Abstract: Structure-based drug design (SBDD) is crucial for developing specific and effective therapeutics against protein targets but remains challenging due to complex protein-ligand interactions and vast chemical space. Although language models (LMs) have excelled in natural language processing, their application in SBDD is underexplored. To bridge this gap, we introduce a method, known as Frag2Seq, to apply LMs to SBDD by generating molecules in a fragment-based manner in which fragments correspond to functional modules. We transform 3D molecules into fragment-informed sequences using $SE(3)$-equivariant molecule and fragment local frames, extracting $SE(3)$-invariant sequences that preserve geometric information of 3D fragments. Furthermore, we incorporate protein pocket embeddings obtained from a pre-trained inverse folding model into the LMs via cross-attention to capture protein-ligand interaction, enabling effective target-aware molecule generation. Benefiting from employing LMs with fragment-based generation and effective protein context encoding, our model achieves the best performance on binding vina score and chemical properties such as QED and Lipinski, which shows our model’s efficacy in generating drug-like ligands with higher binding affinity against target proteins. Moreover, our method also exhibits higher sampling efficiency compared to atom-based autoregressive and diffusion baselines with at most $\times 300$ speedup. The code will be made publicly available at https://github.com/divelab/AIRS/tree/main/OpenMI/Frag2Seq.