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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-19125
ISIS PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 33-0336973
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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2292 FARADAY AVE., CARLSBAD, CA 92008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
760-931-9200
(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 $297,565,000 as of February 26, 1999.*
The number of shares of common stock outstanding as of February 26, 1999
was 27,169,623.
DOCUMENTS INCORPORATED BY REFERENCE
(TO THE EXTENT INDICATED HEREIN)
Registrant's definitive Proxy Statement which will be filed on or before
April 13, 1999 with the Securities and Exchange Commission in connection with
Registrant's annual meeting of stockholders to be held on May 21, 1999 is
incorporated by reference into Part III of this Report.
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- - Excludes 2,501,021 shares of common stock held by directors and officers and
stockholders whose beneficial ownership exceeds 10 percent of the shares
outstanding at February 26, 1999. 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/A contains forward-looking statements regarding the
Company's business, the therapeutic and commercial potential of its technologies
and products in development. Such statements are subject to certain risks and
uncertainties, particularly those risks or uncertainties 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 discussed in this Form 10-K/A. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in this
Form 10-K/A including those identified in the section of Item 1 entitled "Risk
Factors." As a result, the reader is cautioned not to rely on these forward-
looking statements.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Isis Pharmaceuticals, Inc. is a leader in the discovery and development of
a new class of drugs based on antisense technology. With antisense technology,
we believe we can design drugs that are safer and more effective than
traditional drugs. We combine our expertise in molecular and cellular biology
with antisense drug discovery techniques to design drugs to fight a wide range
of diseases, including infectious and inflammatory diseases and cancer. In 1998,
our first drug was approved for commercial sale. In addition, we have five
antisense compounds in human clinical trials, with additional compounds arising
out of our broad research program in preclinical development.
Through our expertise in medicinal chemistry and RNA structure and
function, we have also developed a proprietary RNA-targeting drug discovery
program. This program is being run by our Ibis Therapeutics division and allows
us to use genomic information to identify novel structural targets and to
quickly create and screen, as potential drugs, large libraries of small molecule
compounds designed to inhibit those targets.
In August 1998, the U. S. Food and Drug Administration approved
Vitravene(TM) (fomivirsen) to treat CMV retinitis in AIDS patients.
Vitravene(TM) is the first antisense drug to be approved for marketing by the
FDA. CIBA Vision, our distribution partner for this drug, launched Vitravene(TM)
in November 1998. CIBA Vision is the eye care unit of life sciences leader
Novartis Pharma AG. In 1998, we also filed an application for European marketing
approval for Vitravene(TM). That application is presently being reviewed by the
European regulatory authorities.
This chart represents the pipeline of Isis products currently in
preclinical and clinical development:
ISIS DEVELOPMENT PIPELINE
[LOGO]
ISIS 2302 is in clinical trials to treat a variety of inflammatory diseases
and conditions. ISIS 2302 targets intercellular adhesion molecule-1, ICAM-1,
which is involved in many such diseases. We are testing ISIS 2302 against
Crohn's disease, psoriasis, ulcerative colitis, renal transplant rejection and
asthma. In a Phase II study of patients with Crohn's disease, an encouraging
number of patients receiving ISIS 2302 had their symptoms improve. A
statistically significant (p=0.0001) number were also able to reduce, and for
some patients completely eliminate, their steroid use, the most common treatment
for Crohn's disease. Because of these positive results, we began a pivotal
quality trial of ISIS 2302 in Crohn's disease in 1997. The 300 patient,
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pivotal quality trial in Crohn's disease should be completed in late 1999. We
continue to be optimistic about the potential of ISIS 2302 to treat Crohn's
disease. Toward that end, we are completing the pivotal trial and plan to move
expeditiously toward a regulatory submission, assuming that the data are
supportive.
The kidney transplant Phase II trial of ISIS 2302 is progressing, and we
anticipate completion in mid-1999. We will make the data available after
completion of the trial. We are also pursuing development of ISIS 2302 as a
topical treatment for psoriasis, as an enema formulation for treatment of
ulcerative colitis, and as an aerosol formulation for treatment of asthma. We
intend to initiate clinical trials in as many of these indications as resources
permit in the near term.
We recently completed the analysis of the Phase II, 43 patient study of
ISIS 2302 in rheumatoid arthritis. We saw evidence of therapeutic activity. ISIS
2302 was well tolerated, and the safety profile of the drug continues to be
attractive. Based on this outcome, we are pursuing development of a
second-generation, orally active antisense inhibitor of ICAM-1 in lieu of
continuing development of ISIS 2302 in rheumatoid arthritis. We continue to
believe that inhibition of ICAM-1 is a promising anti-inflammatory strategy in
rheumatoid arthritis and will continue to test second-generation inhibitors of
this target for this disease.
ISIS 3521 is in Phase II clinical trials as an anticancer agent, both alone
and in combination with traditional cancer chemotherapies. The Phase II trials
are studying the effect of this drug in treating a variety of cancer tumors.
This compound targets protein kinase C-X or PKC-X, a protein associated with
abnormal cell growth. We are developing ISIS 3521 as part of our collaboration
with Novartis. In Phase I trials, ISIS 3521 stabilized disease, reduced tumor
mass and reduced tumor markers in a number of patients with ovarian cancer,
lymphoma and lung cancer. In those trials, ISIS 3521 caused no significant side
effects. We have been conducting studies of ISIS 3521 in combination with
chemotherapy agents commonly used against a variety of tumors.
ISIS 5132 is also in Phase II clinical trials as an anticancer agent, both
alone and in combination with traditional cancer chemotherapies. The Phase II
trials are studying the effect of this drug in treating a variety of cancer
tumors. This compound targets C-raf kinase, another type of protein associated
with abnormal cell growth. We are also developing ISIS 5132 as part of our
collaboration with Novartis. In Phase I clinical trials, ISIS 5132 showed
evidence of antitumor activity in patients with ovarian, renal, pancreatic, and
colon cancers. In those trials, ISIS 5132 caused no significant side effects. We
have also been conducting studies of ISIS 5132 in combination with chemotherapy
agents commonly used against a variety of tumors.
ISIS 2503 has completed Phase I clinical trials as an anticancer agent.
This compound inhibits expression of Ha-ras, another protein associated with
cancer. Phase II trials will begin in early 1999. The Phase II trial will be
conducted in patients with a variety of solid tumors. We will initiate clinical
trials of ISIS 2503 in combination with conventional chemotherapy in the first
half of 1999.
ISIS 13312 is in Phase I clinical trials to treat CMV retinitis in AIDS
patients. ISIS 13312 is being evaluated in a small, open label, dose ranging
study in patients with advanced CMV retinitis. We have designed a prudent
development plan for this drug as a follow-on product to Vitravene(TM). Its
future will depend on the progress of treatments for AIDS and the market need.
This initial study should be completed in 1999.
We also have several antisense compounds in preclinical development, some
of which incorporate novel chemical classes that may provide improved potency,
reduced side effects, less frequent dosing and the possibility of oral delivery.
These include a compound inhibiting proteins critical for Hepatitis C gene
expression, inhibitors of inflammatory targets TNF-X and CD49d, and improved
antisense inhibitors of ICAM-1. Isis is also studying improved versions of C-raf
kinase and PKC-X in preclinical models.
We have many research programs that use both antisense and RNA-targeting
drug discovery technologies to identify compounds that inhibit molecular targets
associated with other diseases. Our antisense research programs focus on targets
associated with infectious, inflammatory, cardiovascular and metabolic diseases
and cancer. They combine our expertise in molecular biology and drug discovery
with antisense tools to enable rapid identification of potent inhibitors of
disease causing proteins. We are then able to apply our medicinal chemistry
expertise to specifically tailor a compound to the particular disease indication
targeted.
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Our medicinal chemistry programs have developed novel chemistries that allow us
to design new antisense compounds that are potentially safer and more active
than current antisense drugs and which have the potential to allow more
convenient forms of dosing including oral delivery. Our RNA-targeting program is
focused on identifying the structural elements of RNA targets which are
important in initiating or maintaining diseases, and designing compounds that
interfere with the function of these RNA targets, including those involved in
viral and bacterial infections. This program is also focused on designing small
molecules to block the production or function of cell adhesion molecules.
We have successfully leveraged our technology through supportive corporate
collaborations with Novartis, Boehringer Ingelheim, CIBA Vision, Merck & Co.,
Zeneca Pharmaceuticals and Abbott Laboratories. These collaborations increase
our financial resources, improve our technological strength and establish
valuable development and commercial relationships. As a result, we have been
able, and expect to continue, to pursue drug discovery and development
activities aggressively. We have retained substantial commercial rights to all
of our drug candidates, including those funded by corporate collaborators.
Our antisense target validation program utilizes antisense technology to
streamline the identification, functionalization, and validation of the role
novel gene targets play in human disease. This year, we established our first
antisense target validation collaboration with Abbott Laboratories. In this
collaboration, we are using our proprietary rapid throughput screening
technology to design, synthesize, screen and characterize inhibitors of Abbott's
novel gene targets. Abbott will use these antisense inhibitors to identify the
role of the gene target and its function in disease. This information will
enable Abbott to prioritize these novel targets for its drug discovery programs.
We have focused significant efforts on developing cost-effective,
large-scale, Good Manufacturing Practices manufacturing capability for antisense
compounds. We currently manufacture antisense compounds to meet all of our
research and clinical needs, as well as the needs of our partners. We have
achieved significant manufacturing cost reductions through chemistry and process
improvements. We believe that, with reasonably anticipated benefits resulting
from increases in scale, we will be able to manufacture antisense compounds at
commercially attractive prices. In conjunction with obtaining approval of
Vitravene(TM), we successfully passed the manufacturing pre-approval inspection
by the FDA. Under the terms of our agreement with CIBA Vision, Isis will
manufacture all of the commercial supplies of Vitravene(TM).
ISIS DRUG DISCOVERY AND DEVELOPMENT
The goal of drug discovery is to create chemical compounds that can help
fight or prevent disease. We founded our antisense and RNA-targeting drug
discovery programs on our expertise in medicinal chemistry, RNA biochemistry and
molecular and cellular biology. We have assembled a team of scientists skilled
in these core disciplines to apply the technology to both of our drug discovery
platforms. Once a drug is designed, our significant expertise in medicinal
chemistry enables us to specifically tailor the chemical structure of the lead
compound for its intended use.
Antisense Drug Discovery
Almost all human diseases are a result of inappropriate protein production
or performance. Traditional drugs are designed to interact with the proteins in
the body that are supporting or causing a disease. Antisense technology is
different than traditional drug development because it targets disease-causing
proteins before they are produced. Antisense drugs can be designed to treat a
wide range of diseases, including infectious, inflammatory and cardiovascular
diseases and cancer.
Antisense technology represents a new model for drug discovery because it
focuses on compounds that interact with messenger RNA or mRNA, which has not
been a site for traditional drug interaction. Using the information contained in
mRNA, we design chemical structures, easily recognized by the body, which
resemble mRNA and DNA. These potent "antisense" oligonucleotides inhibit the
production of disease-causing proteins. This method of drug design is highly
productive, and in ten years we have created a substantial pipeline of drug
candidates, including six compounds currently in clinical trials.
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Design of antisense compounds is less complex, more rapid and more
efficient than traditional drug design directed at protein targets. Traditional
drug design usually begins by characterizing the three-dimensional structure of
the protein target in order to design a prototype drug to interact with it.
Proteins are complex molecules with structures that are difficult to predict.
Antisense compounds, on the other hand, are designed to bind to mRNA structures,
which are more easily understood and predicted. Prototype antisense drugs can be
designed as soon as the sequence for the mRNA receptor is identified.
Our early research efforts focused on answering basic questions regarding
antisense-based therapeutics, including their stability, their ability to be
taken up by the target cells, their efficacy and the cost of manufacturing them.
In the ten years since our founding, we have made significant progress in
understanding and using antisense technology to create drugs, and have
established a leadership position in this field.
The Mechanism of Antisense Drugs
Genes carry the information that cells need to produce proteins. Specific
genes contain information to produce specific proteins at the genetic level. The
human genome and its collection of more than 100,000 genes contains the
information required for the human body to produce all proteins. Genes are made
up of DNA, a molecule that contains the information about when and how much of
which protein to produce, depending on what function is to be performed. The DNA
molecule is a "double helix" -- a duplex of entwined strands. In each strand,
the building blocks of DNA, the nucleotides, are 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 in the gene necessary for the
production of a protein is copied from one strand of DNA into precursor mRNA
through a process called transcription. After processing into mature mRNA, the
mRNA moves 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 protein.
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 preventing the production of the disease-causing
protein and acting in the early stage of the disease-causing process, antisense
drugs have the potential to provide greater therapeutic benefit than traditional
drugs, which do not act until after the disease causing protein has been
produced.
Antisense drugs can be designed to be much more selective than traditional
drugs. Because antisense drugs interact by binding to mRNA and not, as
traditional drugs do, by binding to proteins, antisense drugs are able to
selectively inhibit one protein among a closely related group of proteins
without having an impact on the other members of the group. As a result, we are
able to design antisense drugs that selectively inhibit the disease-causing
member of the group without interfering with those members of the group
necessary for normal bodily functions. As a result of this unique selectivity,
antisense drugs have the potential to be far less toxic than traditional drugs
because they can be designed to minimize the impact on unintended targets.
RNA-targeting Drug Discovery
Ibis Therapeutics is our program to discover low molecular weight, orally
bioavailable drugs that work by binding to RNA. Ibis leverages our success in
pioneering RNA-targeted drug discovery and development and expands our ability
to convert genomics data into drug discovery information.
In Ibis, we have developed proprietary technologies in four key areas:
- Mining genomes for structured RNA in therapeutic targets;
- Predicting the three-dimensional structure of RNA from genome sequence
data and designing RNA-targeted small molecules;
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- Synthesizing libraries of compounds designed to find RNA; and
- Screening for RNA-binding molecules using novel massively parallel
screening technology and producing lead compounds for further
optimization and development.
With Ibis, we are developing and integrating genome mining software to
identify these RNA structural motifs in therapeutic targets of interest. We can
predict the three-dimensional shape of these motifs from biochemical probes of
RNA structure and molecular modeling methods. We have made a fundamental
breakthrough in the development of a parallel high-throughput screening strategy
to identify small molecules that bind RNA targets using high resolution mass
spectrometry. In a MASS (multitarget affinity/specificity screening) assay, each
compound and each target RNA is labeled by its exact molecular mass. Since every
small molecule is labeled uniquely, a large mixture (up to 500 compounds) can be
screened in the presence of up to 10 RNA targets simultaneously. The identity of
the small molecule, the RNA target that it binds, its binding affinity and the
location of the binding site on the RNA can be determined in one rapid set of
experiments. Using this technology, we expect to be able to screen 10,000
compounds per day against 10 RNA targets.
Our initial area of focus in Ibis is discovering novel antibacterial
compounds. The technology has potential application in central nervous system
disease, inflammation, as well as degenerative diseases of aging. To date, we
have funded Ibis through government sponsored grants from the Defense Advanced
Research Projects Agency and the National Institute of Standards and Technology.
Our long-term goal for Ibis is that it be self-funding through corporate partner
support. We will move Ibis toward this goal by providing drug candidates for
development and providing optimized leads to pharmaceutical partners for
development and commercialization.
ANTISENSE TARGET VALIDATION
With the establishment of our first target validation partnership with
Abbott Laboratories, and with the potential for additional partnerships, we are
establishing antisense as an essential drug discovery tool for the genomics age.
Our Antisense Target Validation program produces highly specific antisense
inhibitors of novel gene products. These inhibitors can be used in cellular
assays and in animal models of disease to rapidly determine the pharmacological
impact of inhibiting the expression of a single gene target and to determine the
role of the targeted gene in human disease. Once we have shown that a target is
important in human disease, traditional drug discovery can be used to develop
drugs to inhibit the target, or the specific antisense drug used to validate the
target can be rapidly developed as a human therapeutic.
With antisense, we can rapidly identify active sites on a gene when only a
small fragment of the gene sequence is known. The rapid throughput design,
synthesis and optimization of antisense oligonucleotides dramatically reduces
the time required to validate novel targets. Once we know the mRNA sequence, an
antisense inhibitor can be synthesized in just a few days and be ready for
screening in vitro or in vivo. It can take a few more days to identify a lead
compound and, if needed, about a week to optimize the lead. This accelerated
process contrasts dramatically with the months required for small molecule lead
generation.
To take advantage of the use of antisense in functional genomics, we have
established a proprietary, automated rapid throughput screening process that
streamlines the creation of optimized, target-specific antisense inhibitors. We
are using this system to build a large proprietary database of inhibitors to
more than 100 gene targets per year. In addition to amassing a valuable bank of
potential product leads, we are also expanding our antisense proprietary
position. As rapidly as these gene targets can be produced, we can also file
patent applications.
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PRODUCTS APPROVED AND UNDER DEVELOPMENT
Our drug discovery programs use antisense and combinatorial drug discovery
technologies to identify compounds to treat infectious and inflammatory diseases
and cancer. The following table outlines each product under development, its
target, disease indication and development status, as well as Isis' commercial
rights.
ISIS PRODUCTS IN DEVELOPMENT
CLINICAL DEVELOPMENT
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COMPOUND TARGET DISEASE INDICATION DEVELOPMENT STATUS(1) COMMERCIAL RIGHTS
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Vitravene CMV Retinitis Approved for Isis/CIBA Vision(2)
marketing in the U.S.
European market
application under
review.
ISIS 2302 ICAM-1 Crohn's disease Pivotal trial Isis/Boehringer
Kidney transplant Ingelheim(3)
rejection Phase II
Psoriasis (topical) IND candidate
Ulcerative colitis IND candidate
(enema)
ISIS 3521 PKC-(LOGO) Cancer Phase II Novartis(4)
ISIS 5132 C-raf kinase Cancer Phase II Novartis(4)
ISIS 2503 Ha-ras Cancer Phase II Isis
ISIS 13312 CMV Retinitis Phase I/II Isis/CIBA Vision(2)
ISIS 14803 HCV Hepatitis C IND Candidate Isis
TNF-(LOGO) Inflammation Preclinical Isis
CD49d Inflammation Preclinical Isis
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(1) An "IND candidate" is a compound for which IND-enabling toxicology and
pharmacokinetic studies have been initiated and IND preparation has begun.
"Preclinical" means that a lead compound has been identified which Isis has
determined is a candidate for commercial development. Preclinical
development activities include pharmacology, toxicology and pharmacokinetic
testing in preclinical models (in vitro and animal), formulation work and
manufacturing scale-up in preparation for submission of the necessary data
to comply with applicable regulations prior to commencement of human
testing. In some cases, we are developing compounds, such as Vitravene(TM),
to treat certain diseases for which no adequately predictive animal
efficacy model exists. As a result, we may only conduct in vitro efficacy
studies for such compounds, prior to testing the efficacy of the compounds
in humans, and drug candidates for these diseases must progress to Phase II
human clinical trials before we will have evidence of in vivo efficacy for
such compounds. Preclinical development includes studies which may provide
preliminary evidence of a compound's safety in animals but which may not,
without additional testing, be sufficient to commence human clinical trials.
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.
(2) CIBA Vision has the exclusive right to distribute fomivirsen. CIBA Vision
also has an option to acquire the exclusive license to market and distribute
ISIS 13312.
(3) Boehringer Ingelheim and we are co-developing ISIS 2302 and may develop
other cell adhesion compounds. The companies will split the profits equally
if ISIS 2302 is commercialized.
(4) We are developing ISIS 3521 and ISIS 5132 under the direction of Novartis
and at Novartis' expense, and may co-develop second generation compounds as
well.
We also have a significant research program with the potential to yield
additional development candidates in the future. As described in the section of
this report entitled "Risk Factors -- Uncertainties Associated with
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Clinical Trials," the product candidates listed in the preceding table may not
progress beyond their current status or yield a commercially viable product.
Infectious Diseases
CYTOMEGALOVIRUS(CMV) RETINITIS. Individuals with suppressed immune systems,
such as those with AIDS resulting from the HIV virus, are susceptible to
opportunistic infections caused by CMV. In the AIDS population, retinitis caused
by CMV is the primary cause of blindness. There are more than 270,000 active
AIDS cases in the United States. The introduction of new anti-HIV drugs,
particularly protease inhibitors and combination treatment regimens, has
prolonged survival in HIV-infected individuals. Over the last three years, this
has resulted in a decline in mortality from AIDS, accompanied by a decline in
the incidence of many opportunistic infections including CMV. Nevertheless,
because of side effects and poor compliance with prescribed treatment regimens,
many of the approximately 1 million HIV infected individuals will probably
ultimately progress to and through the advanced stages of AIDS. A significant
percentage of these AIDS patients may develop CMV retinitis. The drugs that are
available now for CMV retinitis, other than fomivirsen, have limitations,
including the creation of viral resistance. Currently approved drugs for CMV
retinitis are ganciclovir, foscarnet, cidofovir and fomivirsen. Foscarnet and
cidofovir are available in intravenous (IV) dosing forms only. Ganciclovir is
available in IV and oral doses, as well as in an intraocular implant form. In
order to begin and maintain IV treatment with ganciclovir and foscarnet,
patients require daily administrations of the drug through lines that are placed
permanently in the veins to allow easy access to the blood stream. Ganciclovir,
foscarnet and cidovovir are associated with significant toxic effects to the
body. Oral ganciclovir is approved for preventive treatment and maintenance
therapy, but is less effective than IV ganciclovir and still carries significant
side effects. The ganciclovir intraocular implant is a small disk that is
surgically implanted in the patient's eye and provides local sustained release
of the drug for up to eight months. However, this treatment is associated with
impaired vision for two to four weeks after implantation in most patients, and
the implant itself has also been associated with an increased incidence of
retinal detachment that can result in permanent blindness. There is a 12-18%
chance of retinal detachment after the first implant and a near 30% chance
following a second or third implant. Cidofovir is administered intravenously
less frequently than ganciclovir or foscarnet: weekly for the initial therapy
and every two weeks for maintenance therapy. Cidofovir is also associated with
significant toxicities, particularly to the kidney. For that reason, the patient
must take other drugs and follow strict safety measures over a period of
approximately 12 hours to manage toxicities.
VITRAVENE(TM) (FOMIVIRSEN). In August 1998, the FDA approved Vitravene(TM)
to treat CMV retinitis in AIDS patients. Vitravene(TM) is an antisense compound
discovered by Isis. CIBA Vision, our distribution partner for this drug,
launched Vitravene(TM) in November 1998. In 1998 we also filed an application
for European marketing approval. That application is currently being reviewed by
the European regulatory authorities.
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 Vitravene(TM). Local therapy with Vitravene(TM)
could provide therapeutic benefit without significant side effects or the need
for intravenous treatments. Treatment with oral ganciclovir or other systemic
CMV therapies in combination with Vitravene(TM) could be reserved for patients
who show evidence of the disease in other organs. Approximately one-third of the
patients diagnosed with CMV retinitis could develop systemic CMV disease, but,
in general, these disease manifestations are short-lived and require short
courses of therapy.
In July 1997, the Company entered into an agreement with CIBA Vision
Corporation (a Novartis subsidiary) granting CIBA Vision exclusive worldwide
distribution rights for Vitravene(TM). See "Collaborative Agreements -- CIBA
Vision."
ISIS 13312. ISIS 13312, a second generation compound, is based on novel,
improved antisense chemistry and is being tested in a Phase I clinical trial as
a local treatment for CMV retinitis in AIDS patients. Based on the results of
preclinical studies, ISIS 13312 appears to be less toxic and more stable than
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Vitravene. ISIS 13312 is being evaluated in a small, open label, dose ranging
study in patients with advanced CMV retinitis. We have designed a prudent
development plan for this drug as a follow-on product to Vitravene. Its future
will depend upon the progress of treatments for AIDS and the market need. This
initial study should be completed in 1999. CIBA Vision has an option to market
and distribute ISIS 13312 exclusively worldwide. See "Collaborative
Agreements -- CIBA Vision."
HEPATITIS C (HCV). HCV continues to represent a major public health
challenge. This potentially deadly disease affects the liver and can eventually
cause liver cancer and death. It is estimated that almost four million Americans
are infected with HCV and 8,000-10,000 people are expected to die from this
disease each year. Interferon -- a therapy is widely used in an attempt to
eradicate this virus from chronically infected individuals, but long-term
remissions are achieved in only about 20% of patients even after six months of
therapy. Better, safer and more effective treatments are urgently needed, as
current therapies have limited efficacy and potentially serious toxicities.
ISIS 14803 our antisense inhibitor of HCV, ISIS 14803, may represent a
significant therapeutic advance in treating this serious viral epidemic. Upon
binding to the complementary target sequence, ISIS 14803 inhibits expression of
HCV proteins required for viral replication. The ability of ISIS 14803 to
inhibit HCV gene expression in cell culture and in a novel in vivo mouse model
of HCV gene expression demonstrates the potential of this compound as a drug
development candidate. Preclinical toxicology and pharmacokinetics studies of
ISIS 14803 will begin in early 1999.
Inflammatory Diseases
Cell adhesion molecules make up a large family of related proteins and
represent targets for treating 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 repair injured tissue, disruptions of normal
inflammatory responses often lead to inflammatory diseases. These inflammatory
responses 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 or organ
transplantation.
Some cell adhesion molecules are expressed on the surface of endothelial
cells which line the blood vessels of the body during periods of heightened
inflammatory or immune system response. These adhesion molecules act as anchors
for various types of immune cells circulating in the blood. Once the immune
cells are anchored to the endothelial cells by the cell adhesion molecules,
these immune cells can migrate between the endothelial cells, leave the blood
vessels and travel into tissues and organs where they can cause inflammation.
Left unchecked, these processes can result in acute and chronic tissue damage
and disease. Current anti-inflammatory agents and drugs that suppress the immune
system 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.
However, a drug that stops the production of cell adhesion molecules may prevent
the migration of immune cells from the blood vessels into tissue and therefore
modify the disease process with a more acceptable toxicity profile than do
currently available therapies.
We have focused on a number of targets in our cell adhesion molecule
program. Our most advanced cell adhesion research and development effort has
been focused on the intercellular adhesion molecule ("ICAM") family and in
particular, ICAM-1. ICAM-1 facilitates the migration of immune cells involved in
both chronic and acute inflammation, allowing us to target both conditions.
Over-expression of ICAM-1 has been demonstrated in a wide variety of
inflammatory disorders, such as rheumatoid arthritis, asthma, psoriasis, organ
transplant rejection and inflammatory bowel diseases. 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 and conditions. We have identified
lead compounds for other adhesion molecules including CD49d (VLA-4), vascular
cell adhesion molecule 1 (VCAM-1) and platelet endothelial cell adhesion
molecule 1 (PECAM-1). We are currently evaluating those lead compounds in
inflammatory disease models.
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In addition to cell adhesion molecules, we have active research programs
targeting other steps in the inflammatory process. In particular, we have
identified antisense inhibitors which selectively inhibit the expression of
cytokines such as tumor necrosis factor-(LOGO) (TNF-(LOGO)), interleukin 5
(IL-5) and the IL-5 receptor. Lead antisense compounds targeting these proteins
are showing promising activity in multiple models of inflammatory diseases.
In 1995, Boehringer Ingelheim and we agreed to combine our 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 analysis technology, with
our antisense and combinatorial drug discovery programs. The collaboration uses
these multiple drug discovery programs to identify compounds that limit the
disease-related functions of cell adhesion molecules.
ISIS 2302. ISIS 2302, the most advanced compound in our cell adhesion
program, selectively inhibits ICAM-1 gene expression. In Phase I testing of ISIS
2302 in healthy volunteers, the compound was well tolerated at all doses. We
initiated Phase II trials in five disease indications: rheumatoid arthritis,
ulcerative colitis, Crohn's disease, psoriasis and prevention of renal
transplant rejection. The Phase II studies involve 20 to 40 patients each and,
in general, are randomized and placebo-controlled. We are choosing indications
for further development of ISIS 2302 based on results from these studies.
Crohn's disease is a serious inflammatory disease that affects the
intestines and other parts of the digestive tract. A patient with Crohn's
disease suffers chronic and often severe episodes of diarrhea, abdominal pain,
rectal bleeding and fever. Approximately 500,000 people in North America and
Europe worldwide are afflicted with Crohn's disease. In a randomized,
double-blinded, placebo-controlled 20-patient Phase II study of patients with
Crohn's disease, 15 patients were treated with ISIS 2302 and 5 patients received
a placebo. ISIS 2302 was administered every other day for 26 days (13 doses) by
2-hour intravenous infusion. At the end of the one-month treatment period, 7 of
15 patients treated with ISIS 2302 experienced disease remission (measured by a
Crohn's Disease Activity Index score of below 150) compared to zero patients in
remission in the placebo group. The duration of the remissions was prolonged,
with 5 of 7 remitting patients still in remission at the end of the 6-month
trial. Results of this study also showed a statistically significant lowering of
steroid use in the ISIS 2302 treated group compared to the placebo treated
group. The results also showed favorable trends both in the Endoscopic Index of
Severity (EIS), based on colonoscopic examination, and in the Inflammatory Bowel
Disease Questionnaire (IBDQ), a quality of life scale. Based on the results of
this study, Boehringer Ingelheim and we decided to initiate a pivotal quality
trial of ISIS 2302 in Crohn's disease. That 300 patient trial is progressing. It
should be completed late in 1999. At that point, we and Boehringer Ingelheim
will determine the pace and scope of our development and regulatory strategy,
based on the performance of the drug. At the end of 1998, we performed an
interim analysis of the results of this trial. The purpose of the analysis was
to support internal planning. Consistent with our original strategy and FDA
requirements, we will not make the results of that analysis public. We are
conducting additional studies of ISIS 2302 in Crohn's disease to determine
whether shorter courses of treatment or subcutaneous dosing can be effective.
These studies should be completed in 1999 and, if positive, may support easier,
more convenient dosing. The program may be expanded to include additional
pivotal studies based on analysis of the data from ongoing trials.
We recently completed the analysis of the Phase II, 43 patient study in
rheumatoid arthritis. We saw evidence of therapeutic activity. ISIS 2302 was
well tolerated, and the safety profile of the drug continues to be attractive.
Based on this outcome, we are pursuing development of a second-generation,
orally active antisense inhibitor of ICAM-1 in lieu of continuing development of
ISIS 2302 in rheumatoid arthritis. We continue to believe that inhibition of
ICAM-1 is a promising anti-inflammatory strategy in rheumatoid arthritis and
will continue to test second-generation inhibitors of this target for this
disease.
The Phase II study in kidney transplant rejection is also proceeding at a
pace mandated by the regulatory authorities, as they carefully monitor clinical
studies in this patient population. We anticipate that this study will be
completed in mid-1999. We will make the data available after the study is
completed.
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We are also pursuing development of ISIS 2302 as a topical treatment for
psoriasis, as an enema formulation for treatment of ulcerative colitis, and as
an aerosol formulation for treatment of asthma. Our goal is to initiate clinical
trials in as many of these indications as resources permit in the near term.
Boehringer Ingelheim and we will determine the timing of these initiatives.
Cancer
Much of our work in the area of cancer is focused on specific 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. Since traditional drugs are not
specific enough to inhibit one isotype within a family without affecting the
function of the other related isotypes, it has been difficult to determine the
functional differences among them. There is growing evidence that certain
isotypes might be involved in abnormal cell differentiation or proliferation.
Antisense drug discovery technology exploits the differences among the isotypes
at the mRNA level to design drugs that can inhibit specific isotypes. Selective
inhibition of a single isotype may result in less toxicity. Much of our work has
focused on multigene families in the signal transduction pathway, the method by
which various cellular and extra cellular proteins communicate information
necessary for cell function and growth. Disruptions in the production or
behavior of signal transduction proteins are involved in numerous proliferative
disorders, including cancer.
Clinical trials of our anticancer compounds have demonstrated that
antisense drugs can be effective cancer therapeutics. In these trials, our
compounds were well tolerated, with none of the serious side effects associated
with standard cancer chemotherapies such as bone marrow or immune system
suppression, gastrointestinal distress or hair loss.
ISIS 3521. ISIS 3521 is an antisense compound in Phase II clinical
development which inhibits the production of one particular isotype (the
(LOGO)isotype) of protein kinase C. PKC is a key enzyme in signal transduction,
and PKC isotypes are associated with both normal and abnormal cell growth. We
have been able to specifically inhibit the production of the PKC-(LOGO) isotype
without inhibiting the production of other isotypes, thus allowing the
inhibition of the isotype believed to be involved in abnormal cell growth
without inhibiting the isotypes required for healthy cells to grow.
The Phase I studies included 56 patients with various types of cancer that
had not responded to standard treatment. In one study, 36 patients received the
drug via a 2-hour infusion 3 times per week for 3 weeks, with redosing every 4
weeks. In a second study, 20 patients received the drug via a 21-day continuous
infusion for 3 weeks repeated every 4 weeks. The primary endpoint of the Phase I
trials was safety, and all patients were assessed for antitumor effects. In
these Phase I trials, the drug was well-tolerated by patients with no
significant side effects. We also saw preliminary evidence of anticancer
activity. In the short infusion study, 1 patient with lymphoma experienced a
partial response (defined as a greater than 50% reduction in measurable disease)
that has continued for more than 16 months from the start of therapy. Another
patient with lymphoma has had a partial response lasting more than 8 months, and
1 patient with non-small cell lung cancer has experienced disease stabilization
for 8 months. In the continuous infusion study, 3 of 4 patients with ovarian
cancer showed a decrease in disease. One patient, whose abdominal mass had
doubled in size in the month prior to entering the study, experienced a partial
response for over 11 months before progressing. One patient experienced a 40%
decrease in CA-125, an ovarian tumor marker, for over 5 months and 1 patient
experienced a 75% decrease in CA-125 for more than 7 months.
We initiated Phase II clinical trials in the third quarter of 1997. In the
Phase II trials, we are evaluating ISIS 3521 in both single-agent and
combination studies in patients with a variety of solid tumors, including
ovarian, prostate, breast, brain, colon and lung cancers, and melanomas. We have
also been conducting trials of ISIS 3521 in combination with chemotherapy agents
commonly used against a variety of tumors. We anticipate that the Phase II
program and the Phase I combination trials will be completed in the second half
of 1999, at which point, we and our partner, Novartis, will determine next
development steps.
We are developing ISIS 3521 as part of our antisense research and
development collaboration with Novartis. Isis also has additional
PKC-(LOGO)inhibitors in preclinical development which incorporate second
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generation chemistry and which have the potential for increased safety and more
convenient dosing, possibly including oral delivery. Isis also has lead
compounds that inhibit two isotypes of the PKC family, including PKC-(LOGO),
believed to be involved in cancer and other diseases.
ISIS 5132. ISIS 5132 is an antisense compound which inhibits the expression
of C-raf kinase, another molecular target involved in cell signaling. C-raf
kinase is a member of the raf kinase multi-gene family and is associated with
abnormal cell growth. ISIS 5132 selectively inhibits C-raf kinase without
inhibiting the production of other members of that multigene family. Studies of
ISIS 5132 in cell culture and in nude mouse xenograft models using human tumor
cells show that ISIS 5132 inhibits expression of the target C-raf gene.
In Phase I clinical trials, ISIS 5132 was very well-tolerated. Several
patients in this trial experienced disease stabilization. In the 2-hour infusion
study, 1 patient with colon cancer experienced a decrease in CEA, a colon cancer
marker, with no growth in tumor for approximately 7 months. Another patient with
kidney cancer experienced disease stabilization for more than 9 months and
continues to be on study. In the continuous infusion study, 1 patient with
pancreatic cancer experienced disease stabilization for 7 months and continues
on study, 1 patient with kidney cancer experienced disease stabilization for 9
months, and 1 patient with ovarian cancer had a 97% drop in CA-125 after 6
months.
We initiated Phase II clinical trials of ISIS 5132 in the fourth quarter of
1997. In the Phase II trials, we are evaluating ISIS 5132 as a single-agent in
studies of patients with a variety of solid tumors, including prostate, breast,
ovarian, pancreatic, colon and both small-cell and non-small cell lung cancers.
We have also been conducting trials of ISIS 5132 in combination with
chemotherapy agents commonly used against a variety of tumors. We anticipate
that the Phase II program and the Phase I combination trials will be completed
in the second half of 1999, at which point, we and Novartis will determine next
development steps.
ISIS 2503. Substantial evidence exists supporting a direct role for ras
gene products in the development and maintenance of human cancer. Ras proteins
are involved in passing information between cells. Ras, in both normal and
mutated forms, is associated with abnormal cell growth and, as such, is
associated with cancer. ISIS 2503, a potent selective inhibitor of Harvey ras,
has been shown to inhibit abnormal cell growth by inhibiting expression of ras
genes in cell culture and animal models. ISIS 2503 has also inhibited the growth
of multiple different human cancers in nude mouse xenograft models.
In the fall of 1997, we initiated Phase I clinical trials of ISIS 2503.
This trial involved patients with a variety of solid tumors that had not
responded to standard cancer therapies. In Phase I clinical trials ISIS 2503 has
been well-tolerated and has displayed an excellent safety profile. The Phase I
trials are nearly complete. Once completed, data from these studies will be
analyzed and presented publicly in an appropriate scientific meeting.
Phase II trials of ISIS 2503 will begin in early 1999 and should take about
one year to complete. The Phase II program will include four different tumor
types and treat about 120 patients. Tumor types selected are those in which the
ras proteins are known to contribute to tumor development and maintenance. We
are particularly interested in testing ISIS 2503 in gastrointestinal cancers. We
will initiate clinical trials of ISIS 2503 in combination with conventional
chemotherapy in the first half of 1999.
RESEARCH PROGRAMS
We combine our core technology programs in medicinal chemistry, RNA
biochemistry, and molecular and cellular biology with molecular target-focused
drug discovery efforts to design drug candidates. The goal of our target-based
research programs is to identify antisense and Ibis drug candidates to treat
diseases for which there are substantial markets and for which there is a need
for better drugs. In addition, our research programs focus on identifying
next-generation compounds to serve as backup compounds to our current products
in development and development candidates. Our Ibis drug discovery program is
currently focused both on cell adhesion molecules in connection with our
collaboration with Boehringer Ingelheim and on identifying broad-spectrum
antibacterial agents with a focus on important drug-resistant infections.
Our core technology programs can support multiple target-based antisense
research programs without significantly increasing costs. Through these
programs, we can efficiently explore numerous disease targets and
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identify the best lead compounds to advance into preclinical development. We are
currently pursuing antisense and Ibis drug discovery programs focused on various
anti-viral and anti-bacterial targets, inflammatory disease targets, and other
key molecular targets that might play critical roles in cancer.
COLLABORATIVE AGREEMENTS
Our strategy is to use alliances with other companies and equity-based
financing to increase our financial resources, reduce risk, and retain an
appropriate level of ownership of products currently in development. Through
alliances with major pharmaceutical companies, we can obtain funding, expand
existing programs, learn of new technologies, and gain additional expertise in
developing and marketing products.
Novartis
We began our research and development collaboration with Novartis (then
called Ciba-Geigy Limited) in 1990. The research portion of the collaboration
ended in September 1998, having produced two drugs currently in development,
ISIS 3521 and ISIS 5132. At Novartis' expense, we are conducting clinical
development of ISIS 3521 and ISIS 5132. Novartis will pay us royalties on the
sales of any licensed compound. We have the right to commercially manufacture
ISIS 3521 and ISIS 5132 for additional royalties. See "Products Under
Development -- Cancer -- ISIS 3521; ISIS 5132." As of February 26, 1999,
Novartis owned approximately 9% of our outstanding Common Stock.
Boehringer Ingelheim
In July 1995, we and Boehringer Ingelheim formed an alliance to combine the
clinical development and research programs of both companies in the field of
cell adhesion. We contribute our expertise in antisense and combinatorial drug
discovery and Boehringer Ingelheim contributes its ongoing program in cell
adhesion biology and small molecule library screening capabilities. Both
companies provide ongoing funding for the combined research and development
program. 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.
In addition to funding one-half of the collaboration's research and
development, Boehringer Ingelheim will make additional investments in us as
certain development milestones are met. Boehringer Ingelheim has already paid us
a milestone payment of $10 million for the completion of the first Phase II
clinical trial of ISIS 2302 in Crohn's disease. It also provides us with a $40
million line of credit, which is available under certain circumstances. As of
December 31, 1998, outstanding borrowings under this line of credit totaled
$22.6 million.
The partnership includes development of ISIS 2302, an antisense inhibitor
of ICAM-1, and multiple other preclinical and research compounds targeting other
adhesion molecules. We and Boehringer Ingelheim will split the operating profits
associated with all future products of the partnership. If a partner chooses not
to continue to fund its share of the development expenses for a compound, it
will receive a certain amount of royalties on any future sales of such compounds
rather than a split of operating profits. Boehringer Ingelheim will market the
first two drugs resulting from the collaboration. Both companies will agree on
commercialization responsibilities for any products to follow.
ISIS 2302 is in a pivotal quality trial for Crohn's disease and clinical
trials of various stages for other indications. This compound is being developed
by an Isis-led project team as part of the collaboration. See "Products Under
Development -- Inflammatory Diseases."
As of February 26, 1999, Boehringer Ingelheim owned approximately 9% of our
outstanding Common Stock.
CIBA Vision
In July 1997, we entered into an agreement with CIBA Vision, granting it
exclusive worldwide distribution rights for Vitravene(TM). Under the terms of
the agreement, we will receive $20 million in pre-
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commercial fees and milestones. As of December 31, 1998, we have received a
total of $12.5 million of the pre-commercial fees and milestones. While CIBA
Vision will market and sell Vitravene(TM) worldwide, we will manufacture and
sell Vitravene(TM) to CIBA Vision, at a price that will allow us to share the
commercial value of the product with CIBA Vision. The FDA approved Vitravene(TM)
for commercial marketing in August 1998. CIBA Vision also has the option to
acquire the exclusive license to market and distribute our second generation
antisense compound to treat CMV retinitis, ISIS 13312, which is currently in
preclinical development. See "Products Under Development -- Cytomegalovirus
(CMV) Retinitis."
Zeneca Pharmaceuticals
In December 1998, we established a new antisense collaboration with Zeneca
Pharmaceuticals to discover, develop and commercialize novel antisense drugs
targeting specific genes associated with cancer. In this collaboration, we will
create antisense candidates and work together with Zeneca to optimize them.
Zeneca will develop drugs arising out of the collaboration. Zeneca will pay us
technology access fees and provide research funding as well as milestone
payments and royalties for any drugs progressing into clinical development and
onto the market. The initial term of this collaboration is three years. In
December 1998, Zeneca paid $2 million in technology access fees. While the
initial focus of this collaboration is on a limited number of cancer targets, we
can, with Zeneca, also pursue additional targets in cancer and expand the
collaboration to targets in other therapeutic areas. The agreement also provides
that the collaboration can also be extended beyond its initial term.
Merck & Co.
In June 1998, we established a research collaboration with Merck & Co. to
discover small molecule drug candidates to treat patients infected with
Hepatitis C virus. Our chemists, working together with Merck scientists will
design, synthesize and evaluate novel compounds that Merck will screen in its
proprietary enzymatic assays for identifying Hepatitis C virus replication
inhibitors. Merck will commercialize drugs arising from the collaboration, and
we retain the right to use technology developed in the collaboration in our
antisense program. The three-year collaboration provides us with annual research
support plus a technology access fee and milestone payments and royalties upon
commercialization. In 1998, we received a total of $3.9 million from Merck under
the terms of this agreement.
Abbott Laboratories, Inc.
In December 1998, we entered into an Antisense Target Validation, or ATV,
collaboration with Abbott Laboratories, Inc. The collaboration will utilize our
ATV technology to enable Abbott to validate numerous gene targets, identify the
function of these genes and prioritize the targets. Abbott will pay us an
upfront fee, research fees, and milestone payments and royalties on net sales of
any Abbott non-antisense product arising from the collaboration. We will also
receive rights to develop drugs targeting Abbott proprietary genes for Abbott.
The initial term of this collaboration is two years. In 1998, we received an
initial payment of $250,000.
MANUFACTURING
In the past, production of chemically modified oligonucleotides, like those
used in our research and development programs, was generally expensive and
difficult, except in small quantities. As a result, we dedicated significant
resources to focus on ways to improve manufacturing capacity. Because all
oligonucleotide compounds are made of variants of the same nucleotide building
blocks and are produced using the same types of equipment, we found that the
same techniques used to efficiently manufacture one oligonucleotide drug product
proved helpful in improving the manufacturing processes for many other
oligonucleotide products. Through the development of several proprietary
chemical processes for scaling up manufacturing capabilities, we have been able
to greatly reduce the cost of producing oligonucleotide compounds. For example,
we have significantly reduced the cost of raw materials, while at the same time
greatly increasing our capacity to make the compounds. We have both internal
programs and outside collaborations with various industry vendors to allow for
even greater production.
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We have sufficient manufacturing capacity to meet both current and future
research and clinical needs both for ourselves and for our partners. We also
believe that we have, or will be able to develop or acquire, sufficient supply
capacity to meet our anticipated commercial needs. We also believe that with
reasonably anticipated benefits from increases in scale, we will be able to
manufacture antisense compounds at commercially competitive prices.
In March 1998, we established an antisense oligonucleotide manufacturing
collaboration with Zeneca Life Science Molecules, a leading supplier of chemical
and biological compounds to the pharmaceutical and biotechnology industries.
Access to an alternate manufacturing source will provide greater flexibility in
production scheduling and will reduce our risk of dependence on a single
manufacturing site for all of our clinical needs. Under the terms of the
five-year agreement, Zeneca LSM will supplement our primary manufacturing
facility in producing antisense oligonucleotides for use in clinical trials. The
agreement specifies that we will have Zeneca LSM manufacture a certain portion
of the drug supplies required for its clinical trials. We are not required to
make any capital investment to create this manufacturing capability.
PATENTS AND PROPRIETARY RIGHTS
Our success will depend, in part, on our ability to obtain patent
protection for our products in the United States and other countries. We file
applications, as appropriate, for patents covering our products and processes.
As of January 31, 1999, we have been issued more than 200 patents in the United
States and foreign countries, have received more than 35 U.S. notices of
allowance and have filed more than 400 patent applications in the United States
and counterparts of many of these applications in other countries. Patents
issued or applied for cover the following types of inventions, processes and
products:
- Composition of matter claims to core chemistries for oligonucleotide
structures, which protect our rights to the building blocks of our
compounds;
- Composition of matter claims to messenger RNA target sequences, which
protect our rights to the genetic sequences that our compounds target;
- Use claims for using oligonucleotides targeted to particular disease
targets, which protect our right to use oligonucleotide based drugs to
treat specific diseases; and
- Method claims for the manufacture of oligonucleotides, which protect our
new, improved or more cost effective ways to manufacture
oligonucleotides.
We have obtained licenses from various parties that we deem to be necessary
or desirable for the manufacture, use or sale of our products. These licenses
(both exclusive and non-exclusive) generally require us to pay royalties to the
parties on product sales. We may not be able to obtain licenses to other
required technology or, if obtainable, such technology may not be available at
reasonable cost. Our failure to obtain a license to any technology required to
commercialize our products may have a material adverse impact on our business.
We consider that in the aggregate our issued patents, patent applications
and licenses under patents owned by third parties are important to our success.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
firms are generally uncertain and involve complex legal and factual questions.
Consequently, even though we are currently pursuing patent applications with the
U.S. and foreign patent offices, we do not know whether any of the 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. Litigation, which could result in substantial cost
to us, may also be necessary to enforce any patents issued to us or to determine
the scope and validity of others' proprietary rights in court or in
administrative proceedings. In addition, to determine the priority of
inventions, we may find it necessary 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 our existing or
future patents or patent applications, which could result in substantial cost to
us. We may find it necessary to participate, at substantial cost, in
International Trade Commission proceedings to abate importation of goods that
would compete unfairly with our products.
GOVERNMENT REGULATION
Our 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 us or our licensees or marketing
partners in their respective efforts to secure necessary governmental approvals,
which could delay or preclude us or our licensees or marketing partners from
marketing their products. In conjunction with obtaining approval of
Vitravene(TM), we successfully passed the manufacturing pre-approval inspection
by the FDA. Approval of each new therapeutic will require a rigorous
manufacturing pre-approval inspection by regulatory authorities.
In addition to regulations enforced by the FDA, we are 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. We believe that we are in compliance in all material respects with
applicable laws and regulations.
COMPETITION
For many of their applications, including CMV retinitis, 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 our existing or potential competitors have
substantially greater financial, technical and human resources than we do and
may be better equiped 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 ours. 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.
Vitravene(TM) and our other products under development address numerous
markets. Our competition has been and will continue to be determined in part by
the diseases for which our compounds are developed and ultimately approved by
regulatory authorities. For certain of our products, an important factor in
competition may be the timing of market introduction of competitive products.
Accordingly, the relative speed with which
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we can develop products, complete the clinical trials and approval processes and
supply commercial quantities of the products to the market is an important
competitive factor. We expect 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 treatments for the diseases for which we
are developing compounds could render our compounds non-competitive or obsolete.
Furthermore, because of the fundamental differences between antisense and other
technologies, there may be applications for which the products of one technology
are superior to those of another. We are aware of several companies with
late-stage compounds in development for diseases we are pursuing.
Our competitive position also depends upon our 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 February 26, 1999, we employed 346 individuals, of whom 143 hold
advanced degrees. A significant number of our management and professional
employees have had prior experience with pharmaceutical, biotechnology or
medical product companies. We believe that we have been highly successful in
attracting skilled and experienced scientific personnel; however, competition
for such personnel is intensifying. None of our employees is 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 March 15,
1999 are as follows:
STANLEY T. CROOKE, M.D., PH.D. . . . 53
Chairman of the Board, President and Chief Executive Officer
Dr. Crooke was a founder of the Company and has been its Chief Executive
Officer and a director since January 1989 and has served as President since
February 1999. He was elected Chairman of the Board in February 1991. Dr. Crooke
previously served as President of the Company 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
Megabios Corp., SIBIA Neurosciences, Inc., and Idun Pharmaceuticals, Inc. all
biotechnology companies, and EPIX Medical, Inc., a developer of magnetic
resonance imaging contrast agents. He is also an adjunct professor of
pharmacology at the Baylor College of Medicine and the University of California,
San Diego.
B. LYNNE PARSHALL . . . 43
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, and 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.
DEBBY JO BLANK, M.D. . . . 47
Executive Vice President
Dr. Blank joined Isis in March 1999 as Executive Vice President. Prior to
joining the Company, she held various senior management positions at Cypress
Bioscience, Inc., Advanced Technology Laboratories, Syntex Laboratories, Inc.,
The DuPont Merck Pharmaceutical Company, and E.I. DuPont & Company.
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C. FRANK BENNETT, PH.D. . . . 42
Vice President, Biology
Dr. Bennett has served as Vice President, Biology since June 1995. From
March 1993 to June 1995, he was Director, Molecular Pharmacology, and from May
1992 to March 1993, he was an Associate Director in the Molecular and Cellular
Biology department. Prior to joining Isis in 1989, Dr. Bennett was employed by
SmithKline and French Laboratories in various research positions.
DAVID J. ECKER, PH.D. . . . 44
Vice President & Managing Director, Ibis Therapeutics
Dr. Ecker was a founder of the Company and has served as Vice President &
Managing Director of Ibis Therapeutics, a division of Isis Pharmaceuticals since
June 1995. He served as Vice President, Biology from July 1993 to June 1995, as
Executive Director, Molecular and Cellular Biology from February 1993 to July
1993, and as Director, Molecular and Cellular Biology from February 1989 to
February 1993. From 1984 until February 1989, he was employed by SmithKline and
French Laboratories in a variety of research positions.
PATRICIA LOWENSTAM . . . 52
Vice President, Human Resources
Ms. Lowenstam has served as Vice President, Human Resources since January
1995. She joined Isis in August 1992 as Director, Human Resources and served in
that capacity until January 1995. Prior to joining Isis, she held senior
management positions in Human Resources with Quotron systems, Inc., Citicorp,
Zales Jewelers, and the May Company.
RISK FACTORS
Please consider the following risk factors carefully in addition to the
other information contained in this report.
OUR BUSINESS WILL SUFFER IF WE FAIL TO OBTAIN REGULATORY APPROVAL FOR OUR
PRODUCTS.
We must conduct time-consuming, extensive and costly clinical trials, in
compliance with U.S. Food and Drug Administration regulations, to show the
safety and efficacy of each of our drug candidates, as well as its optimum
dosage, before the FDA can approve a drug candidate for sale. We cannot
guarantee that we will be able to obtain necessary regulatory approvals on a
timely basis, if at all, for any of our products under development. Delays in
receiving these approvals, failure by us or our partners to receive these
approvals at all or failure to comply with existing or future regulatory
requirements could have a material adverse effect on our business, financial
condition and results of operations.
While limited trials of our products have to date produced favorable
results, significant additional trials may be required, and we may not be able
to demonstrate that our drug candidates are safe or effective. We have only
introduced one commercial product, Vitravene. We cannot guarantee that any of
our other product candidates will obtain required government approvals or that
we can successfully commercialize any products. We expect to have ongoing
discussions with the FDA and foreign regulatory agencies with respect to all of
our drugs in clinical development.
OUR BUSINESS WILL SUFFER IF OUR PRODUCTS ARE NOT USED BY DOCTORS TO TREAT
PATIENTS.
We cannot guarantee that any of our products in development, if approved
for marketing, will be used by doctors to treat patients. We currently have one
product, Vitravene, a treatment for CMV retinitis in AIDS patients, which
addresses a small commercial market with significant competition. We delivered
our first commercial shipment of Vitravene to our partner CIBA Vision in 1998,
earning product revenue of $560,000.
The degree of market acceptance for any of our products depends upon a
number of factors, including:
- the receipt and scope of regulatory approvals,
- the establishment and demonstration in the medical and patient community
of the clinical efficacy and safety of our product candidates and their
potential advantages over competitive products, and
- reimbursement policies of government and third-party payors.
In addition, we cannot guarantee that physicians, patients, patient
advocates, payors or the medical community in general will accept and use any
products that we may develop.
OUR BUSINESS WILL SUFFER IF ANY OF OUR COLLABORATIVE PARTNERS FAIL TO DEVELOP,
FUND OR SELL ANY OF OUR PRODUCTS UNDER DEVELOPMENT.
If any collaborative partner fails to develop or sell any product in which
we have rights, our business may be negatively affected. While we believe that
our collaborative
16
<PAGE> 19
partners will have sufficient motivation to continue their funding, development
and commercialization activities, we cannot be sure that any of these
collaborations will be continued or result in commercialized products. The
failure of a corporate partner to continue funding any particular program could
delay or stop the development or commercialization of any products resulting
from such program.
Collaborative partners may be pursuing other technologies or developing
other drug candidates either on their own or in collaboration with others,
including our competitors, to develop treatments for the same diseases targeted
by our own collaborative programs.
We also may wish to rely on additional collaborative arrangements to
develop and commercialize our products in the future. However, we may not be
able to negotiate acceptable collaborative arrangements in the future, and, even
if successfully negotiated, the collaborative arrangements themselves may not be
successful.
OUR BUSINESS COULD SUFFER IF THE RESULTS OF FURTHER CLINICAL TESTING INDICATE
THAT ANY OF OUR PRODUCTS UNDER DEVELOPMENT ARE NOT SUITABLE FOR COMMERCIAL USE.
Drug discovery and development involves inherent risks, including the risk
that molecular targets prove unsuccessful and the risk that compounds that
demonstrate attractive activity in preclinical studies do not demonstrate
similar activity in human beings or have undesirable side effects. Most of our
resources are dedicated to applying molecular biology and medicinal chemistry to
the discovery and development of drug candidates based upon antisense
technology, a novel drug discovery tool in designing drugs that work at the
genetic level to block the production of disease-causing proteins.
WE HAVE INCURRED LOSSES AND OUR BUSINESS WILL SUFFER IF WE FAIL TO ACHIEVE
PROFITABILITY IN THE FUTURE.
Because of the nature of the business of drug discovery and development,
our expenses have exceeded our revenues since Isis was founded in January 1989.
As of December 31, 1998, our accumulated losses were approximately $197 million.
Most of the losses have resulted from costs incurred in connection with our
research and development programs and from general and administrative costs
associated with our growth and operations. These costs have exceeded our
revenues, most of which have come from collaborative arrangements, interest
income and research grants. Our current product revenues are derived solely from
sales of Vitravene. This product has limited sales potential relative to most
pharmaceutical products. We expect to incur additional operating losses over the
next several years and we expect losses to increase as our preclinical testing
and clinical trial efforts continue to expand. We cannot guarantee that we will
successfully develop, receive regulatory approval for, commercialize,
manufacture, market or sell any additional products, or achieve or sustain
future profitability.
OUR BUSINESS WILL SUFFER IF WE FAIL TO OBTAIN TIMELY FUNDING.
Based on our current operating plan, we believe that our available cash and
existing sources of revenue and credit, together with the interest earned
thereon, will be adequate to satisfy our capital needs until at least the end of
2000.
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<PAGE> 20
We expect that we will need substantial additional funding in the future. Our
future capital requirements will depend on many factors, such as the following:
- continued scientific progress in our research, drug discovery and
development programs;
- the size of these programs and progress with preclinical and clinical
trials;
- the time and costs involved in obtaining regulatory approvals;
- the market acceptance of Vitravene;
- the costs involved in filing, prosecuting and enforcing patent claims;
- competing technological and market developments, including the
introduction of new therapies that address our markets; and
- changes in existing collaborative relationships and our ability to
establish and maintain additional collaborative arrangements.
If we find that we do not have enough money, additional funds may be
raised, including through public or private financing. Additional financing may
not be available, or, if available, may not be on acceptable terms. If
additional funds are raised by issuing equity securities, the shares of existing
stockholders will be subject to further dilution and share prices may decline.
If adequate funds are not available, we may be required to cut back on one or
more of our research, drug discovery or development programs or obtain funds
through arrangements with collaborative partners or others. These arrangements
may require us to give up rights to certain of our technologies, product
candidates or products.
OUR BUSINESS WILL SUFFER IF WE CANNOT MANUFACTURE OUR PRODUCTS OR HAVE A THIRD
PARTY MANUFACTURE OUR PRODUCTS AT LOW COSTS SO AS TO ENABLE US TO CHARGE
COMPETITIVE PRICES TO BUYERS.
To establish additional commercial manufacturing capability on a large
scale, we must improve our manufacturing processes and reduce our 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 large commercial
scale. There are a limited number of suppliers for certain capital equipment and
raw materials that we use to manufacture our drugs, and some of these suppliers
will need to increase their scale of production to meet our projected needs for
commercial manufacturing. We may not be able to manufacture at a cost or in
quantities necessary to make commercially successful products.
In 1998, we entered into an antisense oligonucleotide manufacturing
collaboration with Zeneca Life Science Molecules of Manchester, England pursuant
to which Zeneca LSM will supply a portion of our requirements of drugs for
clinical trials. As of the date of this prospectus, we have not received any
supply of drugs under this arrangement, and we cannot guarantee that Zeneca LSM
will prove to be an acceptable alternative supplier.
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<PAGE> 21
OUR BUSINESS WILL SUFFER IF WE FAIL TO COMPETE EFFECTIVELY WITH OUR COMPETITORS.
Our competitors are 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. Our competitors may succeed in
developing other new therapeutic drug candidates that are more effective than
any drug candidates that we have been developing. These competitive developments
could make our technology and products obsolete or non-competitive before we
have had enough time to recover our research, development or commercialization
expenses.
Many of our competitors have substantially greater financial, technical and
human resources than we do. In addition, many of these competitors have
significantly greater experience than we do in conducting preclinical testing
and human clinical trials of new pharmaceutical products and in obtaining FDA
and other regulatory approvals of products for use in health care. Accordingly,
our competitors may succeed in obtaining regulatory approval for products
earlier than we do. We will also compete with respect to manufacturing
efficiency and marketing capabilities, areas in which we have limited or no
experience.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO PROTECT OUR PATENTS OR OUR
PROPRIETARY RIGHTS.
Our success depends to a significant degree upon our ability to develop
proprietary products. However, we cannot assure you that patents will be granted
on any of our patent applications in the United States or in other countries. We
also cannot assure you that the scope of any of our issued patents will be
sufficiently broad to offer meaningful protection. In addition, our issued
patents or patents licensed to us could be successfully challenged, invalidated
or circumvented so that our patent rights would not create an effective
competitive barrier.
INTELLECTUAL PROPERTY LITIGATION COULD HARM OUR BUSINESS.
We have not experienced any patent or other intellectual property
litigation. However, we cannot guarantee that we will not have to defend our
intellectual property rights in the future. In the event of an intellectual
property dispute, we may be forced to litigate or otherwise defend our
intellectual property assets. Such disputes could involve litigation or
proceedings declared by the U.S. Patent and Trademark Office or the
International Trade Commission. Intellectual property litigation can be
extremely expensive, and such expense, as well as the consequences should we not
prevail, could seriously harm our business.
If a third party claimed an intellectual property right to technology we
use, we might be forced to discontinue an important product or product line,
alter our products and processes, pay license fees or cease certain activities.
Although we might under these circumstances attempt to obtain a license to such
intellectual property, we may not be able to do so on favorable terms, if at
all.
THE LOSS OF KEY PERSONNEL, OR THE INABILITY TO ATTRACT AND RETAIN HIGHLY SKILLED
PERSONNEL, COULD ADVERSELY AFFECT OUR BUSINESS.
We are dependent on the principal members of our management and scientific
staff. We do not have employment agreements with any of our management. The loss
of our
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<PAGE> 22
management and key scientific employees might slow the achievement of important
research and development goals. Recently, Dr. Daniel Kisner, our President and
Chief Operating Officer and director resigned all positions to assume the
position of Chief Executive Officer of Caliper Technologies, a privately held
company. Dr. Kisner's resignation is not expected to have a material adverse
effect on our business. It is also critical to our success to recruit and retain
qualified scientific personnel to perform research and development work.
Although we believe we will be successful in attracting and keeping skilled and
experienced scientific personnel, we may not be able to do so on acceptable
terms, because of stiff competition for experienced scientists among many
pharmaceutical and health care companies, universities and non-profit research
institutions.
OUR STOCK PRICE MAY CONTINUE TO BE HIGHLY VOLATILE.
The market price of our common stock, like that of the securities of many
other biopharmaceutical companies, has been and is likely to continue to be
highly volatile. During the last twelve months, the market price of our common
stock has ranged from $7 to $16. The market price can be affected by many
factors, including, for example, fluctuation in our operating results,
announcements of technological innovations or new drug products being developed
by us or our competitors, governmental regulation, regulatory approval,
developments in patent or other proprietary rights, public concern regarding the
safety of our drugs and general market conditions.
PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW MAY PREVENT
STOCKHOLDERS FROM RECEIVING A PREMIUM FOR THEIR SHARES.
Our certificate of incorporation provides for classified terms for the
members of the board of directors. Our certificate also includes a provision
that requires at least 66 2/3% of our voting stockholders to approve a merger or
certain other business transactions with, or proposed by, 15% or more of our
voting stockholders, except in cases where certain directors approve the
transaction or certain minimum price criteria and other procedural requirements
are met.
Our certificate of incorporation also requires that any action required or
permitted to be taken by our stockholders must be taken at a duly called annual
or special meeting of stockholders and may not be taken by written consent. In
addition, special meetings of our stockholders may be called only by the board
of directors, the chairman of the board or the president, or by any holder of
10% or more of our outstanding common stock. The classified board, stockholder
vote requirements and other charter provisions protect us in two ways. First,
these 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 think may be in their best interests. Second, 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 Isis without action by the stockholders.
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<PAGE> 23
ITEM 2. PROPERTIES
We occupy approximately 132,000 square feet of laboratory and office space
(including a 12,000 square foot GMP manufacturing suite) in five buildings
located on our "campus" in Carlsbad, California. Three of these buildings are
owned by Isis and, as of December 31, 1998, secure approximately $8.6
million in indebtedness of the Company. Two of the buildings are leased. We have
also leased 1,600 sq. ft. of office space in the United Kingdom to accommodate
employees supervising European clinical trials. We believe that our facilities
will be adequate to meet our needs through 1999.
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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<PAGE> 24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock (Nasdaq symbol "ISIP") is traded publicly through the
Nasdaq National Market. 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. These prices do not include
retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997
First Quarter............................................ $19.88 $15.00
Second Quarter........................................... $17.38 $12.88
Third Quarter............................................ $18.63 $12.75
Fourth Quarter........................................... $18.38 $11.00
1998
First Quarter............................................ $16.06 $12.00
Second Quarter........................................... $16.25 $11.63
Third Quarter............................................ $16.00 $ 7.00
Fourth Quarter........................................... $13.31 $ 8.88
</TABLE>
As of January 31, 1999, there were approximately 1,427 stockholders of
record of the common stock. We have never paid dividends and do not anticipate
paying any dividends in the foreseeable future. Under the terms of certain term
loans, we are 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,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Research and development
revenues.................. $ 38,611 $ 32,722 $ 22,663 $ 12,966 $ 10,088
Research and development
expenses.................. 62,200 55,940 45,653 33,175 26,468
Net loss.................... (42,983) (31,066) (26,521) (23,712) (18,181)
Basic and diluted net loss
per share................. (1.60) (1.17) (1.04) (1.10) (0.93)
Shares used in computing
basic and diluted net loss
per share................. 26,873 26,456 25,585 21,514 19,542
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments............ $ 58,848 $ 86,786 $ 77,624 $ 77,407 $ 43,440
Working capital.......... 40,651 62,573 56,300 60,040 33,679
Total assets............. 96,074 117,881 101,305 99,569 66,643
Long-term debt and
capital lease
obligations, less
current portion........ 77,724 56,452 19,864 4,714 9,295
Accumulated deficit...... (197,116) (154,133) (123,067) (96,546) (72,834)
Stockholders' equity..... (4,186) 34,852 58,385 75,850 46,019
</TABLE>
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<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Since its inception in January 1989, almost all of our resources have been
devoted to its research, drug discovery and drug development programs. We are
not yet profitable and expect to continue to have operating losses for the next
several years. Our revenue comes from collaborative research and development
agreements with pharmaceutical companies, research grants and interest income.
The revenue from the collaboration agreements increases the amount of research
and development activity that we are able to fund and offsets a portion of our
research and development costs. See Item 1, "Business -- Collaborative
Agreements." In 1998, we received approval from the U.S. Food and Drug
Administration ("FDA") to begin marketing our first product, Vitravene(TM), a
drug used to treat CMV retinitis.
RESULTS OF OPERATIONS
Years Ended December 31, 1998 and December 31, 1997
Our revenue from collaborative research and development agreements was
$38.6 million for the year ended December 31, 1998 compared with $32.7 million
in 1997, an increase of 18%. The receipt of $5 million from CpG
ImmunoPharmaceuticals, Inc. for a license to certain issued patents together
with $1.8 million from a research collaboration with Merck contributed to this
revenue increase. We delivered our first commercial shipment of Vitravene(TM) in
1998, earning product revenue of $0.6 million.
Research and development expenses rose 11% to $62.2 million in 1998 from
$55.9 million in 1997. The increase in research and development expenses
occurred because compounds in preclinical and clinical development are
continuing to advance into more expensive stages of development. We expect that
research and development expenses will continue to increase as compounds
continue to advance in clinical development.
Operating expenses in 1998 included $5.2 million for acquired patents. Isis
purchased the Gilead Sciences, Inc. patent estate, which includes patents and
patent applications covering proprietary antisense chemistry and drug delivery
systems. We acquired the Gilead patents to enhance our dominant proprietary
position in antisense technology. We also believe that the acquisition of the
Gilead patents may reduce the risk of possible future patent infringement
claims. Effort will be required by our scientists to determine if the acquired
patents can be developed into potentially viable products. The scope of the
effort to be invested by our scientists is within the bounds of our existing
research and development budgets. As our scientists are just beginning to work
with the Gilead patents and there is no assurance that research and development
efforts related to these patents will be successful, we wrote off the acquired
patents in 1998. No similar expenses were incurred in 1997.
General and administrative expenses were $9.5 million for 1998 compared
with $8.1 million in 1997. This increase is primarily because of expanded
business development, investor relations activities and support of our
increasing research and development efforts. We expect that general and
administrative expenses will continue to increase in the future to support our
growing research and development activities.
Interest expense increased to $9.4 million in 1998 compared with $3.6
million in 1997. This increase in interest expense is due to borrowing $25
million in a private debt financing completed in the fourth quarter of 1997 with
an additional $15 million follow-on private debt financing in the second quarter
of 1998. Under the terms of these financing arrangements, payment of both
principal and interest is deferred for the first five years. Therefore, of the
$9.4 million interest expense in 1998, $6.1 million was accrued under the
long-term debt agreements and will not require current cash payment.
Our net loss for 1998 was $43.0 million, or $1.60 per share, compared to
$31.1 million, or $1.17 per share, for 1997. We expect that operating losses
will increase for several more years as research and development activities
grow. Operating losses may fluctuate from quarter to quarter because of
differences in the timing of revenue and expense recognition.
At December 31, 1998, our net operating loss carryforward for federal
income tax purposes was approximately $193.5 million. The net operating loss and
research credit carryforwards make up the majority of our deferred tax assets.
We will only be able to use the net operating loss and research credits, and
realize the benefit of these deferred tax assets, if we become profitable. We
have fully reserved all of our deferred tax assets as their realization is
uncertain. Our research credit carryforward for federal income tax purposes was
approximately $8.4 million. Our net operating loss and tax credit carryforwards
will be subject to an annual limitation regarding utilization against taxable
income in future periods, due to "change of ownership" provisions of the Tax
Reform Act of 1986. We believe that such limitation will not have a material
adverse impact on the benefits that may arise from our net operating loss and
tax credit carryforwards.
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<PAGE> 26
However, there may or may not be additional limitations arising from any future
changes in ownership that may have a material adverse impact on Isis.
Isis believes that inflation and changing prices have not had a material
effect on our operations to date.
Years Ended December 31, 1997, and December 31, 1996
Our revenue from collaborative research and development agreements was
$32.7 in 1997 and $22.7 million in 1996, an increase of 44%. The receipt of a $5
million pre-commercial fee from CIBA Vision together with $4 million in
milestone payments from Novartis in addition to ongoing revenue from research
and development collaborations caused this revenue increase.
Research and development expenses amounted to $55.9 million in 1997 and
$45.7 million in 1996. This increase in research and development expenses
resulted from Isis' growing preclinical and clinical development activities.
General and administrative expenses were $8.1 million in 1997 compared with
$6.2 million in 1996. This increase was due to expanded business development and
investor relations activities and support of our increasing research and
development efforts.
Our net loss was $31.1 million, or $1.17 per share, in 1997 and $26.5
million, or $1.04 per share, in 1996.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations with revenue from contract research and
development, by selling equity securities and by issuing long-term debt. From
our inception through December 31, 1998, we have earned approximately $145
million in revenue from contract research and development. We have also raised
net proceeds of approximately $185 million from the sale of equity securities
since Isis was founded. We have borrowed approximately $60 million under
long-term debt arrangements to finance a portion of our operations.
As of December 31, 1998, we had cash, cash equivalents and short-term
investments of $58.8 million and working capital of $40.7 million. In
comparison, we had cash, cash equivalents and short-term investments of $86.8
million and working capital of $62.6 million as of December 31, 1997. This
decrease in cash and short-term investments resulted from the funding of
operating losses, investments in capital equipment and building improvements and
principal payments on debt and capital lease obligations. This decrease was
offset in part by the receipt of $15 million from a private debt financing and
$12.5 million in milestone payments and licensing fees from CIBA Vision and CpG
ImmunoPharmaceuticals, Inc.
The agreement with Boehringer Ingelheim provides us with a $40 million line
of credit. This line of credit is to be used to support the collaboration cell
adhesion programs. Restrictions on the availability of the line of credit are
based on the anticipated collaboration costs, the amount of funds available to
us, and our average stock price over specified periods. As of December 31, 1998
the line of credit was not available. We expect that the line of credit will be
available again in mid-1999. As of December 31, 1998, the outstanding balance
under this line of credit was $22.6 million. See Note 3 to the Financial
Statements, "Long-term obligations and commitments."
In October 1997, we borrowed $25 million in a private transaction. The loan
must be repaid on November 1, 2007, and bears interest at 14% per annum. No
payments of either principal or interest are required during the first 5 years
of the loan. After the first 5 years, interest must be paid quarterly until the
end of the loan. No principal payments are required until November 1, 2007. In
conjunction with this transaction, we issued warrants to purchase 500,000 shares
of common stock at a price of $25 per share. On May 1, 1998, we completed a
follow-on $15 million private debt financing. This financing was a follow-on to
our $25 million private debt financing in October 1997 and bears the same terms
and conditions. In conjunction with this follow-on transaction, we issued
warrants to purchase 300,000 shares of common stock at a price of $25 per share.
The warrants issued in connection with both of these financings expire on
November 1, 2004. The warrants have been valued at combined total of $5.4
million. This amount has been credited to stockholders' equity. Because interest
is deferred during the first 5 years, the combined principal balance of both
borrowings will accrue to a total of $78 million on November 1, 2002. The debt
under these arrangements is carried on the
24
<PAGE> 27
balance sheet net of the unamortized amount allocated to the warrants and
including accrued interest. The combined carrying amount of these notes at
December 31, 1998 was $41,321,000. See Note 3 to the Financial Statements,
"Long-term obligations and commitments".
As of December 31, 1998, our long-term obligations totaled $81.3 million
compared to $58.7 million at December 31, 1997. This increase was due to the $15
million follow-on debt financing together with the accrual of interest on the
ten-year notes described above. Additional capital lease financing to fund
equipment acquisitions also contributed to the increase. We expect that capital
lease obligations will increase over time to fund capital equipment acquisitions
required for our growing business. We will continue to use lease lines as long
as the terms continue to remain commercially attractive. We believe that our
existing cash, cash equivalents and short-term investments, combined with
interest income and contract revenue will be sufficient to meet our anticipated
requirements at least until the end of 2000.
YEAR 2000 COMPUTER ISSUES
Until recently many computer programs were written to store only two digits
of date-related information. Thus the programs were unable to distinguish
between the year 1900 and the year 2000. As a result, many computer experts have
significant concerns regarding how those programs will function after December
31, 1999. This is frequently referred to as the "Year 2000 Problem." Because
Isis was founded in 1989, our computer systems and equipment are relatively new
and generally not subject to the date and time issues that create the Year 2000
problems.
A team of Isis employees is conducting our Year 2000 initiative. The team's
activities are designed to ensure that there is no adverse effect on our core
business operations and that transactions with customers, suppliers, corporate
partners and financial institutions are fully supported. Our Year 2000 plan
includes the following phases: inventorying critical business systems and
vendors, assessment of the probability of Year 2000 non-compliance, remediation
activities including repairing or replacing identified systems, testing, and
developing contingency plans.
An inventory of all computer equipment, operating systems and applications
including other equipment that uses embedded microprocessors has been completed.
Compliance assessment has been completed for all critical or important systems
and equipment. Remediation activities have been completed for all but five
systems or pieces of equipment. We estimate that all required remediation and
validation will be completed by the third quarter of 1999. Testing of our
critical and important systems and applications is ongoing and is scheduled to
be completed by the third quarter of 1999. Contingency planning will begin in
the second quarter of 1999. Based on the work completed to date, we believe that
with the completed remediation work, the Year 2000 issue will not pose
significant operational problems for our computer systems and equipment.
We have also requested information from our significant suppliers,
corporate partners and financial institutions to ensure that those parties are
addressing Year 2000 issues where their systems could impact our operations. We
are assessing the extent to which our operations are vulnerable should those
organizations fail to properly modify their computer systems. The failure of
systems maintained by our vendors, corporate partners or financial institutions
could affect our ability to process transactions, conduct research and
development projects, manufacture products, or engage in other normal business
activities. We have received responses from all but one of the critical or
important third parties and are in the process of evaluating those responses to
identify areas of exposure. We are also in the process of identifying alternate
sources for products or services in the event that any of our present primary or
secondary vendors are not successful in resolving their Year 2000 issues. We
will continue to monitor the progress of critical and important third parties
throughout 1999 to ascertain that they achieve their Year 2000 objectives.
Our most likely exposure to Year 2000 problems is related to our high
dependence on commercial utilities such as water and power. If the providers of
these utilities are not able to maintain service due to Year 2000 noncompliance
it could result in temporarily halting research and development activities until
the service is restored or until suitable alternate facilities in a different
geographic area could be obtained. It is not
25
<PAGE> 28
possible to precisely estimate the length of delays in research and development
projects in those circumstances, but it could range from three to six months.
While we believe our planning and preparations will be adequate to address
our internal Year 2000 concerns, we cannot guarantee that the systems of other
companies, on which our systems and operations rely, will be converted on a
timely basis and will not have a material effect on us. The total cost of the
Year 2000 risk assessment and remediation is funded through operating cash
flows, and we are expensing these costs as they are incurred. Based on
information obtained to date, the cost of identifying and remediating exposures
to the Year 2000 Problem is not expected to be material to our results of
operations or financial position. The estimated total cost of our Year 2000
assessment and remediation is not expected to exceed $500,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and supplementary data 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.
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 our definitive Proxy Statement (the "Proxy Statement")
which will be filed on or before April 12, 1999 with the Securities and Exchange
Commission in connection with the solicitation of proxies for our 1999 Annual
Meeting of stockholders to be held on May 21, 1999.
The required information concerning our Executive Officers 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.
26
<PAGE> 29
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 35 of this Report.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 35
Balance Sheets at December 31, 1998 and 1997................ 36
Statements of Operations for the years ended December 31,
1998, 1997 and 1996....................................... 37
Statements of Stockholders' Equity (deficit) for the years
ended December 31, 1998, 1997 and 1996.................... 38
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996....................................... 39
Notes to Financial Statements............................... 40
</TABLE>
(a)(2) Index to Financial Statement Schedules
None required.
(a)(3) Index to Exhibits
See Index to Exhibits on pages 33 through 34.
The following management compensatory plans and arrangements are required
to be filed as exhibits to this Report pursuant to Item 14(c):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.2 -- Registrant's 1989 Stock Option Plan, as amended (the
"Plan").(5)
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 -- Revised form of Supplemental Stock Option Agreement under
Registrant's 1992 Non-employee Directors' Stock Option Plan,
as amended.(4)
10.9 -- Registrant's Employee Stock Purchase Plan.(3)
</TABLE>
- ---------------
(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 Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by reference.
27
<PAGE> 30
(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, 1998.
(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).
28
<PAGE> 31
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/A
to be signed on its behalf by the undersigned, thereunto duly authorized on the
7th day of June, 1999.
ISIS PHARMACEUTICALS, INC.
By: /s/ STANLEY T. CROOKE, M.D., PH.D.
------------------------------------
Stanley T. Crooke, M.D., Ph.D.
Chairman of the Board, President
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 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 connection
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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ STANLEY T. CROOKE, M.D., PH.D. Chairman of the Board, Chief June 7, 1999
- ----------------------------------------------------- Executive Officer and Director
Stanley T. Crooke, M.D., Ph.D. (Principal executive officer)
* Executive Vice President and June 7, 1999
- ----------------------------------------------------- Chief Financial Officer
B. Lynne Parshall (Principal financial and
accounting officer)
* Director June 7, 1999
- -----------------------------------------------------
Burkhard Blank
* Director June 7, 1999
- -----------------------------------------------------
Christopher F. O. Gabrieli
* Director June 7, 1999
- -----------------------------------------------------
Alan C. Mendelson
* Director June 7, 1999
- -----------------------------------------------------
William R. Miller
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
* Director June 7, 1999
- -----------------------------------------------------
Mark B. Skaletsky
* Director June 7, 1999
- -----------------------------------------------------
Larry Soll
* Director June 7, 1999
- -----------------------------------------------------
Joseph H. Wender
By: /s/ Stanley T. Crooke
------------------------------------------------
Stanley T. Crooke, M.D., Ph.D.
Attorney in Fact
</TABLE>
30
<PAGE> 33
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
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 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.(10)
10.3 Revised form of Incentive Stock Option Agreement under the
Plan.(8)
10.4 Revised form of Supplemental Stock Option Agreement under
the Plan.(8)
10.5 Form of Incentive Stock Option Agreement entered into
between Registrant and certain of its officers together with
related schedule.(4)
10.6 Form of Supplemental Stock Option Agreement entered into
between Registrant and certain of its officers together with
related schedule.(4)
10.7 Registrant's 1992 Non-Employee Directors Stock Option Plan,
as amended.(8)
10.8 Revised form of Supplemental Stock Option Agreement under
Registrant's 1992 Non-Employee Directors' Stock Option
Plan.(9)
10.9 Registrant's Employee Stock Purchase Plan.(2)
10.10 Form of Employee Assignment of Patent Rights.(1)
10.11 Amended and Restated Research, Development and Licensing
Agreement by and between Isis Pharmaceuticals, Inc. and
Novartis AG dated February 13, 1996 (with certain
confidential information deleted).(7)
10.12 License Agreement between the Registrant and the PNA Group
dated as of January 29, 1992 (with certain confidential
information deleted).(3)
10.13 Stock Purchase Agreement between the Registrant and
Boehringer Ingelheim International GmbH, dated as of July
18, 1995 (with certain confidential information deleted).(5)
10.14 Collaborative Agreement between the Registrant and
Boehringer Ingelheim International GmbH, dated as of July
18, 1995 (with certain confidential information deleted).(6)
10.15 Agreement between Registrant and CIBA Vision Corporation
dated July 10, 1997 (with certain confidential information
deleted).(9)
10.16 Amendment No. 2 to the Agreement between the Company and
CIBA Vision Corporation, dated September 14, 1998 (with
certain confidential information deleted).(12)
10.17 Imperial Bank Note Secured by Deed of Trust dated March 24,
1997 in the amount of $6,000,000; together with the related
Deed of Trust and Assignment of Rents dated March 24,
1997.(9)
10.18 Imperial Bank Note Secured by Deed of Trust dated March 24,
1997 in the amount of $3,706,620; together with the related
Deed of Trust and Assignment of Rents dated March 24,
1997.(9)
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10.19 Purchase Agreement for 14% Senior Subordinated Discount
Notes due November 1, 2007 and Warrants for Common Stock
dated October 24, 1997 (with certain confidential
information deleted).(10)
10.20 First Supplement to Purchase Agreement for 14% Senior
Subordinated Discount Notes due November 1, 2007 and
Warrants for Common Stock dated May 1, 1998 (with certain
confidential information deleted).(11)
10.21 Asset Purchase Agreement between Registrant and Gen-Probe
Incorporated dated December 19, 1997 (with certain
confidential information deleted).(10)
10.22 Research Collaboration and License Agreement between Merck &
Co., Inc. and Isis Pharmaceuticals, Inc. dated June 1, 1998
(with certain confidential information deleted).(11)
10.23 Research and Development Agreement between Isis
Pharmaceuticals, Inc. and Zeneca Limited, dated December 18,
1998 (with certain confidential information deleted).(13)
10.24 Patent Rights Purchase Agreement between Isis
Pharmaceuticals, Inc. and Gilead Sciences, Inc., dated
December 18, 1998 (with certain confidential information
deleted).(13)
23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney. Reference is made to page 29.
27.1 Financial Data Schedule.(13)
</TABLE>
- ---------------
(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 Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Report on Form 8-K dated July 18,
1995 and incorporated herein by reference.
(6) 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.
(7) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.
(8) 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.
(9) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 and incorporated herein by reference.
(10) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by reference.
(11) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 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, 1998 and incorporated herein by reference.
(13) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998.
32
<PAGE> 35
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, 1998 and 1997, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
January 30, 1999
33
<PAGE> 36
ISIS PHARMACEUTICALS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 27,618 $ 38,102
Short-term investments.................................... 31,230 48,684
Contracts receivable...................................... 3,466 289
Prepaids and other current assets......................... 873 2,075
--------- --------
Total current assets.............................. 63,187 89,150
Property, plant and equipment, net........................ 21,542 18,785
Patent costs, net......................................... 9,113 7,485
Deposits and other assets................................. 2,232 2,461
--------- --------
$ 96,074 $117,881
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 2,977 $ 2,843
Accrued payroll and related expenses...................... 3,088 2,242
Accrued liabilities....................................... 2,714 4,347
Deferred contract revenues................................ 10,176 14,893
Current portion of long-term obligations.................. 3,581 2,252
--------- --------
Total current liabilities......................... 22,536 26,577
Long-term obligations, less current portion................. 77,724 56,452
Commitments (See Note 3)
Stockholders' equity (deficit):
Common stock, $.001 par value; 50,000,000 shares
authorized, 27,053,000 shares and 26,655,000 shares
issued and outstanding at December 31, 1998 and 1997,
respectively........................................... 27 27
Additional paid-in capital................................ 192,737 188,793
Accumulated other comprehensive income.................... 166 165
Accumulated deficit....................................... (197,116) (154,133)
--------- --------
Total stockholders' equity (deficit).............. (4,186) 34,852
--------- --------
$ 96,074 $117,881
========= ========
</TABLE>
See accompanying notes.
34
<PAGE> 37
ISIS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Research and development revenues under collaborative
agreements............................................ $ 38,611 $ 32,722 $ 22,663
Product revenues......................................... 560 -- --
-------- -------- --------
39,171 32,722 22,663
-------- -------- --------
Expenses:
Research and development................................. 62,200 55,940 45,653
Write-off of acquired patents............................ 5,238 -- --
General and administrative............................... 9,511 8,078 6,246
-------- -------- --------
Total operating expenses......................... 76,949 64,018 51,899
-------- -------- --------
Loss from operations..................................... (37,778) (31,296) (29,236)
Interest income.......................................... 4,150 3,815 3,921
Interest expense......................................... 9,355 3,585 1,206
-------- -------- --------
Net loss................................................... $(42,983) $(31,066) $(26,521)
======== ======== ========
Basic and diluted net loss per share....................... $ (1.60) $ (1.17) $ (1.04)
======== ======== ========
Shares used in computing basic and diluted net loss per
share.................................................... 26,873 26,456 25,585
======== ======== ========
</TABLE>
See accompanying notes.
35
<PAGE> 38
ISIS PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
--------------- PAID IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
DESCRIPTION SHARES AMOUNT CAPITAL INCOME DEFICIT EQUITY
----------- ------ ------ ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995..... 25,249 $25 $172,253 $118 $ (96,546) $ 75,850
Comprehensive Income............. -- -- -- --
Net loss......................... -- -- -- -- (26,521) (26,521)
Changes in unrealized gains and
(losses), net of income
taxes.......................... -- -- -- 60 -- 60
--------
Comprehensive Income............. (26,461)
--------
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............ -- -- 9 -- -- 9
------ --- -------- ---- --------- --------
Balance at December 31, 1996..... 26,201 26 181,248 178 (123,067) 58,385
------ --- -------- ---- --------- --------
Comprehensive Income............. -- -- -- --
Net loss......................... -- -- -- -- (31,066) (31,066)
- --
Change in unrealized gains and
(losses),net of income taxes... -- -- -- (13) -- (13)
--------
Comprehensive Income............. (31,079)
--------
Options exercised and employee
stock purchase plan............ 454 1 3,306 -- -- 3,307
Issuances of warrants to purchase
common stock................... -- -- 3,780 -- -- 3,780
Compensation relating to the
granting of options............ -- -- 459 -- -- 459
------ --- -------- ---- --------- --------
Balance at December 31, 1997..... 26,655 27 188,793 165 (154,133) 34,852
------ --- -------- ---- --------- --------
Comprehensive Income............. -- -- -- --
Net loss......................... -- -- -- -- (42,983) (42,983)
Change in unrealized gains and
(losses), net of income
taxes.......................... -- -- -- 1 -- 1
--------
Comprehensive Income............. (42,982)
--------
Options exercised and employee
stock purchase plan............ 398 -- 2,298 -- -- 2,298
Issuances of warrants to purchase
common stock................... -- -- 1,646 -- -- 1,646
------ --- -------- ---- --------- --------
Balance at December 31, 1998..... 27,053 $27 $192,737 $166 $(197,116) $ (4,186)
====== === ======== ==== ========= ========
</TABLE>
See accompanying notes.
36
<PAGE> 39
ISIS PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net loss................................................... $(42,983) $(31,066) $(26,521)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 4,258 3,178 2,633
Deferred interest on long term debt................... 6,112 654 --
Write-off of acquired patents......................... 5,238 -- --
Compensation related to grant of options.............. -- 459 9
Changes in operating assets and liabilities:
Contracts receivable.................................. (3,177) (289) --
Prepaids and other current assets..................... 1,202 (343) (94)
Accounts payable...................................... 134 481 1,365
Accrued payroll and related expenses.................. 846 753 240
Accrued liabilities................................... (1,633) 1,584 (75)
Deferred contract revenues............................ (4,717) 4,689 1,291
-------- -------- --------
Net cash used in operating activities............... (34,720) (19,900) (21,152)
-------- -------- --------
Investing activities:
Short-term investments................................... 17,454 (8,142) (9,598)
Unrealized gain on investments........................... 1 (13) 60
Property, plant and equipment............................ (4,434) (3,454) (862)
Patent costs............................................. (3,882) (1,455) (1,439)
Deposits and other assets................................ (30) (2,098) 568
-------- -------- --------
Net cash provided by (used in) investing
activities....................................... 9,109 (15,162) (11,271)
-------- -------- --------
Financing activities:
Net proceeds from issuance of equity..................... 3,944 7,087 8,987
Proceeds from long-term borrowing........................ 13,354 32,666 16,200
Principal payments on debt and capital lease
obligations........................................... (2,171) (3,671) (2,145)
-------- -------- --------
Net cash provided from financing activities......... 15,127 36,082 23,042
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (10,484) 1,020 (9,381)
Cash and cash equivalents at beginning of year............. 38,102 37,082 46,463
-------- -------- --------
Cash and cash equivalents at end of year................... $ 27,618 $ 38,102 $ 37,082
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid............................................ $ 3,191 $ 2,644 $ 1,150
Supplemental disclosures of non-cash investing and
financing activities:
Additions to debt and capital lease obligations for
acquisitions of property, plant and equipment......... $ 2,068 $ 2,953 $ 2,325
Additions to debt for patent acquisitions............. $ 3,238 $ -- $ --
</TABLE>
See accompanying notes.
37
<PAGE> 40
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and business activity -- Isis Pharmaceuticals was incorporated
in California on January 10, 1989. In conjunction with its initial public
offering, Isis was reorganized as a Delaware corporation, as Isis
Pharmaceuticals, Inc., in April 1991. Isis was organized principally to develop
human therapeutic drugs using antisense and combinatorial technology.
Basic net loss per share -- In 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings Per Share." Statement No. 128 replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Dilutive earnings per
share includes the dilutive effects of options, warrants and convertible
securities. Options and warrants to purchase common stock were not included in
the computation of diluted net loss per share because the effect would be
antidilutive. All net losses per share have been presented to conform to
Statement No. 128 requirements.
Contract revenues and expenses -- Contract revenues consist of
non-refundable research and development funding and are recorded as earned based
on the performance requirements of the collaborative research and development
contracts. Contract fees for which no further performance obligations exist are
recognized when the payments are received or when the collection is assured.
Payments received in excess of amounts earned are recorded as deferred contract
revenues. Research and development costs are expensed as incurred. For the years
ended December 31, 1998, 1997 and 1996, costs and expenses of approximately
$35,000,000, $31,000,000, and $29,000,000 respectively, were related to
collaborative research and development arrangements.
Revenue recognition -- Isis recognizes revenue from product sales at the
time of shipment. An estimate is made of the amount of the product that may be
returned and current period sales are reduced accordingly. License fees consist
of non-refundable fees from the sale of license rights to our proprietary
technologies. Revenue from these fees is recorded when no further performance
obligations exist.
Cash equivalents and short-term investments -- Cash equivalents and
short-term investments consist of highly liquid debt instruments. Isis considers
instruments with original maturities of less than 90 days to be cash
equivalents. Isis has recorded its cash equivalents and short-term investments
at fair market value as of December 31, 1998, and has classified all of its
investments as available-for-sale. This category includes all securities which
Isis 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 in
accumulated other comprehensive income, 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>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Land........................................................ $ 1,163 $ 1,163
Buildings and improvements.................................. 16,084 13,607
Equipment................................................... 25,324 21,599
Furniture and fixtures...................................... 1,227 927
-------- --------
43,798 37,296
Less accumulated depreciation............................... (22,256) (18,511)
-------- --------
$ 21,542 $ 18,785
======== ========
</TABLE>
38
<PAGE> 41
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
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>
Patent costs -- Isis capitalizes certain costs related to patent
applications, principally consisting of legal and filing fees. These costs are
regularly reviewed to determine that they include costs for patent applications
Isis is pursuing. Costs related to applications that are not being actively
pursued are evaluated under Accounting Principles Board Statement 17: Intangible
Assets and are adjusted to an appropriate amortization period, which results in
an immediate write-off. Accumulated patent costs are amortized on a
straight-line basis over their estimated economic lives of approximately 10
years, beginning with the date the patents are issued. The weighted average
remaining life of issued patents is 8.2 years. Accumulated amortization was
$493,000 at December 31, 1998 and $240,000 at December 31, 1997.
Long-lived assets -- Long-lived assets are reviewed for potential
impairment annually or when events and circumstances warrant an earlier review.
When an evaluation is required, we compare the estimated future undiscounted
cash flows associated with the asset to the asset's carrying amount to determine
if a write-down to market value or discounted cash flow value is required.
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.
Comprehensive income -- Isis adopted Statement of Financial Accounting
Standards (FAS) 130, "Reporting Comprehensive Income", at December 31, 1998.
Under FAS 130, Isis is required to display comprehensive income and its
components as part of Isis' full set of financial statements. The measurement
and presentation of net income did not change. Comprehensive income is comprised
of net income and certain changes in equity that are excluded from net income.
Specifically, FAS 130 requires unrealized holding gains and losses on Isis'
available-for-sale securities, which were reported separately in stockholders'
equity, to be included in accumulated other comprehensive income. Comprehensive
income for the years ended December 31, 1998, 1997 and 1996 have been reflected
in the Consolidated Statement of Stockholders' Equity.
Reclassification -- Certain prior period amounts have been reclassified to
conform to current presentation.
2. INVESTMENTS
Isis invests its excess cash in U.S. Government securities and debt
instruments of financial institutions and corporations with strong credit
ratings. Isis 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.
Isis has not experienced any losses on its short-term investments. As of
December 31, 1998, 79% of the debt securities held by Isis had a contractual
maturity of one year or less, and the remaining 21% of the portfolio was due
within 2 years.
39
<PAGE> 42
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
-----------------------------------
GROSS
UNREALIZED ESTIMATED
COST GAINS FAIR VALUE
------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
DECEMBER 31, 1998
U.S. Treasury securities and obligations of
U.S. Government agencies.......................... $20,700 $ 86 $20,786
U.S. corporate debt securities...................... 10,364 80 10,444
------- ---- -------
Total debt securities..................... $31,064 $166 $31,230
======= ==== =======
DECEMBER 31, 1997
U.S. Treasury securities and obligations of
U.S. Government agencies.......................... $32,980 $105 $33,085
U.S. corporate debt securities...................... 15,539 60 15,599
------- ---- -------
Total debt securities..................... $48,519 $165 $48,684
======= ==== =======
</TABLE>
3. LONG-TERM OBLIGATIONS AND COMMITMENTS
Isis obtained $25,060,000 in private debt financing during 1997 and an
additional $15,000,000 in 1998. The terms of the financing provide for a 10 year
maturity on the debt, interest of 14% per annum and deferred interest payments
for the first 5 years of the loan. After the first 5 years, interest must be
paid quarterly until the end of the loan, November 1, 2007. No principal
repayments are required until the end of the loan. Because interest is deferred
during the first 5 years, the principal balance will be $78 million on November
1, 2002. In conjunction with the debt financing, Isis issued warrants to the
lender to purchase shares of common stock, exercisable at $25 per share. Isis
issued warrants for 500,000 common shares in 1997 and 300,000 shares in 1998.
The fair value of the warrants was estimated using the Black-Scholes option
pricing model, with the following assumptions: expected life of 4.5 years,
expected dividend yield of zero percent and expected volatility of 60 percent.
The assumed risk free interest rate was 5.9%. The warrants were valued at
$3,780,000 and $1,646,000 respectively, and were credited to equity. The
allocation of value to the warrants creates an effective debt discount which is
amortized using the effective interest method. The effective interest rate of
this debt is approximately 16%, including the effect of the discount
amortization. The debt is carried on the balance sheet net of the unamortized
amount allocated to the warrants, and including accrued interest. The carrying
amount at December 31, 1998 was $41,321,000. The fair value of this debt at
December 31, 1998 approximated $45,000,000. The fair value of the long-term debt
is estimated using discounted cash flow analyses, based on current borrowing
rates for similar types of borrowing arrangements.
In 1997, Isis obtained 2 new term loans from a bank to refinance existing
notes secured by real property and to fund facilities expansion. Both notes are
secured by Isis' real property and bear interest at the prime interest rate plus
0.5%. The first note in the amount of $3,707,000 requires monthly principal
repayments of $12,433 plus interest with the remaining principal balance due in
April 2002. The balance of the note at December 31, 1998 was $3,451,000. The
second note in the amount of $6,000,000 requires monthly principal repayments of
$50,000 plus related interest with the remaining principal balance due in July
2002. The balance at December 31, 1998 was $5,150,000. As of December 31, 1998,
the carrying value of these variable rate long-term notes approximated fair
value.
In 1996 and 1997, Isis borrowed a total of $22,576,000 under a $40,000,000
line of credit made available under the terms of its collaborative agreement
with Boehringer Ingelheim International GmbH. The borrowed funds are being used
to fund research and development costs associated with the collaboration.
Borrowings
40
<PAGE> 43
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
under the line of credit bear interest at the 7 year U.S. interbanking rate plus
2.0%, determined at the time each advance is made. Interest payments are due
twice each year with principal repayment due 7 years after the advance date. The
principal may be repaid in cash or stock, at Isis' option. If Isis 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, 1998 was $22,576,000, which approximated fair value.
In December 1998, Isis purchased from Gilead Sciences, Inc. ("Gilead"), the
holdings of its antisense patent estate. This acquisition includes patents and
patent applications covering a broad proprietary suite of antisense chemistry
and antisense drug delivery systems. The purchase price was $6,000,000 payable
in four installments over the next three years. Isis made the initial $2,000,000
payment in December 1998. Isis has recorded the net present value of the future
payments, using a discount rate of 10%, as a long-term obligation on the balance
sheet. The balance of this obligation at December 31, 1998 was $3,238,000, which
approximated fair value.
Isis leases equipment and certain office and lab space under non-cancelable
operating and capital leases with terms through February 2007. Annual future
minimum payments under operating leases and other long-term obligations as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL CONTRACT LONG-TERM
LEASES LEASES OBLIGATIONS DEBT
--------- ------- ----------- ---------
<S> <C> <C> <C> <C>
1999.................................... $1,150 $ 2,426 $1,000 $ 3,388
2000.................................... 859 1,797 1,000 3,321
2001.................................... 856 1,610 2,000 3,253
2002.................................... 797 645 8,574
2003.................................... 778 9 28,955
Thereafter.............................. 2,238 1 128,156
------ ------- ------ ---------
Total minimum payments........ $6,678 $ 6,488 $4,000 $ 175,647
====== ======= ====== =========
Less amount representing interest....... (919) (762) (103,149)
------- ------ ---------
Present value of future minimum
payments.............................. 5,569 3,238 72,498
Less current portion.................... (1,923) (909) (749)
------- ------ ---------
Total......................... $ 3,646 $2,329 $ 71,749
======= ====== =========
</TABLE>
Rent expense for the years ended December 31, 1998, 1997, and 1996 was
$1,328,000, $1,030,000 and $520,000, respectively. Cost of equipment under
capital leases at December 31, 1998 and 1997 was $17,227,000 and $14,133,000,
respectively. Accumulated depreciation of equipment under capital leases at
December 31, 1998 and 1997 was $13,266,000 and $11,177,000, respectively.
4. STOCKHOLDERS' EQUITY
Stock Option Plans and Other Employee Option Grants -- In June 1989, Isis
adopted a stock option plan which provides for the issuance of incentive and
non-qualified stock options for the purchase of up to 10,200,000 shares of
common stock to its employees and certain other individuals. In addition to the
options issued under the terms of the 1989 plan, non-qualified options to
purchase 319,000 shares of common stock have been granted to certain employees.
The plan also includes provisions for the issuance of stock pursuant to
restricted stock purchases and bonuses. Typically options expire 10 years from
the date of grant. Options granted after December 31, 1995 vest over a 4 year
period, with 25% exercisable at the end of 1 year from the date of the grant and
the balance vesting ratably thereafter. Options granted before January 1, 1996
generally
41
<PAGE> 44
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
vest over a 5 year period. At December 31, 1998, a total of 4,347,000 shares
were exercisable, and 1,903,000 were available for future grant.
In July 1992, Isis 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 10 years from the date of grant. Options granted
after December 31, 1995 become exercisable in 4 equal annual installments
beginning 1 year after the date of grant. Options granted before January 1, 1996
vest over a 5 year period. At December 31, 1998, 139,000 shares issued under
this plan were exercisable and 58,000 shares were available for future grant.
The following table summarizes stock option activity for the years ended
December 31, 1998 and 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVG.
SHARES PRICE PER SHARE PRICE/SHARE
--------- ---------------- -------------
<S> <C> <C> <C>
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 $ 8.48
Granted................................... 1,071 13.19 to 19.88
Exercised................................. (395) .14 to 16.00
Terminated................................ (327) 3.75 to 18.25
------
Outstanding at December 31, 1997.......... 6,442 .14 to 20.00 9.80
Granted................................... 1,168 7.06 to 15.44
Exercised................................. (320) .14 to 14.50
Terminated................................ (304) 3.75 to 20.00
------
Outstanding at December 31, 1998.......... 6,986 .14 to 19.88 10.27
======
</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 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/98 EXERCISE PRICE
- -------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.14 - $ 4.00.. 900 4.51 $ 3.32 649 $ 3.09
$ 4.13 - $ 6.38.. 825 4.71 $ 5.68 772 $ 5.70
$ 6.46 - $ 7.75.. 896 4.90 $ 6.88 864 $ 6.87
$ 7.88 - $11.88.. 1,052 5.68 $ 9.91 769 $ 9.66
$12.00 - $12.31.. 851 8.64 $12.29 88 $12.22
$12.31 - $13.13.. 891 7.02 $13.02 621 $13.03
$13.18 - $16.19.. 831 7.82 $14.54 333 $14.61
$16.25 - $19.88.. 740 7.69 $17.99 390 $17.94
----- -----
$ 0.14 - $19.88.. 6,986 6.46 $10.27 4,486 $ 9.10
===== =====
</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
42
<PAGE> 45
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
each six-month purchase period. During 1998, 78,000 shares were issued to
employees at prices ranging from $10.47 to $10.73 per share. In 1997, 58,000
shares were issued at prices ranging from $10.73 to $15.30 per share. At
December 31, 1998, 141,000 shares were available for purchase under this plan.
Stock-Based Employee Compensation -- Isis 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, Isis' net loss and basic net loss per share
would have been changed to the following pro forma amounts (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net loss -- as reported............................ $(42,983) $(31,066) $(26,521)
Net loss -- pro forma.............................. (49,761) (38,004) (32,200)
Basic net loss per share -- as reported............ $ (1.60) $ (1.17) $ (1.04)
Basic net loss per share -- pro forma.............. (1.85) (1.44) (1.26)
</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 1996, 1997 and 1998: expected life of 1 year from vesting date
for regular employees, 2 years from vesting date for Directors and Vice
Presidents, and 4 years from vesting date for Executive Officers; expected
dividend yield of zero percent and expected volatility of 60 percent. The
risk-free interest rate was based on the Treasury Bill rate at the end of each
year during 1996, 1997 and 1998. The weighted average risk free interest rates
for 1996, 1997 and 1998 were 6.1%, 5.7%, and 4.6%, respectively. All options
granted during the year were valued using the same risk-free rate for the
year. The weighted average fair value of options granted was $7.20 for 1996,
$8.50 for 1997 and $5.98 for 1998.
Warrants -- In 1993, Isis issued Class A warrants in connection with a
strategic alliance with PerSeptive Biosystems, Inc. As of December 31, 1998,
448,001 of the warrants remain outstanding at an exercise price of $7.75 per
share. The warrants expire March 15, 1999.
In 1997 and 1998, Isis issued 500,000 and 300,000 warrants, respectively,
in conjunction with a private debt financing agreement. As of December 31, 1998,
all of the warrants remain outstanding at an exercise price of $25 per share.
The warrants expire November 1, 2004. See Note 3.
As of December 31, 1998, total common shares reserved for future issuance
was 10,429,000.
43
<PAGE> 46
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
5. INCOME TAXES
Significant components of Isis' deferred tax assets as of December 31, 1998
and 1997 are shown below. Valuation allowances of $90,931,000 and $71,400,000
have been recognized for 1998 and 1997, respectively, to offset the net deferred
tax assets as realization of such assets is uncertain.
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Capitalized research expense.............................. $ 8,320,000 $ 7,741,000
Net operating loss carryforwards.......................... 69,661,000 57,959,000
Research and development credits.......................... 10,849,000 7,258,000
Other, net................................................ 5,314,000 889,000
------------ ------------
Total deferred tax assets................................. 94,144,000 73,847,000
Deferred tax liabilities:
Patent expense............................................ (3,213,000) (2,447,000)
------------ ------------
Total deferred tax liabilities............................ (3,213,000) (2,447,000)
Total net deferred tax assets............................. 90,931,000 71,400,000
Valuation allowance for deferred tax assets............... (90,931,000) (71,400,000)
------------ ------------
Net deferred tax assets................................... $ 0 $ 0
============ ============
</TABLE>
At December 31, 1998, approximately $3,627,000 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, 1998, Isis had federal and California tax net operating
loss carryforwards of approximately $193,526,000 and $33,507,000, respectively.
Isis also had federal and California research credit carryforwards of
approximately $8,402,000 and $3,765,000, 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.
Approximately $3,100,000 of the California tax loss carryforward expired during
1998 and the related deferred tax asset and tax loss carryforward amounts have
been reduced accordingly. The remaining California tax loss carryforward will
begin expiring in 1999, unless utilized.
Annual use of Isis' 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, Isis believes that such limitations will not have a material impact
upon the utilization of the carryforwards.
6. RESEARCH AND DEVELOPMENT COLLABORATIVE ARRANGEMENTS AND LICENSING AGREEMENTS
In 1990, Isis entered into a collaborative agreement with Novartis to
discover and investigate oligonucleotide compounds active against 4 specific
targets. In 1996, Isis and Novartis signed a definitive agreement broadening the
companies' antisense research and development collaboration to include the
development of ISIS 3521 and ISIS 5132, anticancer compounds that were
discovered through the research collaboration. The broadened collaboration also
includes research to discover additional therapeutic compounds. Under the terms
of the expanded collaboration, Novartis is funding the development of both ISIS
3521 and ISIS 5132. Isis receives certain milestone payments from Novartis as
these compounds and subsequent compounds arising out of the expanded research
program progress through development. Novartis will market these compounds
worldwide and will pay Isis a royalty based on sales. Included in the statement
of operations for
44
<PAGE> 47
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
the years ended December 31, 1998, 1997 and 1996 are contract revenues arising
from this collaboration totaling $15,641,000, $21,106,000 and $14,003,000,
respectively. As of December 31, 1998, Novartis owned approximately 9% of Isis'
outstanding common stock.
In July 1997, Isis and CIBA Vision Corporation entered into an agreement
granting CIBA Vision exclusive worldwide distribution rights for Vitravene(TM)
(fomivirsen). Under the terms of the agreement, Isis will manufacture and sell
Vitravene(TM) to CIBA Vision at a price that will allow Isis and CIBA Vision to
share the commercial value of the product. CIBA Vision will market and sell
Vitravene(TM) worldwide and will be responsible for regulatory approvals outside
of the United States and Europe. Additionally, CIBA Vision received the option
to acquire the exclusive license to market and distribute a second generation
antisense compound to treat CMV retinitis (ISIS 13312) which Isis is currently
developing. At the inception of the agreement, CIBA Vision paid Isis a $5
million non-refundable pre-commercial fee to partially reimburse us for the
costs incurred in discovering and developing Vitravene(TM) to that point. That
payment was recognized as revenue in 1997 and included in the statement of
operations as contract revenue. In August 1998, the FDA approved Vitravene(TM)
for marketing, and in the fourth quarter of the year CIBA Vision began selling
Vitravene(TM) commercially. Isis delivered its first commercial shipment of
Vitravene(TM) to CIBA Vision in the third quarter of 1998 and recorded $560,000
in net product revenues. Under the CIBA Vision agreement Isis earned contract
revenue of $7,500,000 in 1998 and $5,000,000 (which represents the
pre-commercial fee described above) in 1997.
In July 1995, Isis and Boehringer Ingelheim International GmbH signed
definitive agreements and completed the formation of a major collaboration in
cell adhesion drug design, discovery, development and commercialization.
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 was
accounted for as equity and $7,200,000 was accounted for as deferred revenue,
representing Boehringer Ingelheim's advance payment of research and development
costs under the collaboration. In December 1996, coinciding with the achievement
of a milestone, Boehringer Ingelheim purchased 409,000 shares for $10,000,000.
Of that total, $6,000,000 was accounted for as equity and $4,000,000 as deferred
revenue. The agreement also provides that Boehringer Ingelheim is entitled to
designate 1 person for election to Isis' Board of Directors. As of December 31,
1998 Boehringer Ingelheim owned approximately 9% of Isis' outstanding common
stock. Boehringer Ingelheim and Isis 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, 1998, the
outstanding balance under this line of credit was $22,576,000. The statement of
operations for the years ended December 31, 1998, 1997 and 1996 reflects
contract revenues of $6,544,000, $5,603,000 and $4,024,000, respectively, from
this collaboration.
In June 1998, Isis entered into a research collaboration with Merck & Co.
to discover small molecule drug candidates to treat patients infected with
Hepatitis C virus ("HCV"). Isis and Merck will design, synthesize, and evaluate
novel compounds that Merck will screen in its proprietary assays for identifying
HCV replication inhibitors. Merck will commercialize drugs arising from the
collaboration, and Isis retains the right to use technology developed in the
collaboration in our antisense program. The three year collaboration provides us
with annual research support plus technology access fees, and milestone payments
and royalties upon commercialization. In 1998, Isis received a total of
$3,875,000 from Merck under the terms of this agreement.
In August 1998, Isis granted an exclusive license to our patents covering
immune stimulation by phosphorothioate oligonucleotides to CpG
ImmunoPharmaceuticals, Inc. The agreement grants exclusive worldwide rights to
the methods and applications covered by issued U.S. Patents No. 5,663,153; No.
5,723,335; and related patent applications, not including claims for antisense
therapeutics. Under the terms of
45
<PAGE> 48
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
the agreement, Isis received $5 million in 1998 and a 5% equity position in CpG
ImmunoPharmaceuticals, Inc. Isis will also receive a portion of any sublicensing
revenue relating to the technology. In 1998, Isis recorded revenue for the $5
million licensing fee, as there are no further performance obligations. Isis did
not record revenue for the value of the 5% equity position, since realization of
this asset is uncertain.
In November 1998, Isis sublicensed to Pantheco A/S, a Danish biotechnology
company, our Peptide Nucleic Acid technology for the creation of anti-infective
drugs. As the exclusive licensee, Isis will retain the rights for all other
areas of human therapeutics. As part of this transaction, Isis received a 24.9%
equity position in Pantheco A/S. Isis did not record any revenue related to this
transaction, since realization of the value of the equity interest in Pantheco
is uncertain.
In December 1998, Isis purchased from Gilead Sciences, Inc. the holdings of
its antisense patent estate. This acquisition includes patents and patent
applications covering proprietary antisense chemistry and antisense drug
delivery systems. The purchase price was $6,000,000 payable in four installments
over the next three years. Isis made the initial $2,000,000 payment in December
1998. Isis has recorded the net present value of the future payments as a
long-term obligation on the balance sheet. The balance of this obligation at
December 31, 1998 was $3,238,000. Isis acquired the Gilead patents to enhance
its dominant proprietary position in antisense technology. Isis also believes
that the acquisition of the Gilead patents may reduce the risk of possible
future patent infringement claims. Effort will be required by Isis' scientists
to determine if the acquired patents can be developed into potentially viable
products. The scope of the effort to be invested by Isis' scientists is within
the bounds of its existing research and development budgets. Because Isis'
scientists are just beginning to work with the Gilead patents and there is no
assurance that research and development efforts related to these patents will be
successful, Isis wrote off the acquired patents in 1998.
In December 1998, Isis entered into a collaborative research agreement with
Zeneca Pharmaceuticals to discover, develop and commercialize novel
antisense-based cancer drugs. Under the terms of this collaboration, Isis will
create and, with Zeneca, screen antisense-based candidates for certain cancer
targets. Isis will receive from Zeneca a technology access fee, annual research
funding, milestone payments for any drugs progressing into clinical development
and royalties on the sales of any marketed drug arising out of the
collaboration. The initial term of the research collaboration is three years. In
December 1998, Zeneca paid $2,000,000 in technology access fees which was
accounted for as deferred revenue.
Also in December 1998, Isis entered into a research collaboration with
Abbott Laboratories, Inc. to prioritize drug development targets using Isis'
Antisense Target Validation Technology. The collaboration will enable Abbott to
validate numerous gene targets, identify the function of these genes and
prioritize the targets. Isis will receive from Abbott an upfront fee, quarterly
research fees, milestone payments and royalties on net sales of any Abbott
non-antisense product arising from the collaboration. Isis will receive rights
to Abbott genes to develop antisense drugs. The initial term of the research
collaboration is two years. In December 1998, Isis received an initial payment
of $250,000 which was accounted for as deferred revenue.
7. EARNINGS PER SHARE
In July 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share." The Company has adopted the provisions of the new
standard. In accordance with the statement, prior periods have not been restated
as the effect of the change is not material.
46
<PAGE> 49
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Numerator for basic net loss per share -- net
loss.......................................... $(42,983) $(31,066) $(26,521)
Numerator for diluted net loss per share -- net
loss.......................................... $(42,983) $(31,066) $(26,521)
Denominator:
Denominator for basic net loss per
share -- weighted average shares.............. 26,873 26,456 25,585
Denominator for diluted net loss per
share -- weighted average shares.............. 26,873 26,456 25,585
Basic net loss per share........................... $ (1.60) $ (1.17) $ (1.04)
======== ======== ========
Diluted net loss per share......................... $ (1.60) $ (1.17) $ (1.04)
======== ======== ========
</TABLE>
Options and warrants to purchase common stock were not included in the
computation of diluted net loss per share because the effect would be
antidilutive. For additional disclosures regarding outstanding stock options and
warrants, see Note 4 -- Stockholders' equity.
47
<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. 33-75068, 33-96138, and 333-71911 and Form S-8 No. 33-51236,
33-42970, 33-42356, 33-54840, 33-58450, 33-43330, 33-75150, 33-90780, 333-05825,
and 333-55683) of Isis Pharmaceuticals, Inc. and in the related Prospectus of
our report dated January 30, 1999, with respect to the financial statements of
Isis Pharmaceuticals, Inc., as amended, included in this Annual Report (Form
10-K/A) for the year ended December 31, 1998.
ERNST & YOUNG LLP
San Diego, California
June 7, 1999
