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Sample Business Contracts

Severance Agreement - Ligand Pharmaceuticals Inc. and Tod G. Mertes

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May 20, 2003

Mr. Tod G. Mertes
Vice President, Controller and Treasurer
LIGAND PHARMACEUTICALS INCORPORATED
10275 Science Center Drive
San Diego, CA  92121

Dear Tod:

          The purpose of this letter agreement is to document the terms of the
severance package to which you will be entitled should your employment with
Ligand Pharmaceuticals Incorporated (the "Company") terminate under certain
specified circumstances.

          Part One of this letter agreement sets forth certain definitional
provisions to be in effect for purposes of determining your benefit
entitlements. Part Two specifies the terms and conditions upon which you may
become entitled to receive severance benefits. Severance benefits accrue under
this letter agreement in the event your employment with the Company were to be
terminated involuntarily in connection with certain changes in control of the
Company. Part Three concludes this letter agreement with a series of general
terms and conditions applicable to your severance benefits.

                             PART ONE -- DEFINITIONS

          DEFINITIONS. For purposes of this letter agreement, including in
particular the application of the special benefit limitations of Part Three, the
following definitions will be in effect:

1.   Average Compensation means your average W-2 wages from the Company for the
     five (5) calendar years completed immediately prior to the calendar year in
     which the Change in Control is effected. Any W-2 wages for a partial year
     of employment will be annualized, in accordance with the frequency with
     which such wages are paid during such partial year, before inclusion within
     your Average Compensation.

2.   Board means the Company's Board of Directors.

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Mr. Tod G. Mertes
May 20, 2003
Page 2

3.   Change in Control means any of the following events:

          (i) a merger or consolidation in which the Company is not the
     surviving entity, except for a transaction the principal purpose of which
     is to change the state in which the Company is incorporated,

          (ii) the sale, transfer or other disposition of all or substantially
     all of the assets of the Company other than in the ordinary course of
     business,

          (iii) any reverse merger in which the Company ceases to exist as an
     independent corporation and becomes the subsidiary of another corporation,
     except where there is an insubstantial change in the de facto voting
     control of the Company (e.g. the creation of a holding company),

          (iv) any Hostile Take-Over,

          (v) the acquisition by any person (or related group of persons),
     whether by tender or exchange offer made directly to the Company's
     stockholders, private purchases from one or more of the Company's
     stockholders, open market purchases or any other transaction, of beneficial
     ownership of securities possessing more than thirty percent (30%) of the
     total combined voting power of the Company's outstanding securities,

          (vi) the acquisition by any person (or related group of persons),
     whether by tender or exchange offer made directly to the Company's
     stockholders, private purchases from one or more of the Company's
     stockholders, open market purchases or any other transaction, of additional
     securities of the Company which increase the total holdings of such person
     (or group) to a level of securities possessing more than fifty percent
     (50%) of the total combined voting power of the Company's outstanding
     securities, or

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Mr. Tod G. Mertes
May 20, 2003
Page 3

          (vii) the acquisition by any person (or related group of persons),
     whether by tender or exchange offer made directly to the Company's
     stockholders, private purchases from one or more of the Company's
     stockholders, open market purchases or any other transaction, of securities
     of the Company possessing sufficient voting power in the aggregate to elect
     an absolute majority of the members of the Board (rounded up to the nearest
     whole number).

4.   COBRA means the continuation-of-coverage provisions of the Consolidated
     Omnibus Budget Reconciliation Act of 1985, as amended.

5.   Code means the Internal Revenue Code of 1986, as amended.

6.   Common Stock means the Company's common stock, par value $0.001 per share.

7.   Equity Incentive Plans means any of the following equity incentive plans of
     the Company: 1992 Stock Option/Stock Issuance Plan, the 2002 Stock
     Incentive Plan, and the Restricted Stock Purchase Plan, together with any
     amendments or successors to such plans.

8.   Equity Parachute Payment means, with respect to any Option (whether
     Acquisition-Accelerated or Severance-Accelerated) or unvested Stock
     Issuance, the portion deemed to be a parachute payment under Code Section
     280G and the Treasury Regulations issued thereunder. Such Equity Parachute
     Payment shall be calculated in accordance with the valuation provisions
     established under Code Section 280G and the applicable Treasury Regulations
     and will include an appropriate dollar adjustment to reflect the lapse of
     your obligation to remain in the Company's employ as a condition to your
     vesting in the accelerated portion of such Option or Stock Issuance.

9.   ERISA means the Employee Retirement Income Security Act of 1974, as
     amended.

10.  Health Care Coverage means the health care benefits provided by the Company
     to you and your eligible dependents for which you are eligible to continue
     coverage under the provisions of COBRA.

11.  Hostile Take-Over means either of the following events:

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Mr. Tod G. Mertes
May 20, 2003
Page 4

          (i) the acquisition by any person (or related group of persons)
     whether by tender or exchange offer made directly to the Company's
     stockholders, private purchases from one or more of the Company's
     stockholders, open market purchases or any other transaction, of beneficial
     ownership of securities possessing more than thirty percent (30%) of the
     total combined voting power of the Company's outstanding securities
     pursuant to a tender offer made directly to the Company's stockholders
     which the Board does not recommend such stockholders to accept, or

          (ii) a change in the composition of the Board over a period of
     thirty-six (36) consecutive months or less such that a majority of the
     Board members (rounded up to the next whole number) ceases, by reason of
     one or more contested elections for Board membership, to be comprised of
     individuals who either (a) have been Board members continuously since the
     beginning of such period or (b) have been elected or nominated for election
     as Board members during such period by at least a majority of the Board
     members described in clause (a) who were still in office at the time such
     election or nomination was approved by the Board.

12.  Involuntary Termination means the termination of your employment with the
     Company:

          (i) upon your involuntary discharge or dismissal, or

          (ii) upon your resignation in connection with any of the following
     changes to the terms and conditions of your employment: (A) a change in
     your position with the Company which materially reduces your level of
     responsibility, (B) a greater than ten percent (10%) reduction in your
     level of compensation (including base salary, fringe benefits and
     participation in non-discretionary bonus programs under which awards are
     payable pursuant to objective financial or performance standards, but
     excluding equity compensation) or (C) a relocation of your principal place
     of employment by more than fifty (50) miles.

          The following guidelines shall determine whether one or more
     reductions in compensation should be taken into account for purposes of
     clause (ii)(B):

               (a) Any reduction in compensation which occurs in connection with
          an across-the-board reduction in the level of compensation payable to

<PAGE>

Mr. Tod G. Mertes
May 20, 2003
Page 5
          the Company's executive officers or senior management shall not
          constitute grounds for a clause (ii)(B) resignation, unless
          implemented within eighteen (18) months after a Change in Control.

               (b) In the event of a Hostile Take-Over, the greater than ten
          percent (10%) standard of clause (ii)(B) shall be reduced to zero
          percent (0%) so that any reduction in the level of your compensation
          shall constitute grounds for a clause (ii)(B) resignation.

          In no event shall an Involuntary Termination be deemed to occur should
     your employment terminate by reason of death or permanent disability.

13.  Option means any option granted to you under any of the Equity Incentive
     Plans which is outstanding at the time of your Involuntary Termination or
     any earlier Change in Control. Your outstanding options are to be divided
     into two separate categories as follows:

          (i) Acquisition-Accelerated Options: any outstanding Option (or
     installment thereof) which accelerates upon a Change in Control in
     accordance with the automatic acceleration provisions of the Equity
     Incentive Plans.

          (ii) Severance-Accelerated Options: any outstanding Option (or
     installment thereof) which is not an Acquisition-Accelerated Option but
     which accelerates upon your Involuntary Termination, whether or not in
     connection with a Change in Control, as part of your severance benefits
     under this letter agreement.

14.  Other Parachute Payments mean any payments in the nature of compensation to
     which you may become entitled under this letter agreement (other than the
     Equity Parachute Payment) or any other arrangement with the Company, to the
     extent such payments qualify as parachute payments within the meaning of
     Code Section 280G(b)(2) and the Treasury Regulations issued thereunder or
     would so qualify if the aggregate present value of such payments exceeded
     the amount specified in Code Section 280G(b)(2)(ii).

15.  Stock Issuance means the issuance of unvested shares of Common Stock under
     the Company's Restricted Stock Plan or any other Equity Incentive Plan.

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Mr. Tod G. Mertes
May 20, 2003
Page 6

16.  Termination for Cause means an Involuntary Termination or resignation of
     your employment with the Company by reason of your conviction of any felony
     or other criminal act, your commission of any act of fraud or embezzlement,
     your unauthorized use or disclosure of confidential or proprietary
     information or trade secrets of the Company or its subsidiaries, or any
     other intentional misconduct on your part which adversely affects the
     business or affairs of the Company in a material manner.

                  PART TWO -- INVOLUNTARY TERMINATION BENEFITS

          You will be entitled to receive the severance benefits specified below
should there occur an Involuntary Termination of your employment during the term
of this letter agreement effected in connection with a Change in Control, other
than a Termination for Cause. However, in the absence of a Hostile Take-Over,
these benefits will continue to be paid you only for so long as you remain
available for any consulting services required of you under Part Two, Paragraph
4 and abide by the restrictive covenants set forth in Part Two, Paragraph 5.

1.   Severance Payments. You will receive severance payments from the Company
     for a period of twelve (12) months following your Involuntary Termination
     in an aggregate amount equal to the sum of (A) one (1) times the annual
     rate of base salary in effect for you at the time of your Involuntary
     Termination or at the time of the relevant Change in Control, whichever is
     higher plus (B) one (1) times the average of the bonuses (excluding any
     signing bonus) paid to you for services rendered in the two (2) fiscal
     years immediately preceding the fiscal year of your Involuntary Termination
     (annualized if paid for a partial fiscal year). If a bonus is paid to you
     for only one of those years, then the bonus amount under Clause (B) will be
     equal to one (1) times such bonus amount. The aggregate severance payments
     shall be paid to you in equal installments over the twelve-month period in
     accordance with the Company's normal payroll practices and subject to all
     applicable withholding taxes. The severance payments will immediately
     terminate if and only if (i) you should cease to remain available for the
     consulting services required of you under Section 4, or (ii) you fail to
     abide by the restrictive covenants set forth in Section 5 . However, in the
     event your Involuntary Termination occurs in connection with a Hostile
     Take-Over, your severance payments will be paid to you in the form of a
     single lump sum amount within thirty (30) days after such Involuntary
     Termination, and the provisions of Sections 4 and 5 of this Part Two will
     not apply.

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Mr. Tod G. Mertes
May 20, 2003
Page 7

2.   Health Care Coverage. The Company will, at its expense, make any COBRA
     payments for you and your eligible dependents in order to continue your
     Health Care Coverage until the earlier of (i) twelve (12) months after the
     effective date of your Involuntary Termination (other than a Termination
     for Cause) or (ii) the first date that you are covered under another
     employer's (or, in the event of rehire, the Company's) health benefit
     program which provides substantially the same level of benefits without
     exclusion for pre-existing medical conditions. Such payments will be in
     lieu of any other continued health care coverage to which you or your
     dependents would otherwise be entitled pursuant to the requirements of Code
     Section 4980B by reason of your termination of employment.

3.   Option Acceleration and Lapse of Restrictions. Each of your outstanding
     Options under the Equity Incentive Plans will (to the extent not then
     otherwise exercisable) automatically accelerate so that each such Option
     will become immediately exercisable for the total number of shares of
     Common Stock at the time subject to that Option. Each such accelerated
     Option, together with all of your other vested Options, will remain
     exercisable for a period of twelve (12) months following your Involuntary
     Termination until the end of the specified ten (10)-year option term. Such
     Option(s) may be exercised for any or all of the option shares in
     accordance with the exercise provisions of the option agreement evidencing
     the grant. In addition, all restrictions applicable to the Stock Issuances
     you hold (to the extent those restrictions have not previously lapsed in
     accordance with the terms of the issuance agreements) will automatically
     lapse upon your Involuntary Termination (except a Termination for Cause).

4.   Consulting Services. Unless your Involuntary Termination occurs in
     connection with a Hostile Take-Over, you will make yourself available to
     perform consulting services reasonably requested of you during the twelve
     (12)-month period following your Involuntary Termination. You will be
     compensated at an hourly rate to be agreed upon by you and the Company at
     the time such consulting services are to be rendered, and you will be
     reimbursed for all reasonable out-of-pocket expenses incurred in rendering
     such services upon your submission of appropriate documentation for those
     expenses.

5.   Restrictive Covenants. For the one hundred twenty (120)-day period
     following your Involuntary Termination:

               (i) You will not directly or indirectly, whether for your own

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Mr. Tod G. Mertes
May 20, 2003
Page 8

          account or as an employee, director, consultant or advisor, provide
          services to any business enterprise which is at the time in
          competition with any of the Company's then existing or formally
          planned product lines and which is located geographically in an area
          where the Company maintains substantial business activities, unless
          you obtain the prior written consent of the Board of Directors.

               (ii) You will not directly or indirectly encourage or solicit any
          individual to leave the Company's employ for any reason or interfere
          in any other manner with the employment relationships at the time
          existing between the Company and its current or prospective employees.

               (iii) You will not induce or attempt to induce any customer,
          supplier, distributor, licensee or other business relation of the
          Company to cease doing business with the Company or in any way
          interfere with the existing business relationship between any such
          customer, supplier, distributor, licensee or other business relation
          and the Company.

          You acknowledge that monetary damages may not be sufficient to
          compensate the Company for any economic loss which may be incurred by
          reason of your breach of the foregoing restrictive covenants.
          Accordingly, in the event of any such breach, the Company shall, in
          addition to the cessation of the severance benefits provided you under
          this letter agreement and any remedies available to the Company at
          law, be entitled to obtain equitable relief in the form of an
          injunction precluding you from continuing to engage in such breach.

          None of the foregoing restrictive covenants in this section 5
          shall be applicable in the event your Involuntary Termination occurs
          in connection with a Hostile Take-Over.

6.   Benefit Reduction.

               (i) BENEFIT REDUCTION. If the Change in Control does not
          constitute a Hostile Take-Over, first the dollar amount of your
          severance payment under Paragraph 1 will be reduced to the extent
          necessary to assure that the present value of those benefits will not,
          when added to the present value of your Equity Parachute Payment and
          your Other Parachute Payments, exceed 2.99 times your Average
          Compensation. In the event of a Hostile Take-Over, no reduction will
          be made to your severance payment (or any other benefit to which you
          become entitled hereunder), unless necessary to provide you with the
          maximum after-tax benefit available, after taking into account any

<PAGE>

Mr. Tod G. Mertes
May 20, 2003
Page 9

          parachute excise tax which might otherwise be payable by you under
          Code Section 4999 and any analogous State income tax provision.

               (ii) RESOLUTION OF DISPUTES. In the event there is any
          disagreement between you and the Company as to whether one or more
          benefits to which you become entitled (whether under this letter
          agreement or otherwise) in connection with a Change in Control
          constitute Equity Parachute Payments or Other Parachute Payments, such
          dispute is to be resolved as follows:

               A. The matter shall be submitted for resolution to independent
          counsel mutually acceptable to you and the Company ("Independent
          Counsel"). The resolution reached by Independent Counsel shall be
          final and controlling. However, should the Independent Counsel
          determine that the status of the benefits in dispute can be resolved
          by obtaining a private letter ruling from the Internal Revenue
          Service, a formal and proper request for such ruling shall be prepared
          and submitted by Independent Counsel, and the determination made by
          the Internal Revenue Service in the issued ruling shall be
          controlling. All expenses incurred in connection with the retention of
          Independent Counsel and (if applicable) the preparation and submission
          of the ruling request shall be paid by the Company.

               B. The present value of each Equity Parachute Payment and each of
          the Other Parachute Payments (including your severance payment and
          Health Care Coverage) shall be determined in accordance with the
          provisions of Code Section 280G(d)(4) and the Treasury Regulations
          issued thereunder.

          The full amount of your severance benefit under Paragraph 1 shall
          not be paid to you until any amounts in dispute under this Paragraph
          6(ii) have been resolved in accordance herewith. However, any portion
          of such severance payment which would not otherwise exceed the benefit
          limitation of Paragraph 6(i) even if all amounts in dispute under this
          Paragraph 6(ii) were to be resolved against you will be paid to you in
          accordance with the applicable provisions of this letter agreement.

               (iii) OVERRIDING LIMITATION. You will in all events be entitled
          to receive the full amount of your severance payment under Paragraph
          1, to the extent those benefits, when added to the present value of
          your Equity Parachute Payment and your Other Parachute Payments
          (excluding such severance payment), will nevertheless qualify as
          reasonable compensation within the standards established under Code
          Section 280G(b)(4).

<PAGE>

Mr. Tod G. Mertes
May 20, 2003
Page 10

               (iv) INTERPRETATION. The provisions of this Section 6 shall in
          all events be interpreted in such manner as will avoid the imposition
          of excise taxes under Code Section 4999, and the disallowance of
          deductions under Code Section 280G(a), with respect to your severance
          benefits under this letter agreement.

                     PART THREE -- MISCELLANEOUS PROVISIONS

1.   Termination for Cause. Should your termination constitute a Termination for
     Cause, then the Company shall only be required to pay you (i) any unpaid
     compensation earned for services previously rendered through the date of
     such termination and (ii) any accrued but unpaid vacation benefits or sick
     days, (iii) any reimbursements then owed to you by the Company and no
     benefits will be payable to you under this letter agreement.

2.   Term of Agreement. The provisions of this letter agreement will continue in
     effect for a period of five (5) years from the date hereof.

3.   General Creditor Status. The benefits to which you may become entitled
     under this letter agreement (except those attributable to your Options or
     Stock Issuances) will be paid, when due, from the general assets of the
     Company. Your right (or the right of the executors or administrators of
     your estate) to receive any such payments will at all times be that of a
     general creditor of the Company and will have no priority over the claims
     of other general creditors of the Company.

4.   Death. Should you die before receipt of all benefits to which you become
     entitled under this letter agreement, then the payment of such benefits
     will be made, on the due date or dates hereunder had you survived, to the
     executors or administrators of your estate. Should you die before you
     exercise your Severance-Accelerated Options (if any) or any other of your
     outstanding vested Options, then each such Option may be exercised, during
     the applicable exercise period in effect hereunder for those options at the
     time of your death, by the executors or administrators of your estate or by
     person to whom the Option is transferred pursuant to your will or in
     accordance with the laws of inheritance.

5.   Miscellaneous. The provisions of this letter agreement will be construed
     and interpreted under ERISA. To the extent ERISA is inapplicable, then the
     laws of the State of California shall control, without regard to that
     state's choice of law provisions. This letter agreement incorporates the
     entire agreement between you and the Company relating to the subject of

<PAGE>

Mr. Tod G. Mertes
May 20, 2003
Page 11

     severance benefits and supersedes all prior agreements and understandings
     with respect to such subject matter. This letter agreement may only be
     amended by written instrument signed by you and another duly-authorized
     officer of the Company. If any provision of this letter agreement as
     applied to any party or to any circumstance should be adjudged by an
     arbitrator or court of competent jurisdiction to be void or unenforceable
     for any reason, the invalidity of that provision shall in no way affect (to
     the maximum extent permissible by law) the application of such provision
     under circumstances different from those so adjudicated, the application of
     any other provision of this letter agreement, or the enforceability or
     invalidity of this letter agreement as a whole. Should any provision of
     this letter agreement become or be determined to be invalid, illegal or
     unenforceable in any jurisdiction by reason of the scope, extent or
     duration of its coverage, then such provision shall be deemed amended to
     the extent necessary to conform to applicable law so as to be valid and
     enforceable or, if such provision cannot be so amended without materially
     altering the intention of the parties, then such provision shall be
     stricken and the remainder of this letter agreement shall continue in full
     force and effect.

6.   Remedies. All rights and remedies provided pursuant to this letter
     agreement or by law will be cumulative, and no such right or remedy will be
     exclusive of any other. A party may pursue any one or more rights or
     remedies hereunder or may seek damages or specific performance in the event
     of another party's breach hereunder or may pursue any other remedy by law
     or equity, whether or not stated in this letter agreement.

7.   Arbitration. Any controversy which may arise between you and the Company
     with respect to the construction, interpretation or application of any of
     the terms, provisions or conditions of this letter agreement or any
     monetary claim arising from or relating to this letter agreement will be
     submitted to and exclusively decided by final and binding arbitration in
     San Diego, California in accordance with the rules of the American
     Arbitration Association then in effect.

8.   No Employment or Service Contract. Nothing in this letter agreement shall
     confer upon you any right to continue in the employment of the Company for
     any period of specific duration or interfere with or otherwise restrict in
     any way the rights of the Company or you, which rights are hereby expressly
     reserved by each, to terminate your employment at any time for any reason
     whatsoever, with or without cause.

<PAGE>

Mr. Tod G. Mertes
May 20, 2003
Page 12

9.   Proprietary Information. You hereby acknowledge that the Company may, from
     time to time during your employment with the Company, disclose to you
     confidential information pertaining to the Company's business and affairs.
     All information and data, whether or not in writing, of a private or
     confidential nature concerning the business or financial affairs of the
     Company is and will remain subject to a separate Proprietary Information
     and Inventions Agreement (or the like) between you and the Company.

          Please indicate your acceptance of the foregoing provisions of this
severance agreement by signing the enclosed copy of this letter agreement and
returning it to the Company.

Very truly yours,

LIGAND PHARMACEUTICALS INCORPORATED

/S/DAVID E. ROBINSON

David E. Robinson
Chairman, President and CEO


DER:bjo
share\executive severance template.doc
share\agreement\severance Mertes 05-20-03.doc


ACCEPTED BY AND AGREED TO



Signature: /S/TOD G. MERTES
           ________________________

Dated:     July 16, 2003
           ________________________