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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-19125
ISIS PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0336973
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2292 FARADAY AVE., CARLSBAD, CA 92008
(Address of principal executive offices, including zip code)
619-931-9200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
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 and
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X No .
The approximate aggregate market value of the common stock held by
non-affiliates of the Registrant, based upon the last sale price of the common
stock reported on the National Association of Securities Dealers Automated
Quotation National Market System was $383,786,000 as of January 31, 1997.*
The number of shares of common stock outstanding as of January 31,
1997 was 26,235,805.
DOCUMENTS INCORPORATED BY REFERENCE
(To the extent indicated herein)
Registrant's definitive Proxy Statement which will be filed on or
before April 21, 1997 with the Securities and Exchange Commission in connection
with Registrant's annual meeting of stockholders to be held on June 6, 1997 is
incorporated by reference into Part III of this Report.
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* Excludes 2,435,114 shares of common stock held by directors and officers and
stockholders whose beneficial ownership exceeds ten percent of the shares
outstanding at January 31, 1997. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of the
Registrant, or that such person is controlled by or under common control with
the Registrant.
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THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS REGARDING THE
COMPANY'S BUSINESS AND PRODUCTS AND THEIR PROJECTED PROSPECTS OR QUALITIES.
SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, PARTICULARLY
THOSE INHERENT IN THE PROCESS OF DISCOVERING, DEVELOPING AND COMMERCIALIZING
DRUGS THAT CAN BE PROVEN TO BE SAFE AND EFFECTIVE FOR USE AS HUMAN THERAPEUTICS
AND THE ENDEAVOR OF BUILDING A BUSINESS AROUND SUCH POTENTIAL PRODUCTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THIS FORM 10-K.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THIS FORM 10-K INCLUDING, WITHOUT LIMITATION, IN
THE SECTION OF ITEM 1 ENTITLED "RISK FACTORS". AS A RESULT, THE READER IS
CAUTIONED NOT TO RELY ON THESE FORWARD-LOOKING STATEMENTS.
PART I
ITEM 1. BUSINESS
OVERVIEW
Isis Pharmaceuticals, Inc. ("Isis" or the "Company") is a leader in
the discovery and development of novel drugs based upon antisense technology.
Antisense technology enables the rapid design of novel drug candidates that
have the potential to be safer and more effective than traditional drugs. The
Company combines antisense technology with its core expertise in molecular and
cellular biology and medicinal chemistry to develop drug candidates targeting a
wide variety of diseases, including infectious and inflammatory diseases, and
cancer. To date, Isis has advanced five antisense compounds into clinical
trials and one additional antisense compound into preclinical development. In
addition, through its medicinal chemistry expertise, Isis has developed a
proprietary combinatorial drug discovery program to create and rapidly screen
diverse libraries of small molecule compounds as potential drug candidates.
Isis has one compound in clinical trials that was discovered through its
combinatorial drug discovery program. The Company believes that its antisense
and combinatorial drug discovery programs address complementary therapeutic
opportunities and are synergistic due to their common reliance on Isis'
significant medicinal chemistry capabilities.
Isis' drug discovery programs have produced the following compounds
currently in clinical trials:
ISIS 2922 ("fomivirsen") is in Phase III clinical trials as an
antiviral agent to treat CMV retinitis in AIDS patients. Isis is
developing ISIS 2922 in North America, Europe, South America and
Australia.
ISIS 2302 is in Phase II clinical trials for five indications as an
inhibitor of intercellular adhesion molecule-1 ("ICAM-1") to treat
renal transplant rejection, rheumatoid arthritis, ulcerative colitis,
Crohn's disease and psoriasis. ICAM-1 is a protein involved in
numerous inflammatory disorders and diseases. ISIS 2302 is a
component of Isis' cell adhesion collaboration with Boehringer
Ingelheim International GmbH ("Boehringer Ingelheim").
ISIS 3521/CGP 64128A is in Phase I clinical trials for treatment of
solid tumors. ISIS 3521/CGP 64128A is targeted at protein kinase C
("PKC")-a, a member of a family of signal transduction proteins
involved in the regulation of cell growth and thought to be involved in
a variety of inflammatory diseases and cancer. ISIS 3521/CGP 64128A is
a compound that is part of Isis' collaboration with Novartis Pharma AG
(formed from the merger of Ciba-Geigy and Sandoz) ("Novartis"), the
development of which is being conducted by Isis.
ISIS 5132/CGP 69846A is in Phase I clinical trials for treatment of
solid tumors. ISIS 5132/CGP 69846A inhibits C-raf kinase, a molecular
target associated with both normal and abnormal cell growth. ISIS
5132/CGP 69846A is a compound that is part of Isis' collaboration with
Novartis, the development of which is being conducted by Isis.
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ISIS 5320 is in Phase I clinical trials for the treatment of human
immunodeficiency virus (HIV). This compound has been shown in vitro
to inhibit virus-to-cell and cell-to-cell transmission of HIV. It has
exhibited anti-viral activity against a variety of clinical HIV-1 and
HIV-2 strains, including a panel of drug resistant isolates.
The Company's drug discovery programs have also generated one
additional compound in preclinical development, an antisense compound which has
shown potent activity in animal models of Ha-ras, a cancer-related target.
Isis is also conducting a number of target-based research programs
using its antisense and combinatorial drug discovery technologies. Isis'
antisense research programs focus on molecular targets associated with
infectious and inflammatory diseases and cancer as well as on the development
of second-and third-generation compounds with altered and improved therapeutic
properties. The Company's combinatorial drug discovery program is primarily
focused on identifying compounds targeting important RNA protein interactions
including those involved in viral and bacterial infections and in inhibiting
the production or function of cell adhesion molecules.
Isis has leveraged its technology through supportive corporate
collaborations which augment the Company's financial resources, add
complementary technology strength and establish valuable development and
commercialization relationships. As a result, Isis has been able, and expects
to continue, to pursue more aggressively drug discovery and development
activities than otherwise might be possible. Isis has retained substantial
commercial participation to all of its potential products, including those
funded by corporate collaborators.
Isis has made significant progress in expanding its collaborations
with pharmaceutical partners. In February 1996, Isis and Novartis signed an
agreement to expand their collaboration with respect to the development of ISIS
5132/CGP 69846A and to broaden their collaboration further to include the
development of ISIS 3521/CGP 64128A, research to discover additional
therapeutic compounds targeting the PKC family of signal transduction proteins
and the c-raf kinase family of signal transduction proteins and development of
any such compounds. In 1995, Isis consummated a substantial collaboration with
Boehringer Ingelheim which joins the clinical development and research programs
of both companies in the field of cell adhesion. This partnership combines
Boehringer Ingelheim's significant expertise in cell adhesion biology and its
small molecule and monoclonal antibody-based drug discovery efforts with Isis'
antisense and combinatorial drug discovery programs. The collaboration will
use these multiple drug discovery technologies to identify compounds to treat a
variety of inflammatory diseases and conditions. As part of the collaboration,
Boehringer Ingelheim made an equity investment in Isis and will make additional
equity investments upon the achievement of certain development milestones. In
1996, Isis met the first milestone, triggering a $10 million equity investment
by Boehringer Ingelheim. Isis and Boehringer Ingelheim will share equally the
costs associated with the development of these compounds and the operating
profits associated with these compounds, if any. Isis also has a corporate
collaboration with the Chemo Sero Therapeutic Research Institute ("Kaketsuken")
to identify antisense compounds to treat hepatitis C virus.
Isis has focused significant efforts on developing cost-effective,
large scale Good Manufacturing Practices ("GMP") manufacturing capability for
antisense compounds. Isis currently manufactures antisense compounds to meet
its research and clinical needs. Significant progress has been made by Isis in
reducing the cost of manufacturing antisense compounds. Isis believes that,
with reasonably anticipated benefits from increases in scale, the Company can
manufacture such compounds at commercially competitive costs. The Company is
actively preparing for a manufacturing pre-approval inspection by the U.S. Food
and Drug Administration ("FDA"), which will follow the filing of the Company's
first New Drug Application.
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ISIS DRUG DISCOVERY AND DEVELOPMENT
Drug discovery is the process of creating chemical compounds having
the appropriate attributes to produce desired therapeutic effects. Isis has
founded both its antisense and its combinatorial drug discovery programs on its
expertise in medicinal chemistry, RNA biochemistry and molecular and cellular
biology. Isis has assembled a team of scientists skilled in these core
disciplines to apply these technologies to both of its drug discovery
platforms.
ANTISENSE DRUG DISCOVERY
Early efforts in antisense drug discovery have focused on answering
basic questions regarding antisense-based therapeutics, including their
stability, ability to be taken up by the target cells, efficacy and cost of
manufacturing. In the eight years since its founding, Isis has made
significant progress in understanding and using antisense technology and has
established a leadership position in this field. Isis' antisense drug
discovery programs are able to rapidly identify attractive lead drug candidates
directed against numerous host and infectious disease targets. The Company's
first-generation antisense compounds have demonstrated activity in numerous
models of disease in animals. In addition, ISIS 2922, an antisense compound
for the treatment of CMV-induced retinitis, has shown antiviral activity in
humans and ISIS 2302, an antisense inhibitor of ICAM-1, has shown activity in
patients with Crohn's disease. Next-generation chemical modifications of these
compounds are demonstrating the ability to increase safety and potency and to
alter other drug properties in ways that may be advantageous. Through the
development of proprietary scale-up chemistries, Isis has also demonstrated the
ability to manufacture antisense compounds in large scale and to substantially
reduce the manufacturing cost.
Antisense drugs work at the genetic level to interrupt the process by
which disease-causing proteins are produced. Proteins play a central role in
virtually every aspect of human metabolism. Almost all human diseases are the
result of inappropriate protein production or disordered protein performance.
Traditional drugs are designed to interact with protein molecules throughout
the body that support or cause diseases. Antisense drugs are designed to
inhibit the production of disease-causing proteins and can be designed to treat
a wide range of diseases including infectious, inflammatory and cardiovascular
diseases and cancer. Antisense drugs have the potential to be more selective
and, as a result, more effective and less toxic than traditional drugs.
The information necessary to produce proteins in cells is contained in
genes. Specific genes contain information to produce specific proteins. The
information required for the human body to produce all proteins is contained in
the human genome and its collection of more than 100,000 genes. Genes are made
up of DNA that contains information about when and how much of which protein to
produce, depending upon what function is to be performed. The DNA molecule is
a "double helix" -- a duplex of entwined strands. In each duplex, the building
blocks of DNA, the nucleotides, are weakly bound or "paired" with complementary
nucleotides on the other strand. The precise sequence of a nucleotide chain,
called the "sense" sequence, is a blueprint for the information that is used
during protein production. The sequence of a nucleotide chain that is
precisely complementary to a given sense sequence is called its "antisense"
sequence.
In the cell nucleus, the information contained in the gene is copied
from one strand of DNA into precursor messenger RNA ("mRNA") through a process
called transcription. A particluar mRNA contains the information necessary to
produce many copies of one particular protein. The precursor mRNA is then
processed through a complex set of steps into mature mRNA and is transported
from the nucleus of the cell into the cell cytoplasm, which contains amino
acids. The information encoded in a single mRNA is then translated into many
copies of the sequence of amino acids that builds the proteins.
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Antisense drugs are mirror or complementary images of small segments
of mRNA. To create antisense drugs, nucleotides are linked together in short
chains called oligonucleotides. Each antisense drug is designed to bind to a
specific sequence of nucleotides in its mRNA target to inhibit production of
the protein encoded by the target mRNA. By acting at this stage in the
disease-causing process to prevent the production of a disease-causing protein,
antisense drugs have the potential to provide greater therapeutic benefit than
traditional drugs which do not act until the disease-causing protein has
already been produced.
Antisense drugs also have the potential to be much more selective and
specific than traditional drugs, and therefore more effective. The design of
antisense compounds also has the advantage of being less complex, more rapid
and more efficient than traditional drug design directed at protein targets.
Rational drug design usually begins by characterizing the three-dimensional
structure of the protein target in order to design a prototype drug to interact
with the target. Proteins, however, are complex molecules whose structure is
difficult to predict. In contrast, antisense compounds are designed to bind to
mRNA whose structures are more easily understood and predicted. Once the
receptor sequence on the mRNA is identified, the three-dimensional structure of
the receptor site can be defined, and the prototype antisense drugs can be
designed.
COMBINATORIAL DRUG DISCOVERY
Isis has developed a novel combinatorial drug discovery capability
that is complementary to its antisense drug discovery capability. The
significant medicinal chemistry expertise of Isis and its collaborators
supports the strong chemical underpinning of the program. Isis' combinatorial
drug discovery program enables the Company to discover compounds with the
potential to treat a wide range of diseases where the structure of the target
may not be known or where the extreme specificity of antisense compounds may
not be desirable, such as in designing antibacterial drugs that require a wide
spectrum of activity to be attractive. The combinatorial drug discovery
program is a significant factor in Isis' collaboration with Boehringer
Ingelheim. See "--Collaborative Agreements--Boehringer Ingelheim."
The goal of combinatorial drug discovery is to create large, highly
diverse libraries of chemical compounds which can be screened for biological
activity against a wide variety of disease targets. The greater the chemical
diversity (e.g., size, shape, charge, rigidity, etc.) that a combinatorial
program can produce, the greater the probability of finding compounds with
meaningful biological activity and, thus, potential therapeutic application.
For decades, the pharmaceutical industry has relied on using natural product
extracts or chemical banks to provide chemical compounds to screen for
biological activity in pharmaceutical assays. These sources of compounds have
inherent limitations both in terms of their current accessibility and their
chemical diversity. In addition, when natural compound libraries evidence
activity in assays, it frequently is extremely difficult to identify the active
compound, and, when identified, such compound may be difficult to synthesize.
The need for more efficient ways to access and screen chemical diversity has
led the scientific community to look for alternatives to conventional chemical
bank and natural product extract screening. Combinatorial drug discovery,
which harnesses and exploits randomness and synthetically creates chemical
diversity, offers unlimited quantities of potentially unique biologically
active compounds and accelerates the identification of drug candidates.
Isis has focused its internal combinatorial screening program on drug
resistant bacteria. There is a need for new classes of antimicrobial compounds
that work by novel mechanisms. RNA/protein interactions represent novel
mechanisms for small molecule drug discovery with the potential for a broad
spectrum of activity. Contacts between RNA and protein are highly conserved
and essential to the life cycles of bacteria. These contacts are often
distinctly different or completely absent in humans. Novel chemical inhibitors
of these evolutionarily conserved targets may have activity against drug
resistant or newly emergent disease causing bacteria.
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In collaboration with the Defense Advanced Research Projects Agency
("DARPA"), Isis is using comparative bacterial genome sequence analysis and
bioinformatics methods to identify and prioritize essential conserved
RNA/protein targets. The Company is approaching these targets with a
combinatorial chemical technology that applies the principles of molecular
evolution to drug discovery using small organic molecules. A large number of
chemical shapes are created by assembling a defined number of chemical units in
numerous permutations and then testing for a desired activity. Although the
permutations are random, the choices of chemical units are rational and based
upon computational methods that utilize information from small molecules and
proteins that bind RNA as well as information from high throughput screening.
The program uses novel chemistries, proprietary to Isis, to create
these compounds libraries. The libraries contain low molecular weight
compounds that are structurally stable and may not require extensive
modification to be useful drug candidates. The combinatorial libraries can be
screened in solution which increases the breadth of pharmaceutical assays in
which they can be evaluated. Isis uses fully automated instrumentation to
synthesize many of its combinatorial libraries. The equipment has distinct
advantages in speed and efficiency over other robotic instruments and thus
significantly enhances the productivity of combinatorial library production.
The combinatorial drug discovery program has already yielded ISIS
5320, a compound in clinical development, that has shown promising biological
activity against HIV. See "--Products Under Development--Infectious
Disease--Human Immunodeficiency Virus."
PRODUCTS UNDER DEVELOPMENT
Isis' drug discovery programs use antisense and combinatorial drug
discovery technologies to identify compounds to treat infectious and
inflammatory diseases and cancer. The following table summarizes the disease
indications and development status of, as well as Isis' commercial rights to,
each product under development. There can be no assurance that any of the
listed product candidates will progress beyond its current status or yield a
commercially viable product. The Company also has a significant research
program with the potential to yield additional development candidates in the
future. See "--Research Programs."
<TABLE>
<CAPTION>
DISEASE DEVELOPMENT COMMERCIAL
TARGET COMPOUND INDICATION STATUS(1) RIGHTS
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<S> <C> <C> <C> <C>
CLINICAL DEVELOPMENT
CMV ISIS 2922 ("fomivirsen") Retinitis Phase III Isis
ICAM-1 ISIS 2302 Crohn's disease Phase II Isis/Boehringer
Renal transplant Phase II Ingelheim(2)
rejection
Rheumatoid Phase II
arthritis
Ulcerative colitis Phase II
Psoriasis Phase II
PKC-a, ISIS 3521/ Cancer Phase I Novartis(3)
CGP 64128A
C-raf kinase ISIS 5132/ Cancer Phase I Novartis(3)
CGP 69846A
HIV ISIS 5320 AIDS Phase I Isis(4)
PRECLINICAL DEVELOPMENT
Ha-ras ISIS 2503 Cancer IND candidate Isis
</TABLE>
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(1) "IND candidate" indicates a compound for which IND-enabling toxicology
and pharmacokinetic studies have been initiated and IND preparation has
begun. There can be no assurance that drugs discovered by the Company will
prove efficacious or will be commercially successful.
(2) Isis and Boehringer Ingelheim are co-developing ISIS 2302. Isis and
Boehringer Ingelheim will split profits from this product equally if and
when it is commercialized. See "--Collaborative Agreements--Boehringer
Ingelheim."
(3) Isis and Novartis are co-developing ISIS 3521/CGP 64128A and ISIS 5132/CGP
69846A at Novartis' expense. Novartis will have world-wide rights to
market these compounds, subject to a royalty to Isis, and Isis will have
certain manufacturing rights. "--See Collaborative Agreements--Novartis."
(4) Preclinical development of ISIS 5320 was funded, in part, by the National
Cancer Institute ("NCI").
INFECTIOUS DISEASES
Cytomegalovirus ("CMV"). CMV produces opportunistic infections in
immuno-compromised patients, primarily those with AIDS. In the AIDS
population, retinitis caused by CMV is the primary cause of blindness,
occurring in 25% to 40% of patients during the course of their illness. There
are approximately 220,000 active AIDS cases in the U.S., and the prevalence is
growing by 5% to 15% each year. While the recent introduction of new anti-HIV
drugs, particularly protease inhibitors, and combination treatment regimens may
slow the deterioration of the immune system and prolong survival in
HIV-infected individuals, the vast majority of the approximately one million
HIV-infected individuals are, neverless, expected to ultimately progress to and
through the advanced stages of AIDS where CMV retinitis generally occurs.
These patients represent a significant pool of potential CMV retinitis cases.
Currently available therapies for CMV retinitis have limitations and frequently
result in viral resistance.
Isis has discovered an antisense compound, ISIS 2922 ("fomivirsen"),
for the treatment of CMV-induced retinitis. ISIS 2922 entered clinical trials
in December 1993. In the Phase I/II study, patients with advanced CMV
retinitis, which had proven refractory to currently available drug therapies,
were treated with intravitreal injections of ISIS 2922. Approximately
two-thirds of the patients in the two middle dose groups showed positive
clinical responses to the drug, and in most of these patients progress of the
disease was halted within the first two weeks of treatment. Many of the
disease remissions seen in the trial were of significant duration. ISIS 2922
was well tolerated at the doses tested. The Company believes that ISIS 2922
was the first antisense compound to demonstrate efficacy in humans in a
multi-patient clinical trial.
The Phase III trials, which started in December 1994, are designed to
include over 300 patients in four randomized study designs: one comparing
immediate ISIS 2922 therapy with no therapy until disease progression; the
second comparing ISIS 2922 treatment in combination with ganciclovir to
ganciclovir alone; and the third and fourth studying different dosing regimens
for ISIS 2922 in a patient population with advanced CMV retinitis which has
proven refractory to current drug therapies. All four study designs will
examine the time to disease progression, and are ongoing.
Isis has reported on data from an ongoing open-label uncontrolled
trial of ISIS 2922 in patients with advanced CMV retinitis whose disease had
progressed despite treatment with other CMV retinitis therapies. When treated
with ISIS 2922, many patients achieved significant therapeutic utility,
including extended progression free periods, some as long as 12-18 months,
despite the advanced
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stage of their CMV retinitis. While these results are not conclusive, they
confirm the therapeutic benefit of ISIS 2922 and suggest an attractive clinical
profile. There can be no assurance that ISIS 2922 will prove safe or effective
at the current doses, or at any other doses, or that ISIS 2922 will be approved
by the FDA.
Currently approved drugs for CMV retinitis are ganciclovir, foscarnet
and cidofovir. Foscarnet and cidofovir are avaliable in intravenous dosing
forms only. Ganciclovir is available in intravenous, oral and intraocular
implant dosing forms. Intravenous induction and maintenance therapy with
ganciclovir and foscarnet require daily administrations using permanent
indwelling catheters, and each drug is associated with significant systemic
toxicities. Oral ganciclovir is approved for prophylaxis and maintenance
therapy, but is less efficacious than IV ganciclovir and still carries
significant systemic side-effects. The ganciclovir intraocular implant provides
local sustained release of drug over five to eight months, but treatment is
associated with impaired vision for two to four weeks after implantation in most
patients, and a significant incidence of retinal detachment, 12-18% after the
first implant and over 30% following a second or third implant, that can itself
permanently destroy vision. Cidofovir is administered less frequently, weekly
for induction therapy and every two weeks for maintenance therapy, but is
associated with significant toxicities, particularly to the kidneys, that
require cidofovir to be administered in conjunction with other drugs and strict
safety measures over a period of approximately twelve hours to ameliorate or
prevent toxicities.
As CMV retinitis patients are living longer with their disease due to
improvements in the management of HIV infection and AIDS, there is increasing
need for more CMV retinitis treatment options, particularly ones with novel
mechanisms of action such as fomivirsen. Local therapy with ISIS 2922 could
provide therapeutic effects without systemic side effects or the need for
intravenous treatments, reserving systemic anti-CMV therapy in combination with
ISIS 2922 for the patients who acquire symptoms of systemic disease
(approximately one-third of the patients within one year after diagnosis of CMV
retinitis).
Isis is pursuing its CMV drug development program, including the
development of ISIS 2922 in North America, Europe, Australia and South America.
U.S. Patent No. 5442049, issued August 15, 1995, covers the composition of
matter for ISIS 2922 and U.S. Patent No. 5595978, issued January 21, 1997,
covers methods of treatment of CMV retinitis using ISIS 2922.
Human Immunodeficiency Virus ("HIV"). Approximately one million
people in the United States are estimated to be infected with HIV.
HIV-infected individuals ultimately develop AIDS which causes severe
suppression of the immune system, leaving the body susceptible to opportunistic
infections and cancer. Since the discovery of HIV as the causative agent of
AIDS, the main treatment strategy has been to keep the virus from proliferating
in infected individuals. The majority of the therapeutic agents developed to
date to treat HIV act either by inhibiting viral enzymes, such as reverse
transcriptase or protease, or by arresting expression of viral genes or gene
products.
Through its combinatorial drug discovery program, Isis has discovered
a compound to prevent replication of HIV. ISIS 5320 is a potent and specific
inhibitor of HIV infection as demonstrated in a panel of in vitro arrays. ISIS
5320 has also shown significant antiviral activity in vitro at low
concentrations and is effective against HIV 1 and 2, drug-resistant strains of
HIV and all clinical isolates tested. Furthermore, ISIS 5320 has demonstrated
dose-dependent anti-viral activity in an NIH-approved animal model, the SCID-hu
thy/liv mouse. ISIS 5320 may also be suitable for administration in
combination with currently available HIV therapies, which could then be
administered at lower and less toxic doses. The Company filed an IND for ISIS
5320 in December 1996 and initiated Phase I clinical studies in January 1997.
U.S. Patent No. 5523389, issued June 4, 1996, covers the composition of matter
for ISIS 5320.
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INFLAMMATORY DISEASES
Inflammation is a key component of a large number of acute and chronic
diseases. Although inflammation is part of a normal localized protective
response that the human body uses to destroy infectious agents or injured
tissues, disruptions of normal inflammatory processes often lead to
inflammatory diseases. These inflammatory disorders result in or contribute to
a diverse set of diseases that can affect many organs of the body ranging from
the skin to the brain. Common inflammatory diseases include rheumatoid
arthritis, psoriasis, asthma and inflammatory bowel disease. Inflammation also
occurs as a result of burn, shock and organ transplant rejection. The cause of
inflammation at the molecular level is becoming better understood. Isis'
inflammation drug discovery and development program focuses on cell adhesion
molecules.
Cell Adhesion Molecules. Cell adhesion molecules make up a large
family of related proteins and represent targets for treating inflammatory
diseases. During periods of hyperimmune activity, certain members of this
protein family are expressed on the outside of the endothelial cells which line
the blood vessels of the body. These adhesion molecules act as anchors for
various types of immune cells circulating in the blood. Once these cells are
anchored to the endothelial cells by adhesion molecules, they can migrate
between the endothelial cells, leave the blood vessels and travel into tissues
and organs where they propagate the inflammatory response. Left unchecked,
these processes can result in acute and chronic tissue damage and disease.
Cell adhesion molecules have been associated with many inflammatory disorders,
coagulation disorders, bacterial infections and the spread of cancer in the
body. Currently used anti-inflammatory and immunosuppressive agents decrease
the symptoms of inflammation but do little to change the course of the
underlying disease or do so at the risk of substantial toxicity. Inhibitors of
cell adhesion molecules may prevent the migration of immune cells from the
vasculature into tissue and therefore modify the disease process with a more
acceptable toxicity profile than currently available therapies.
Isis has focused on a number of targets in its cell adhesion molecule
program. The Company is specifically focused on the intercellular adhesion
molecule ("ICAM") family and in particular, ICAM-1. Isis' focus on ICAM-1
allows the Company to target both chronic and acute inflammatory conditions
since, unlike other adhesion molecules, ICAM-1 facilitates the migration of
immune cells involved in both acute and chronic inflammation. Over-expression
of ICAM-1 is specifically implicated in a wide variety of inflammatory
disorders, such as rheumatoid arthritis, asthma, psoriasis, organ transplant
rejection and inflammatory bowel disease. While it is unlikely that
over-expression of ICAM-1 is a cause of these disorders, ICAM-1 is thought to
contribute to the pathology of these diseases or conditions.
In 1995, Isis and Boehringer Ingelheim agreed to combine their
respective programs in the area of cell adhesion to form a jointly managed and
funded effort. This partnership combines Boehringer Ingelheim's significant
expertise in cell adhesion biology and its small molecule and monoclonal
antibody-based drug discovery efforts, including its state-of-the-art assay
technology, with Isis' antisense and combinatorial drug discovery programs.
The collaboration will use these multiple drug discovery technologies to
identify compounds that inhibit the disease-related functions of cell adhesion
molecules. See "--Collaborative Agreements--Boehringer Ingelheim."
ISIS 2302, the Company's lead compound in its cell adhesion program,
selectively inhibits ICAM-1 gene expression in vitro. Isis has conducted
extensive preclinical studies with an antisense inhibitor of murine ICAM-1,
that as closely as possible matches the characteristics of ISIS 2302, an
inhibitor of human ICAM-1. Compounds from Isis' ICAM-1 program have
demonstrated highly potent therapeutic activity in animal models of cardiac
transplant rejection, arthritis, tumor metastasis (malignant melanoma),
inflammatory bowel disease, as well as in other models of induced inflammation.
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Phase I testing of ISIS 2302 was completed in the first quarter of
1995. In the Phase I study, which was conducted on healthy volunteers, the
compound was well tolerated at all doses including those expected to have
therapeutic activity. Based on activity observed in a broad range of animal
models of inflammatory disease, the Company has initiated Phase II trials in
five disease indications -- rheumatoid arthritis, ulcerative colitis, Crohn's
disease, psoriasis and prevention of renal transplant rejection -- to provide
initial safety and efficacy data for these indications. The studies involve 20
to 40 patients each and, in general, are randomized and placebo-controlled.
The choice of indications for subsequent development of ISIS 2302, if any, will
be made based on results from these studies.
In the Phase II study of patients with Crohn's disease, ISIS 2302
demonstrated safety and efficacy. In this randomized, double-blinded,
placebo-controlled study, 47% of patients treated with ISIS 2302 were in
disease remission versus 0% in the placebo group at the end of the one-month
treatment phase. The mean duration of remission in responding patients was
prolonged, lasting almost five months following a single course of treatment.
The results of this study were supported by a statistically significant
(p=0.0001) lowering of the corticosteroid requirements in the ISIS 2302 treated
group, as well as by favorable trends in Endoscopic Index of Severity (EIS) and
Inflammatory Bowel Disease Questionaire (IBDQ) assessments. Based on the
results of this study, Isis and its partner, Boehringer Ingelheim, have decided
to proceed with full-scale development of ISIS 2302 in Crohn's disease.
Isis is pursuing its cell adhesion drug development program with
Boehringer Ingelheim, including the development of ISIS 2302, in North America
and Europe. U.S. Patents No. 5514788, issued May 7, 1996, and No. 5591623,
issued January 7, 1997, cover the composition of matter for ISIS 2302.
CANCER
Much of Isis' work in the area of cancer is focused on targets within
multigene families believed to be involved in both normal and abnormal cell
differentiation and cell growth. Members of multigene families, called
isotypes, are extremely similar to one another at the protein level but most
likely serve different biological functions. Until recently, tools have not
existed to determine the functional differences among the isotypes within a
multigene family since traditional drug molecules are insufficiently specific
to inhibit one isotype within a family without affecting the function of the
other related isotypes. In contrast, antisense drug discovery technology
exploits the differences among the isotypes at the mRNA level to design
isotype-specific inhibitors. Isis has focused its cancer drug discovery
program on multigene families due to growing evidence that certain isotypes
might be differentially involved in abnormal (rather than normal) cell
differentiation or proliferation and that selective inhibition of a single
isotype may result in less toxicity than general inhibition of a family of
proteins significantly involved in the daily functions of the body. Much of
Isis' work has focused on multigene families in the signal transduction
pathway. In addition, Isis focuses on targets, such as oncogenes, more
traditionally associated with cancer.
Signal Transduction Molecules. Information about the environment
surrounding a cell in the body is transferred into cells by specific cellular
and extracellular proteins through cellular membranes by a process called
"signal transduction." The cell uses a large number of different but, in many
cases, related proteins to carry out signal transduction processes. Disordered
regulation of these signal transduction proteins is thought to be involved in
numerous proliferative disorders, including cancer.
PKC. Isis has an antisense compound in Phase I clinical development
which inhibits the production of a particular isotype of PKC. PKC is a key
enzyme in signal transduction, and isotypes of PKC are associated with the
growth of certain types of cancer. Isis has shown that its PKC compounds can
specifically inhibit the production of single isotypes of PKC without
inhibiting the production of other isotypes. Isis has recently shown in
animals that an antisense compound targeting one specific
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isotype, PKC-a, can specifically eradicate PKC-a mRNA expression with no effect
on the mRNA levels of other PKC isotypes, thus confirming the antisense
mechanism of action in vivo.
Isis' most advanced compound from its PKC discovery program is ISIS
3521/CGP 64128A, a potent and highly specific antisense inhibitor of the PKC-a
isotype. In nude mouse xenografts of various human tumor types, ISIS 3521/CGP
64128A exhibits potent anti-tumor activity at doses well below those that
result in side effects. The Company filed an IND for ISIS 3521/CGP 64128A in
December 1995 and initiated Phase I clinical studies in the first quarter of
1996. Completion of the Phase I studies is expected in the second quarter of
1997. The drug has been well tolerated in the 40 patients treated to date and
there have been no unanticipated toxicities. Phase II clinical trials are
planned to start in the third quarter of 1997 in the U.S., Canada and Europe.
In February 1996, Isis and Novartis signed a definitive agreement to
broaden their collaboration further to include the development of ISIS 3521/CGP
64128A, research to discover additional therapeutic compounds targeting the PKC
family of signal transduction proteins and development of any such compounds.
See "--Collaborative Agreements--Novartis."
C-raf Kinase. In its collaboration with Novartis, Isis is developing
another antisense compound, ISIS 5132/CGP 69846A, which inhibits C-raf kinase,
another molecular target involved in cell signaling. C-raf is a member of a
multigene family and is associated with abnormal cell growth. Isis and
Novartis have shown that ISIS 5132/CGP 69846A selectively inhibits C-raf
without inhibiting the production of other members of the multigene family.
Studies of three different human tumor cell lines in cell culture have
demonstrated that ISIS 5132/CGP 69846A inhibits expression of its target in a
specific and concentration dependent manner. Studies in a nude mice xenograft
model have demonstrated that ISIS 5132/CGP 69846A reduces the growth of a
variety of solid tumor types at doses well below those that result in side
effects. In March 1996, Isis commenced Phase I clinical studies with ISIS
5132/CGP 69846A. Phase I trials are expected to be completed in the second
quarter of 1997. The drug has been well tolerated and the Company plans to
begin Phase II studies in the third quarter of 1997 in the U.S., Canada and
Europe. See "--Collaborative Agreements--Novartis." U.S. Patent No. 5563255,
issued October 8, 1996, covers the composition of matter for ISIS 5132.
Ras. Isis' drug discovery program in the cancer area focuses on the
discovery of antisense compounds to inhibit the expression of the two different
ras proteins, Ha-ras and Ki-ras. Although the exact role of ras in human
malignant disease is still being studied, these proteins appear to be involved
in the process by which tumor cells respond to growth factors and other
extracellular stimuli. The altered responses of tumor cells cause these cells
to grow and proliferate in a "deregulated" or malignant manner. Mutations of
ras genes and over-expression of ras proteins have been implicated in a
variety of human cancers, including solid tumor types such as colon, bladder,
breast, kidney, lung and liver as well as certain hematopoietic tumors. Isis
is evaluating a number of ras antisense compounds in animal efficacy models
and has shown inhibition of the growth of a variety of human tumors in a number
of animal models at doses well below those that result in side effects. In
addition, the Company is applying its second- and third-generation chemistries
to create highly potent and specific new ras antisense drugs. Isis has
compounds targeting both Ha-ras and Ki-ras in preclinical development,
including ISIS 2503, an inhibitor of the Ha-ras, for which the Company plans to
file an IND in 1997.
RESEARCH PROGRAMS
Isis combines its core technology programs in medicinal chemistry, RNA
biochemistry and molecular and cellular biology with molecular target-focused
drug discovery efforts to create future drug candidates for its product
development pipeline. The goal of Isis' target-based research programs is to
identify antisense and combinatorial drug candidates to treat diseases for
which there are substantial markets and the potential for significant
improvement over existing therapies. In addition, Isis' research programs
focus on identifying second-generation compounds to serve as backup compounds
to its products in development and development candidates. Isis' combinatorial
drug discovery program
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is currently focused on cell adhesion molecules in connection with its
collaboration with Boehringer Ingelheim and on identifying broad-spectrum
anti-infective agents with a focus on important drug-resistant infections.
See "--Collaborative Agreements--Boehringer Ingelheim."
Isis' core technology programs can support multiple target-based
antisense research programs without significant incremental expense, allowing
Isis to explore efficiently numerous disease targets and identify the most
attractive lead compounds to advance to preclinical development. Isis is
currently pursuing antisense and combinatorial drug discovery programs focused
on various antiviral and antibacterial targets, inflammatory disease targets,
and other key molecular targets that might play critical roles in cancer.
COLLABORATIVE AGREEMENTS
Isis' strategy is to balance corporate collaborations and equity-based
financings to augment the Company's financial resources, reduce risk and retain
commercial rights to its pipeline of products in development. Through
collaborative partnerships with major pharmaceutical companies, Isis broadens
its target programs, obtains funding for existing programs, accesses
complementary technologies and gains significant development and
commercialization expertise. Isis intends to continue to pursue this strategy.
NOVARTIS
In January 1995, Isis and Ciba-Geigy Limited ("Ciba") agreed to extend
their collaborative research program for an additional three years. In
September 1995, Isis and Ciba signed a letter of intent to broaden the
collaboration. After making an $8.5 million equity investment in Isis at the
commencement of the collaboration in September 1990, Ciba purchased an
additional 129,000 shares of common stock for approximately $1 million in
January 1993 and an additional 200,000 shares of common stock at $15 per share
for $3 million in June 1995. Ciba purchased 700,000 shares of common stock in
the Company's public offering completed in October 1995 at $10 per share. In
1996, Ciba agreed to merge with Sandoz forming a new company known as Novartis.
As of December 31, 1996, Novartis beneficially owned approximately 9% of the
Company's outstanding common stock.
Beginning in September 1995, the research collaboration has focused on
PKC and C-raf kinase (the "Novartis Targets"). In this collaboration, Isis is
committing substantial resources to discover and investigate antisense
compounds that inhibit the Novartis targets. Novartis is providing financial
support for the research relating to these targets at Isis and is committing
substantial resources of its own to the application of medicinal chemistry to
antisense drugs, the development of large scale manufacturing processes, and
the provision of antisense compounds for extended research evaluation. Isis
has granted Novartis the option, exercisable prior to clinical development, to
obtain an exclusive license in all countries to develop, manufacture, use and
market any compounds arising out of the collaboration directed to the Novartis
Targets (the "Novartis Compounds"). In the event that Novartis exercises its
option to obtain an exclusive license for any Novartis Compound, Isis and
Novartis will co-develop the Novartis Compound at Novartis' expense. Isis will
receive certain milestone payments as the first two Novartis Compounds for each
target progress through development. For any Novartis Compound so licensed,
Isis and Novartis will be jointly responsible for the clinical development of,
and obtaining all regulatory approvals related to, the Novartis Compound in all
countries other than Japan where Novartis will have sole responsibility for
development. With certain exceptions, in the event that Novartis fails to
exercise its option with respect to any Novartis Compound, it forfeits all
rights to such Novartis Compound. Novartis has exercised its option with
respect to ISIS 5132/CGP 69846A and ISIS 3521/CGP 64128A. In connection with
these exercises, Isis, at Novartis' expense, is conducting the preclinical and
clinical development of these compounds. See "--Products Under
Development--Cancer--Signal Transduction Molecules--PKC" and "--C-Raf Kinase."
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Isis will receive royalties on sales of each Novartis Compound,
including ISIS 5132/CGP 69846A and ISIS 3521/CGP 64128A, as to which Novartis
exercises its option. Novartis has the exclusive world-wide rights to market
Novartis Compounds. Any commercial manufacturing of ISIS 5132/CGP 69846A and
ISIS 3521/CGP 64128A is expected to be done by Isis in return for an additional
royalty on sales of such compounds. Any commercial manufacturing of additional
Novartis Compounds is to be determined based on cost, quality and supply
factors.
Either Novartis or, with certain exceptions, Isis may terminate the
collaborative research program beginning in September 1998, and under certain
circumstances Novartis may terminate the research program earlier. There can
be no assurance that ISIS 5132/CGP 69846A, ISIS 3521/CGP 64128A or any other
Novartis Compound will be successfully developed under the agreement with
Novartis, or that Isis will receive the royalties contemplated by such
agreement.
BOEHRINGER INGELHEIM
In July 1995, Isis and Boehringer Ingelheim formed a collaboration to
combine the clinical development and research programs of both companies in the
field of cell adhesion. Isis will contribute its expertise in antisense and
combinatorial drug discovery and Boehringer Ingelheim will contribute its
ongoing program in cell adhesion biology and small molecule library screening
capabilities. Both companies will provide ongoing funding for the combined
research and development program. The research program will be managed by a
joint representation Research Management Committee. Research will be conducted
at both Isis and Boehringer Ingelheim. Compounds arising out of the research
program are candidates for joint development, with development decisions made
by a joint representation Development Coordination Committee. A joint
representation Executive Committee will manage the overall collaboration. A
party choosing not to fund its share of the development expenses for a compound
will receive royalties on any future sales of such compounds.
In July 1995, Boehringer Ingelheim purchased 2,000,000 shares of
common stock for $28.5 million in cash plus certain license rights. Of the
$28.5 million, $21.3 million has been accounted for as equity and $7.2 million
has been accounted for as deferred revenue, representing Boehringer Ingelheim's
advance payment of research and development costs under the collaboration. In
December 1996, Boehringer Ingelheim made a $10 million milestone payment by
purchasing an additional 409,000 shares of common stock. Of the $10 million,
$6 million has been accounted for as equity and $4 million has been recorded as
deferred revenue. As of December 31, 1996, Boehringer Ingelheim owned
approximately 9% of the outstanding common stock of the Company. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." In addition to funding one-half
of the research and development budgets, Boehringer Ingelheim will make
additional equity investments in Isis when certain development milestones are
met and will also provide a $40 million line of credit to Isis which is
available under certain circumstances. As of December 31, 1996, outstanding
borrowings under this line of credit totaled $16.2 million.
The partnership includes: enlimomab, Boehringer Ingelheim's murine
monoclonal antibody targeting ICAM-1, which is currently in Phase III clinical
trials; ISIS 2302, an antisense inhibitor of ICAM-1; and multiple other
preclinical and research compounds targeting other adhesion molecules. Upon
commercialization, Isis and Boehringer Ingelheim will share equally in the
operating profits associated with all future products of the collaboration.
Boehringer Ingelheim will market the first two drugs arising out of the
collaboration. The parties will mutually agree on commercialization
responsibilities for subsequent products, if any. In addition, Isis will
receive a royalty with respect to worldwide sales of enlimomab, if any.
ISIS 2302, an antisense inhibitor of ICAM-1 expression discovered by
Isis, is in Phase II clinical trials for five indications. See "--Products
Under Development--Inflammatory Diseases--Cell Adhesion Molecules." This
compound is a part of Isis' collaboration with Boehringer Ingelheim and is
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being developed by an Isis-led project team. There can be no assurance that
ISIS 2302, enlimomab or any other compound arising out of Boehringer
Ingelheim's collaboration with Isis will be successfully developed or that Isis
will receive the revenue contemplated by such agreement. Either party may
terminate the funding requirements under the collaboration agreement if, at the
end of five years, there are no compounds being developed or commercialized
jointly.
EISAI
In December 1990, Isis entered into a collaborative research program
with Eisai which concluded in 1993 when a compound arising out of the
collaboration, ISIS 2922, was accepted by Eisai for development. Isis and
Eisai proceeded to co-develop ISIS 2922 in Europe and the United States. Isis
conducted the clinical development program, and Eisai paid half the costs of
this development. In August 1996, Isis reacquired full ownership of ISIS 2922
in exchange for a royalty on future sales of ISIS 2922. The Company will be
responsible for funding all future development costs for this compound. ISIS
2922 is currently in Phase III clinical trials. See "--Products Under
Development--Infectious Diseases--Cytomegalovirus." There can be no assurance
that ISIS 2922 will be successfully developed.
KAKETSUKEN
Isis entered into a collaborative research agreement for a three-year
research program with Kaketsuken in July 1992. Kaketsuken was collaborating in
this program with Mochida Pharmaceutical Co., Ltd. ("Mochida"). In July 1995,
Mochida terminated its participation in the collaboration. For the first three
years of the collaboration, Isis committed significant resources to discover
and investigate antisense compounds active against hepatitis C virus, and
Kaketsuken provided financial support for the necessary research at Isis. Isis
has granted Kaketsuken the option to obtain an exclusive license in Japan to
use or sell any compounds discovered in the research program or, under certain
circumstances, during the next four years. Isis has also granted Kaketsuken
the option to obtain an exclusive license to make or have made any licensed
compound. Kaketsuken has agreed to develop, sell and commercially exploit any
licensed compound. In the event that Kaketsuken fails to exercise its option
with respect to any compound, it forfeits all rights to such compound.
Isis has received initial research and option fees and will receive
additional option and license fees and royalties on sales of any products
licensed to Kaketsuken. Isis has the right to develop and market worldwide all
products discovered in the research program, except for licensed compounds
which it may not develop or market in Japan.
Kaketsuken has the right to terminate the collaboration. There can be
no assurance that any compound will be successfully developed under the
agreement with Kaketsuken or that Isis will receive the additional payments or
royalties contemplated by such agreement.
MANUFACTURING
Chemically modified oligonucleotides, such as those used in the
Company's research and development programs, have generally been expensive and
difficult to produce except in small quantities. As a result, the Company has
focused on the development of improved manufacturing capacity as an important
factor for its long-term success and has dedicated significant resources to
achieving this objective. To date, through the development of several
proprietary scale-up chemistries, Isis has substantially reduced its cost of
producing oligonucleotide compounds and substantially increased its capacity to
manufacture such compounds. The Company has both internal programs and
external collaborations with various industry vendors to further advance its
manufacturing capability.
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The production of chemically-modified oligonucleotides, like the
chemical synthesis used in the production of traditional pharmaceuticals, does
not involve any fermentation processes or living cells and therefore entails
lower manufacturing costs than processes that utilize fermentation. The
Company is applying its expertise in organic chemistry and chemical synthesis
to the development of proprietary manufacturing processes to increase capacity
and reduce the costs of producing oligonucleotides. Because all
oligonucleotide compounds are composed of variants of the same nucleotide
building blocks and are produced using the same types of equipment, the Company
believes that the capabilities and know-how that it develops in manufacturing
one oligonucleotide drug product will be equally applicable to the manufacture
of future products. The Company has sufficient manufacturing capacity to meet
current research and development needs. The Company believes that it has or
will be able to develop or acquire sufficient supply capacity to meet its
anticipated needs and that, with reasonably anticipated benefits from increases
in scale, will be able to manufacture antisense compounds at commercially
competitive costs.
PATENTS, TRADE SECRETS AND LICENSES
Proprietary protection for the Company's product candidates, processes
and know-how is important to Isis' business. Thus, the Company plans to
aggressively prosecute and defend its patents and proprietary technology. The
Company's policy is to file patent applications to protect technology,
inventions and improvements that are considered important to the development of
its business. The Company also relies upon trade secrets, know-how, continuing
technological innovation and licensing opportunities to develop and maintain
its competitive position.
As of January 31, 1997, Isis held 51 issued U.S. patents, including
composition-of-matter patents covering ISIS 5320, ISIS 5132 and ISIS 2302, and
had received notices of allowance for an additional 33 patents. The Company
has also filed more than 250 patent applications involving chemistry,
processes, biological insights and specific target-oriented compositions of
matter with the U.S. Patent and Trademark Office and, in some cases, with the
corresponding offices in other countries, including members of the European
Patent Convention, Canada, Japan, South Korea and Australia. Isis currently
has 35 issued foreign patents.
The Company has filed applications for patents relating to chemical
compositions for therapeutic and, in some cases, diagnostic use in the
treatment of certain diseases. The Company believes that these patents, if
granted and upheld, will be a key to the Company's success. The Company has
also filed patent applications regarding methods of preparation and use of
certain novel nucleoside monomers, oligonucleotide analogs, linkages for
oligonucleotide analogs and key intermediates in the synthesis of
oligonucleotide analogs. Composition of matter patents have been filed which
define oligonucleotide sequences and structures that are relevant to many of
the RNA targets the Company is currently pursuing. In addition, the Company
has filed patent applications resulting from novel discoveries made by its
employees relating to nucleic acid structure and biochemistry, which it
believes will be broadly applicable and important to the discovery, development
and commercialization of oligonucleotide-based drugs. The Company has also
filed patent applications regarding novel discoveries arising out of its
combinatorial drug discovery program, including applications on methods of
making libraries and identifying active compounds; on novel chemical
constructions and methods of building combinatorial libraries; and on the
combinatorial libraries. As lead compounds are identified, the Company also
files patent applications on those compounds.
The patent positions of pharmaceutical, biopharmaceutical and
biotechnology firms, including Isis, are generally uncertain and involve
complex legal and factual questions. Consequently, even though Isis is
currently prosecuting its patent applications with the U.S. and foreign patent
offices, the Company does not know whether any of its pending applications will
result in the issuance of any additional patents or whether any issued patents
will provide significant proprietary protection or will be circumvented or
invalidated. Since patent applications in the United States are maintained in
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secrecy until patents issue, and since publication of discoveries in the
scientific or patent literature tend to lag behind actual discoveries by
several months, Isis cannot be certain that it was the first creator of
inventions covered by pending patent applications or that it was the first to
file patent applications for such inventions.
There can be no assurance that the Company's patents or those of its
competitors, if issued, would be held valid by a court of competent
jurisdiction. Moreover, to determine priority of invention, the Company may
have to participate in interference proceedings declared by the U.S. Patent and
Trademark Office or opposition proceedings before an equivalent foreign agency
with respect to any of its existing patents or patent applications or any
future patents or patent applications, which could result in substantial cost
to the Company.
Competitors or potential competitors have filed applications for, or
have received patents and may obtain additional patents and proprietary rights
relating to, compounds or processes competitive with those of the Company.
Accordingly, there can be no assurance that the Company's patent applications
will result in patents being issued or that if issued the patents will afford
protection against competitors with similar technology; nor can there be any
assurance that others will not obtain patents that the Company would need to
license or circumvent. The Company is aware of three issued patents owned by
the U.S. government regarding the use of phosphorothioates, a specific type of
oligonucleotide analog, in the treatment of certain human diseases. The
Company is using phosphorothioates in a number of its programs in a manner
which may be covered by these patents. The U.S. government granted a license
to the Company in September 1995. The patents have, in part, been licensed to
other companies on a co-exclusive basis.
The Company also relies upon unpatented trade secrets, and there can
be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company
can meaningfully protect its right to unpatented trade secrets.
Isis requires its employees, consultants, members of the Scientific
Advisory Board, outside scientific collaborators and sponsored researchers and
other advisors to execute confidentiality agreements upon the commencement of
employment or consulting relationships with the Company. These agreements
provide that all confidential information developed or made known to the
individual during the course of the individual's relationship with Isis is to
be kept confidential and not disclosed to third parties except in specific
circumstances. In the case of employees, the agreements provide that all
inventions conceived by the individual shall be the exclusive property of the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for the Company's trade secrets in
the event of unauthorized use or disclosure of such information.
GOVERNMENT REGULATION
The Company's manufacture and potential sale of therapeutics are
subject to extensive regulation by United States and foreign governmental
authorities. In particular, pharmaceutical products are subject to rigorous
preclinical and clinical testing and other approval requirements by the FDA in
the United States under the Federal Food, Drug and Cosmetic Act and by
comparable agencies in most foreign countries. Various federal, state and
foreign statutes also govern or influence the manufacture, safety, labeling,
storage, record keeping and marketing of such products. Pharmaceutical
manufacturing facilities are also regulated by state, local and other
authorities. Obtaining approval from the FDA and other regulatory authorities
for a new therapeutic may take several years and involve substantial
expenditures. Moreover, ongoing compliance with these requirements can require
the expenditure of substantial resources. Difficulties or unanticipated costs
may be encountered by the Company or its licensees or marketing partners in
their respective efforts to secure necessary
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governmental approvals, which could delay or preclude the Company or its
licensees or marketing partners from marketing their products.
As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animals to identify potential safety
problems. For certain diseases, animal models exist which are believed to be
predictive of human efficacy. For such diseases, a drug candidate is tested in
such animal model. The results of the studies are submitted to the FDA as a
part of an IND application, which is filed to comply with FDA regulations prior
to beginning human clinical testing. For other diseases for which no
appropriately predictive animal model exists, no such results can be filed.
For several of the Company's drug candidates, no appropriately predictive
animal model exists. As a result, no in vivo evidence of efficacy would be
available until such a compound progresses to human clinical trials.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, which frequently begins with the
initial introduction of the drug into healthy human subjects prior to
introduction into patients, the compound will be tested for safety and dosage
tolerance. Phase II typically involves studies in a somewhat larger patient
population to identify possible adverse effects and safety risks, to begin
gathering preliminary efficacy data and to investigate potential dose sizes and
schedules. Phase III trials are undertaken to further evaluate clinical
efficacy and to further test for safety within an expanded patient population.
Each trial is conducted in accordance with certain standards under protocols
that detail the objectives of the study, the parameters to be used to monitor
safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Further, each clinical study must be
evaluated by an independent Institutional Review Board ("IRB") at the
institution at which the study will be conducted. The IRB will consider, among
other things, ethical factors, the safety of human subjects and the possible
liability of the institution.
Data from preclinical testing and clinical trials are submitted to the
FDA in a New Drug Application ("NDA") for marketing approval. Preparing an
NDA involves considerable data collection, verification, analysis and expense,
and there can be no assurance that any approval will be granted on a timely
basis, if at all. The approval process is affected by a number of factors,
including the severity of the disease, the availability of alternative
treatments and the risks and benefits demonstrated in clinical trials. The FDA
may deny an NDA if applicable regulatory criteria are not satisfied, require
additional testing or information or require post-marketing testing and
surveillance to monitor the safety of the Company's products. Quality control
and manufacturing procedures conforming to GMP are conditions for clinical
studies and NDA approval. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, money and effort in
the area of production and quality control to ensure full technical compliance.
After FDA approval for the initial indications, further clinical trials would
be necessary to gain approval for the use of a product for any additional
indications. Approvals may be withdrawn if compliance with labeling and GMP
regulatory standards is not maintained or if unexpected safety problems occur
following initial marketing.
The Company has filed INDs and commenced clinical trials with respect
to six compounds: ISIS 2922, ISIS 2105, ISIS 2302, ISIS 3521/CGP 64128A, ISIS
5132/CGP 69846A and ISIS 5320. ISIS 2922 is currently in Phase III clinical
trials, which commenced in December 1994, for the treatment of CMV-induced
retinitis in AIDS patients. In August 1995, the Company began Phase II
clinical trials of ISIS 2302 to treat renal transplant rejection and
subsequently began Phase II trials for Crohn's disease, rheumatoid arthritis,
psoriasis and ulcerative colitis. In January 1996, the Company began Phase I
clinical trials of ISIS 3521/CGP 64128A to treat solid tumors. In March 1996,
the Company began Phase I clinical trials of ISIS 5132/CGP 69846A which also
targets solid tumors. In January 1997, the Company began Phase I clinical
trials of ISIS 5320 to treat HIV.
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Under Title 35 of the United States Code as amended by the General
Agreement on Tariffs and Trade implementing the Uruguay Round Agreement Act of
1994 ("GATT"), patents that issue from patent applications filed prior to June
8, 1995, will enjoy a 17-year period of enforceability as measured from the
date of patent issue while those that issue from applications filed on or after
June 8, 1995 will enjoy a 20-year period of enforceability as measured from the
date the patent application was filed or the first claimed priority date,
whichever is earlier. Patents that issue from applications filed on or after
June 8, 1995, may be extended under the term extension provisions of GATT for a
period of up to five years to compensate for any period of enforceability lost
due to interference proceedings, government secrecy orders or appeals to the
Board of Patent Appeals or the Federal Circuit. Under the Drug Price
Competition and Patent Restoration Act of 1984, including amendments
implemented under GATT ("the Patent Term Restoration Act"), the period of
enforceability of a first or basic product patent or use patent covering a drug
may be extended for up to five years to compensate the patent holder for the
time required for FDA regulatory review of the product. This law also
establishes a period of time following FDA approval of certain drug
applications during which the FDA may not accept or approve applications for
similar or identical drugs from other sponsors. Any extension under the Patent
Term Restoration Act and any extension under GATT are cumulative. There can be
no assurance that the Company will be able to take advantage of either the
patent term extension or marketing exclusivity provisions of this law.
In addition to regulations enforced by the FDA, the Company is also
subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state and local regulations. The Company believes that it is in compliance in
all material respects with applicable laws and regulations.
COMPETITION
For many of their applications, antisense based drugs will be
competing with existing therapies for market share. In addition, a number of
companies are pursuing the development of oligonucleotide-based technology and
the development of pharmaceuticals utilizing such technology. These companies
include specialized pharmaceutical firms and large pharmaceutical companies
acting either independently or together with biopharmaceutical companies. Many
of the Company's existing or potential competitors have substantially greater
financial, technical and human resources than the Company and may be better
equipped to develop, manufacture and market products. In addition, many of
these companies have extensive experience in preclinical testing and human
clinical trials. These companies may develop and introduce products and
processes competitive with or superior to those of the Company. Furthermore,
academic institutions, government agencies and other public and private
organizations conducting research may seek patent protection and may establish
collaborative arrangements for product and clinical development.
The Company's products under development address an array of markets.
The Company's competition will be determined in part by the potential
indications for which the Company's compounds are developed and ultimately
approved by regulatory authorities. For certain of the Company's potential
products, an important factor in competition may be the timing of market
introduction of its or competitive products. Accordingly, the relative speed
with which Isis can develop products, complete the clinical trials and approval
processes and supply commercial quantities of the products to the market is
expected to be an important competitive factor. The Company expects that
competition among products approved for sale will be based, among other things,
on product efficacy, safety, reliability, availability, price and patent
position.
The development by others of new treatment methods not based on
oligonucleotide-based technology for those indications for which the Company is
developing compounds could render such compounds non-competitive or obsolete.
Furthermore, because of the fundamental differences between oligonucleotide and
other technologies, there may be applications for which the products of one
18
<PAGE> 19
technology are superior to those of another. Isis is aware of several
companies with late-stage compounds in development for indications targeted by
the Company.
The Company's competitive position also depends upon its ability to
attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient capital
resources for the often substantial period between technological conception and
commercial sales.
EMPLOYEES
As of January 31, 1997, Isis employed 287 individuals, of whom 112
hold advanced degrees. A significant number of the Company's management and
professional employees have had prior experience with pharmaceutical,
biotechnology or medical product companies. Isis believes that it has been
highly successful in attracting skilled and experienced scientific personnel;
however, competition for such personnel is intensifying. The Company's
employees are not covered by collective bargaining agreements, and management
considers relations with its employees to be good.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of February
28, 1997 are as follows:
STANLEY T. CROOKE, M.D., PH.D.... 51
Chairman of the Board and Chief Executive Officer
Stanley T. Crooke, M.D., Ph. D., was a founder of the Company and has
been its Chief Executive Officer and a director since January 1989 and Chairman
of the Board since February 1991. He served as President from January 1989
to May 1994. From 1980 until January 1989, Dr. Crooke was employed by
SmithKline Beckman Corporation, a pharmaceutical company, most recently as
President of Research and Development of SmithKline & French Laboratories. Dr.
Crooke is a director of SIBIA Neurosciences, Inc. and GeneMedicine, Inc., both
biotechnology companies, and EPIX Medical, Inc., a developer of magnetic
resonance imaging contrast agents. Dr. Crooke is also an adjunct professor of
pharmacology at the Baylor College of Medicine and the University of
California, San Diego.
DANIEL L. KISNER, M.D.... 50
President and Chief Operating Officer
Daniel L. Kisner, M.D., has served as a director of the Company since
March 1991, Chief Operating Officer since February 1993 and President since May
1994. He was Executive Vice President of the Company from March 1991 until May
1994. From December 1988 until March 1991, he was a Division Vice President of
Pharmaceutical Development for Abbott Laboratories, a pharmaceutical company.
He is also a director of Anesta Corporation, a drug delivery company.
B. LYNNE PARSHALL.... 41
Executive Vice President, Chief Financial Officer and Secretary
Ms. Parshall has served as Executive Vice President since December
1995, Chief Financial Officer of the Company since June 1994, and Secretary
since November 1991. From February 1993 to December 1995, she was a Senior Vice
President of the Company. From November 1991 to February 1993, she was a Vice
President of the Company. Prior to joining Isis, Ms. Parshall practiced law at
Cooley Godward LLP, counsel to the Company, where she was a partner from 1986
to 1991. Ms. Parshall served as Vice President of Business Development of
Biotrack, Inc., a medical device company, during 1988 and 1989.
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<PAGE> 20
RISK FACTORS
The following risk factors should be considered carefully in addition
to the other information contained in this Report.
UNCERTAINTY ASSOCIATED WITH CLINICAL TRIALS
Subject to compliance with FDA regulations, Isis plans to undertake
extensive and costly clinical testing to demonstrate optimal dose, safety and
efficacy for its compounds in development. There can be no assurance that the
Company will be able to submit an IND application to the FDA to obtain
authorization for human clinical testing of any of its compounds currently in
research or preclinical development. The Company or the FDA may suspend
clinical trials at any time if the subjects or patients participating in such
trials are being exposed to unacceptable health risks. Further, there can be
no assurance that human clinical testing will show any current or future
product candidate to be safe or efficacious or that any such product will be
approved by the FDA for any indication.
The rate of completion of the Company's clinical trials is dependent
upon, among other factors, the rate of patient enrollment. Patient enrollment
is a function of many factors, including the size of the patient population,
the nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the study. Delays in planned patient enrollment may
result in increased costs and delays, which could have a material adverse
effect on the Company.
There also can be no assurance that any authorized clinical testing
will be completed successfully within any specified time period, if at all,
with respect to any of the Company's current or future product candidates.
There can be no assurance that the Company will not encounter problems in its
clinical trials which would cause the Company or the FDA to delay or suspend
the trials.
NO ASSURANCE OF REGULATORY APPROVAL
The production and marketing of the Company's products and its ongoing
research and development activities are subject to regulation by numerous
federal, state and local governmental authorities in the United States.
Similar regulatory authorities exist in other countries where the Company
intends to test and market its products. Prior to marketing, any drug
developed by the Company must undergo an extensive regulatory approval process.
In addition, each clinical study is conducted under the auspices of an
independent IRB. The IRB will consider, among other things. ethical factors,
the safety of human subjects and patients and the possible liability of the
host institution.
The regulatory process, which includes preclinical and clinical
testing of each compound to establish its safety and efficacy, can take many
years and require the expenditure of substantial resources. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations
which could delay, limit or prevent FDA regulatory approval. In addition,
delays or rejections may be encountered based upon changes in FDA policy for
drug approval during the period of product development and FDA regulatory
review of each submitted new drug application. Similar delays may also be
encountered in foreign countries. There can be no assurance that, even after
such time and expenditures, regulatory approval will be obtained for any drugs
developed by the Company. Moreover, if regulatory approval of a drug is
granted, such approval may entail limitations on the indicated uses for which
it may be marketed. Further, even if such regulatory approval is obtained, a
marketed drug, its manufacturer and its manufacturing facilities are subject to
continual review and periodic inspections, and later discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on such product or manufacturers, including a withdrawal of the
product from the market. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, suspensions of
regulatory approvals, product recalls, operating restrictions and criminal
prosecution. Further, additional government regulation may be established
which could prevent or delay regulatory approval of the Company's products.
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<PAGE> 21
DEPENDENCE ON COLLABORATIVE PARTNERS
Isis has relied on certain established pharmaceutical companies
interested in its various technology platforms to fund a portion of its
research and development expenses. The Company has entered into research and
development agreements with these collaborative partners whereby the partners
provide capital in exchange for certain technology, product, manufacturing
and/or marketing rights related to the targets of the collaborative research.
Under certain of these agreements, the collaborative partner will have the
responsibility for conducting preclinical testing and human clinical trials and
for preparing and filing the submission for regulatory approval of the product
candidate with the FDA and certain other regulatory agencies in specified
territories, and in certain circumstances, worldwide. In addition, certain of
these agreements provide for Isis to receive royalties or other revenues based
on sales of products developed primarily by the corporate partners. Should any
collaborative partner fail to develop or commercialize successfully any product
to which it has rights, or any of the partner's products to which Isis has
rights, the Company's business may be adversely affected. While Isis believes
that its collaborative partners will have sufficient economic motivations to
continue their funding, there can be no assurance that any of these
collaboration will be continued or result in successfully commercialized
products. A failure of a corporate partner to continue funding any particluar
program could delay or halt the development or commercialization of any
products arising out of such program. In addition, there can be no assurance
that the collaborative partners will not be pursuing alternative technologies
or developing alternative compounds either on their own or in collaboration
with others, including the Company's competitors, as a means for developing
treatments for the diseases targeted by these collaborative programs. Isis
also may rely on additional collaborative arrangements to develop and
commercialize its products in the future. There can be no assurance that the
Company will be able to negotiate acceptable collaborative arrangements in the
future, or that such collaborative arrangements will be successful.
EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY
Isis is at an early stage of development. To date, most of the
Company's resources have been dedicated to applying molecular biology and
medicinal chemistry to the research and development of potential pharmaceutical
products based upon antisense technology. The Company has five compounds in
clinical trials and has other compounds in preclinical development. Conduct of
clinical trials in humans is necessary to determine whether or not a compound
will be an attractive or effective drug. Results obtained in preclinical
studies are not necessarily indicative of results that will be obtained in
later stages of preclinical development or in human clinical testing. For
example, the Company is attempting to develop products, including ISIS 2922,
for certain diseases for which no appropriately predictive animal efficacy
model currently exists. As a result, drug candidates for these diseases must
progress at least to Phase II human clinical trials before Isis will have
evidence of in vivo efficacy for such compounds. There can be no assurance
that drugs discovered by the Company will prove efficacious or will be
commercially successful. Products, if any, resulting from Isis' research and
development programs are not expected to be commercially available for a number
of years.
CONTINUING OPERATING LOSSES
Isis has incurred net losses since its inception in January 1989. At
December 31, 1996, the Company's accumulated deficit was approximately $123
million. Such losses have resulted principally from costs incurred in the
Company's research and development programs and from general and administrative
costs associated with the Company's growth and operations. These costs have
exceeded the Company's revenues, which to date have been generated primarily
from collaborative arrangements, interest income and research grants. No
revenues have been generated from product sales. The Company expects to incur
additional operating losses over the next several years and expects losses to
increase as the Company's preclinical testing and clinical trial efforts
expand. The Company's ability to achieve profitability is dependent in part on
obtaining regulatory approvals for its products,
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<PAGE> 22
entering into agreements for product development and commercialization and
developing the capacity to manufacture and sell its products successfully.
There can be no assurance that the Company will obtain required regulatory
approvals, successfully develop, commercialize, manufacture and market its
products or ever achieve profitability.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company anticipates that its existing capital resources will be
adequate to satisfy its current capital requirements for at least the next two
years. The Company's future capital requirements will depend on many factors,
including continued scientific progress in its research, drug discovery and
development programs, the magnitude of these programs and progress with
preclinical and clinical trials; the time and costs involved in obtaining
regulatory approvals; the costs involved in filing, prosecuting and enforcing
patent claims; competing technological and market developments; changes in the
existing collaborative relationships and the ability of the Company to
establish and maintain additional collaborative arrangements; and the cost of
manufacturing scale-up and effective commercialization activities and
arrangements. To the extent that existing resources are insufficient to fund
the Company's activities, additional funds may be raised, including through
public or private financings. There can be no assurance that additional
financing will be available, or, if available, that it will be available on
acceptable terms. If additional funds are raised by issuing equity securities,
further dilution to then existing stockholders may result. If adequate funds
are not available, the Company may be required to significantly curtail one or
more of its research, drug discovery or development programs or obtain funds
through arrangements with collaborative partners or others that may require the
Company to relinquish rights to certain of its technologies, product candidates
or products.
POSSIBLE OBSOLESCENCE DUE TO TECHNOLOGICAL CHANGE; COMPETITION
Certain companies, both private and publicly traded, are conducting
research and development activities on oligonucleotide technology and products.
The Company believes that the investigation of the potential of oligonucleotide
therapeutics will continue and may accelerate as the techniques which permit
oligonucleotide drug design and development are more widely understood.
Competitors of the Company engaged in all areas of drug discovery in the United
States and other countries are numerous and include, among others, major
pharmaceutical and chemical companies, specialized biopharmaceutical firms,
universities and other research institutions. There can be no assurance that
the Company's competitors will not succeed in developing oligonucleotide
therapeutics or other novel therapeutic compounds that are more effective than
any which have been or are being developed by the Company or which would render
Isis' technology and products obsolete and non-competitive prior to the Company
recovering research, development or commercialization expenses.
Many of the Company's competitors have substantially greater
financial, technical and human resources than the Company. In addition, many of
these competitors have significantly greater experience than the Company in
undertaking preclinical testing and human clinical trials of new pharmaceutical
products and obtaining FDA and other regulatory approvals of products for use
in health care. Accordingly, the Company's competitors may succeed in obtaining
FDA approval for products earlier than the Company. Furthermore, if the
Company is permitted to commence commercial sales of products, it will also be
competing with respect to manufacturing efficiency and marketing capabilities,
areas in which it has limited or no experience.
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain
patent protection for its products both in the United States and in other
countries. The Company intends to file applications as appropriate for patents
covering both its products and processes. As of January 31, 1997, Isis had been
issued 51 U.S. patents and had filed more than 250 patent applications in the
United States and foreign
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<PAGE> 23
counterparts of certain of these applications in many countries. There can be
no assurance that patents will issue from any of these applications. Since
patent applications in the United States are maintained in secrecy until
patents issue, and since publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries by several months, Isis
cannot be certain that it was the first creator of inventions covered by
pending patent applications or that it was the first to file patent
applications for such inventions. Further, there can be no assurance that the
claims allowed under any issued patents will be sufficiently broad to protect
the Company's proprietary position in its technology. In addition, there can be
no assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company.
The commercial success of the Company will also depend in part on
neither infringing patents issued to competitors nor breaching the technology
licenses upon which the Company's products might be based. While the Company is
aware of patent applications and patents belonging to competitors, it is
uncertain whether these will require the Company to alter its products or
processes, pay licensing fees or cease certain activities. The Company is aware
of certain patents and patent applications owned by the U.S. government
regarding the use of phosphorothioates, a specific type of oligonucleotide
analog, in the treatment of certain human diseases. The Company is using
phosphorothioates in a manner which may be covered by these patents or patent
applications. The U.S. government granted a license to the Company in September
1995. This patent application has in part been licensed to certain other
companies on a co-exclusive basis. Although the Company has been offered a
license to this technology and is in the process of negotiating the terms of
such license, there can be no assurance that the Company will obtain this
license. Further, there can be no assurance that the Company will be able to
obtain a license to other technology that it may require or that, if
obtainable, such technology can be licensed at reasonable cost. Failure by the
Company to obtain a license to any technology that it may require to
commercialize its products may have a material adverse impact on the Company.
Litigation, which could result in substantial cost to the Company, may also be
necessary to enforce any patents issued to the Company and/or to determine the
scope and validity of others' proprietary rights in court or administrative
proceedings. In addition, to determine the priority of inventions, the Company
may have to participate in interference proceedings declared by the U.S. Patent
and Trademark Office or in opposition, nullity or other proceedings before
foreign agencies with respect to any of its existing patents or patent
applications or any future patents or applications, which could result in
substantial cost to the Company. Further, the Company may have to participate
at substantial cost in International Trade Commission proceedings to abate
importation of goods which would compete unfairly with products of Isis.
Under Title 35 of the United States Code as amended by GATT, patents
that issue from patent applications filed prior to June 8, 1995, will enjoy a
17-year period of enforceability as measured from the date of patent issue
while those that issue from applications filed on or after June 8, 1995 will
enjoy a 20-year period of enforceability as measured from the date the patent
application was filed or the first claimed priority date, whichever is earlier.
Patents that issue from applications filed on or after June 8, 1995, may be
extended under the term extension provisions of GATT for a period up to five
years to compensate for any period of enforceability lost due to interference
proceedings, government secrecy orders or appeals to the Board of Patent
Appeals or the Federal Circuit. Under the Patent Term Restoration Act, the
period of enforceability of a first or basic product patent or sue patent
covering a drug may be extended for up to five years to compensate the patent
holder for the time required for FDA regulatory review of the product. This
law also establishes a period of time following FDA approval of certain drug
applications during which the FDA may not accept or approve applications for
similar or identical drugs from other sponsors. Any extension under the Patent
Term Restoration Act and any extension under GATT are cumulative. There can be
no assurance that the Company will be able to take advantage of such patent
term extensions or marketing exclusivity provisions of these laws. While the
Company cannot predict the effect that such changes will have on its business,
the adoption of such changes could have a material adverse effect on the
Company's ability to protect its proprietary information and sustain the
commercial viability of its products. Furthermore, the possibility of
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<PAGE> 24
shorter terms of patent protection, combined with the lengthy FDA review
process and possibility of extensive delays in such process, could effectively
further reduce the term during which a marketed product could be protected by
patents.
Isis also relies on trade secrets and proprietary know-how which it
seeks to protect, in part, by confidentiality agreements with its corporate
partners, collaborators, employees and consultants. There can be no assurance
that these agreements will not be breached, that the Company would have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently discovered by competitors.
LIMITED MANUFACTURING EXPERIENCE
The Company's ability to operate profitably will depend in part on its
ability to manufacture its products at a competitive cost. To successfully
establish commercial manufacturing capability, Isis must improve its
manufacturing processes and must reduce its product costs. The manufacture of
sufficient quantities of new drugs is typically a time-consuming and complex
process. Pharmaceutical products based on chemically modified oligonucleotides
have never been manufactured on a commercial scale. There can be no assurance
that such molecules can be manufactured by the Company or any other party at a
cost or in quantities necessary to make commercially viable products.
ABSENCE OF SALES AND MARKETING CAPABILITIES
The Company has no experience in sales, marketing or distribution. To
market any of its products directly, the Company must develop a marketing and
sales force with technical expertise and with supporting distribution
capability. There can be no assurance that the Company will be able to build
such a sales force at all, or at a reasonable cost, or that its direct sales
and marketing efforts will be successful. As with any new product, there can be
no assurance that any of the Company's products, if approved by the FDA, will
achieve market acceptance in lieu of existing treatments.
UNCERTAINTIES ASSOCIATED WITH THIRD-PARTY REIMBURSEMENT
The Company's ability to commercialize its products, if any, depends
in part on the extent to which reimbursement for the cost of such products and
related treatments will be available from government health administration
authorities, private health coverage insurers and other organizations. There
can be no assurance that adequate third-party coverage will be available for
the Company to obtain satisfactory price levels for third-party payor
reimbursements. Government and other third-party payors are increasingly
attempting to contain health care costs by limiting both coverage and the level
of reimbursement for new therapeutic products. If adequate coverage and
reimbursement levels are not provided by government and third-party payors for
uses of the Company's potential products, the market acceptance of these
products would be adversely affected.
DEPENDENCE ON KEY EMPLOYEES AND CONSULTANTS
The Company is highly dependent on the principal members of its
management and scientific staff, the loss of whose services might impede the
achievement of development objectives. Furthermore, recruiting and retaining
qualified scientific personnel to perform research and development work in the
future will also be critical to the Company's success. Although the Company
believes it will be successful in attracting and retaining skilled and
experienced scientific personnel, there can be no assurance that the Company
will be able to attract and retain such personnel on acceptable terms given the
competition among numerous pharmaceutical and health care companies,
universities and non-profit research institutions for experienced scientists.
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<PAGE> 25
Isis' anticipated growth and expansion into areas and activities
requiring additional expertise, such as clinical testing, regulatory affairs,
production and marketing, are expected to place increased demands on the
Company's resources. These demands are expected to require the addition of new
management personnel and the development of additional expertise by existing
management personnel. The failure to acquire such services or to develop such
expertise could have a material adverse effect on the prospects for the
Company's success.
PRODUCT LIABILITY AND POTENTIAL LIMITS OF INSURANCE COVERAGE
The use of drugs in clinical trials and, if approved, the sale of such
drugs may expose the Company to liability claims resulting from the use of such
products. These claims might be made directly by consumers or by sellers or
distributors of the Company's products. Isis has obtained limited product
liability insurance coverage. However, such coverage is becoming increasingly
expensive, and there can be no assurance that the Company will be able to
maintain such insurance at a reasonable cost or in sufficient amounts to
protect the Company against losses due to liability that could have a material
adverse effect on the Company.
USE OF HAZARDOUS MATERIALS
The Company's research and development activities involve the
controlled use of hazardous materials, chemicals, viruses and various
radioactive compounds. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by local, state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could have a material adverse effect
on the financial condition of the Company. Although the Company believes that
it is in compliance in all material respects with applicable environmental laws
and regulations and currently does not expect to make material capital
expenditures for environmental control facilities in the near term, there can
be no assurance that it will not be required to incur significant costs to
comply with environmental laws and regulations in the future, or that the
operations, business or assets of the Company will not be materially adversely
affected by current or future environmental laws or regulations.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation provides for classified
terms for the members of the Board of Directors and includes a provision (the
"Fair Price Provision") that requires the approval of the holders of at least
66-2/3% of the Company's voting stock as a condition to a merger or certain
other business transactions with, or proposed by, a holder of 15% or more of
the Company's voting stock, except in cases where certain Directors approve the
transaction or certain minimum price criteria and other procedural requirements
are met. The Company's Certificate of Incorporation also requires that any
action required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of stockholders and may not
be effected by any consent in writing. In addition, special meetings of the
stockholders of the Company may be called only by the Board of Directors, the
Chairman of the Board or the President of the Company or by any person or
persons holding shares representing at least 10% of the outstanding common
stock. The classified board, Fair Price Provision and other charter provisions
may discourage certain types of transactions in which the stockholders might
otherwise receive a premium for their shares over then current market prices
and may limit the ability of the stockholders to approve transactions that they
may deem to be in their best interests. In addition, the Board of Directors has
the authority to fix the rights and preferences of and issue shares of
Preferred Stock, which may have the effect of delaying or preventing a change
in control of the Company without action by the stockholders.
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VOLATILITY OF STOCK PRICE
The market price of the common stock, like that of the securities of
many other biopharmaceutical companies, has been and is likely to continue to
be highly volatile. Factors such as fluctuation in the Company's operating
results, announcements of technological innovations or new commercial
therapeutic products by the Company or its competitors, governmental
regulation, regulatory approval, development in patent or other proprietary
rights, public concern as to the safety of drugs developed by the Company and
general market conditions may have a significant effect on the market price of
the common stock.
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends and does not anticipate
paying cash dividends in the foreseeable future.
ITEM 2. PROPERTIES
Isis occupies approximately 86,000 square feet of laboratory and
office space in four buildings located in Carlsbad, California. These
buildings are owned by the Company and, as of December 31, 1996, secure
approximately $6.8 million in indebtedness of the Company. Isis has leased an
additional 46,000 square feet of laboratory and office space which will be
available for occupancy in March, 1997. The Company believes that its
facilities will be adequate to meet its needs through 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock (NASDAQ symbol "ISIP") is traded publicly through the
NASDAQ National Market System. The following table presents quarterly
information on the price range of the common stock. This information indicates
the high and low sale prices reported by the NASDAQ National Market System.
These prices do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
First Quarter $ 8.63 $ 3.63
Second Quarter $ 14.63 $ 6.00
Third Quarter $ 15.25 $ 11.25
Fourth Quarter $ 14.25 $ 9.38
1996
First Quarter $ 15.13 $ 10.88
Second Quarter $ 24.75 $ 10.38
Third Quarter $ 19.50 $ 11.75
Fourth Quarter $ 20.50 $ 15.38
</TABLE>
As of January 31, 1997, there were approximately 1,347 stockholders of
record of the common stock. The Company has never paid dividends and does not
anticipate paying any dividends in the foreseeable future. Under the terms of
certain term loans, the Company will be restricted from paying cash dividends
until the loans are fully repaid. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Research and development revenues $ 22,572 $ 12,966 $ 10,088 $ 10,654 $ 8,727
Research and development expenses 45,653 33,175 26,468 25,604 23,120
Net loss (26,521) (23,712) (18,181) (19,062) (19,510)
Net loss per share (1.04) (1.10) (0.93) (1.22) (1.51)
Shares used in computing net loss per share 25,585 21,514 19,542 15,685 12,892
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments $ 77,624 $ 77,407 $ 43,440 $ 54,034 $ 36,354
Working capital 56,300 60,040 33,679 44,076 29,518
Total assets 101,305 99,569 66,643 78,814 55,474
Long-term debt and capital lease
obligations, less current portion 19,864 4,714 9,295 8,847 6,674
Accumulated deficit (123,067) (96,546) (72,834) (54,653) (35,591)
Stockholders' equity 58,385 75,850 46,019 58,459 39,849
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Since its inception in January 1989, the Company has devoted
substantially all of its resources to its research, drug discovery and drug
development programs. The Company has been unprofitable since its inception
and expects to incur additional operating losses for the next several years.
The Company has entered into collaborative research and development agreements
with pharmaceutical companies that generate revenue to augment the level of
research and development activity and to offset portions of its research and
development costs. See Item 1, "Business--Collaborative Agreements." To date,
the Company has not received any significant revenue from the sale of products.
RESULTS OF OPERATIONS
Years Ended December 31, 1996 and December 31, 1995
The Company had contract revenues from collaborative research and
development agreements of $22.6 million for 1996 compared with $13.0 million in
1995, an increase of 74%. The revenue increase was due in part to revenue
received under agreements with Novartis to conduct the preclinical and clinical
development of drug candidates identified through the collaborative research
program between Novartis and Isis. Additional revenue from a collaborative
agreement with Boehringer Ingelheim, formed in 1995, also contributed to the
increase. The Company also had interest income totaling $4.0 million for the
year ended December 31, 1996 versus $3.0 million in 1995. This increase was
due to higher cash and short-term investment balances.
Research and development expenses increased 38% to $45.7 million for
1996 from $33.2 million in 1995. This increase was primarily attributable to
the Company's growing preclinical and clinical development activities. In
1995, the Company recorded a charge of $733,000 to research and development
expense relating to its repurchase of rights in PerIsis I Development
Corporation ("Perisis I"). The Company expects its development expenses will
continue to increase as its current preclinical and clinical activities advance
and additional preclinical and clinical studies are undertaken.
General and administrative expenses increased 15% to $6.2 million for
1996 from $5.4 million in 1995. This increase was principally due to expanded
business development and investor relations activities and to the costs
associated with hiring additional administrative personnel in support of the
Company's increasing research and development efforts. The Company expects
that its general and administrative expenses will continue to increase in the
future in support of its expanding operations.
During 1996, the Company recorded a net loss of $26.5 million, or
$1.04 per share, compared with $23.7 million, or $1.10 per share, for 1995.
The change in net loss per share reflected the increase in the weighted average
number of shares outstanding due to the sale of common stock in the second half
of 1995 offset by the increase in the net loss for 1996. The Company expects
that its operating losses will increase for several more years as its
activities grow, and may fluctuate from quarter to quarter as a result of
differences in the timing and composition of revenue earned and expenses
incurred.
At December 31, 1996, the Company had available net operating loss
carryforwards of approximately $119.1 million and $7.7 million for federal and
state income tax purposes, respectively. The Company's research credit
carryforwards were approximately $4.5 million and $1.8 million for federal and
state income tax purposes, respectively. Because of "change of ownership"
provisions of the Tax Reform Act of 1986, the Company's net operating loss and
tax credit carryforwards will be subject to an annual limitation regarding
utilization against taxable income in future periods. The Company believes
that such limitation will not have a material adverse impact on the benefits
that may arise out of its net operating loss and tax credit carryforwards, but
there can be no assurance that additional limitations arising from any future
changes in ownership will not have a material adverse impact on the Company.
28
<PAGE> 29
The Company believes that inflation and changing prices have not had a
material effect on its ongoing operations to date.
Years Ended December 31, 1995, and December 31, 1994
The Company had $13.0 million of contract revenues from collaborative
research agreements in 1995 and $10.1 million in 1994, an increase of 29%. The
increase was primarily due to revenue received under collaborative agreements
with Novartis and Boehringer Ingelheim. The Company also had interest income
of $3.0 million in 1995 and $2.3 million in 1994. The increase in interest
income in 1995 was due to higher investment balances.
Research and development expenses increased 25% to $33.2 million in
1995 from $26.5 million in 1994. This increase was attributable to expanded
preclinical and clinical research and development activities.
General and administrative expenses decreased 10% to $5.4 million in
1995 from $6.0 million in 1994, reflecting lower recruiting and relocation
expenses.
The Company recorded net losses of $23.7 million in 1995 and $18.2
million in 1994, or $1.10 and $0.93 per share, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through the sale of equity securities, raising net proceeds aggregating
approximately $180 million as of December 31, 1996 from the private and public
sale of such securities. The Company has also financed a portion of its
operations through contract research and development revenue, portions of which
were paid in advance of work being performed, offsetting the Company's cash
usage for operations.
As of December 31, 1996, the Company had cash, cash equivalents and
short-term investments totaling $77.6 million and working capital of $56.3
million. In comparison, the Company had cash, cash equivalents and short-term
investments of $77.4 million and working capital of $60.0 million as of
December 31, 1995. The increase resulted from net proceeds of approximately $9
million from the sale of common stock in 1996 and proceeds of $16.2 million
from borrowings under a line of credit made available to the Company by
Boehringer Ingelheim, offset by the amounts required to fund operating losses,
investments in capital equipment, building improvements, and other investments,
and to make principal payments on debt and capital lease obligations.
The 1995 agreement with Boehringer Ingelheim provided the Company with
a $40 million line of credit, available under certain circumstances and to be
used in support of the combined cell adhesion programs. As of December 31,
1996, the outstanding balance under this line of credit was $16.2 million. See
Note 3, Long-term debt and commitments. In December 1996, Boehringer Ingelheim
made a $10 million milestone payment by purchasing 409,000 shares of Isis
common stock. Of the $10 million payment, $6 million has been accounted for as
equity and $4 million has been recorded as deferred revenue, representing
Boehringer Ingelheim's advance payment of research and development costs under
the collaboration. The Company's valuation of the equity portion was based on
a number of factors, including restrictions on transferability of the shares
sold in the unregistered transaction and other conditions imposed on Boehringer
Ingelheim in connection with its ownership of the shares as well as the average
closing price of the common stock for the 20 trading days prior to the
milestone date.
The Company had long-term debt and capital lease obligations at
December 31, 1996 totaling $26.1 million versus $9.7 million at December 31,
1995. This increase primarily resulted from the $16.2
29
<PAGE> 30
million advance from the Boehringer Ingelheim line of credit, partially offset
by principal repayments on existing obligations. The Company expects that its
capital lease obligations will increase over time to fund capital equipment
acquisitions required for its expanding business. Lease lines will continue to
be used by the Company to the extent that the terms thereof remain commercially
attractive.
The Company expects to incur substantial additional research and
development costs, including costs related to clinical trials, manufacturing
costs, and marketing and distribution expenses, and expects losses to continue
to increase as the Company's preclinical testing and clinical trial efforts
expand. It is the Company's intention to seek additional collaborative
research and development relationships with suitable potential corporate
partners. There can be no assurance that any agreements resulting from these
discussions will successfully reduce the Company's funding requirements, and
arrangements with collaborative partners may require the Company to relinquish
rights to certain of its technologies, product candidates or products.
Additional equity or debt financings will be required, and there can be no
assurance that these funds will be available on favorable terms, if at all. If
additional funds are raised by issuing equity securities, further dilution to
then existing stockholders may result.
Isis anticipates that its existing available cash, cash equivalents
and short-term investments, combined with anticipated interest income and
contract revenues, will be adequate to satisfy its capital requirements for
approximately two years. The Company's future capital requirements will depend
on many factors, including continued scientific progress in its research, drug
discovery and development programs; the magnitude of these programs and
progress with preclinical and clinical trials; the time and costs involved in
obtaining regulatory approvals; the costs involved in filing, prosecuting and
enforcing patent claims; competing technological and market developments;
changes in the existing collaborative research and development relationships
and the ability of the Company to establish additional research and development
arrangements; and the cost of manufacturing scale-up and effective
commercialization activities and arrangements. If adequate funds are not
available, the Company may be required to significantly curtail one or more of
its research, drug discovery or development programs.
Uncertainties associated with the length and expense of preclinical
and clinical testing of any of the Company's products could greatly increase
the cost of development of such product and affect the timing of anticipated
revenues from product sales, and failure by the Company to obtain regulatory
approval for any product will preclude its commercialization. In addition, the
failure by the Company to obtain patent protection for its products may make
certain of its products commercially unattractive.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company
required by this item are filed as exhibits hereto, are listed under Item
14(a)(1) and (2), and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
30
<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's definitive Proxy Statement which will be
filed on or before April 21, 1997 with the Securities and Exchange Commission
in connection with the solicitation of proxies for the Company's 1997 Annual
Meeting of stockholders to be held on June 6, 1997 (the "Proxy Statement").
The required information concerning Executive Officers of the Company
is contained in Item 1, Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information under the caption "Executive Compensation" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the information under the captions "Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information under the caption "Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions" contained in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements
The financial statements required by this item are submitted in a
separate section beginning on page 37 of this Report.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 37
Balance Sheets at December 31, 1996 and 1995 38
Statements of Operations for the years ended December 31, 1996,
1995 and 1994 39
Statements of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994 40
Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994 41
Notes to Financial Statements 42
</TABLE>
31
<PAGE> 32
(A)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
None required.
(A)(3) INDEX TO EXHIBITS
See Index to Exhibits on pages 35 through 36.
The following management compensatory plans and arrangements are required to be
filed as exhibits to this Report pursuant to Item 14(c):
EXHIBIT
NUMBER DESCRIPTION
10.2 -- Registrant's 1989 Stock Option Plan, as amended (the "Plan").
(1)
10.3 -- Revised form of Incentive Stock Option Agreement under the Plan.
(1)
10.4 -- Revised form of Supplemental Stock Option Agreement under the
Plan. (1)
10.5 -- Form of Incentive Stock Option Agreement entered into between
Registrant and certain of its officers together with related
schedule. (2)
10.6 -- Form of Supplemental Stock Option Agreement entered into between
Registrant and certain of its officers together with related
schedule. (2)
10.7 -- Registrant's 1992 Non-employee Directors Stock Option Plan, as
amended. (1)
10.8 -- Registrant's Employee Stock Purchase Plan. (3)
10.10 -- Stock Option Agreement with Daniel L. Kisner, dated as of
November 29, 1990. (4)
- ------------
(1) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 and incorporated herein by
reference.
(2) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 (No. 33-42970) and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (No. 33-39640) or amendments thereto and incorporated herein by
reference.
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Registrant during the
fourth quarter of the fiscal year ended December 31, 1996.
(C) EXHIBITS
The exhibits required by this Item are listed under Item 14(a)(3).
(D) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules required by this Item are listed
under Item 14(a)(2).
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 14 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized on the
14th day of March, 1997.
ISIS PHARMACEUTICALS, INC.
By: /s/ STANLEY T. CROOKE, M.D., Ph.D.
-------------------------------------
Stanley T. Crooke, M.D., Ph.D.
Chairman of the Board and
Chief Executive
Officer (Principal executive
officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoint Stanley T. Crooke, Daniel L. Kisner, and
B. Lynne Parshall, or any of them, his or her attorney-in-fact, each with the
power of substitution, for him or her in any and all capacities, to sign any
amendments to this Report, and to file the same, with exhibits thereto and
other documents in connections therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue hereof.
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
Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ STANLEY T. CROOKE, M.D., PH.D.
- ------------------------------------
Stanley T. Crooke, M.D., Ph.D. Chairman of the Board,
Chief Executive Officer
and Director (Principal
executive officer) March 14, 1997
/s/ B. LYNNE PARSHALL
- ------------------------------------
B. Lynne Parshall Executive Vice President
and Chief Financial Officer
(Principal financial and
accounting officer) March 14, 1997
/s/ DANIEL L. KISNER, M.D.
- ------------------------------------
Daniel L. Kisner, M.D. President, Chief Operating
Officer and Director March 14, 1997
/s/ STEPHEN K. CARTER
- ------------------------------------
Stephen K. Carter Director March 14, 1997
/s/ CHRISTOPHER F. O. GABRIELI
- ------------------------------------
Christopher F. O. Gabrieli Director March 14, 1997
/s/ ALAN C. MENDELSON
- ------------------------------------
Alan C. Mendelson Director March 14, 1997
33
<PAGE> 34
SIGNATURES TITLE DATE
/s/ WILLIAM R. MILLER
- ------------------------------------
William R. Miller Director March 14, 1997
/s/ MARK B. SKALETSKY
- ------------------------------------
Mark B. Skaletsky Director March 14, 1997
/s/ LARRY SOLL
- ------------------------------------
Larry Soll Director March 14, 1997
/s/ JOSEPH H. WENDER
- ------------------------------------
Joseph H. Wender Director March 14, 1997
34
<PAGE> 35
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.1 -- Amended and Restated Certificate of Incorporation. (1)
3.2 -- Bylaws. (1)
4.1 -- Reference is made to Exhibits 3.1, 3.2 and 10.19.
4.2 -- Ciba-Geigy Investor Rights Agreement between the Registrant
and Novartis Pharma AG, formerly Ciba-Geigy Limited
("Novartis"), dated November 9, 1990. (1)
4.3 -- Voting Rights Agreement among the Registrant, Novartis and Dr.
Crooke, dated November 9, 1990. (1)
4.4 -- Specimen stock certificate. (1)
9.1 -- Reference is made to Exhibit 4.4.
10.1 -- Form of Indemnification Agreement entered into between the
Registrant and its Directors and officers with related
schedule. (1)
10.2 -- Registrant's 1989 Stock Option Plan, as amended. (12)
10.3 -- Revised form of Incentive Stock Option Agreement under the
Plan. (12)
10.4 -- Revised form of Supplemental Stock Option Agreement under the
Plan. (12)
10.5 -- Form of Incentive Stock Option Agreement entered into between
Registrant and certain of its officers together with related
schedule. (8)
10.6 -- Form of Supplemental Stock Option Agreement entered into
between Registrant and certain of its officers together with
related schedule. (8)
10.7 -- Registrant's 1992 Non-Employee Directors Stock Option Plan, as
amended. (12)
10.8 -- Registrant's Employee Stock Purchase Plan. (2)
10.9 -- Form of Employee Assignment of Patent Rights. (1)
10.10 -- Stock Option Agreement with Daniel L. Kisner, dated as of
November 29, 1990. (1)
10.11 -- Amended and Restated Research, Development and Licensing
Agreement by and between Isis Pharmaceuticals, Inc. and
Novartis dated February 13, 1996 (with certain confidential
information deleted). (11)
10.12 -- License Agreement between the Registrant and the National
Technical Information Service (U.S. Department of Commerce),
dated September 12, 1990 (with certain confidential
information deleted). (1)
10.13 -- License Agreement between the Registrant and the PNA Group
dated as of January 29, 1992 (with certain confidential
information deleted). (3)
10.14 -- Kyowa Saitama Loan Agreement dated as of April 8, 1992;
together with related Trust Deed with Assignment of Rents,
Security and Fixture Filing dated as of April 8, 1992; Pledge,
Assignment and Security Agreement dated as of April 8, 1992;
and Promissory Note dated as of April 20, 1992. (3)
10.15 -- Collaborative Research, Development and License Agreement
between the Registrant and The Chemo-Sero-Therapeutic Research
Institute dated as of July 11, 1992 (with certain confidential
information deleted). (4)
10.16 -- Non-Exclusive Patent License Agreement Between the Registrant
and Molecular Biosystems, Inc. dated as of September 14, 1992
(with certain confidential information deleted). (5)
10.17 -- Imperial Bank Note and related Credit Terms and Conditions
dated December 31, 1993; together with General Security
Agreements dated January 11, 1993 and August 26, 1993.(6)
10.18 -- Imperial Bank Note Secured By Deed of Trust dated May 24,
1994; together with related Deed of Trust and Assignment of
Rents dated May 24, 1994; and General Security Agreements
dated May 24, 1994. (7)
35
<PAGE> 36
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
10.19 -- Stock Purchase Agreement between the Registrant and Boehringer
Ingelheim International GmbH, dated as of July 18, 1995 (with
certain confidential information deleted). (9)
10.20 -- Collaborative Agreement between the Registrant and Boehringer
Ingelheim International GmbH, dated as of July 18, 1995 (with
certain confidential information deleted).(10)
23.1 -- Consent of Ernst & Young LLP.
24.1 -- Power of Attorney. Reference is made to page 33.
27.1 -- Financial Data Schedule.
__________________
(1) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (No. 33-39640) or amendments thereto and incorporated herein by
reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 (No. 33-42970) and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1992 and incorporated herein by
reference.
(4) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1992 and incorporated herein by
reference.
(5) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1992 and incorporated herein by
reference.
(6) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993 and incorporated herein by reference.
(7) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994 and incorporated herein by
reference.
(8) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994 and incorporated herein by reference.
(9) Filed as an exhibit to the Registrant's Report on Form 8-K dated July
18, 1995 and incorporated herein by reference.
(10) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995 and incorporated herein by
reference.
(11) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December, 1995 and incorporated herein by reference.
(12) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 and incorporated herein by
reference.
36
<PAGE> 37
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Isis Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Isis
Pharmaceuticals, Inc. as of December 31, 1996 and 1995, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Isis
Pharmaceuticals, Inc. at December 31, 1996 and 1995, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
January 23, 1997
37
<PAGE> 38
ISIS PHARMACEUTICALS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
-------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 37,082 $46,463
Short-term investments 40,542 30,944
Prepaid expenses and other current assets 1,732 1,638
-------- -------
Total current assets 79,356 79,045
Property, plant and equipment, net 15,334 14,631
Patent costs, net 6,157 4,773
Deposits and other assets 458 1,120
-------- -------
$101,305 $99,569
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,362 $ 997
Accrued payroll and related expenses 1,489 1,249
Accrued liabilities 2,763 2,838
Deferred contract revenues 10,204 8,913
Current portion of long-term debt and capital
lease obligations 6,238 5,008
------- ------
Total current liabilities 23,056 19,005
Long-term debt and capital lease obligations,
less current portion 19,864 4,714
Commitments (See Note 3)
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares
authorized, 26,201,000 shares and 25,249,000 shares
issued and outstanding at December 31, 1996 and 1995,
respectively 26 25
Additional paid-in capital 181,248 172,253
Unrealized gain on investments 178 118
Accumulated deficit (123,067) (96,546)
------- --------
Total stockholders' equity 58,385 75,850
------- --------
$101,305 $ 99,569
======= ========
</TABLE>
See accompanying notes.
38
<PAGE> 39
ISIS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Research and development revenues under
collaborative agreements $ 22,572 $ 12,966 $ 10,088
Gain on sale of investment -- -- 3,174
Interest income 4,012 3,001 2,251
-------- -------- --------
26,584 15,967 15,513
Expenses:
Research and development 45,653 33,175 26,468
General and administrative 6,246 5,402 5,981
Interest expense 1,206 1,102 1,245
-------- -------- --------
53,105 39,679 33,694
-------- -------- --------
Net loss $(26,521) $(23,712) $(18,181)
======== ======== ========
Net loss per share $ (1.04) $ (1.10) $ (0.93)
======== ======== ========
Shares used in computing net loss per share 25,585 21,514 19,542
======== ======== ========
</TABLE>
See accompanying notes.
39
<PAGE> 40
ISIS PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNREALIZED TOTAL
----------------- PAID IN GAINS AND ACCUMULATED STOCKHOLDERS'
DESCRIPTION SHARES AMOUNT CAPITAL (LOSSES) DEFICIT EQUITY
------ ------ -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 18,773 $19 $113,093 $ -- $ (54,653) $ 58,459
Options exercised and employee
stock purchase plan 93 -- 418 -- -- 418
Issuances of common stock net of
repurchases and offering costs 850 1 5,257 -- -- 5,258
Compensation relating to the
granting of options and stock bonus -- -- 65 -- -- 65
Adjustment to beginning balance for
change in accounting method, net
of income taxes -- -- -- 3,821 -- 3,821
Change in unrealized gains and
(losses), net of income taxes -- -- -- (647) -- (647)
Realized gains on sale of investment -- -- -- (3,174) -- (3,174)
Net loss -- -- -- -- (18,181) (18,181)
------ ------ -------- ------ --------- --------
Balance at December 31, 1994 19,716 20 118,833 -- (72,834) 46,019
------ ------ -------- ------ --------- --------
Options exercised and employee
stock purchase plan 318 -- 1,702 -- -- 1,702
Issuances of common stock net of
repurchases and offering costs 5,215 5 51,655 -- -- 51,660
Compensation relating to the
granting of options and stock bonus -- -- 63 -- -- 63
Change in unrealized gains,
net of income taxes -- -- -- 118 -- 118
Net loss -- -- -- -- (23,712) (23,712)
------- ------ -------- ------ --------- --------
Balance at December 31, 1995 25,249 25 172,253 118 (96,546) 75,850
------- ------ -------- ------ --------- --------
Options exercised and employee
stock purchase plan 543 1 3,164 -- -- 3,165
Issuances of common stock net of
repurchases and offering costs 409 -- 5,822 -- -- 5,822
Compensation relating to the
granting of options and stock bonus -- -- 9 -- -- 9
Change in unrealized gains,
net of income taxes -- -- -- 60 -- 60
Net loss -- -- -- -- (26,521) (26,521)
------- ------ -------- ------- --------- --------
Balance at December 31, 1996 26,201 $ 26 $181,248 $ 178 $(123,067) $ 58,385
======= ====== ======== ======= ========= ========
</TABLE>
See accompanying notes.
40
<PAGE> 41
ISIS PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Operating activities:
Net loss $ (26,521) $ (23,712) $ (18,181)
Adjustments to reconcile net loss to net cash provided
from (used in) operating activities:
Depreciation and amortization 2,633 2,814 3,854
Gain on sale of investment -- -- (3,174)
Issuance of securities in exchange for technology -- 733 --
Compensation related to grant of options and
stock bonus 9 63 65
Changes in assets and liabilities:
Prepaid expenses and other current assets (94) (70) (18)
Accounts payable 1,365 (533) 160
Accrued payroll and related expenses 240 309 106
Accrued liabilities (75) 784 (662)
Deferred contract revenues 1,291 4,532 2,689
---------- --------- ---------
Net cash used in operating activities (21,152) (15,080) (15,161)
---------- --------- ---------
Investing activities:
Short-term investments (9,598) (430) (10,214)
Unrealized gain on investment 60 118 --
Proceeds from the sale of investment -- -- 4,174
Property, plant and equipment (862) (1,073) (870)
Patent costs (1,439) (742) (1,467)
Deposits and other assets 568 629 (865)
---------- ---------- ----------
Net cash used in investing activities (11,271) (1,498) (9,242)
---------- --------- ---------
Financing activities:
Net proceeds from issuance of equity 8,987 52,629 5,676
Proceeds from long-term borrowing 16,200 -- 3,030
Principal payments on debt and capital lease obligations (2,145) (2,514) (5,111)
---------- --------- ---------
Net cash provided from financing activities 23,042 50,115 3,595
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents (9,381) 33,537 (20,808)
Cash and cash equivalents at beginning of year 46,463 12,926 33,734
---------- --------- ---------
Cash and cash equivalents at end of year $ 37,082 $ 46,463 $ 12,926
========== ========= =========
Supplemental disclosures of cash flow information:
Interest paid $ 1,150 $ 1,094 $ 1,257
Supplemental disclosures of non-cash investing and
financing activities:
Additions to debt and capital lease obligations for
acquisitions of property, plant and equipment $ 2,325 $ 517 $ 58
</TABLE>
See accompanying notes.
41
<PAGE> 42
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY--Isis Pharmaceuticals (the
"Company"), was incorporated in California on January 10, 1989. In conjunction
with its initial public offering the Company was reorganized as a Delaware
corporation, as Isis Pharmaceuticals, Inc., in April 1991. The Company was
organized principally to develop human therapeutic drugs using antisense and
combinatorial technology.
NET LOSS PER SHARE--Net loss per share is computed using the weighted
average number of shares of common stock outstanding during the period.
RESEARCH AND DEVELOPMENT REVENUES AND EXPENSES--Research and
development revenues are recorded as earned based on the performance
requirements of the collaborative research and development contracts. Payments
received in excess of amounts earned are deferred. Research and development
costs are expensed as incurred. For the years ended December 31, 1996, 1995
and 1994 costs and expenses of approximately $29,000,000, $18,100,000, and
$12,500,000 respectively, were related to collaborative research and
development arrangements.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS--Cash equivalents and
short-term investments consist of highly liquid debt instruments. The Company
considers instruments with original maturities of less than 90 days to be cash
equivalents. The Company has recorded its cash equivalents and short-term
investments at fair market value as of December 31, 1996, and has classified
all of its investments as available- for-sale. This category includes all
securities which the Company does not have the positive intent and ability to
hold to maturity. The measurement basis for available-for-sale securities is
fair market value. Unrealized gains and losses, net of the related tax effect,
are included as a separate component of stockholders' equity. See Note 2 -
Investments.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment is
stated at cost and consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Land $ 1,163 $ 1,163
Buildings and improvements 12,974 12,918
Equipment 16,311 13,257
Furniture and fixtures 441 364
---------- ----------
30,889 27,702
Less accumulated depreciation (15,555) ( 13,071)
---------- ----------
$ 15,334 $ 14,631
========== ==========
</TABLE>
Depreciation of property, plant and equipment is provided on the
straight-line method over estimated useful lives as follows:
<TABLE>
<S> <C>
Building 31.5 years
Improvements 15 years
Equipment 2.5-5 years
Furniture and fixtures 5 years
</TABLE>
42
<PAGE> 43
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
PATENT COSTS--The Company capitalizes certain costs related to patent
applications. Accumulated costs are amortized over the estimated economic
lives of the patents using the straight-line method, commencing at the time the
patents are issued. Accumulated amortization was $112,000 at December 31, 1996
and $57,000 at December 31, 1995.
USE OF ESTIMATES--The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
2. INVESTMENTS
The Company invests its excess cash in U.S. Government securities and
debt instruments of financial institutions and corporations with strong credit
ratings. The Company has established guidelines relative to diversification
and maturities that maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any losses on its short-term
investments. As of December 31, 1996, 77% of the debt securities held by the
Company had a contractual maturity of one year or less, and the remaining 23%
of the portfolio was due within 2.5 years.
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." The Company adopted the provisions of the new
standard for investments held as of or acquired after January 1, 1994. In
accordance with the Statement, prior period financial statements have not been
restated to reflect the change in accounting principle. The cumulative effect
as of January 1, 1994 of adopting the Statement increased the opening balance
of stockholders' equity by $3,821,000 to reflect the net unrealized holding
gains on securities classified as available-for-sale which were previously
carried at lower of cost or market. This unrealized holding gain arose from
the Company's investment in equity securities of Vical Incorporated (see Note
6). During the year ended December 31, 1994 the Company sold its entire
investment in the equity securities of Vical Incorporated, realizing a net gain
of $3,174,000.
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
-------------------------------------------------------
GROSS
UNREALIZED ESTIMATED
COST GAINS FAIR VALUE
-------------------------------------------------------
DECEMBER 31, 1996 (In Thousands)
<S> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
agencies $ 36,416 $ 165 $ 36,581
U.S. corporate securities 3,948 13 3,961
-------------------------------------------------------
Total debt securities $ 40,364 $ 178 $ 40,542
=======================================================
</TABLE>
43
<PAGE> 44
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
--------------------------------------------
GROSS
UNREALIZED ESTIMATED
COST GAINS FAIR VALUE
--------------------------------------------
DECEMBER 31, 1995 (In Thousands)
<S> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
agencies $ 24,839 $ 13 $ 24,852
U.S. corporate securities 5,987 105 6,092
--------------------------------------------
Total debt securities $ 30,826 $ 118 $ 30,944
============================================
</TABLE>
3. LONG-TERM DEBT AND COMMITMENTS
In 1992, the Company refinanced one of its buildings by borrowing
$2,500,000. The note bears interest of 8.78% per annum. Principal payments of
$30,000 plus related interest are due quarterly, with the remaining principal
amount of $1,930,000 due in April 1997. The balance of the note at December
31, 1996 was $1,960,000.
In 1993, the Company borrowed $4,812,000 from a bank to finance the
building improvements for a chemistry and manufacturing facility in a building
already owned by the Company. The term loan, bearing interest at the prime
rate plus 2.5%, was to mature in December 1996. The loan has been extended to
February 28, 1997 while terms of a permanent extension are negotiated. The
loan requires payments of $50,000 per month plus interest and is secured by
certain fixtures and building improvements financed by the bank and a pledged
$1,500,000 certificate of deposit. This financing arrangement requires
maintenance of certain financial ratios and contains other restrictive
covenants, including a restriction on dividends. In addition, if the Company's
cash and investment balances fall below $20,000,000, monthly principal payments
will increase to $100,000. The balance of the note at December 31, 1996 was
$3,062,000.
In 1994, the Company borrowed $2,000,000 from a bank to refinance two
of its buildings. The loan bears interest at the prime rate plus 2.5%, will
mature in December 1998, and requires payments of $6,667 per month plus
interest. The loan is secured by the real estate and a pledged $500,000
certificate of deposit. The balance of the note at December 31, 1996 was
$1,813,000.
The Company plans to refinance all of the long-term debt secured by
its real estate and building improvements as described in the preceding three
paragraphs. The Company has received proposals from financial institutions to
provide funding for this purpose and expects that the terms will be finalized
in the first quarter of 1997.
In 1996, The Company borrowed $16,200,000 under a $40,000,000 line of
credit made available under the terms of its collaborative agreement with
Boehringer Ingelheim. The funds will be used for the purpose of funding
research and development costs associated with the collaboration. Borrowings
under the line of credit bear interest at the seven year US interbanking rate
plus 2.0%, determined at the time each advance is made. Interest payments are
due twice each year with principal repayment
44
<PAGE> 45
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
due seven years after the advance date. The principal may be repaid in cash or
stock, at the Company's option. If the Company elects to repay the loan in
shares of Isis common stock, repayment will be made at a share price equal to
90% of the average market value over the 20 trading days preceding the maturity
date. The balance under this line of credit as of December 31, 1996 was
$16,200,000.
The Company leases equipment and certain maintenance and storage
facilities under non-cancelable operating and capital leases with terms through
February 2007. Annual future minimum payments under operating and capital
leases and future maturities of long-term debt as of December 31, 1996 are as
follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL LONG-TERM
LEASES LEASES DEBT
--------- --------- ---------
<S> <C> <C> <C>
1997 $ 828 $ 1,388 $ 6,781
1998 809 851 3,279
1999 680 821 1,371
2000 466 504 1,371
2001 440 21 1,371
Thereafter 2,274 -- 18,780
------ ------- -------
Total minimum payments $5,497 3,585 32,953
======
Less amount representing interest (520) (9,916)
------- -------
Present value of future minimum payments 3,065 23,037
Less current portion (1,129) (5,109)
------- -------
Total $ 1,936 $17,928
======= =======
</TABLE>
Rent expense for the years ended December 31, 1996, 1995, and 1994 was
$520,000, $303,000 and $180,000, respectively. Cost of equipment under capital
leases at December 31, 1996 and 1995 was $12,781,000, and $10,456,000,
respectively. Accumulated depreciation of equipment under capital leases at
December 31, 1996, and 1995 was $9,899,000 and $8,694,000, respectively.
4. STOCKHOLDERS' EQUITY
EQUITY OFFERINGS--In June 1995, in conjunction with the extension of
its collaborative agreement with the Company, Novartis made an additional
equity investment, purchasing 200,000 shares of common stock at $15 per share.
In July 1995, Boehringer Ingelheim purchased 2,000,000 shares of
common stock for $28.5 million in cash plus certain license rights. Of the
$28.5 million, $21.3 million has been accounted for as equity and $7.2 million
has been accounted for as deferred revenue, representing Boehringer Ingelheim's
advance payment of research and development costs under the collaboration. The
Company's valuation of the equity portion was based on a number of factors,
including the restrictions on transferability of the shares sold in the
unregistered transaction and other conditions imposed on Boehringer Ingelheim
in connection with its ownership of the shares as well as the average closing
price of the common stock for the 20 trading days prior to the execution of the
definitive agreements. This valuation resulted in recording the equity portion
of the transaction at $10.67 per share. On February 28, 1995, the date the
negotiation of the principal terms of the collaboration was completed and the
parties signed a letter of
45
<PAGE> 46
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
intent, the closing price of the common stock was $5.63 per share. The closing
price of the common stock on July 18, 1995, the date the definitive agreements
were executed, was $12.00 per share.
In October 1995, the Company completed a public offering of 2,875,000
shares of its common stock at $10.00 per share, 700,000 shares of which were
acquired by Novartis. The net proceeds of this offering amounted to $27.0
million.
In 1996, Isis achieved a milestone specified under the terms of its
collaborative agreement with Boehringer Ingelheim. As a result of this
accomplishment, in December 1996, Boehringer Ingelheim purchased 409,000 shares
of common stock for $10,000,000 in cash. Of the $10,000,000 payment,
$6,000,000 has been accounted for as equity and $4,000,000 has been recorded as
deferred revenue, representing Boehringer Ingelheim's advance payment of
research and development costs under the collaboration. The Company's
valuation of the equity portion was based on the same factors as were used in
connection with Boehringer Ingelheim's July 1995 investment. This valuation
resulted in recording the equity portion of the transaction at $14.67 per
share. The closing price of the common stock on November 18, 1996, the date
the parties agreed that the milestone criteria had been achieved, was $16.13
per share.
STOCK OPTION PLANS AND OTHER EMPLOYEE OPTION GRANTS--In June 1989, the
Company adopted a stock option plan which provides for the issuance of
incentive and non-qualified stock options for the purchase of up to 8,200,000
shares of common stock to its key employees and certain other individuals. In
addition to the options issued under the terms of the 1989 plan, options to
purchase 319,000 shares of common stock have been granted to certain employees.
Typically options expire ten years from the date of grant. Options granted
after December 31, 1995 vest over a four year period, with 25% exercisable at
the end of one year from the date of the grant and the balance vesting ratably
thereafter. Options granted before January 1, 1996 generally vest over a five
year period. At December 31, 1996, a total of 2,515,000 shares were
exercisable, with an aggregate exercise price of $16,851,000. As of that date,
8,200,000 shares had been reserved for issuance under the 1989 plan, of which
1,455,000 were available for future grant. In January 1993, the Board of
Directors amended the plan to include provisions for the issuance of stock
pursuant to restricted stock purchases and bonuses. The Company has recorded
compensation expense of $832,000 for the difference between the grant price and
the deemed fair value for financial statement purposes related to options
granted between November 1990 and the completion of the Company's initial
public offering that have vested.
In July 1992, the Company adopted the 1992 Non-Employee Directors'
Stock Option Plan which provides for the issuance of non-qualified stock
options for the purchase of up to 300,000 shares of common stock to its
non-employee directors. Options under this plan expire ten years from the date
of grant. Options granted after December 31, 1995 become exercisable in four
equal annual installments beginning one year after the date of grant. Options
granted before January 1, 1996 vest over a five year period. At December 31,
1996, 73,000 shares issued under this plan were exercisable and 114,000 Shares
were available for future grant.
46
<PAGE> 47
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
The following table summarizes stock option activity for the years
ended December 31, 1996 and 1995 (in thousands, except per share data):
<TABLE>
<CAPTION>
NUMBER OF
SHARES PRICE PER SHARE
--------- ------------------
<S> <C> <C> <C>
Outstanding at December 31, 1994 4,301 $ .14 to $19.75
Granted 1,698 3.75 to 15.00
Exercised (253) .14 to 12.75
Terminated (300) 3.75 to 16.25
--------
Outstanding at December 31, 1995 5,446 .14 to 19.75
Granted 1,337 11.38 to 20.00
Exercised (468) .14 to 17.88
Terminated (222) 4.00 to 18.63
--------
Outstanding at December 31, 1996 6,093 .14 to 20.00
========
</TABLE>
The following table summarizes information concerning currently
outstanding and exercisable options (in thousands, except contractual life and
exercise price data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE AS OF 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/96 EXERCISE PRICE
-------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$0.14 - $4.00 1,185 6.34 $3.13 597 $2.33
$4.13 - $6.50 1,185 6.74 $5.73 657 $5.76
$6.63 - $8.25 1,119 6.78 $7.09 699 $7.13
$8.50 - $12.63 1,167 7.26 $10.78 473 $10.20
$12.75 - $14.75 1,053 8.83 $13.25 75 $13.72
$14.81 - $20.00 384 8.51 $17.48 86 $16.15
------- -------
$0.14 - $20.00 6,093 7.24 $8.48 2,587 $6.73
======= =======
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN--In 1991, the Board of Directors adopted
the Employee Stock Purchase Plan and reserved 500,000 shares of common stock
for issuance thereunder. The plan permits full-time employees to purchase
common stock through payroll deductions (which cannot exceed 10% of each
employee's compensation) at the lower of 85% of fair market value at the
beginning of the offer or the end of each six-month purchase period. During
1996, 75,000 shares were issued to employees at prices ranging from $3.40 to
$11.16 per share.
STOCK-BASED EMPLOYEE COMPENSATION--The Company has adopted the
disclosure-only provision of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
expense has been recognized for the stock option plans. Had compensation
expense been determined consistent with Statement No. 123, the Company's net
loss and net loss per share would have been changed to the following pro forma
amounts (in thousands, except per share amounts):
47
<PAGE> 48
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss - as reported $ (26,521) $ (23,712)
Net loss - pro forma (32,200) (25,100)
Loss per share - as reported $ (1.04) $ (1.10)
Loss per share - pro forma (1.26) (1.17)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted- average
assumptions for both 1995 and 1996: expected life of one year for regular
employees, two years for Directors and Vice Presidents, and four years for
Executive Officers; expected dividend yield of zero percent and expected
volatility of 60 percent. Risk-free interest rate was based on the Treasury
Bill rate at the end of each quarter during 1995 and 1996. All options granted
during the quarter were valued using the same risk-free rate for the quarter.
The weighted average fair value of options granted was $4.01 for 1995 and $7.20
for 1996. The effect of applying FAS 123 pro forma data as provided herein is
not necessarily representative of future net operating results.
WARRANTS--The Company has issued warrants in connection with a
strategic alliance with PerSeptive Biosystems, Inc. See Note 6.
5. INCOME TAXES
The Company accounts for income taxes pursuant to FASB Statement No.
109, Accounting for Income Taxes.
Significant components of the Company's deferred tax assets as of
December 31, 1996 and 1995 are shown below. Valuation allowances of
$55,313,000 and $43,200,000 have been recognized for 1996 and 1995,
respectively, to offset the net deferred tax assets as realization of such
assets is uncertain.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Capitalized research expense $ 6,287,000 $ 5,200,000
Net operating loss carryforwards 42,136,000 32,040,000
Research and development credits 5,683,000 5,282,000
Other 3,131,000 2,730,000
------------- -------------
Total deferred tax assets 57,237,000 45,252,000
Deferred tax liabilities:
Patent expense (1,924,000) (2,052,000)
------------- -------------
Total deferred tax liabilities (1,924,000) (2,052,000)
Total net deferred tax assets 55,313,000 43,200,000
Valuation allowance for deferred tax assets (55,313,000) (43,200,000)
------------- -------------
Net deferred tax assets $ 0 $ 0
============= =============
</TABLE>
48
<PAGE> 49
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
At December 31, 1996, approximately $1,391,000 of the valuation
allowance for deferred tax assets relates to stock option deductions which,
when recognized, will be allocated directly to additional paid-in capital.
At December 31, 1996, the Company had federal and California tax net
operating loss carryforwards of approximately $119,076,000, and $7,654,000,
respectively. The Company also had federal and California research credit
carryforwards of approximately $4,506,000 and $1,812,000, respectively. The
difference between the tax loss carryforwards for federal and California
purposes was attributable to the capitalization of research and development
expenses for California tax purposes and a required 50% limitation in the
utilization of California loss carryforwards. The federal tax loss
carryforward and the research credit carryforwards will begin expiring in 2004
unless previously utilized. The California tax loss carryforward began
expiring in 1996.
Annual use of the Company's net operating loss and credit
carryforwards will be limited under the Internal Revenue Code as a result of
cumulative changes in ownership of more than 50% during the periods ended
December 31, 1989 and 1991. However, the Company believes that such
limitations will not have a material impact upon the utilization of the
carryforwards.
6. RESEARCH AND DEVELOPMENT COLLABORATIVE ARRANGEMENTS
In September 1990, the Company entered into a five-year collaborative
agreement with Ciba-Geigy Limited ("Ciba") to discover and investigate
oligonucleotide compounds active against four specific targets. Both Ciba and
the Company have certain licensing and royalty rights under conditions set
forth in the agreement. In February 1995, this agreement was extended for an
additional three years. Under the agreement, the Company will receive maximum
yearly amounts based on the level of scientific resources expended on the
program. The program may be terminated based on certain limited circumstances.
In May 1995, Ciba accepted ISIS 5132/CGP 69846A, a novel antisense
compound arising from the research collaboration, as a development compound.
In September 1995, Isis and Ciba signed a letter of intent to broaden the
companies antisense research and development collaboration to include the
development of ISIS 3521/CGP 64128A, an anticancer compound that is an
antisense inhibitor of protein kinase C (PKC)-a. The broadened collaboration
will also include research to discover additional therapeutic compounds. Under
the terms of the expanded collaboration, Ciba will fund the development of both
ISIS 3521/CGP 64128A and ISIS 5132/CGP 69846A. Isis will receive certain
milestone payments from Ciba as these compounds and subsequent compounds
arising out of the expanded research program progress through development.
Ciba will market these compounds worldwide and will pay Isis a royalty based on
sales. In February 1996, Isis and Ciba signed a definitive agreement
incorporating the terms of the broadened collaboration. In 1996, Ciba agreed
to merge with Sandoz forming a new company known as Novartis. Included in the
statement of operations for the years ended December 31, 1996, 1995 and 1994
are contract revenues arising from this collaboration totaling $14,003,000,
$7,308,000 and $5,018,000, respectively.
As part of the expanded collaborative relationship, Ciba also made
additional equity investments in Isis totaling $10,000,000 in 1995. In June
1995, Ciba made a private equity investment purchasing 200,000 shares for
$3,000,000. In October 1995, Ciba purchased an additional 700,000 shares for
$7,000,000 as part of the Company's public offering. As of December 31, 1996,
Ciba owned approximately 9% of the outstanding common stock of the Company.
49
<PAGE> 50
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
In December 1990, the Company entered into an agreement for a
collaborative research program with Eisai Co., Ltd. ("Eisai") to discover and
investigate oligonucleotide compounds active against CMV, which terminated in
March 1994 with the identification of and initiation of clinical development of
a compound arising out of this research program. Both Eisai and the Company
have certain licensing and royalty rights under conditions set forth in the
agreement. Included in the statement of operations is contract revenue of
$298,000 for the year ended December 31, 1994. As a result of the
collaboration efforts under this program, in December 1992, the Company entered
into a co-development agreement with Eisai to develop a specific
oligonucleotide compound for North American and European markets. Under the
agreement, the Company was responsible for funding 50% of the development
activities on a quarterly basis. In August 1996, Isis reacquired full
ownership of the development compound in exchange for a royalty on future
sales. The Company will be responsible for funding all future development
costs of this compound. Included in the statement of operations are
co-development revenues of $3,788,000, $2,720,000, and $1,698,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
In 1992, the Company entered into an exclusive license and development
agreement with Vical related to certain lipid formulations technology. In
connection with the agreement, the Company paid an initial licensing fee of
$500,000 and has made payments of $250,000 related to deliverables which were
included in the statement of operations as research and development expenses
for the year ended December 31, 1992. To maintain its license, the Company
paid an additional $250,000 in 1993 related to Vical deliverables. Under the
agreement, the Company is required to make additional payments in connection
with reaching development-related milestones for Company products incorporating
this technology, and is required to pay royalties on certain future sales of
such products, if any. In connection with this agreement, the Company
purchased equity securities of Vical, which were sold during 1994, resulting
in a net gain of $3,174,000.
In July 1992, the Company entered into a three-year collaborative
research, development and license agreement with the Chemo-Sero-Therapeutic
Research Institute ("Kaketsuken") to discover and develop antisense compounds
active against Hepatitis C. Kaketsuken was collaborating in this program with
Mochida Pharmaceutical Co., Ltd. ("Mochida"). In July 1995, Mochida terminated
its participation in the collaboration. The Company received contract revenues
related to this agreement of $450,000 and $952,000 for the years ended December
31, 1995 and 1994, respectively. Kaketsuken will have certain rights to
develop and market compounds arising out of the collaboration in Japan for the
payment of royalties. The parties have certain other rights and obligations as
set forth in the agreement.
In March 1993, the Company entered into a strategic alliance with
PerSeptive Biosystems, Inc. ("PerSeptive") for pursuing the development of
tools for synthesis, purification and analysis of oligonucleotides. Under the
agreements, the Company and PerSeptive receive payments for research and
development services and PerSeptive will have the option to commercialize novel
purification, analysis, and synthesis products developed as part of the
alliance. In conjunction with financing this alliance, a special purpose
corporation, PerIsis I, was created. The Company issued, to investors in
PerIsis I, six-year Class A warrants to purchase 449,123 shares of its common
stock at an exercise price of $8.75 per share. In addition, the Company issued
to investors in PerIsis I Class B warrants to purchase a number of shares equal
to $800,000 divided by an amount approximating the price per share at the date
that the Company's buyout option for PerIsis I stock lapses pursuant to the
agreement. In September 1995, the Company purchased all of the outstanding
shares of PerIsis I for $1,000 and exchanged 140,000
50
<PAGE> 51
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
shares of restricted common stock for all of the outstanding Class B warrants.
The Company also agreed to reduce the strike price of Class A warrants to $7.75
per share. The Company recorded a charge of $733,000 to research and
development expense in 1995 related to this repurchase of rights in PerIsis I.
As of December 31, 1996, all of the Class A warrants remain outstanding.
The Company entered into a research contract with PerIsis I, agreeing
to share its knowledge and perform further research into the synthesis,
purification and analysis of oligonucleotides. Under this agreement the
Company has received approximately $2,400,000 of which approximately $315,000
represents value attributed to the Company's warrants issued as part of the
transaction. During the year ended December 31, 1994, the Company recorded
revenues related to this research agreement totaling $1,089,000. Recorded
revenue was net of warrant amortization of $160,000 in 1994 .
In July 1995, the Company and Boehringer Ingelheim International GmbH
("Boehringer Ingelheim") signed the definitive agreements and completed the
formation of a major collaboration in cell adhesion drug design, discovery,
development and commercialization. Consistent with the terms of the agreement
outlined in the letter of intent, which was signed in February 1995, Boehringer
Ingelheim purchased 2,000,000 shares of common stock for $28,500,000 in cash
plus certain license rights. Of the $28,500,000, $21,300,000 has been
accounted for as equity and $7,200,000 has been accounted for as deferred
revenue, representing Boehringer Ingelheim's advance payment of research and
development costs under the collaboration. In December 1996, Boehringer
Ingelheim made a $10,000,000 milestone payment by purchasing 409,000 shares for
$10,000,000. Of that total, $6,000,000 has been accounted for as equity and
$4,000,000 as deferred revenue. The agreement also provides that Boehringer
Ingelheim is entitled to designate one member for election to Isis' Board of
Directors. As of December 31, 1996 Boehringer Ingelheim owns approximately 9%
of the outstanding common stock of the Company. Boehringer Ingelheim and the
Company are providing equal funding for the combined research and development
program and will share equally in the profits from all products of the
collaboration. Boehringer Ingelheim has also provided Isis with a $40,000,000
line of credit, available under certain circumstances to be used in support of
the combined programs. As of December 31, 1996, the outstanding balance under
this line of credit was $16,200,000. The statement of operations for the years
ended December 31, 1996 and 1995 reflect contract revenues of $4,024,000 and
$1,267,000, respectively, from this collaboration.
51
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-72124, 33-75068 and 33-96138 and Form S-8 No. 33- 51236,
33-42970, 33-42356, 33-54840, 33-58450, 33-43330, 33-75150, 33-90780 and
333-05825) of Isis Pharmaceuticals, Inc. of our report dated January 23, 1997,
with respect to the financial statements of Isis Pharmaceuticals, Inc. included
in this Annual Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
San Diego, California
March 24, 1997
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED BALANCE SHEET AS OF DECEMBER 31, 1996 AND AUDITED STATEMENTS
OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRET BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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