<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to _______
Commission file number 0-19125
ISIS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0336973
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2292 Faraday Avenue, Carlsbad, CA
92008 (Address of principal executive offices,
including zip code)
(760) 931-9200
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
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.
(1)Yes [X] No [ ](2) Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK $.001 PAR VALUE 38,448,777 SHARES
---------------------------- -----------------
(Class) (Outstanding at July 31, 2000)
<PAGE>
ISIS PHARMACEUTICALS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Balance Sheets as of June 30, 2000 and December 31, 1999 3
Condensed Statements of Operations for the three and six months
ended June 30, 2000 and 1999 4
Condensed Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 5
Notes to Financial Statements 6
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Results of Operations 7
Liquidity and Capital Resources 8
Quantitative and Qualitative Disclosures About Market Risk 13
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings 13
ITEM 2: Changes in Securities 13
ITEM 3: Default upon Senior Securities 13
ITEM 4: Submission of Matters to a Vote of Security Holders 13
ITEM 5: Other Information 14
ITEM 6: Exhibits and Reports on Form 8-K 14
SIGNATURES
</TABLE>
2
<PAGE>
ISIS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(In Thousands)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents 62,043 35,296
Short-term investments 58,291 17,543
Contract revenue receivable 4,644 5,429
Prepaid expenses and other current assets 1,210 929
------------ ------------
Total current assets 126,188 59,197
Property, plant and equipment, net 22,596 23,945
Patent costs, net 11,886 11,250
Deposits and other assets 1,587 1,724
Investment in joint ventures 14,767 6,991
------------ ------------
Total assets 177,024 103,107
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 1,134 3,148
Accrued payroll and related expenses 2,344 1,215
Accrued liabilities 3,210 2,563
Deferred contract revenues 2,351 4,166
Current portion of long term debt and capital lease obligations 3,723 3,892
------------ ------------
Total current liabilities 12,762 14,984
Long-term debt and capital lease obligations, less current portion 94,504 87,254
Stockholders' equity:
Series A Convertible Exchangeable 5% Preferred stock, $.001 par value;
15,000,000 shares authorized, 120,150 shares issued
and outstanding at June 30, 2000 and December 31, 1999, respectivley 12,623 12,315
Accretion of Series A Preferred stock dividends 122 120
Series B Convertible Exchangeable 5% Preferred stock, $.001 par
value; 16,620 shares authorized, 12,015 shares and no shares issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively 12,015 --
Accretion of Series B Preferred stock dividends 277 --
Common stock, $.001 par value; 50,000,000 shares authorized, 38,375,438 shares
and 31,613,000 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively 38 32
Additional paid-in capital 334,687 245,192
Unrealized gain (loss) on investments (26) (29)
Accumulated deficit (289,978) (256,761)
------------ ------------
Total stockholders' equity 69,758 869
------------ ------------
Total liabilities and stockholders' equity 177,024 103,107
============ ============
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date.
See accompanying notes.
3
<PAGE>
ISIS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three months ended, Six months ended,
June 30, June 30,
2000 1999 2000 1999
------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenue:
Research and development revenues under
collaborative agreements $4,224 $5,815 $7,110 $12,391
Research and development revenues
from joint ventures 2,761 1,393 3,929 1,393
------------------------- -------------------------
Total Revenue 6,985 7,208 11,039 13,784
Expenses:
Research and development 12,746 16,443 25,985 30,759
General and administrative 2,414 2,762 4,238 5,577
Restructuring activities - - 1,608 -
------------------------- -------------------------
Total Operating Expenses 15,160 19,205 31,831 36,336
------------------------- -------------------------
(Loss) from operations (8,175) (11,997) (20,792) (22,552)
Equity in loss of joint ventures (4,594) (2,277) (8,089) (2,277)
Interest income 1,596 551 2,488 1,207
Interest expense (3,129) (2,800) (6,236) (5,505)
------------------------- -------------------------
Net loss (14,302) (16,523) (32,629) (29,127)
------------------------- -------------------------
Accretion of dividends on preferred stock (306) (117) (587) (117)
------------------------- -------------------------
Net loss applicable to common stock (14,608) (16,640) (33,216) (29,244)
========================= =========================
Basic and diluted net loss per share ($0.40) ($0.59) ($0.95) ($1.06)
========================= =========================
Shares used in computing basic and diluted
net loss per share 36,979 28,047 35,021 27,615
========================= =========================
</TABLE>
See accompanying notes.
4
<PAGE>
ISIS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash used in operations (19,385) (28,351)
Investing activities:
Short-term investments (40,745) 22,632
Property and equipment (924) (894)
Other assets (876) (1,423)
Investment in joint venture (15,865) (12,015)
------------------------------
Net cash used for investing activities (58,410) 8,300
------------------------------
Financing activities:
Net proceeds from issuance of equity securities 102,103 28,144
Proceeds from long-term borrowings 3,850 -
Principal payments on debt and capital lease obligations (1,411) (1,338)
------------------------------
Net cash provided from financing activities 104,542 26,806
------------------------------
Net increase (decrease) in cash and cash equivalents 26,747 6,755
Cash and cash equivalents at beginning of period 35,296 27,618
------------------------------
Cash and cash equivalents at end of period 62,043 34,373
==============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid 530 1,654
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Additions to long-term debt obligations for acquisitions of property,
plant and equipment - 2,071
Conversion of preferred stock dividends into preferred stock 308 -
</TABLE>
See accompanying notes.
5
<PAGE>
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited interim financial statements for the six month periods ended
June 30, 2000 and 1999 have been prepared on the same basis as the Company's
audited financial statements for the year ended December 31, 1999. The financial
statements include all adjustments (consisting only of normal recurring
adjustments) which the Company considers necessary for a fair presentation of
the financial position at such dates and the operating results and cash flows
for those periods. Results for the interim periods are not necessarily
indicative of the results for the entire year. For more complete financial
information, these financial statements, and notes thereto, should be read in
conjunction with the audited financial statements for the year ended December
31, 1999 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
2. STRATEGIC ALLIANCES
ORASENSE
On April 20, 1999, Isis Pharmaceuticals, Inc., a Delaware corporation
("Isis" or the "Company") and Elan Corporation, plc ("Elan") formed a joint
venture to develop technology for the formulation of oral oligonucleotide
drugs. The joint venture, Orasense Ltd. ("Orasense"), a Bermuda limited
company, is initially owned 80.1% by the Company and 19.9% by Elan. Isis and
Elan each contributed rights to certain oral drug delivery technology to the
joint venture. In addition, Isis contributed rights to ISIS 104838, an
antisense oligonucleotide to inhibit TNF-(alpha), which will be the first
candidate for oral formulation by Orasense. Isis and Elan will provide
development and manufacturing services to Orasense and will be entitled to a
portion of milestone payments and royalties received by Orasense for
development of orally formulated oligonucleotide drugs. If Isis enters into
an agreement with Orasense for oral formulation of any Isis oligonucleotide
drug, Isis will pay Orasense royalties and a portion of certain third party
milestone payments with respect to the drug.
While Isis owns 80.1% of the outstanding common stock of Orasense, Elan and
its subsidiaries have retained significant minority investor rights that are
considered "participating rights" as defined in EITF 96-16. Therefore, Isis does
not consolidate the financial statements of Orasense, but instead accounts for
its investment in Orasense under the equity method of accounting. During the six
month period ended June 30, 2000, Isis recognized $2,490,566 in contract
revenues for research and development activities performed for Orasense Ltd.
This amount is included as research and development revenues from joint ventures
for the related periods.
The results of operations of Orasense Ltd. for the six month period ended
June 30, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 2000
----------------
<S> <C>
Revenue $ --
Research and Development expense $ 6,151
Net Loss $ 6,151
</TABLE>
HEPASENSE
On January 14, 2000, Isis and Elan Corporation formed a new joint venture
to develop an antisense drug, ISIS 14803, to treat patients chronically infected
with the Hepatitis C virus (HCV). The new joint venture is called HepaSense and
plans to develop and commercialize this novel therapeutic for HCV while
investigating delivery of the therapeutic with Elan's proprietary
MEDIPAD-Registered Tradmark- Drug Delivery System, a disposable subcutaneous
infusion device. ISIS 14803 began Phase I clinical trials in early 2000. Isis
and Elan have each licensed technology to HepaSense.
In conjunction with the formation of HepaSense, Elan International
Services, Ltd. ("EIS") purchased 12,015 shares of Isis' Series B Preferred stock
for $12,015,000. In April 2000, EIS purchased an additional 298,000 shares of
Isis' common stock for $7,500,000. EIS will purchase an additional $7.5 million
of common stock at a premium to Isis' market price upon completion of a mutually
agreed milestone.
After June 30, 2002, the preferred stock (including accrued dividends) will
be convertible at EIS' option, into shares of Isis' common stock at 125% of the
60-trading day average closing price of Isis' common stock ending two business
days prior to June 30,
6
<PAGE>
2002 (as adjusted for stock splits, stock dividends and the like). In the
event of a liquidation of Isis or certain transactions involving a change of
control of Isis, the agreement provides for automatic conversion of the
preferred stock on terms similar to those set forth above.
Isis is not obligated to issue shares representing more than 19.99% of its
then outstanding Common Stock upon conversion of the Preferred Stock if it would
result in a violation of the rules of any securities market or exchange upon
which the Common Stock is traded.
At any time until June 30, 2002, the holders of preferred stock may
exchange their preferred stock with Isis for preferred shares of HepaSense, Ltd.
held by Isis that represent 60.2% of the total outstanding preferred stock of
HepaSense. The exchange right will terminate if the Isis Series B Convertible
Preferred stock is converted into Isis' common stock, unless such conversion
occurs as a result of a liquidation or certain transactions involving a change
of control of Isis.
Isis contributed $12,015,000 to HepaSense as the purchase price for 6,001
shares of common stock of HepaSense and 3,612 shares of HepaSense preferred
stock. Until July 14, 2002, EIS will, at Isis' request, purchase convertible
debt of Isis in an amount equal to Isis' share of budgeted funding for
HepaSense. The convertible debt will have a term of six years, bear interest at
the rate of 12% and be convertible into Isis' common stock at a premium. Isis
may prepay the convertible debt in cash or Isis' common stock. Isis will use the
proceeds of the sale of the convertible debt to provide additional development
funding to HepaSense.
While Isis owns 80.1% of the outstanding common stock of HepaSense, Elan
and its subsidiaries have retained significant minority investor rights that are
considered "participating rights" as defined in EITF 96-16. Therefore, Isis does
not consolidate the financial statements of HepaSense, but instead accounts for
its investment in HepaSense under the equity method of accounting. During the
six month period ended June 30, 2000, Isis recognized $1,439,126 in contract
revenues for research and development activities performed for HepaSense Ltd.
This amount is included as research and development revenues from joint ventures
for the related periods.
The results of operations of HepaSense Ltd. for the six month period ended
June 30, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 2000
----------------
<S> <C>
Revenue $ --
Research and Development expense $ 3,939
----------
Net Loss $ 3,939
==========
</TABLE>
AGOURON
In June 2000, Ibis Therapeutics ("Ibis"), a division of Isis
Pharmaceuticals, Inc. and Agouron Pharmaceuticals, Inc., a Pfizer Company,
entered into a collaboration for the discovery and development of small molecule
drugs against certain RNA targets in an undisclosed therapeutic area. Using
Ibis' proprietary technology and Agouron's expertise in small molecule drug
discovery, the collaboration will focus on discovering drugs that bind to RNA.
Agouron will fund collaborative research, pay an upfront technology access fee
and make milestone payments totaling $37 million for the first product. In
addition, Agouron will develop and commercialize drugs discovered by the
collaboration and will pay Isis royalties on the sales of drugs.
3. FINANCING
On March 8, 2000, Isis sold 1,000,000 shares of its common stock to an
institutional investor at a negotiated price of $27.25 per share. In addition,
over the six months ended June 30, 2000 the company sold 4,937,289 shares of its
common stock to Ridgeway Investment Limited at prices ranging from an average of
$7.57 per share to $21.66 per share under the terms of the Common Stock Purchase
Agreement filed as an exhibit to the prospectus dated December 6, 1999. The per
share average purchase prices reflect the average trading prices of the common
stock on the Nasdaq National Market during the respective drawdown periods.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information contained in this Report, this Report
contains forward-looking statements regarding Isis' business and products and
their projected prospects and qualities as well as our relationships with our
corporate partners. Such statements are subject to certain risks and
uncertainties, particularly those inherent in the process of discovering,
developing and
7
<PAGE>
commercializing drugs that are 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-Q. As a result, the reader should not place undue reliance on these
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under "Risk
Factors".
Since its inception in January 1989, almost all of Isis' resources have
been devoted to its research, drug discovery and drug development programs. Isis
is not yet profitable and expects to continue to have operating losses for the
next few years. Isis's revenue comes from collaborative research and development
agreements with pharmaceutical companies, research grants and interest income.
The revenue from the collaborations increases the amount of research and
development activity that Isis is able to fund and offsets a portion of its
research and development costs.
RESULTS OF OPERATIONS
Isis' revenue from collaborative research and development agreements with
corporate and government partners was $4.2 million for the second quarter and
$7.1 million for the six months ended June 30, 2000, compared with $5.8 million
and $12.4 million respectively, for the same periods in 1999. The revenue
decrease was due primarily to the conclusion of development funding at December
1999 by Novartis for the cancer drugs ISIS 5132 and ISIS 3521 and Boehringer
Ingelheim for ISIS 2302. This decrease was partially offset by an increase in
revenues from ongoing collaborations including government grants and contracts
and the Agouron collaboration that began in the second quarter. Isis recognized
contract revenues for research and development activities performed for its
joint ventures, OraSense and HepaSense, of $2.7 million and $3.9 million for the
three and six months ended June 30, 2000, respectively, compared with $1.4
million for the same periods in 1999. The increase in the current period is due
to the start of the HepaSense joint venture in January 2000. The Company also
had interest income of $1.6 million for the quarter and $2.5 million for the six
months ended June 30, 2000, compared with $0.6 million and $1.2 million for the
same periods in 1999. This increase in interest income was due primarily to
higher average cash and investment balances and, in part to higher interest
rates.
Research and development expenses were $12.7 million for the three months
ended June 30, 2000, and $26.0 million for the six months ended June 30, 2000,
compared with $16.4 million and $30.8 million respectively, for the same periods
in 1999. For both periods, research and development expenses were driven by the
cost of preclinical and clinical activities to support the progress of drugs in
clinical trials. The decrease in research and development expenses is directly
related to the implementation of the company's restructuring plan, which was
announced in January 2000.
General and administrative expenses decreased to $2.4 million for the
second quarter and $4.2 million for the six months ended June 30, 2000, from
$2.8 million and $5.6 million for the same periods in 1999. This decrease in
general and administrative expenses is primarily related to the company's
restructuring activities.
The total cost of restructuring was recorded in the first quarter and
totaled $1.6 million. To date, we have incurred actual costs of approximately
$1.5 million and do not anticipate the actual costs to exceed $1.6 million. This
expense is comprised primarily of labor costs for our reduction in work force.
Interest expense increased to $3.1 million for the second quarter and
$6.2 million for the six months ended June 30, 2000, compared to $2.8 million
and $5.5 million for the same periods in 1999. The increase is due primarily
to accruing interest on our $40 million debt financing that was completed in
the fourth quarter of 1997 and the second quarter of 1998. In this financing,
payment of interest accrues for the first five years and no principal
payments are due for 10 years. The increase in interest expense is also due
to borrowings by Isis during the second quarter of 1999 and the first quarter
of 2000 under a debt facility from Elan related to the OraSense joint venture
to fund Isis' share of OraSense expenses. Of the $3.1 million of interest
expense recognized in the second quarter of 2000, $2.3 million was accrued
under long-term debt agreements and will not require current cash payment.
Similarly, of the $6.2 million of interest expense incurred during the six
months ended June 30, 2000, $4.6 million was accrued under long-term debt
arrangements and will not require current cash payments.
During the quarter and six month periods ended June 30, 2000, Isis recorded
a net loss applicable to common stock of $14.6 million and $33.2 million, or
$0.40 and $0.95 per share respectively, compared with $16.6 million and $29.2
million, or $0.59 and $1.06 per share respectively, for the same periods in
1999. The second quarter 2000 loss included $2.8 million in joint venture
revenue together with $4.6 million for Isis' equity in the loss of Orasense and
HepaSense, the joint ventures, compared to $1.4 million and $2.3 million
respectively, for the same period in 1999. Isis' loss from operations was $8.2
million for the second quarter of 2000, compared
8
<PAGE>
to $12.0 million for the same period in 1999. The decrease in loss from
operations in the second quarter is primarily attributable to our
restructuring activities. Operating losses may fluctuate from quarter to
quarter because of differences in the timing of revenue and expense
recognition.
Isis believes that inflation and changing prices have not had a material
effect on its operations to date.
LIQUIDITY AND CAPITAL RESOURCES
The company has financed its operations with revenue from contract research
and development, through the sale of equity securities and the issuance of
long-term debt. From Isis' inception through June 30, 2000, Isis has earned
approximately $191 million in revenue from contract research and development.
Isis has also raised net proceeds of approximately $352 million from the sale of
equity securities since it was founded. The company has borrowed approximately
$76 million under long-term debt arrangements to finance a portion of its
operations.
As of June 30, 2000, Isis had cash, cash equivalents and short-term
investments totaling $120.3 million and working capital of $113.4 million. In
comparison, we had cash, cash equivalents and short-term investments of $52.8
million and working capital of $44.2 million as of December 31, 1999. The
increases in cash and working capital during the first half of the year are due
primarily to the sales of common stock to institutional investors along with the
sale of common stock to Elan International Services, Ltd. ("EIS") in conjunction
with the formation of HepaSense and funding from Ibis' collaboration with
Agouron.
Isis' collaborative agreement with Boehringer Ingelheim provided a line of
credit which was used to support the collaboration cell adhesion programs. As of
June 30, 2000, the outstanding balance of this obligation was $22.6 million. In
1999 Isis reacquired the rights to ISIS 2302 from Boehringer Ingelheim.
Therefore, there will be no further draws against this line.
In 1997 and 1998, Isis borrowed a total of $40 million in private
transactions. The loans bear interest at 14% per annum and must be repaid on
November 1, 2007. The interest accrues during the first five years of the loans.
After the first five years, interest must be paid quarterly. No principal
payments are required until November 1, 2007. In conjunction with these
transactions, Isis issued warrants to purchase 800,000 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. Because interest is accrued during the
first five years, the balance of these borrowings will accrue to a total of $78
million on November 1, 2002. The debt under these arrangements is carried on the
balance sheet, net of the amortized amount allocated to the warrants and
including accrued interest. The combined carrying amount of these notes at June
30, 2000 was $53.4 million.
As of June 30, 2000, Isis' long-term obligations totaled $94.5 million,
versus $87.3 million at December 31, 1999. The increase was due to the accrual
of interest on the ten-year notes described above and the addition of $2.5
million in loans related to partnership agreements, including the Orasense joint
venture. This increase was partially offset by principal repayments on existing
obligations. The company expects that capital lease obligations will increase
over time to fund capital equipment acquisitions required for Isis' growing
business. The company will continue to use lease financing as long as the terms
remain commercially attractive. The company believes 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 for at
least the next 36 months.
PROSPECTIVE INFORMATION
On August 3, 2000, Isis' GeneTrove-TM- division initiated an antisense
target validation collaboration with The R.W. Johnson Pharmaceutical Research
Institute (PRI), a member of the Johnson & Johnson family of companies, to
assess and prioritize genes as drug discovery targets. GeneTrove will use its
proprietary antisense technology to assist PRI to study the function and
therapeutic relevance of novel gene targets.
RISK FACTORS
Please consider the following risk factors carefully in addition to
the other information contained in this report.
9
<PAGE>
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 the optimum
dosage for each, 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.
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-TM-. 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-TM-, 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-TM- to
our partner CIBA Vision in 1998, earning product revenue of $560,000. No
commercial shipments of Vitravene-TM- were made in 1999 or to date in 2000,
and no product revenue was earned.
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 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.
In late 1999, we completed a Phase III trial of ISIS 2302 in Crohn's
disease. The data from that study did not demonstrate efficacy and did not
support an NDA filing. This negative outcome was unexpected. In late 1998, the
company conducted an
10
<PAGE>
interim analysis of the first 150 patients enrolled in the study. Based on
the positive data from the interim analysis, the company believed that the
300 patient study was likely to support an NDA filing. This same result could
occur with other products under development.
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 June 30, 2000, our accumulated losses were approximately
$290 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-TM-. 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 on those funds, will be adequate to satisfy our capital needs for at
least three years. 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-TM-;
- 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 will
need to 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 Avecia Life Science Molecules of Manchester, England pursuant
to which Avecia LSM will supply a portion of our requirements of drugs for
clinical trials. As of the date of this report, we have not yet received any
supply of drugs under this arrangement, and we cannot guarantee that Avecia LSM
will prove to be an acceptable alternative supplier.
11
<PAGE>
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 potentially 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.
To date, 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. Disputes could involve litigation or
proceedings declared by the United States 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.
We may not be able to obtain a license to such intellectual property 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 management and key scientific employees might slow
the achievement of important research and development goals. It is also critical
to our success to recruit and retain qualified scientific personnel to perform
research and development work. We may not be able to attract and retain skilled
and experienced scientific personnel 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. 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.
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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 the outstanding common stock. 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. In addition, the board of directors has the authority to
fix the rights and preferences of and issue shares of Preferred Stock, which may
have the effect of delaying or preventing a change in control of Isis without
action by the stockholders
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily from its
long-term debt arrangements and, secondarily, its investments in certain
short-term investments. The Company invests its excess cash in highly liquid
short-term investments that are typically held for the duration of the term of
the respective instrument. The Company does not utilize derivative financial
instruments, derivative commodity instruments or other market risk sensitive
instruments, positions or transactions to manage exposure to interest rate
changes. Accordingly, the Company believes that, while the securities the
Company holds are subject to changes in the financial standing of the issuer of
such securities, the Company is not subject to any material risks arising from
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices or other market changes that affect market risk sensitive
instruments.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 8, 2000, The Company's Annual Meeting of Stockholders
was held in Carlsbad, California for the following purposes:
(1) To elect three (3) Class III Directors of the Company. The
total number of votes cast for and against are as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
Nominees with terms to expire at the 2003 Annual Meeting:
<S> <C> <C>
Alan C. Mendelson 34,038,339 185,612
William R. Miller 33,310,472 913,479
Christopher F.O. Gabrieli 34,027,525 196,426
(2) To approve the Company's 2000 Employee Stock Purchase Plan. The number of
votes for, against and abstaining was 18,244,257, 1,216,187 and 116,292,
respectively.
(3) To ratify the appointment of Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending
</TABLE>
13
<PAGE>
December 31, 2000. The total number of votes cast for, against and
abstaining was 34,045,286, 135,500 and 43,165, respectively.
ITEM 5. OTHER INFORMATION
Pursuant to the Company's bylaws, stockholders who wish to
bring matters or propose nominees for director at the
Company's 2001 annual meeting of stockholders must provide
specified information to the Company by January 31, 2001
(unless such matters are included in the Company's proxy
statement pursuant to Rule 14a-8 under Securities Exchange
Act of 1934, as amended).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.33 Agreement between Registrant and Agouron Pharmaceuticals dated
June 9, 2000 (with certain confidential information deleted).
27.1 Financial Data Schedules
b. Reports on Form 8-K
Not applicable
14
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ISIS PHARMACEUTICALS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ISIS PHARMACEUTICALS, INC.
(Registrant)
Date: August 14, 2000 By: /S/ STANLEY T. CROOKE
--------------- -------------------------------
Stanley T. Crooke, M.D., Ph.D.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2000 By: /S/ B. LYNNE PARSHALL
--------------- -------------------------------
B. Lynne Parshall
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
15
