla Pharmaceutical CompanyWe have audited the accompanying consolidated balance sheets of La Jolla Pharmaceutical Company as of December 31, 2007 and 2006, and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. Thesefinancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based onour audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of La Jolla PharmaceuticalCompany at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2007, in conformity with U.S. generally accepted accounting principles.As discussed in Note 1 to the consolidated financial statements, La Jolla Pharmaceutical Company changed its method of accounting for Share-BasedPayments in accordance with Statement of Financial Accounting Standards No. 123R (revised 2004) effective January 1, 2006.The accompanying financial statements have been prepared assuming that La Jolla Pharmaceutical Company will continue as a going concern. As more fullydescribed in Note 1, La Jolla Pharmaceutical Company has recurring operating losses, an accumulated deficit of $352.8 million and working capital of$29.9 million at December 31, 2007. These factors, among others, as discussed in Note 1 to the consolidated financial statements, raise substantial doubtabout the Company’s ability to continue as a going concern. Management’s plans in regard to these matters also are described in Note 1. The 2007consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or theamounts and classifications of liabilities that may result from the outcome of this uncertainty.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), La Jolla PharmaceuticalCompany’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 17, 2008 expressed an unqualified opinion thereon./s/ Ernst & Young LLP San Diego, CaliforniaMarch 17, 2008F-1Table of ContentsLa Jolla Pharmaceutical CompanyConsolidated Balance Sheets(In thousands, except share and par value amounts) December 31, 2007 2006 Assets Current assets: Cash and cash equivalents $4,373 $3,829 Short-term investments, available-for-sale 34,986 39,080 Prepaids and other current assets 1,018 1,004 Total current assets 40,377 43,913 Property and equipment, net 1,271 2,333 Patent costs and other assets, net 2,757 3,279 $44,405 $49,525 Liabilities and stockholders’ equity Current liabilities: Accounts payable $2,203 $2,125 Accrued clinical/regulatory expenses 6,282 1,530 Accrued expenses 664 1,137 Accrued payroll and related expenses 1,199 1,265 Current portion of obligations under notes payable 138 183 Current portion of obligations under capital leases 10 — Total current liabilities 10,496 6,240 Non-current portion of obligations under notes payable 344 196 Non-current portion of obligations under capital leases 44 — Commitments Stockholders’ equity: Preferred stock, $0.01 par value; 8,000,000 shares authorized, no shares issued or outstanding — — Common stock, $0.01 par value; 225,000,000 shares authorized, 39,629,660 and 32,692,676 sharesissued and outstanding at December 31, 2007 and 2006, respectively 396 327 Additional paid-in capital 385,944 342,519 Other comprehensive income 14 — Accumulated deficit (352,833) (299,757) Total stockholders’ equity 33,521 43,089 $44,405 $49,525 See accompanying notes.F-2Table of ContentsLa Jolla Pharmaceutical CompanyConsolidated Statements of Operations(In thousands, except per share amounts) Years Ended December 31, 2007 2006 2005 Expenses: Research and development $46,635 $32,938 $22,598 General and administrative 9,058 9,287 5,405 Total expenses 55,693 42,225 28,003 Loss from operations (55,693) (42,225) (28,003) Interest expense (82) (46) (116) Interest income 2,699 2,826 756 Net loss $(53,076) $(39,445) $(27,363) Basic and diluted net loss per share $(1.40) $(1.21) $(1.77) Shares used in computing basic and diluted net loss per share 37,818 32,588 15,446 See accompanying notes.F-3Table of ContentsLa Jolla Pharmaceutical CompanyConsolidated Statements of Stockholders’ Equity(In thousands)For the Years Ended December 31, 2005, 2006 and 2007 Additional Other Total Common stock paid-in comprehensive Accumulated stockholders’ Shares Amount capital income (loss) deficit equity Balance at December 31, 2004 12,302 $123 $258,850 $(23) $(232,949) $26,001 Issuance of common stock, net 20,050 200 77,955 — — 78,155 Issuance of common stock underEmployee Stock PurchasePlan 95 1 287 — — 288 Exercise of stock options 3 — 6 — — 6 Share-based compensationexpense 83 1 19 — — 20 Net loss — — — — (27,363) (27,363) Net unrealized gains onavailable-for-sale securities — — — 23 — 23 Comprehensive loss (27,340) Balance at December 31, 2005 32,533 325 337,117 — (260,312) 77,130 Issuance of common stock underEmployee Stock PurchasePlan 80 1 226 — — 227 Exercise of stock options 56 1 125 — — 126 Share-based compensationexpense 24 — 5,051 — — 5,051 Net loss — — — — (39,445) (39,445) Balance at December 31, 2006 32,693 327 342,519 — (299,757) 43,089 Issuance of common stock, net 6,670 67 37,845 — — 37,912 Issuance of common stock underEmployee Stock PurchasePlan 97 1 260 — — 261 Exercise of stock options 166 1 499 — — 500 Share-based compensationexpense 4 — 4,821 — — 4,821 Net loss — — — — (53,076) (53,076) Net unrealized gains onavailable-for-sale securities — — — 14 — 14 Comprehensive loss (53,062) Balance at December 31, 2007 39,630 $396 $385,944 $14 $(352,833) $33,521 See accompanying notes.F-4Table of ContentsLa Jolla Pharmaceutical CompanyConsolidated Statements of Cash Flows(In thousands) Years Ended December 31, 2007 2006 2005 Operating activities Net loss $(53,076) $(39,445) $(27,363) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 1,687 1,987 2,109 Loss on write-off/disposal of patents, property and equipment and licenses 934 420 405 Share-based compensation expense 4,821 5,051 20 Accretion of interest income, net (227) 36 (125) Changes in operating assets and liabilities: Prepaids and other current assets (14) (101) (120) Accounts payable 78 1,259 (589) Accrued clinical/regulatory expenses 4,752 1,303 (420) Accrued expenses (473) (147) (777) Accrued payroll and related expenses (66) 487 (432) Net cash used for operating activities (41,584) (29,150) (27,292) Investing activities Purchases of short-term investments (51,415) (16,700) (82,350) Sales of short-term investments 55,750 44,050 36,236 Additions to property and equipment (354) (335) (123) Increase in patent costs and other assets (628) (536) (361) Net cash provided by (used for) investing activities 3,353 26,479 (46,598) Financing activities Net proceeds from issuance of common stock 38,673 353 78,449 Proceeds from issuance of notes payable 312 263 — Payments on obligations under notes payable (209) (527) (995) Payments on obligations under capital leases (1) — (14) Net cash provided by financing activities 38,775 89 77,440 Increase (decrease) in cash and cash equivalents 544 (2,582) 3,550 Cash and cash equivalents at beginning of period 3,829 6,411 2,861 Cash and cash equivalents at end of period $4,373 $3,829 $6,411 Supplemental disclosure of cash flow information: Interest paid $82 $46 $116 Supplemental schedule of noncash investing and financing activities: Capital lease obligations incurred for property and equipment $55 $— $— See accompanying notes.F-5Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements1. Organization and Summary of Significant Accounting PoliciesOrganization and Business ActivityLa Jolla Pharmaceutical Company (the “Company”) is a biopharmaceutical company dedicated to improving and preserving human life by developinginnovative pharmaceutical products.Basis of PresentationThe Company has a history of recurring losses from operations and has an accumulated deficit of $352,833,000 as of December 31, 2007. As of December 31,2007, the Company had available cash and cash equivalents and short-term investments totaling $39,359,000 and working capital of $29,881,000. As ofMarch 6, 2008, there was insufficient demand at auctions for three of the Company’s AAA rated U.S. government-backed student loan auction rate securities,representing approximately $6,000,000. As a result of insufficient demand, these three securities may not be liquid. The Company may experience a similarsituation with its other remaining asset-backed student loan auction rate security of $4,000,000, which comes up for auction on March 24, 2008. See Note 9for details on recent events affecting the liquidity of certain securities. Additionally, the Company will require additional cash funding to execute against itsstrategic plan for 2008. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidatedfinancial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery ofthe Company’s assets and the satisfaction of liabilities in the normal course of business and this does not include any adjustments to reflect the possiblefuture effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company beunable to continue as a going concern.The Company is actively seeking additional funding, including through collaborative arrangements and, through the public and/or private financings, tofinance its continuing development efforts and to commercialize its technologies. The Company believes that additional funds can be obtained in the nearfuture; however, there is no assurance such funds will be available to the Company when needed or that such funds would be available under favorable terms.In the event that the Company cannot obtain additional funds in the near future, the Company has the ability and intent to cut back on certain expendituresand/or reduce its operations including halting its ongoing Phase 3 clinical trial of Riquent and significantly reducing its workforce, which would have anadverse impact on completing its development efforts in a timely manner.Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, La Jolla Limited, which wasincorporated in England in October 2004. There have been no significant transactions related to La Jolla Limited since its inception.Use of EstimatesThe preparation of consolidated financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requiresmanagement to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in theaccompanying notes to the consolidated financial statements. Actual results could differ materially from those estimates.Cash, Cash Equivalents and Short-Term InvestmentsCash and cash equivalents consist of cash and highly liquid investments which include money market funds and debt securities with maturities frompurchase date of three months or less and are stated at market. Short-term investments mainly consist of debt securities with maturities from purchase date ofgreater than three months. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 115, Accounting for Certain Investments in Debtand Equity Securities, management has classified the Company’s cash equivalents and short-term investments as available-for-sale securities in theaccompanying consolidated financial statements. Available-for-sale securities are stated at fair market value, with unrealized gains and losses reported inother comprehensive income (loss). Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities areincluded in interest income and have been immaterial for each of the years presented. The cost of securities sold is based on the specific identificationmethod. Interest and dividends on securities classified as available-for-sale are included in interest income.F-6Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements1. Organization and Summary of Significant Accounting Policies (continued)Fair Value of Financial InstrumentsFinancial instruments, including cash and cash equivalents, accounts payable and accrued expenses, are carried at cost, which management believesapproximates fair value because of the short-term maturity of these instruments. Short-term investments are carried at fair value. None of the Company’s debtor capital lease instruments that were outstanding at December 31, 2007 have readily ascertainable market values; however, the carrying values areconsidered to approximate their fair values.Concentration of RiskCash, cash equivalents and short-term investments are financial instruments which potentially subject the Company to concentrations of credit risk. TheCompany deposits its cash in financial institutions. At times, such deposits may be in excess of insured limits. The Company invests its excess cash primarilyin government-asset-backed securities, obligations of government agencies and money market funds. The Company has established guidelines relative to thediversification of its cash investments and their maturities in an effort to maintain safety and liquidity. These guidelines are periodically reviewed andmodified to take advantage of trends in yields and interest rates.As of March 6, 2008, there was insufficient demand at auctions for three of the Company’s AAA rated U.S. government-backed student loan auction ratesecurities, representing approximately $6,000,000. As a result of insufficient demand, these three securities may not be liquid and the interest rates have beenreset to the security’s maximum rate. The Company may experience a similar situation with its other remaining asset-backed student loan auction ratesecurity of $4,000,000, which comes up for auction on March 24, 2008. To date, the Company has not recognized any realized losses on these securities. SeeNote 9 for details on recent events affecting the liquidity of certain securities.Impairment of Long-Lived Assets and Assets to Be Disposed OfIn accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, if indicators of impairment exist, the Company assessesthe recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through the undiscountedfuture operating cash flows. If impairment is indicated, the Company measures the amount of such impairment by comparing the carrying value of the asset tothe fair value of the asset and records the impairment as a reduction in the carrying value of the related asset and a charge to operating results. Estimating theundiscounted future cash flows associated with long-lived assets requires judgment and assumptions that could differ materially from the actual results.Although the Company believes its current and historical operating and cash flow losses are indicators of impairment, the Company believes the future cashflows to be received from the long-lived assets will exceed the assets’ carrying value. The Company recognized approximately $152,000 and $104,000 inimpairment losses for the years ended December 31, 2005 and December 31, 2006, respectively, and no impairment losses for the year ended December 31,2007.Property and EquipmentProperty and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets (primarily five years).Leasehold improvements and equipment under capital leases are stated at cost and depreciated on a straight-line basis over the shorter of the estimated usefullife or the lease term.F-7Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements1. Organization and Summary of Significant Accounting Policies (continued)Property and equipment is comprised of the following (in thousands): December 31, 2007 2006Laboratory equipment $6,498 $6,347 Computer equipment and software 4,727 4,682 Furniture and fixtures 491 488 Leasehold improvements 3,273 3,268 14,989 14,785 Less: Accumulated depreciation (13,718) (12,452) $1,271 $2,333 Depreciation expense for the years ended December 31, 2007, 2006 and 2005 was $1,471,000, $1,840,000, and $1,991,000, respectively.PatentsThe Company has filed numerous patent applications with the United States Patent and Trademark Office and in foreign countries. Legal costs and expensesincurred in connection with pending patent applications have been capitalized. Costs related to successful patent applications are amortized using thestraight-line method over the lesser of the remaining useful life of the related technology or the remaining patent life, commencing on the date the patent isissued. Total successful patent application costs and accumulated amortization were $2,492,000 and $911,000 at December 31, 2007 and $2,102,000 and$734,000 at December 31, 2006, respectively. Total pending patent application costs were $1,004,000 and $1,761,000 at December 31, 2007 and 2006,respectively. Capitalized costs related to patent applications are charged to operations at the time a determination is made not to pursue such applications.Amortization expense for the years ended December 31, 2007, 2006 and 2005 was $207,000, $139,000, and $107,000, respectively. The expected futureannual amortization expense of successful patent applications for each of the succeeding five years is estimated to be approximately $215,000.Accrued Clinical/Regulatory ExpensesThe Company reviews and accrues clinical trial and regulatory-related expenses based on work performed, which relies on estimates of total costs incurredbased on patient enrollment, completion of studies and other events. The Company follows this method since reasonably dependable estimates of the costsapplicable to various stages of a clinical trial can be made. Accrued clinical/regulatory costs are subject to revisions as trials progress to completion.Revisions are charged to expense in the period in which the facts that give rise to the revision become known. Historically, revisions have not resulted inmaterial changes to research and development costs; however, a modification in the protocol of a clinical trial or cancellation of a trial could result in acharge to the Company’s results of operations.Share-Based CompensationOn January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payment (“SFAS 123R”), which is a revision of SFAS No. 123, Accounting andDisclosure of Stock-Based Compensation (“SFAS 123”). SFAS 123R requires the measurement and recognition of compensation expense for all share-basedpayment awards made to employees and directors, including stock options, restricted stock and purchases under the La Jolla Pharmaceutical Company 1995Employee Stock Purchase Plan (the “ESPP”), based on estimated fair values. SFAS 123R supersedes the Company’s previous accounting under AccountingPrinciples Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees (“APB 25”), and SFAS 123, for periods beginning in fiscal 2006. InMarch 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 107 (“SAB 107”), which discusses theinteraction between SFAS 123R and certain SEC rules and regulations and provides the SEC’s staff views regarding the valuation of share-based paymentarrangements for public companies.F-8Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements1. Organization and Summary of Significant Accounting Policies (continued)The Company has applied the provisions of SAB 107, related to the calculation of its expect term, in its adoption of SFAS 123R.The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as ofJanuary 1, 2006, the first day of the Company’s fiscal year 2006. The Company’s Consolidated Statements of Operations as of and for the years endedDecember 31, 2006 and 2007 reflect the impact of SFAS 123R. In accordance with the modified prospective transition method, the Company’s ConsolidatedStatements of Operations for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. Share-based compensation expenserecognized under SFAS 123R for the years ended December 31, 2007 and 2006, respectively was approximately $4,810,000 and $5,048,000. As ofDecember 31, 2007, there was approximately $6,933,000 of total unrecognized compensation cost related to non-vested share-based payment awards grantedunder all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. The Companyexpects to recognize that cost over a weighted-average period of 1.1 years.Prior to January 1, 2006, the Company had adopted the disclosure-only provision of SFAS 123. Accordingly, the Company had not previously recognizedcompensation expense, except for compensation expense related to stock options granted to consultants and restricted stock granted to certain members ofmanagement.Options or stock awards issued to non-employees, other than non-employee directors, have been determined in accordance with Emerging Issues Task Force96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.Deferred charges for options granted to such non-employees are periodically remeasured as the options vest. In September and October 2007, the Companygranted non-qualified stock options to purchase a total of 12,000 shares of common stock to consultants at an exercise price equal to the fair market value ofthe stock at the date of each grant. The Company recognized compensation expense for these stock option grants of approximately $11,000 for the yearended December 31, 2007. In both January 2006 and January 2005, the Company granted a non-qualified stock option to purchase 1,000 shares of commonstock to a consultant at an exercise price equal to the fair market value of the stock at the date of the grant. The Company recognized compensation expensefor these stock option grants of approximately $3,000 and $8,000 for the year ended December 31, 2006 and 2005, respectively.The table below reflects net loss (in thousands) and basic and diluted net loss per share for the year ended December 31, 2005 assuming the Companydetermined compensation expense in accordance with SFAS 123: Year Ended December 31, 2005 Net loss as reported $(27,363)Share-based compensation expense determined under fair value based method for all awards (3,843)Pro forma net loss $(31,206)Basic and diluted net loss per share—as reported $(1.77)Basic and diluted net loss per share—pro forma $(2.02)The assumptions used to calculate share-based compensation expense for 2005 are discussed below.SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of theportion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods as share-based compensation expense inthe Company’s Consolidated Statements of Operations. For the years ended December 31, 2007 and 2006, the Company’s Consolidated Statement ofOperations included compensation expense for share-based payment awards granted prior to, but not yet vested as of, December 31, 2005 based on the grantdate fair value estimated in accordance with the pro formaF-9Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements1. Organization and Summary of Significant Accounting Policies (continued)provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fairvalue estimated in accordance with the provisions of SFAS 123R. Compensation expense for all share-based payment awards granted prior to the adoption ofSFAS 123R will continue to be recognized using the straight-line single-option method of attributing the value of share-based compensation to expense.Compensation expense for all share-based payment awards granted after December 31, 2005 is recognized using the straight-line single-option method. Asshare-based compensation expense recognized in the Consolidated Statement of Operations for the fiscal years 2007 and 2006 is based on awards ultimatelyexpected to vest, share-based compensation expense has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required underSFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.As permitted by SFAS 123R, the Company utilizes the Black-Scholes option-pricing model as its method of valuation for stock options and purchases underthe ESPP. The Black-Scholes model was previously utilized for the Company’s pro forma information required under SFAS 123. The Company’sdetermination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price aswell as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expectedstock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors.Valuation and Expense Information Under SFAS 123R and APB 25The following table summarizes share-based compensation expense (in thousands) related to employee and director stock options, restricted stock and ESPPpurchases under SFAS 123R for the years ended December 31, 2007 and 2006: December 31, 2007 2006 Research and development $1,907 $1,833 General and administrative 2,903 3,215 Share-based compensation expense included in operating expenses $4,810 $5,048 For the years ended December 31, 2007, 2006, and 2005 the Company estimated the fair value of each option grant and ESPP purchase right on the date ofgrant using the Black-Scholes option-pricing model with the following weighted-average assumptions:Options: December 31, 2007 2006 2005Risk-free interest rate 4.7% 4.8% 4.1%Dividend yield 0.0% 0.0% 0.0%Volatility 118.0% 113.7% 119.0%Expected life (years) 6.0 5.9 5.9 F-10Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements1. Organization and Summary of Significant Accounting Policies (continued)ESPP: December 31, 2007 2006 2005Risk-free interest rate 4.5% 4.8% 4.1%Dividend yield 0.0% 0.0% 0.0%Volatility 67.8% 46.4% 125.4%Expected life (years) 3 months 3 months 5.9 The weighted-average fair values of options granted were $3.71, $3.92, and $2.81 for the years ended December 31, 2007, 2006 and 2005, respectively. Theweighted-average purchase prices of shares purchased through the ESPP were $2.69, $2.98, and $3.04 for the years ended December 31, 2007, 2006 and2005, respectively.The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the Company’s employee and director stock options andESPP purchases. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The Company has never paiddividends on its common stock and the Company does not anticipate paying dividends in the foreseeable future.The Company used historical stock price volatility as the expected volatility assumption required in the Black-Scholes option-pricing model consistent withSFAS 123R. Prior to fiscal 2006, the Company used its historical stock price volatility in accordance with SFAS 123 for purposes of its pro formainformation. The selection of the historical volatility approach was based on the availability of historical stock prices for the duration of the awards’ expectedterm and the Company’s assessment that historical volatility is more representative of future stock price trends than other available methods.The expected life of employee and director stock options represents the weighted-average period the stock options are expected to remain outstanding. Underthe SAB 107 simplified method, the expected life calculated by the Company for option grants made during the year ended December 31, 2007 was 6.0 —6.1 years for the new and existing employee grants and 5.5 years for the director grants. The expected life calculated by the Company for option grants madeduring the year ended December 31, 2006 was 5.8 years for the new and existing employee grants, 6.1 years for the new officer grants, and 5.3 — 6.0 years forthe director grants. The expected life for ESPP purchase rights represents the length of each purchase period. Because employees purchase stock quarterly, theexpected term for ESPP purchase rights is three months for shares purchased during the years ended December 31, 2007 and 2006. Prior to the adoption ofSFAS 123R on January 1, 2006, the Company utilized an estimate of expected life for ESPP that was consistent with its estimate for options.Because share-based compensation expense recognized in the Consolidated Statement of Operations for fiscal years 2007 and 2006 is based on awardsultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. In the Company’spro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.Restricted StockOn December 14, 2005, the Company issued 83,518 shares of restricted stock to certain members of management in exchange for services provided over thevesting period, pursuant to certain retention agreements dated October 6, 2005. The shares of restricted stock fully vested (i.e., the restrictions lapsed) oneyear from the date of grant and were subject to repurchase by the Company until the one-year anniversary of the date of issuance. Pursuant to a separationagreement dated March 17, 2006, the Company’s repurchase right with respect to 29,120 shares ofF-11Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements1. Organization and Summary of Significant Accounting Policies (continued)restricted stock granted to the former Chairman and Chief Executive Officer immediately lapsed upon his resignation on March 14, 2006. As such and inaccordance with his retention agreement, the Company accelerated the vesting of these shares of restricted stock. In addition, the remaining 54,398 shares ofrestricted stock fully vested on December 14, 2006, the one-year anniversary of the date of issuance, and therefore the Company’s repurchase right withrespect to these shares of restricted stock has lapsed.On March 15, 2006, the Company issued 20,000 shares of restricted stock to the new Chairman of the Board in exchange for services provided over thevesting period. The shares of restricted stock vested with respect to 10,000 shares six months after the issuance date and will vest with respect to theremaining 10,000 shares upon the first anniversary of the issuance date. On September 15, 2006 and March 15, 2007, the vesting provisions with respect tothe 20,000 shares of restricted stock were met and therefore the Company’s repurchase rights lapsed.In both December 2006 and March 2007, the Company issued an additional 3,600 shares of restricted stock to the Chairman of the Board in accordance withthe Chairman Compensation Policy approved by the Board of Directors on March 14, 2006 regarding the tax liability associated with the restricted stockissued on March 15, 2006 and vested on September 15, 2006 and March 15, 2007. All of these additional shares of restricted stock immediately vested on thedate of issuance.In accordance with SFAS 123R, the Company recognized approximately $36,000, $381,000, and $12,000, respectively, in compensation expense for therestricted stock grants noted above for the years ended December 31, 2007, 2006, and 2005 which includes compensation expense for the acceleration ofvesting.Reverse Stock SplitOn December 12, 2005, the Company’s stockholders approved a one-for-five reverse stock split of the Company’s common stock, effective as of the close ofbusiness on December 21, 2005. All share and per share figures presented herein have been adjusted to reflect the reverse stock split, except for shares ofauthorized common stock.Net Loss Per ShareBasic and diluted net loss per share is computed using the weighted-average number of common shares outstanding during the periods in accordance withSFAS No. 128, Earnings per Share and SAB No. 98. Basic earnings per share (“EPS”) is calculated by dividing the net income or loss by the weighted-average number of common shares outstanding for the period, without consideration for common share equivalents. Diluted EPS is computed by dividing thenet income or loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. Forpurposes of this calculation, stock options, common stock subject to repurchase by the Company, and warrants are considered to be common stockequivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.Because the Company has incurred a net loss for all three years presented in the Consolidated Statements of Operations, stock options, common stock subjectto repurchase and warrants are not included in the computation of net loss per share because their effect is anti-dilutive. The shares used to compute basic anddiluted net loss per share represent the weighted-average common shares outstanding, reduced by the weighted-average unvested common shares subject torepurchase. There were no unvested common shares subject to repurchase for the year ended December 31, 2007. The number of weighted-average unvestedcommon shares subject to repurchase for the years ended December 31, 2006 and December 31, 2005 were 8,000 and 4,119, respectively.F-12Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements1. Organization and Summary of Significant Accounting Policies (continued)Comprehensive LossIn accordance with SFAS No. 130, Reporting Comprehensive Income (Loss), unrealized gains and losses on available-for-sale securities are included in othercomprehensive income.Recently Issued Accounting StandardsIn September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from theapplication of SFAS 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair valuemeasurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company iscurrently assessing the impact of SFAS 157 on its consolidated results of operations and financial condition.In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASBStatement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gainsand losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning afterNovember 15, 2007. The Company is currently assessing the impact of SFAS 159 on its consolidated results of operations and financial condition.In June 2007, FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on EITF Issue No. 07-3, Accounting for NonrefundableAdvance Payments for Goods or Services to Be Used in Future Research and Development Activities (“ETF 07-3”). EITF 07-3 addresses the diversity thatexists with respect to the accounting for the non-refundable portion of a payment made by a research and development entity for future research anddevelopment activities. Under EITF 07-3, an entity would defer and capitalize non-refundable advance payments made for research and developmentactivities until the related goods are delivered or the related services are performed. EITF 07-3 is effective for fiscal year beginning after December 15, 2007.The adoption of EITF 07-3 is not expected to have a material effect on the Company’s consolidated financial statements.F-13Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements2. Cash Equivalents and Short-term InvestmentsThe following is a summary of the Company’s available-for-sale securities (in thousands): Gross Gross Amortized Unrealized Unrealized Estimated Fair Cost Gains Losses ValueDecember 31, 2007 Money market accounts $2,051 $— $— $2,051 Obligations of United States government agencies 6,916 14 — 6,930 Asset-backed auction rate securities 28,056 — — 28,056 $37,023 $14 $— $37,037 Gross Gross Amortized Unrealized Unrealized Estimated Fair Cost Gains Losses ValueDecember 31, 2006 Money market accounts $2,189 $— $— $2,189 United States corporate debt securities 12,024 — — 12,024 Asset-backed auction rate securities 27,056 — — 27,056 $41,269 $— $— $41,269 The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Included in cash and cash equivalentsat December 31, 2007 and 2006 were $2,051,000 and $2,189,000, respectively, of securities classified as available-for-sale as the Company expects to sellthem in order to support its current operations regardless of their maturity date. As of December 31, 2007, available-for-sale securities and cash equivalents of$8,981,000 mature in one year or less and $28,056,000 are due after one year. Securities that have a maturity date greater than one year have their interest ratereset periodically within time periods not exceeding 92 days. See Note 9 to the consolidated financial statements for subsequent events related to theCompany’s asset-backed auction rate securities.3. CommitmentsLeasesIn July 1992, the Company entered into a non-cancelable operating lease for the rental of its research and development laboratories and clinicalmanufacturing facilities. In October 1996, the Company entered into an additional non-cancelable operating lease for additional office space. In 2004, theCompany exercised its options to extend these leases until July 2009.In September 2002, the Company entered into an additional non-cancelable operating lease for additional research space. In July 2006, the Companyextended the term of this lease until December 2006. This lease expired on December 31, 2006.In July 2003, the Company entered into a capital lease agreement for $111,000 to finance the purchase of certain equipment. The agreement was secured bythe equipment, bore interest at 7.00% per annum, and was payable inF-14Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements3. Commitments (continued)quarterly installments of principal and interest of approximately $15,000 for eight quarters. The final quarterly installment was made in March 2005.In October 2007, the Company entered into a capital lease agreement for $55,000 to finance the purchase of certain equipment. The agreement is secured bythe equipment, bears interest at 10.00% per annum, and is payable in monthly installments of principal and interest of approximately $1,000 for 60 months.Annual future minimum lease payments as of December 31, 2007 are as follows (in thousands): Operating Capital Years ended December 31, Leases Leases 2008 $830 $15 2009 543 14 2010 34 14 2011 17 14 2012 and there-after — 12 Total $1,424 $69 Less amount representing interest (15)Present value of net minimum lease payments 54 Less current portion 10 Noncurrent portion of capital lease obligations $44 Rent expense under all operating leases totaled $869,000, $1,065,000 and $1,046,000 for the years ended December 31, 2007, 2006 and 2005, respectively.Equipment acquired under capital leases included in property and equipment totaled $54,000 (net of accumulated amortization of $1,000) at December 31,2007. Amortization expense associated with this equipment is included in depreciation and amortization expense for the period ended December 31, 2007.There was no equipment under capital leases included in property and equipment as of December 31, 2006.Purchase ObligationsAs of December 31, 2007, the Company had total purchase obligations of approximately $1,412,000, which consisted of non-cancelable purchasecommitments with third-party manufacturers of materials to be used in the production of Riquent. For the year ended December 31, 2007, approximately$763,000 of the total purchase obligations were not included in the Company’s consolidated financial statements. The Company intends to use its currentfinancial resources to fund its obligations under these purchase commitments.4. Long-Term DebtThe following is a summary of the notes payable obligations that are secured by the financed equipment of approximately $833,000 as of December 31,2007: Original Note Interest AmountDate of Note Rate (%) Monthly Payments (in thousands)September 28, 2004 8.44 First 36 months at $5,000; last six months at $1,000 157December 28, 2006 10.56 First 36 months at $8,000; last 12 months at $3,000 263June 28, 2007 10.82 First 36 months at $2,000; last 12 months at $500 75December 31, 2007 10.55 $6,000 for 48 months 236 $731F-15Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements4. Long-Term Debt (continued)Annual future minimum notes payable payments as of December 31, 2007 are as follows (in thousands): Notes Years ended December 31, Payable 2008 $179 2009 193 2010 127 2011 69 Total 568 Less amount representing interest (86)Present value of net minimum notes payable payments 482 Less current portion (138)Noncurrent portion of notes payable $344 5. Restructuring ChargesIn March 2005, the Company restructured its operations in order to reduce costs. In accordance with SFAS No. 146, Accounting for Costs Associated withExit or Disposal Activities, the Company recorded total restructuring charges of approximately $1,488,000 in connection with the termination of 60employees (approximately $1,174,000), the impairment of certain long-term assets (approximately $152,000), and retention payments for key executives(approximately $162,000). This action followed an announcement by the Company in March 2005 that, based on the outcome of a meeting with the FDA,the Company’s lead drug candidate, Riquent, was unlikely to receive accelerated approval under the FDA’s Subpart H regulation.In fiscal 2005, approximately $991,000 of the total restructuring charges was included in research and development expense and approximately $497,000was included in general and administrative expense. The restructuring plan was completed in September 2005 and actual total charges paid wereapproximately $1,336,000. The non-cash charge of $152,000 for write-downs of impaired assets as a result of the restructuring was included in research anddevelopment expense in the first quarter of 2005.6. Stockholders’ EquityPreferred StockAs of December 31, 2007, the Company’s Board of Directors is authorized to issue 8,000,000 shares of preferred stock with a par value of $0.01 per share, inone or more series.The Company’s Certificate of Designation filed with the Secretary of State of the State of Delaware designates 100,000 shares of preferred stock asnonredeemable Series A Junior Participating Preferred Stock (“Series A Preferred Stock”). Pursuant to the terms of the Company’s Stockholder Rights Plan, inthe event of liquidation, each share of Series A Preferred Stock is entitled to receive, subject to certain restrictions, a preferential liquidation payment of$1,000 per share plus the amount of accrued unpaid dividends. The Series A Preferred Stock is subject to certain anti-dilution adjustments, and the holder ofeach share is entitled to 1,000 votes, subject to adjustments. Cumulative quarterly dividends of the greater of $0.25 or, subject to certain adjustments, 1,000times any dividend declared on shares of common stock, are payable when, as and if declared by the Board of Directors, from funds legally available for thispurpose.F-16Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements6. Stockholders’ Equity (continued)WarrantsIn connection with the December 2005 private placement, the Company issued warrants to purchase 4,399,992 shares of the Company’s common stock. Thewarrants were immediately exercisable upon grant, have an exercise price of $5.00 per share and remain exercisable for five years. As of December 31, 2007,all of the warrants were outstanding and 4,399,992 shares of common stock are reserved for issuance upon exercise of the warrants.Restricted StockOn December 14, 2005, the Company issued 83,518 shares of restricted stock to certain members of management in exchange for services provided over thevesting period, pursuant to certain retention agreements dated October 6, 2005. The shares of restricted stock fully vested (i.e., the restrictions lapsed) oneyear from the date of grant and were subject to repurchase by the Company until the one-year anniversary of the date of issuance. Pursuant to a separationagreement dated March 17, 2006, the Company’s repurchase right with respect to 29,120 shares of restricted stock granted to the former Chairman and ChiefExecutive Officer immediately lapsed upon his resignation on March 14, 2006. As such and in accordance with his retention agreement, the Companyaccelerated the vesting of these shares of restricted stock. In addition, the remaining 54,398 shares of restricted stock fully vested on December 14, 2006, theone-year anniversary of the date of issuance, and therefore the Company’s repurchase right with respect to these shares of restricted stock has lapsed.On March 15, 2006, the Company issued 20,000 shares of restricted stock to the new Chairman of the Board in exchange for services provided over thevesting period. The shares of restricted stock vested with respect to 10,000 shares six months after the issuance date and will vest with respect to theremaining 10,000 shares upon the first anniversary of the issuance date. On September 15, 2006 and March 15, 2007, the vesting provisions with respect tothe 20,000 shares of restricted stock were met and therefore the Company’s repurchase rights lapsed.In both December 2006 and March 2007, the Company issued an additional 3,600 shares of restricted stock to the Chairman of the Board in accordance withthe Chairman Compensation Policy approved by the Board of Directors on March 14, 2006 regarding tax liability associated with the restricted stock issuedon March 15, 2006 and vested on September 15, 2006 and March 15, 2007. All of these additional shares of restricted stock immediately vested on the dateof issuance.In accordance with SFAS 123R, the Company recognized approximately $36,000, $381,000, and $12,000, respectively, in compensation expense for therestricted stock grants noted above for the years ended December 31, 2007, 2006, and 2005, which includes compensation expense for the acceleration ofvesting. The total fair value of the restricted stock grants vested in 2007 was approximately $77,000 of which approximately $41,000 was recognized in2006 and approximately $36,000 was recognized in 2007. The total fair value of the restricted stock grants vested in 2006 was approximately $352,000 ofwhich approximately $12,000 was recognized in 2005 and approximately $340,000 was recognized in 2006.Stock Option PlansIn June 1994, the Company adopted the La Jolla Pharmaceutical Company 1994 Stock Incentive Plan (the “1994 Plan”) under which, as amended, 1,640,000shares of common stock (post-reverse stock split) were authorized for issuance. The 1994 Plan expired in June 2004 and there were 952,500 optionsoutstanding under the 1994 Plan as of December 31, 2007.F-17Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements6. Stockholders’ Equity (continued)In May 2004, the Company adopted the La Jolla Pharmaceutical Company 2004 Equity Incentive Plan (the “2004 Plan”) under which, as amended,5,000,000 shares of common stock (post-reverse stock split) have been authorized for issuance. The 2004 Plan provides for the grant of incentive and non-qualified stock options, as well as other share-based payment awards, to employees, directors, consultants and advisors of the Company with up to a 10 yearcontractual life and various vesting periods as determined by the Company’s compensation committee or the board of directors, as well as automatic fixedgrants to non-employee directors of the Company. As of December 31, 2007, there were a total of 3,857,076 options outstanding and no unvested shares ofrestricted stock granted under the 2004 Plan and 864,400 shares remained available for future grant.A summary of the Company’s stock option activity (including shares of restricted stock) and related data follows: Outstanding Options Options Weighted- Available Number of Average For Grant Shares Exercise PriceBalance at December 31, 2004 131,125 1,795,502 $22.22 Additional shares authorized 3,760,000 — — Granted (743,981) 743,981 $3.35 Restricted stock granted (83,518) — — Exercised — (3,106) $2.37 Cancelled 388,349 (388,349) $20.15 Expired (261,744) — — Balance at December 31, 2005 3,190,231 2,148,028 $16.09 Granted (2,450,745) 2,450,745 $4.58 Restricted stock granted (23,600) — — Exercised — (56,012) $2.25 Cancelled 240,382 (240,382) $14.04 Expired (100,983) — — Balance at December 31, 2006 855,285 4,302,379 $9.83 Additional shares authorized 840,000 — — Granted (1,027,973) 1,027,973 $4.30 Restricted stock granted (3,600) — — Exercised — (166,280) $3.01 Cancelled 354,496 (354,496) $14.20 Expired (153,808) — — Balance at December 31, 2007 864,400 4,809,576 $8.56 For the year ended December 31, 2007, options cancelled (included in the above table) consisted of approximately 200,688 options forfeited with aweighted-average exercise price of $5.32 and approximately 153,808 options expired with a weighted-average exercise price of $25.80.As of December 31, 2007, options exercisable have a weighted-average remaining contractual term of 6.1 years. The total intrinsic value of stock optionexercises, which is the difference between the exercise price and closing price of the Company’s common stock on the date of exercise, during the yearsended December 31, 2007, 2006, and 2005 was $500,000, $74,000 and $5,000, respectively. As of December 31, 2007 the total intrinsic value, which is thedifference between the exercise price and closing price of the Company’s common stock of options outstanding and exercisable was $844,000 and $469,000,respectively.F-18Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements6. Stockholders’ Equity (continued) Years Ended December 31, 2007 2006 2005 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options PriceExercisable at end of year 2,808,588 $11.44 1,859,139 $16.27 1,276,090 $22.24 Weighted-average fair value ofoptions granted during theyear $3.71 $3.92 $2.81 Exercise prices and weighted-average remaining contractual lives for the options outstanding (excluding shares of restricted stock) as of December 31, 2007were: Weighted- Weighted- Average Average Remaining Weighted- Exercise Contractual Average Price ofOptions Range of Life Exercise Options OptionsOutstanding Exercise Prices (in years) Price Exercisable Exercisable645,050 $1.72 — $3.08 7.82 $2.80 295,965 $2.53 512,078 $3.23—$4.01 8.63 $3.70 225,189 $3.69 339,787 $4.03—$4.44 7.65 $4.21 243,939 $4.20 1,025,089 $ 4.46 7.35 $4.46 624,297 $4.46 855,500 $4.60—$5.26 8.27 $5.23 378,834 $5.26 460,199 $5.28—$14.00 8.44 $6.58 68,491 $11.58 449,566 $14.50—$23.13 4.38 $17.08 449,566 $17.08 522,307 $23.55—$60.31 4.15 $31.16 522,307 $31.16 4,809,576 $1.72—$60.31 7.21 $8.56 2,808,588 $11.44 At December 31, 2007, the Company has reserved 5,673,976 shares of common stock for future issuance upon exercise of options granted or to be grantedunder the 1994 and 2004 Plans.Employee Stock Purchase PlanEffective August 1, 1995, the Company adopted the ESPP under which, as amended, 700,000 shares of common stock are reserved for sale to eligibleemployees, as defined in the ESPP. Employees may purchase common stock under the ESPP every three months (up to but not exceeding 10% of eachemployee’s base salary, or hourly compensation, and any cash bonus paid, subject to certain limitations) over the offering period at 85% of the fair marketvalue of the common stock at specified dates. The offering period may not exceed 24 months. During the years ended December 31, 2007 and 2006, 97,104and 80,017 shares of common stock were issued under the ESPP, respectively. As of December 31, 2007, 529,086 shares of common stock have been issuedunder the ESPP and 170,914 shares of common stock are available for future issuance. Years Ended December 31, 2007 2006 2005Weighted-average fair value of Employee Stock Purchase Plan purchases $1.47 $1.48 $0.59 F-19Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements6. Stockholders’ Equity (continued)Stockholder Rights PlanThe Company has adopted a Stockholder Rights Plan (the “Rights Plan”), which was amended in July 2000, December 2005 and March 2006. The RightsPlan provides for a dividend of one right (a “Right”) to purchase fractions of shares of the Company’s Series A Preferred Stock for each share of theCompany’s common stock. Under certain conditions involving an acquisition by any person or group of 15% or more of the common stock (or in the case ofState of Wisconsin Investment Board, 20% or more, Essex Woodland Health Ventures Fund V, L.P., 29% or more, Frazier Healthcare V, L.P., 19% or more, orAlejandro Gonzalez, 19% or more), the Rights permit the holders (other than the 15% holder, or, in the case of State of Wisconsin Investment Board, 20%holder, Essex Woodland Health Ventures Fund V, L.P., 29% holder, Frazier Healthcare V, L.P., 19% holder, or Alejandro Gonzalez, 19% holder) to purchasethe Company’s common stock at a 50% discount upon payment of an exercise price of $30 per Right. In addition, in the event of certain businesscombinations, the Rights permit the purchase of the common stock of an acquirer at a 50% discount. Under certain conditions, the Rights may be redeemedby the Board of Directors in whole, but not in part, at a price of $0.001 per Right. The Rights have no voting privileges and are attached to and automaticallytrade with the Company’s common stock. The Rights expire on December 2, 2008.7. 401(k) PlanThe Company has established a 401(k) defined contribution retirement plan (the “401(k) Plan”), which was amended in May 1999 to cover all employees.The 401(k) Plan was also amended in December 2003 to increase the voluntary employee contributions from a maximum of 20% to 50% of annualcompensation (as defined). This increase was effective beginning January 1, 2004. The Company does not match employee contributions or otherwisecontribute to the 401(k) Plan.8. Income TaxesOn July 13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which clarifies the accounting foruncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken in a tax return.Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-notto be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood ofbeing sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosureand transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted the provisions of FIN 48 on January 1, 2007.There were no unrecognized tax benefits as of the date of adoption and there are no unrecognized tax benefits included in the balance sheet at December 31,2007, that would, if recognized, affect the effective tax rate.The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual forinterest or penalties on the Company’s consolidated balance sheets at December 31, 2006 and at December 31, 2007, and has not recognized interest and/orpenalties in the consolidated statement of operations for each of the three years in the period ended December 31, 2007.The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years for 1993 and forward are subject toexamination by the United States and California tax authorities due to the carry forward of unutilized net operating losses and research and developmentcredits.F-20Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements8. Income Taxes (continued)The Company is currently undergoing a Section 382/383 analysis regarding the limitation of net operating loss and research and development creditcarryforwards. Until this analysis has been completed the Company has removed the deferred tax assets for net operating losses of $120,445,000 and researchand development credits of $21,112,000 generated through 2007 from its deferred tax asset schedule and has recorded a corresponding decrease to itsvaluation allowance. When this analysis is finalized, the Company plans to update its unrecognized tax benefits under FIN No. 48. The Company expects theSection 382 analysis to be completed within the next twelve months. Due to the existence of the valuation allowance, future changes in the Company’sunrecognized tax benefits will not impact the Company’s effective tax rate.At December 31, 2007, the Company had federal and California income tax net operating loss carryforwards of approximately $316,089,000 and$169,422,000, respectively. The difference between the federal and California tax loss carryforwards is primarily attributable to the capitalization of researchand development expenses for California income tax purposes. In addition, the Company has federal and California research and development tax creditcarryforwards of $15,344,000 and $8,874,000, respectively. The federal net operating loss and research tax credit carryforwards will begin to expire in 2008unless previously utilized. The California net operating loss carryforwards will begin to expire in 2009 unless previously utilized. The California researchand development credit carryforwards will carry forward indefinitely until utilized.Significant components of the Company’s deferred tax assets as of December 31, 2007 and 2006 are listed below. A valuation allowance of $10,923,000 and$131,496,000 at December 31, 2007 and 2006, respectively, has been recognized to offset the net deferred tax assets as realization of such assets is uncertain.Amounts are shown in thousands as of December 31 of the respective years: December 31, 2007 2006Deferred tax assets: Net operating loss carryforwards $— $104,705 Research and development credits — 19,100 Capitalized research and development and other 10,923 7,691 Total deferred tax assets 10,923 131,496 Net deferred tax assets 10,923 131,496 Valuation allowance for deferred tax assets (10,923) (131,496)Net deferred taxes $— $— 9. Subsequent Events The recent conditions in the global credit markets have prevented some investors from liquidating their holdings of auction rate securities because theamount of securities submitted for sale has exceeded the amount of purchase orders for such securities. If there is insufficient demand for the securities at thetime of an auction, the auction may not be completed and the interest rates may be reset to the security’s maximum rate. When auctions for these securitiesfail, the investments may not be readily convertible to cash until a future auction of these investments is successful or they are redeemed or mature. The Company reduced the amount of investments held in auction rate securities from $28,056,000 to $10,000,000 subsequent to year-end through thesuccessful sale of $18,056,000 of investments in auction rate securities at par value. As of March 6, 2008, there was insufficient demand at auctions for threeof the Company’s AAA rated U.S. government-backed student loan auction rate securities, representing approximately $6,000,000 of the $10,000,000auction rate securities then outstanding. As a result of insufficient demand, these three securities may not be liquid and the interest rates have been reset tothe security’s maximum rate. The Company may experience a similar situation with its other remaining asset-backed student loan auction rate security of$4,000,000, which comes up for auction on March 24, 2008. If the credit ratings of the security issuers deteriorate and any decline in market value isdetermined to be other-than-temporary, the Company would be required to adjust the carrying value of the investment through an impairment charge. Todate, the Company has not recognized any realized losses on these securities.F-21Table of ContentsLa Jolla Pharmaceutical CompanyNotes to Consolidated Financial Statements10. Selected Quarterly Financial Data (unaudited)The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2007 and 2006 (in thousands except per shareamounts): Quarters Ended Mar. 31, Jun. 30, Sept. 30, Dec. 31,2007 Expenses: Research and development $10,375 $12,186 $11,448 $12,626 General and administrative 1,980 2,112 2,585 2,381 Loss from operations (12,355) (14,298) (14,033) (15,007) Interest income, net 485 781 744 607 Net loss $(11,870) $(13,517) $(13,289) $(14,400) Basic and diluted net loss per share $(0.36) $(0.34) $(0.34) $(0.36) Shares used in computing basic and diluted net loss per share 32,737 39,256 39,577 39,607 2006 Expenses: Research and development $7,890 $8,187 $7,687 $9,174 General and administrative 3,725 1,900 1,546 2,116 Loss from operations (11,615) (10,087) (9,233) (11,290) Interest income, net 747 742 695 596 Net loss $(10,868) $(9,345) $(8,538) $(10,694) Basic and diluted net loss per share $(0.33) $(0.29) $(0.26) $(0.33) Shares used in computing basic and diluted net loss per share 32,480 32,503 32,534 32,660 F-22Table of ContentsEXHIBIT INDEX Exhibit Number Description3.1 Restated Certificate of Incorporation (1) 3.2 Amended and Restated Bylaws (2) 3.3 Form of Common Stock Certificate (3) 4.1 Rights Agreement, dated as of December 3, 1998, between the Company and American Stock Transfer & Trust Company (4) 4.2 Amendment No. 1 to the Rights Agreement, dated as of July 21, 2000, between the Company and American Stock Transfer & TrustCompany (5) 4.3 Amendment No. 2 to the Rights Agreement, dated as of December 14, 2005, between the Company and American Stock Transfer &Trust Company (6) 4.4 Amendment No. 3 to the Rights Agreement, dated as of March 1, 2006, between the Company and American Stock Transfer & TrustCompany (1) 10.1 Form of Indemnification Agreement (7)* 10.2 Industrial Real Estate Lease, effective July 27, 1992, by and between the Company and BRE Properties, Inc. (8) 10.3 First Amendment to Lease, dated March 15, 1993, by and between the Company and BRE Properties, Inc. (8) 10.4 Second Amendment to Lease, dated July 18, 1994, by and between the Company and BRE Properties, Inc. (9) 10.5 Third Amendment to Lease, dated January 26, 1995, by and between the Company and BRE Properties, Inc. (10) 10.6 Fourth Amendment to Lease, dated July 8, 2004, by and between the Company and EOP-Industrial Portfolio, LLC (11) 10.7 Building Lease Agreement, effective November 1, 1996, by and between the Company and WCB II-S BRD Limited Partnership (12) 10.8 First Amendment to Lease, dated May 4, 2001, by and between the Company and Spieker Properties, L.P. (11) 10.9 Second Amendment to Lease, dated July 8, 2004, by and between the Company and EOP-Industrial Portfolio, LLC (11) 10.10 La Jolla Pharmaceutical Company 1994 Stock Incentive Plan (Amended and Restated as of May 16, 2003) (13)* 10.11 La Jolla Pharmaceutical Company 1995 Employee Stock Purchase Plan (Amended and Restated as of May 24, 2007) (33)* 10.12 La Jolla Pharmaceutical Company 2004 Equity Incentive Plan (Amended and Restated as of May 24, 2007 (33)* 10.13 Form of Option Grant under the La Jolla Pharmaceutical Company 2004 Equity Incentive Plan (15)* 10.14 Reserved. 10.15 Reserved. 10.16 Steven B. Engle Employment Agreement (8)* 10.17 Amendment No. 1 to Steven B. Engle Employment Agreement (16)* Table of Contents Exhibit Number Description10.18 Amendment No. 2 to Steven B. Engle Employment Agreement (17)* 10.19 Amendment No. 3 to Steven B. Engle Employment Agreement (13)* 10.20 Amended and Restated Employment Agreement, dated February 23, 2006, by and between the Company and Matthew Linnik, Ph.D.(1)* 10.21 Amended and Restated Employment Agreement, dated February 23, 2006, by and between the Company and Bruce Bennett, Jr. (1)* 10.22 Amended and Restated Employment Agreement, dated February 23, 2006, by and between the Company and Josefina Elchico (1)* 10.23 Amended and Restated Employment Agreement, dated February 23, 2006, by and between the Company and Paul Jenn, Ph.D. (1)* 10.24 Amended and Restated Employment Agreement, dated February 23, 2006, by and between the Company and Theodora Reilly (1)* 10.25 Amended and Restated Employment Agreement, dated February 23, 2006, by and between the Company and Gail Sloan (1)* 10.26 Supplement to employment offer letter for Kenneth R. Heilbrunn (18)* 10.27 Retention Agreement, dated October 6, 2005, by and between the Company and Steven B. Engle (19)* 10.28 Retention Agreement, dated October 6, 2005, by and between the Company and Matthew Linnik, Ph.D. (19)* 10.29 Retention Agreement, dated October 6, 2005, by and between the Company and Bruce Bennett (19)* 10.30 Retention Agreement, dated October 6, 2005, by and between the Company and Josefina T. Elchico (19)* 10.31 Retention Agreement, dated October 6, 2005, by and between the Company and Paul Jenn, Ph.D. (19)* 10.32 Retention Agreement, dated October 6, 2005, by and between the Company and Theodora Reilly (19)* 10.33 Retention Agreement, dated October 6, 2005, by and between the Company and Gail Sloan (19)* 10.34 Retention Agreement, dated October 6, 2005, by and between the Company and Andrew Wiseman, Ph.D. (19)* 10.35 Retention Agreement, dated October 6, 2005, by and between the Company and Lisa Koch (32)* 10.36 Underwriting Agreement, dated January 28, 2005, by and between the Company and Pacific Growth Equities, LLC (20) 10.37 Underwriting Agreement, dated as of February 19, 2004, between the Company and Pacific Growth Equities, LLC (21) 10.38 Underwriting Agreement, dated as of August 7, 2003, between the Company and Pacific Growth Equities, LLC (22) 10.39 Registration Rights Agreement, dated October 6, 2005, between the Company and the initial purchasers (19) 10.40 Form of Registration Rights Agreement, dated January 2002, between the Company and the initial purchasers (23) Table of Contents Exhibit Number Description10.41 Form of Registration Rights Agreement, dated February 5, 2001, between the Company and the initial purchasers (24) 10.42 Form of Registration Rights Agreement, dated July 19, 2000, between the Company and the initial purchasers (24) 10.43 Form of Registration Rights Agreement, dated February 10, 2000, between the Company and the initial purchasers (24) 10.44 Securities Purchase Agreement, dated as of October 6, 2005, between the Company and the initial purchasers (19) 10.45 Form of Stock Purchase Agreement, dated January 2002, between the Company and the initial purchasers (23) 10.46 Form of Stock Purchase Agreement, dated February 5, 2001, between the Company and the initial purchasers (24) 10.47 Form of Stock Purchase Agreement, dated July 19, 2000, between the Company and the initial purchasers (24) 10.48 Form of Stock Purchase Agreement, dated February 10, 2000, between the Company and the initial purchasers (24) 10.51 Master Security Agreement, effective as of September 6, 2002, by and between the Company and General Electric CapitalCorporation (25) 10.52 Promissory Note, dated as of December 28, 2006, by and between the Company and General Electric Capital Corporation (31) 10.53 Promissory Note, dated as of September 28, 2004, by and between the Company and General Electric Capital Corporation (26) 10.54 Promissory Note, dated as June 25, 2004, between the Company and General Electric Capital Corporation (11) 10.55 Promissory Note, dated as March 31, 2004, between the Company and General Electric Capital Corporation (27) 10.56 Promissory Note, dated as of December 18, 2003, between the Company and General Electric Capital Corporation (28) 10.57 Promissory Note, dated as of September 26, 2003, between the Company and General Electric Capital Corporation (24) 10.58 Promissory Note, dated as of June 27, 2003, between the Company and General Electric Capital Corporation (13) 10.59 Promissory Note, dated as of April 23, 2003, between the Company and General Electric Capital Corporation (29) 10.60 Promissory Note, dated as of December 30, 2002, between the Company and General Electric Capital Corporation (29) 10.61 Amendment to Promissory Note, dated as of September 27, 2002, by and between the Company and General Electric CapitalCorporation (25) 10.62 Promissory Note, dated as of September 26, 2002, by and between the Company and General Electric Capital Corporation (25) 10.63 Employment Agreement, dated March 15, 2006, by and between the Company and Deirdre Y. Gillespie, M.D. (30)* 10.64 Separation Agreement, dated March 17, 2006, by and between the Company and Steven B. Engle (30)* Table of Contents Exhibit Number Description10.65 Employment Offer Letter, dated July 10, 2006 and executed July 14, 2006, by and between the Company and Michael Tansey, M.D.(34)* 10.66 Employment Agreement, dated December 4, 2006, by and between the Company and Michael Tansey, M.D. (31)* 10.67 Underwriting Agreement, dated as of March 29, 2007, between the Company and Needham & Company, LLC and A.G. Edwards &Sons, Inc. (38) 10.68 Employment Agreement, dated May 10, 2007, by and between the Company and Niv Caviar (36)* 10.69 Promissory Note, dated as of June 28, 2007, between the Company and General Electric Capital Corporation (35) 10.70 Amendment to Chief Executive Officer Employment Agreement (35)* 10.71 Promissory Note, dated as of December 31, 2007, between the Company and General Electric Capital Corporation 10.72 Employment Agreement, dated March 4, 2008, by and between the Company and Luke Seikkula (37)* 21.1 Subsidiaries of La Jolla Pharmaceutical Company (15) 23.1 Consent of Independent Registered Public Accounting Firm 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * This exhibit is a management contract or compensatory plan or arrangement. (1) Previously filed with the Company’s Current Report on Form 8-K filed March 1, 2006 and incorporated by reference herein. (2) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated by reference herein. (3) Previously filed with the Company’s Registration Statement on Form S-3 (Registration No. 333-131246) filed January 24, 2006 and incorporated byreference herein. (4) Previously filed with the Company’s Registration Statement on Form 8-A (Registration No. 000-24274) filed December 4, 1998 and incorporated byreference herein. (5) Previously filed with the Company’s Current Report on Form 8-K filed January 26, 2001 and incorporated by reference herein. The changes effected bythe Amendment are also reflected in the Amendment to Application for Registration on Form 8-A/A filed on January 26, 2001. (6) Previously filed with the Company’s Current Report on Form 8-K filed December 16, 2005 and incorporated by reference herein. (7) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 and incorporated by reference herein. (8) Previously filed with the Company’s Registration Statement on Form S-1 (Registration No. 33-76480) filed June 3, 1994 and incorporated by referenceherein. Table of Contents(9) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and incorporated by reference herein. (10) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and incorporated by reference herein. (11) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 and incorporated by reference herein. (12) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated by reference herein. (13) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated by reference herein. (14) Previously filed with the Company’s Current Report on Form 8-K filed May 20, 2005 and incorporated by reference herein. (15) Previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated by reference herein. (16) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated by reference herein. (17) Previously filed with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and incorporated by reference herein. (18) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 and incorporated by reference herein. (19) Previously filed with the Company’s Current Report on Form 8-K filed October 7, 2005 and incorporated by reference herein. (20) Previously filed with the Company’s Current Report on Form 8-K filed January 28, 2005 and incorporated by reference herein. (21) Previously filed with the Company’s Current Report on Form 8-K filed February 20, 2004 and incorporated by reference herein. (22) Previously filed with the Company’s Current Report on Form 8-K filed August 12, 2003 and incorporated by reference herein. (23) Previously filed with the Company’s Current Report on Form 8-K filed January 16, 2002 and incorporated by reference herein. (24) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and incorporated by reference herein. (25) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and incorporated by reference herein. (26) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated by reference herein. (27) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and incorporated by reference herein. Table of Contents(28) Previously filed with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and incorporated by reference herein. (29) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and incorporated by reference herein. (30) Previously filed with the Company’s Current Report on Form 8-K filed March 20, 2006 and incorporated by reference herein. (31) Previously filed with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and incorporated by reference herein. (32) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 and incorporated by reference herein. (33) Previously filed with the Company’s Registration Statement on Form S-8 filed June 12, 2007 and incorporated by reference herein. (34) Previously filed with the Company’s Current Report on Form 8-K filed July 18, 2006 and incorporated by reference herein. (35) Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and incorporated by reference herein. (36) Previously filed with the Company’s Current Report on Form 8-K filed May 10, 2007 and incorporated by reference herein. (37) Previously filed with the Company’s Current Report on Form 8-K filed March 4, 2008 and incorporated by reference herein. (38) Previously filed with the Company’s Current Report on Form 8-K filed March 30, 2007 and incorporated by reference herein. EXHIBIT 10.71PROMISSORY NOTEDecember 31, 2007(Date)FOR VALUE RECEIVED, La Jolla Pharmaceutical Company a corporation located at the address stated below (“Maker”) promises, jointly and severallyif more than one, to pay to the order of General Electric Capital Corporation or any subsequent holder hereof (each, a “Payee”) at its office located at 83Wooster Heights Road, Danbury, CT or at such other place as Payee or the holder hereof may designate, the principal sum of Two Hundred Thirty SixThousand Four Hundred Fifty One and 29/00 Dollars ($236,451.29), with interest on the unpaid principal balance, from the date hereof through andincluding the dates of payment, at a fixed interest rate of Ten and Fifty Five Hundredths percent (10.55%) per annum, to be paid in lawful money of theUnited States, in Forty-Eight (48) consecutive monthly installments of principal and interest as follows: Periodic Installment Amount Thirty-Six (36) $6,119.60 Eleven (11) $5,586.12 each (“Periodic Installment”) and a final installment which shall be in the amount of the total outstanding principal and interest. The first PeriodicInstallment shall be due and payable on January 1, 2008 and the following Periodic Installments and the final installment shall be due and payable on thesame day of each succeeding month (each, a “Payment Date”). Such installments have been calculated on the basis of a 360 day year of twelve 30-daymonths. Each payment may, at the option of the Payee, be calculated and applied on an assumption that such payment would be made on its due date.The acceptance by Payee of any payment which is less than payment in full of all amounts due and owing at such time shall not constitute a waiver ofPayee’s right to receive payment in full at such time or at any prior or subsequent time.The Maker hereby expressly authorizes the Payee to insert the date value is actually given in the blank space on the face hereof and on all related documentspertaining hereto.This Note may be secured by a security agreement, chattel mortgage, pledge agreement or like instrument (each of which is hereinafter called a “SecurityAgreement”).Time is of the essence hereof. If any installment or any other sum due under this Note or any Security Agreement is not received within ten (10) days after itsdue date, the Maker agrees to pay, in addition to the amount of each such installment or other sum, a late payment charge of five percent (5%) of the amountof said installment or other sum, but not exceeding any lawful maximum. If (i) Maker fails to make payment of any amount due hereunder within ten(10) days after the same becomes due and payable; or (ii) Maker is in default under, or fails to perform under any term or condition contained in any SecurityAgreement, then the entire principal sum remaining unpaid, together with all accrued interest thereon and any other sum payable under this Note or anySecurity Agreement, at the election of Payee, shall immediately become due and payable, with interest thereon at the lesser of eighteen percent (18%) perannum or the highest rate not prohibited by applicable law from the date of such accelerated maturity until paid (both before and after any judgment).Notwithstanding anything to the contrary contained herein or in the Security Agreement, Maker may not prepay in full or in part any indebtedness hereunderwithout the express written consent of Payee in its sole discretion.It is the intention of the parties hereto to comply with the applicable usury laws; accordingly, it is agreed that, notwithstanding any provision to the contraryin this Note or any Security Agreement, in no event shall this Note or any Security Agreement require the payment or permit the collection of interest inexcess of the maximum amount permitted by applicable law. If any such excess interest is contracted for, charged or received under this Note or any SecurityAgreement, or if all of the principal balance shall be prepaid, so that under any of such circumstances the amount of interest contracted for, charged orreceived under this Note or any Security Agreement on the principal balance shall exceed the maximum amount of interest permitted by applicable law, thenin such event (a) the provisions of this paragraph shall govern and control, (b) neither Maker nor any other person or entity now or hereafter liable for thepayment hereof shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount of interest permitted byapplicable law, (c) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal balance or refunded to Maker, at the option of the Payee,and (d) the effective rate of interest shall be automatically reduced to the maximum lawful contract rate allowed under applicable law as now or hereafterconstrued by the courts having jurisdiction thereof. It is further agreed that without limitation of the foregoing, all calculations of the rate of interestcontracted for, charged or received under this Note or any Security Agreement which are made for the purpose of determining whether such rate exceeds themaximum lawful contract rate, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating and spreading in equal partsduring the period of the full stated term of the indebtedness evidenced hereby, all interest at any time contracted for, charged or received from Maker orotherwise by Payee in connection with such indebtedness; provided, however, that if any applicable state law is amended or the law of the United States ofAmerica preempts any applicable state law, so that it becomes lawful for the Payee to receive a greater interest per annum rate than is presently allowed, theMaker agrees that, on the effective date of such amendment or preemption, as the case may be, the lawful maximum hereunder shall be increased to themaximum interest per annum rate allowed by the amended state law or the law of the United States of America.The Maker and all sureties, endorsers, guarantors or any others (each such person, other than the Maker, an “Obligor”) who may at any time become liablefor the payment hereof jointly and severally consent hereby to any and all extensions of time, renewals, waivers or modifications of, and all substitutions orreleases of, security or of any party primarily or secondarily liable on this Note or any Security Agreement or any term and provision of either, which may bemade, granted or consented to by Payee, and agree that suit may be brought and maintained against any one or more of them, at the election of Payee withoutjoinder of any other as a party thereto, and that Payee shall not be required first to foreclose, proceed against, or exhaust any security hereof in order toenforce payment of this Note. The Maker and each Obligor hereby waives presentment, demand for payment, notice of nonpayment, protest, notice of protest,notice of dishonor, and all other notices in connection herewith, as well as filing of suit (if permitted by law) and diligence in collecting this Note orenforcing any of the security hereof, and agrees to pay (if permitted by law) all expenses incurred in collection, including Payee’s actual attorneys’ fees.Maker and each Obligor agrees that fees not in excess of twenty percent (20%) of the amount then due shall be deemed reasonable.THE MAKER HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPONOR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS NOTE, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN MAKERAND PAYEE RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THERELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN MAKER AND PAYEE. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALLENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACTCLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.) THIS WAIVER ISIRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TOANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS NOTE, ANY RELATED DOCUMENTS, ORTO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. IN THE EVENTOF LITIGATION, THIS NOTE MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.This Note and any Security Agreement constitute the entire agreement of the Maker and Payee with respect to the subject matter hereof and supercedes allprior understandings, agreements and representations, express or implied.No variation or modification of this Note, or any waiver of any of its provisions or conditions, shall be valid unless in writing and signed by an authorizedrepresentative of Maker and Payee. Any such waiver, consent, modification or change shall be effective only in the specific instance and for the specificpurpose given. Any provision in this Note or any Security Agreement which is in conflict with any statute, law or applicable rule shall be deemed omitted, modified oraltered to conform thereto. La Jolla Pharmaceutical Company /s/ Lisa Peraza By: /s/ Deirdre Gillespie (Witness) Lisa Peraza Name: Deirdre Gillespie (Print name) 6455 Nancy Ridge Drive Title: President & CEO San Diego, CA 92121 (Address) Federal Tax ID #: 330361285 Address: 6455 Nancy Ridge Drive, San Diego, San Diego County, CA 92121 By: /s/ Gail A. Sloan Name: Gail A. Sloan Title: VP Finance EXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-106060, 333-116233, 333-131248, 333-125427 and 333-143677 and Form S-3 Nos. 333-101499, 333-31142, 333-43066, 333-55370, 333-81432, 333-131246 and 333-145009) of La Jolla Pharmaceutical Companyand in the related Prospectuses of our reports dated March 17, 2008, with respect to: (1) the consolidated financial statements of La Jolla PharmaceuticalCompany, and (2) the effectiveness of internal control over financial reporting of La Jolla Pharmaceutical Company, included in this Annual Report (Form10-K) for the year ended December 31, 2007./s/ Ernst & Young LLPSan Diego, CaliforniaMarch 17, 2008 EXHIBIT 31.1SECTION 302 CERTIFICATIONI, Deirdre Y. Gillespie, certify that:1. I have reviewed this annual report on Form 10-K of La Jolla Pharmaceutical Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: March 17, 2008 /s/ Deirdre Y. Gillespie Deirdre Y. GillespiePresident, Chief Executive Officer andAssistant Secretary EXHIBIT 31.2SECTION 302 CERTIFICATIONI, Niv E. Caviar, certify that:1. I have reviewed this annual report on Form 10-K of La Jolla Pharmaceutical Company; 2. Based on my knowledge, this report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make thestatement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: March 17, 2008 /s/ Niv E. Caviar Niv E. CaviarExecutive Vice President, Chief BusinessOfficer and Chief Financial Officer EXHIBIT 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002Each of the undersigned, in his or her capacity as an officer of La Jolla Pharmaceutical Company (the “Registrant”), hereby certifies, for purposes of 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: • the annual report of the Registrant on Form 10-K for the year ended December 31, 2007 (the “Report”), which accompanies this certification,fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and • the information contained in the Report fairly presents, in all material respects, the financial condition of the Registrant at the end of such yearand the results of operations of the Registrant of such year.Dated: March 17, 2008 /s/ Deirdre Y. Gillespie Deirdre Y. GillespiePresident, Chief Executive Officer andAssistant Secretary /s/ Niv E. Caviar Niv E. CaviarExecutive Vice President, Chief BusinessOfficer and Chief Financial Officer Note: A signed original of this written statement required by Section 906 has been provided to La Jolla Pharmaceutical Company and will be retained by LaJolla Pharmaceutical Company and furnished to the Securities and Exchange Commission or its staff upon request.

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