<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 September 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.
<TABLE>
<CAPTION>
COMMON STOCK $.001 PAR VALUE 39,013,173 SHARES
---------------------------- -----------------
<S> <C>
(Class) (Outstanding at November 6, 2000)
</TABLE>
<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 September 30, 2000
and December 31, 1999 3
Condensed Statements of Operations for the three
and nine months ended September 30, 2000 and 1999 4
Condensed Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 5
Notes to Financial Statements 6
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations 9
Liquidity and Capital Resources 11
Risk Factors 12
ITEM 3: Quantitative and Qualitative Disclosures About
Market Risk 17
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings 18
ITEM 2: Changes in Securities 18
ITEM 3: Default upon Senior Securities 18
ITEM 4: Submission of Matters to a Vote of Security Holders 18
ITEM 5: Other Information 18
ITEM 6: Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
2
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ISIS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 59,030 $ 35,296
Short-term investments 61,655 17,543
Contract revenue receivable 6,942 5,429
Prepaid expenses and other current assets 1,145 929
------------ ------------
Total current assets 128,772 59,197
Property, plant and equipment, net 23,322 23,945
Patent costs, net 12,135 11,250
Deposits and other assets 1,238 1,724
Investment in joint ventures 11,108 6,991
------------ ------------
Total assets $ 176,575 $ 103,107
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 732 $ 3,148
Accrued payroll and related expenses 2,782 1,215
Accrued liabilities 3,119 2,563
Deferred contract revenues 4,109 4,166
Current portion of long term debt and capital lease obligations 3,538 3,892
------------ ------------
Total current liabilities 14,280 14,984
Long-term debt and capital lease obligations, less current portion 96,330 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 September 30, 2000 and December 31, 1999, respectively 12,623 12,315
Accretion of Series A Preferred stock dividends 280 120
Series B Convertible Exchangeable 5% Preferred stock, $.001 par value; 16,620
shares authorized, 12,015 shares issued and outstanding at
September 30, 2000 and no shares issued and outstanding at December 31, 1999 12,315 -
Accretion of Series B Preferred stock dividends 130 -
Common stock, $.001 par value; 50,000,000 shares authorized, 38,474,485 shares
and 31,613,000 shares issued and outstanding
at September 30, 2000 and December 31, 1999, respectively 38 32
Additional paid-in capital 337,600 245,192
Deferred compensation (1,293) -
Unrealized gain (loss) on investments (31) (29)
Accumulated deficit (295,697) (256,761)
------------ ------------
Total stockholders' equity 65,965 869
------------ ------------
Total liabilities and stockholders' equity $ 176,575 $ 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
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ISIS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended, Nine months ended,
September 30, September 30,
2000 1999 2000 1999
------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenue:
Research and development revenues under
collaborative agreements $ 16,521 $ 9,641 $ 23,631 $ 22,032
Research and development revenues
from joint ventures 1,759 997 5,688 2,390
------------------------- -------------------------
Total Revenue 18,280 10,638 29,319 24,422
Expenses:
Research and development (not including
compensation related to variable stock
options of $502 for the three and nine
months ended September 30, 2000) 16,001 16,273 41,986 47,032
General and administrative (not including
compensation related to variable stock
options of $58 for the three and nine
months ended September 30, 2000) 2,073 2,406 6,311 7,983
Compensation related to variable stock options 560 - 560 -
Restructuring activities 27 - 1,635 -
------------------------- -------------------------
Total Operating Expenses 18,661 18,679 50,492 55,015
------------------------- -------------------------
Loss from operations (381) (8,041) (21,173) (30,593)
Equity in loss of joint ventures (3,659) (2,018) (11,748) (4,295)
Interest income 1,976 553 4,464 1,760
Interest expense (3,345) (2,924) (9,581) (8,429)
------------------------- -------------------------
Net loss (5,409) (12,430) (38,038) (41,557)
Accretion of dividends on preferred stock (311) (150) (898) (267)
------------------------- -------------------------
Net loss applicable to common stock $ (5,720) $ (12,580) $ (38,936) $ (41,824)
========================= =========================
Basic and diluted net loss per share $ (0.15) $ (0.44) $ (1.08) $ (1.49)
========================= =========================
Shares used in computing basic and diluted
net loss per share 38,448 28,838 36,172 28,027
========================= =========================
</TABLE>
See accompanying notes.
4
<PAGE>
ISIS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash used in operations $ (17,268) $ (37,422)
Investing activities:
Short-term investments (44,114) 25,704
Property and equipment (2,775) (3,355)
Other assets (1,340) (2,235)
Investment in joint venture (15,865) (9,174)
------------------------------
Net cash (used for) provided from investing activities (64,094) 10,940
------------------------------
Financing activities:
Net proceeds from issuance of equity securities 103,474 36,734
Proceeds from long-term borrowings 3,850 2,468
Principal payments on debt and capital lease obligations (2,228) (2,005)
------------------------------
Net cash provided from financing activities 105,096 37,197
------------------------------
Net increase in cash and cash equivalents 23,734 10,715
Cash and cash equivalents at beginning of period 35,296 27,618
------------------------------
Cash and cash equivalents at end of period $ 59,030 $ 38,333
==============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 878 $ 2,017
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Additions to long-term debt obligations for acquisitions of property,
plant and equipment $ - $ 2,071
Additions to receivables from sales of property, plant and equipment 27 -
Conversion of preferred stock dividends into preferred stock 608 -
</TABLE>
See accompanying notes.
5
<PAGE>
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited interim financial statements for the nine month periods
ended September 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) that 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-TM-
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.
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
nine month period ended September 30, 2000, Isis recognized $3,834,724 in
contract revenues for research and development activities performed for OraSense
Ltd. This amount was included as research and development revenues from joint
ventures for the related periods.
The results of operations of OraSense Ltd. for the nine month period
ended September 30, 2000 was as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 2000
----------------
<S> <C>
Revenue $ --
Research and Development expense 9,035
----------------
Net Loss $ (9,035)
================
</TABLE>
6
<PAGE>
HEPASENSE
On January 14, 2000, Isis and Elan formed a new joint venture to
develop an antisense drug, ISIS 14803, to treat patients infected with the
Hepatitis C virus (HCV). The new joint venture, called HepaSense, plans to
develop and commercialize this novel drug for HCV while investigating delivery
of the drug with Elan's proprietary MEDIPAD-TM- Drug Delivery System, a
disposable subcutaneous infusion device. HepaSense is initially owned 80.1% by
the Company and 19.9% by Elan. ISIS 14803 is in Phase II clinical trials. Isis
and Elan have each licensed technology 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 nine month period ended September 30, 2000, Isis recognized
$1,853,144 in contract revenues for research and development activities
performed for HepaSense Ltd. This amount was included as research and
development revenues from joint ventures for the related periods.
The results of operations of HepaSense Ltd. for the nine month period
ended September 30, 2000 was as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 2000
------------------
<S> <C>
Revenue $ --
Research and Development expense 5,632
------------------
Net Loss $ (5,632)
==================
</TABLE>
AGOURON PHARMACEUTICALS, INC., a PFIZER COMPANY
In June 2000, Ibis Therapeutics-TM- ("Ibis"), a division of Isis
Pharmaceuticals, Inc. and Agouron Pharmaceuticals, Inc., a Pfizer Company
("Pfizer"), 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 Pfizer's expertise in small
molecule drug discovery, the collaboration will focus on discovering drugs that
bind to RNA. Pfizer will fund collaborative research, pay an upfront technology
access fee and make milestone payments totaling up to $37 million for the first
product. In addition, Pfizer will develop and commercialize drugs discovered by
the collaboration and will pay Isis royalties on the sales of drugs.
THE R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE
In August 2000, GeneTrove-TM-, a division of Isis, 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. PRI will make
milestone payments for the successful validation of such novel gene targets.
7
<PAGE>
COLEY PHARMACEUTICAL GROUP
In September 2000, Isis sold its patents concerning the use of
phosphorothioate oligonucleotides for activating the immune system to Coley
Pharmaceutical Group ("Coley"). The patents were originally licensed to Coley
in 1998 for a limited scope of use, at which time Coley paid Isis $5 million
in cash and issued preferred stock to Isis. In exchange for all non-antisense
rights to this group of immunomodulation patents and in lieu of any and all
future payments that could potentially be owed under the original agreement,
Coley paid Isis an additional $10.7 million. A portion of the fee, $3.7
million, was paid to repurchase the Coley preferred stock that was granted to
Isis as part of the total consideration given for the original patent
license. During the three and nine month period ended September 30, 2000,
Isis recognized $10.7 million in licensing revenue from the transaction. This
amount was included in research and development revenues under collaborative
agreements for the related periods.
3. FINANCING
Over the nine months ended September 30, 2000, Isis sold 2,939,460
shares of its common stock to institutional investors at negotiated prices
ranging from $10.45 per share to $27.25 per share. In addition, over the nine
months ended September 30, 2000 the Company sold 1,997,879 shares of its common
stock to Ridgeway Investment Limited at prices ranging from $7.57 per share to
$14.45 per share under the terms of the Common Stock Purchase Agreement filed as
an exhibit to the Company's registration statement on Form S-3, No. 333-90811.
The per share average purchase prices reflect the average trading prices of the
common stock over a period of time less a discount percentage ranging from 4.5%
to 5.875%.
4. SUBSEQUENT EVENTS
In September 2000, Isis entered into an agreement to license its novel
antisense chemistry, Peptide Nucleic Acid ("PNA"), to Pantheco A/S ("Pantheco"),
a Danish biotechnology company, on a nonexclusive basis to treat diabetes and
cardiovascular diseases. Pantheco completed financing to raise funds to support
its current business and to fund this expansion of therapeutic focus on October
18, 2000. Subsequent to the completion of Pantheco's financing, Isis received,
as a fee for this license, 9 million DKK, or $1.1 million, which was paid in
Pantheco shares. In addition, Pantheco will pay Isis royalties and milestones on
products developed using the PNA. This is the second license of PNA technology
from Isis to Pantheco. As part of the first licensing transaction completed in
November 1998, Isis received an equity position in Pantheco for which no
carrying value was given as realization of the value of the equity interest in
Pantheco was uncertain. As a result of the current transaction, Isis' ownership
of Pantheco is approximately 22%.
On October 6, 2000, pursuant to the Company's registration statement on
Form S-3, No. 333-90811, Isis sold 483,092 shares of its common stock to an
institutional investor at a negotiated price of $10.35 per share.
On October 10, 2000, Isis completed the licensing of novel chemistry
patents to Roche Molecular Systems, Inc. ("RMS"), a business unit of Roche
Diagnostics, for use in the production of RMS's diagnostic products. The
royalty-bearing license grants RMS non-exclusive worldwide access to proprietary
Isis chemistry, in exchange for initial and ongoing payments.
8
<PAGE>
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 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 below under "Risk
Factors".
Since our inception in January 1989, almost all of Isis' resources have
been devoted to our research, drug discovery and drug development programs. Isis
is not yet profitable and we expect 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 our
research and development costs.
RESULTS OF OPERATIONS
Isis' revenue from collaborative research and development agreements
with corporate and government partners was $16.5 million for the three months
ended September 30, 2000, and $23.6 million for the nine months ended September
30, 2000, compared with $9.6 million and $22.0 million, respectively, for the
same periods in 1999. The revenue increase was due primarily to $10.7 million in
licensing revenue from the sale to Coley of Isis' patents concerning the use of
phosphorothioate oligonucleotides for activating the immune system. In addition,
Isis earned revenue from ongoing collaborations, including the Pfizer
collaboration that began in the second quarter, as well as from government
grants and contracts, . These increases were partially offset by a decrease in
revenues in 2000, due to the conclusion of development funding in December 1999
by Novartis and Boehringer Ingelheim . Isis recognized contract revenues for
research and development activities performed for its joint ventures, OraSense
and HepaSense, of $1.8 million and $5.7 million, respectively, for the three and
nine months ended September 30, 2000, compared with $1.0 million and $2.4
million, respectively, for the same periods in 1999. The increase in the current
year was due to the start of the HepaSense joint venture in January 2000. Isis
also had interest income of $2.0 million for the quarter ended September 30,
2000, and $4.5 million for the nine months ended September 30, 2000, compared
with $0.6 million and $1.8 million, respectively, for the same periods in 1999.
This increase in interest income was primarily due to higher average cash and
investment balances and, in part, to higher interest rates.
Research and development expenses were $16.0 million and $42.0 million,
respectively, for the three and nine months ended September 30, 2000, compared
with $16.3 million and $47.0 million, respectively, for the same periods in
1999. For both periods, research and development expenses were driven by the
cost of activities to support the progress of drugs in clinical trials. The
decrease in expenses was primarily the result of our restructuring activities
and reduction in staff previously announced in January 2000 offset by increased
spending related to the
9
<PAGE>
initiation of Phase III clinical trials for ISIS 3521 in non-small cell lung
cancer.
General and administrative expenses decreased to $2.1 million for the
three months ended September 30, 2000 and $6.3 million for the nine months ended
September 30, 2000, from $2.4 million and $8.0 million, respectively, for the
same periods in 1999. This decrease in general and administrative expenses was
primarily related to the Company's restructuring activities mentioned above.
Compensation related to variable stock options was $0.6 million for the
three and nine months ended September 30, 2000. Stock options granted to
consultants are required to be accounted for as variable stock options in
accordance with EITF 96-18. Isis granted options to consultants with exercise
prices of fair market value at the time of issuance. In addition, in January
2000 Isis offered non-officer employees an opportunity to exchange certain of
their existing options. These options are required to be accounted for as
variable stock options in accordance with Financial Accounting Standards Board
Interpretation Number 44. Variable stock options can result in significant
increases and decreases in compensation expense subject to the variability of
Isis' stock price.
The estimated cost of restructuring activities was recorded in the
first quarter of 2000, and totaled $1.6 million. For the nine months ended
September 30, 2000, we have incurred actual costs of approximately $1.6 million,
a nominal portion of which was incurred in the third quarter. We do not
anticipate the actual costs to substantially exceed the amount incurred to date.
This expense primarily consisted of costs associated with our reduction in work
force.
Interest expense increased to $3.3 million and $9.6 million,
respectively, for the three and nine months ended September 30, 2000, compared
to $2.9 million and $8.4 million, respectively, for the same periods in 1999.
The increase was due primarily to interest accrued 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 was also due to borrowings by Isis during the second quarter of
1999 and the first and second quarters of 2000 under a debt facility from Elan
related to the OraSense joint venture to fund Isis' share of OraSense expenses.
Of the $3.3 million of interest expense recognized in the third quarter of 2000,
$2.4 million was accrued under long-term debt agreements and will not require
current cash payments. Similarly, of the $8.4 million of interest expense
incurred during the nine months ended September 30, 2000, $7.0 million was
accrued under long-term debt arrangements and will not require current cash
payments.
During the three and nine month periods ended September 30, 2000, Isis
recorded a net loss applicable to common stock of $5.7 million and $38.9
million, respectively, or $0.15 and $1.08 per share, respectively, compared with
$12.6 million and $41.8 million, respectively, or $0.44 and $1.49 per share,
respectively, for the same periods in 1999. The third quarter 2000 loss included
$1.8 million in joint venture revenue together with $3.7 million for Isis'
equity in the losses from OraSense and HepaSense, the joint ventures, compared
to $1.0 million and $2.0 million, respectively, for the same period in 1999. The
increases were primarily due to the formation of the HepaSense joint venture in
January 2000. Isis' loss from operations was $0.4 million for the third quarter
of 2000, compared to $8.0 million for the same period in 1999. The decrease in
loss from operations in the third quarter was primarily attributable to the
$10.7 million in licensing revenue from the sale to Coley of Isis' patents
concerning the use of phosphorothioate
10
<PAGE>
oligonucleotides for activating the immune system and, in part, to our
restructuring activities. Operating losses may fluctuate from quarter to quarter
because of differences in the timing of revenue and expense recognition.
We believe that inflation and changing prices have not had a material
effect on our operations to date.
LIQUIDITY AND CAPITAL RESOURCES
Isis has financed its operations with revenue from contract research
and development, product sales, patent licensing, through the sale of equity
securities and the issuance of long-term debt. From our inception through
September 30, 2000, we have earned approximately $209 million in revenue from
contract research and development, patent licensing and product sales. Isis has
also raised net proceeds of approximately $353 million from the sale of equity
securities since we were founded. To date, Isis has borrowed approximately $79
million under long-term debt arrangements to finance a portion of its
operations.
As of September 30, 2000, Isis had cash, cash equivalents and
short-term investments totaling $120.7 million and working capital of $114.5
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 nine months of 2000
were primarily due to the sales of common stock to institutional investors and
the sale of common stock to Elan International Services, Ltd. ("EIS") in
conjunction with the formation of HepaSense, funding from Ibis' collaboration
with Pfizer, and proceeds from the sale of Isis' patents to Coley.
Isis' collaborative agreement with Boehringer Ingelheim provided us
with a line of credit that was used to support the collaboration's cell adhesion
programs. As of September 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 of the loans, 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 September 30, 2000 was $55.7 million.
As of September 30, 2000, Isis' long-term obligations totaled $96.3
million, compared to $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 $3.9 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. Isis will continue to use lease financing
as long as the terms remain commercially attractive. We believe that our
existing cash, cash equivalents and short-term investments, combined
11
<PAGE>
with interest income and contract revenue will be sufficient to meet our
anticipated requirements for at least the next 36 months.
PROSPECTIVE INFORMATION
On October 4, 2000, We announced that we will reinitiate development of
its antisense ICAM-1 inhibitor, ISIS 2302 in Crohn's disease. A recently
completed analysis of the randomized trial indicates that those patients who
received higher exposure to ISIS 2302 were more likely to experience complete
clinical remission, the primary endpoint of the study. Patients in complete
clinical remission were completely off steroids and symptom-free. The analysis
showed that patients' exposure to ISIS 2302 varied based on gender and weight.
Isis is planning additional clinical studies in Crohn's patients using higher
doses of ISIS 2302 to reproduce the drug exposure levels that correlated with
higher response rates in the analysis.
On October 18, 2000, we announced that the first patient had been
dosed in a Phase III trial of ISIS 3521 in non-small cell lung cancer. The
study will evaluate the ability of ISIS 3521 to safely prolong the lives of
patients' with non-small cell lung cancer when given in combination with a
standard chemotherapy regimen, used to treat non-small cell lung cancer. In
early November 2000 we announced that the U.S. Food and Drug Administration
("FDA") granted fast track review status to ISIS 3521. The FDA's fast track
review process is intended to expedite the review of treatments that have the
potential to address unmet medical needs for serious life-threatening
diseases.
On October 25, 2000, we announced that we had initiated Phase I
clinical studies of ISIS 104838, a novel antisense drug to treat inflammatory
and autoimmune diseases such as rheumatoid arthritis and Crohn's disease. ISIS
104838, an inhibitor of TNF-alpha, employs Isis' proprietary second-generation
antisense chemistry which is more potent and more stable than first generation
chemistries. The clinical program for ISIS 104838 will investigate the safety
and efficacy of the drug administered intravenously and subcutaneously. Oral
formulations of ISIS 104838 are being developed in parallel by Isis' joint
venture with Elan, OraSense. OraSense plans to test solid dosage forms (tablets
or capsules) of ISIS 104838 in human clinical trials in 2001.
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 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.
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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, VitraveneTM. We cannot guarantee that any of
our other product candidates will obtain required government approvals or that
we can successfully commercialize any products.
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. No commercial shipments of
Vitravene 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.
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OUR BUSINESS COULD SUFFER IF THE RESULTS OF 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 for 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 we were founded in
January 1989. As of September 30, 2000, our accumulated losses were
approximately $296 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. 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 the next
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;
- 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.
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Additional funds will need to be raised through public or private
financing. Additional financing may not be available, or, if available, may not
be available 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.
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 are developing. These competitive developments could
make our technology and products obsolete or non-competitive before we have had
enough time to develop and commercialize our products, or 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 pending 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.
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INTELLECTUAL PROPERTY LITIGATION COULD HARM OUR BUSINESS.
It is possible that we may 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 this 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 that we 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
intense 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 past nine months, the market price of our common
stock has ranged from $5.88 to $33.81 per share. The market price can be
affected by many factors, including, for example, fluctuations 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 our 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, any holder of 15% or
more of our voting stock, 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 the outstanding common stock. These provisions may
discourage certain types
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of transactions in which our stockholders might otherwise receive a premium for
their shares over then current market prices, and may limit the ability of our
stockholders to approve transactions that they think may be in their best
interests. In addition, our 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Isis is exposed to changes in interest rates primarily from its
long-term debt arrangements and, secondarily, its investments in certain
short-term investments. Isis invests its excess cash in highly liquid short-term
investments that are typically held for the duration of the term of the
respective instrument. Isis 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, we believe that, while the securities we hold are subject to
changes in the financial standing of the issuer of such securities, we are 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.
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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
Not applicable.
ITEM 5. OTHER INFORMATION
On September 26, 2000, Isis announced that B. Lynne Parshall had been
elected to the Company's Board of Directors, increasing the Board to seven.
Ms. Parshall is Executive Vice President and Chief Financial Officer of
Isis Pharmaceuticals. She is responsible for overseeing the operations of
regulatory affairs, development chemistry and manufacturing, business
development, finance, and the Company's legal and patent affairs.
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
Not applicable
b. Reports on Form 8-K
Not applicable
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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: November 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: November 14, 2000 By: /s/ B. LYNNE PARSHALL
------------------ -------------------------------
B. Lynne Parshall
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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