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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-19125
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ISIS PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 33-0336973
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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2292 FARADAY AVE., CARLSBAD, CA 92008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
760-931-9200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
The approximate aggregate market value of the common stock held by
non-affiliates of the Registrant, based upon the last sale price of the common
stock reported on the National Association of Securities Dealers Automated
Quotation National Market System was $533,724,000 as of March 24, 2000.*
The number of shares of common stock outstanding as of March 24, 2000 was
35,094,199.
DOCUMENTS INCORPORATED BY REFERENCE
(To the extent indicated herein)
Registrant's definitive Proxy Statement which will be filed on or before
April 24, 2000 with the Securities and Exchange Commission in connection with
Registrant's annual meeting of stockholders to be held on June 8, 2000 is
incorporated by reference into Part III of this Report.
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* Excludes 4,265,360 shares of common stock held by directors and officers and
stockholders whose beneficial ownership exceeds 10 percent of the shares
outstanding at February 25, 2000. Exclusion of shares held by any person
should not be construed to indicate that such person possesses the power,
direct or indirect, to direct or cause the direction of the management or
policies of the Registrant, or that such person is controlled by or under
common control with the Registrant.
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THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS REGARDING THE
COMPANY'S BUSINESS AND THE THERAPEUTIC AND COMMERCIAL POTENTIAL OF ITS
TECHNOLOGIES AND PRODUCTS IN DEVELOPMENT. SUCH STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES, PARTICULARLY THOSE RISKS OR UNCERTAINTIES INHERENT IN
THE PROCESS OF DISCOVERING, DEVELOPING AND COMMERCIALIZING DRUGS THAT CAN BE
PROVEN TO BE SAFE AND EFFECTIVE FOR USE AS HUMAN THERAPEUTICS, AND THE ENDEAVOR
OF BUILDING A BUSINESS AROUND SUCH POTENTIAL PRODUCTS. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS FORM 10-K. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THIS FORM 10-K INCLUDING THOSE IDENTIFIED IN THE SECTION OF ITEM 1
ENTITLED "RISK FACTORS." AS A RESULT, THE READER IS CAUTIONED NOT TO RELY ON
THESE FORWARD-LOOKING STATEMENTS.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Isis Pharmaceuticals, Inc. is a leading genomics-based drug discovery
and development company that is focused on RNA. Our goal is to create important
new drug discovery technology platforms that will improve the productivity of
the pharmaceutical industry and will enable our discovery and development of
important new drugs to treat disease and improve the lives of patients. RNA is a
novel target for drug discovery, and Isis has established a dominant position in
RNA research. We have integrated our expertise in molecular and cellular
biology, medicinal chemistry, RNA biochemistry, bioinformatics, pharmacology and
clinical development to create two exciting technologies, antisense and Ibis, a
robust pipeline of drugs in development and genomics services.
Our technologies have reached a level of maturity to be of substantial
value to the company and to industry partners. Additionally, our technologies
are protected by a broad patent estate covering inventions in areas such as
antisense chemistries, gene sequences, antisense drugs in specific diseases and
manufacturing methods.
ANTISENSE. Our leading technology, antisense, is a science based on the
direct application of gene sequence information. We have pioneered and reduced
to practice the synthesis of antisense inhibitors to the RNA of genes. Antisense
inhibitors can be used directly as drugs or as genomics tools. Based on the
specificity of antisense, we believe we can design antisense drugs that are
safer and more effective than traditional drugs. We have succeeded in bringing
the first antisense drug to market, Vitravene(TM), for CMV retinitis. Our
development pipeline includes five compounds presently in clinical trials, of
which at least one will advance to Phase III before year-end. We have
successfully leveraged our antisense technology through corporate collaborations
with Elan Corporation, Merck & Co., Astra-Zeneca PLC, Abbott Laboratories, Inc.,
Aventis S.A. (formerly Rhone-Poulenc Rorer), CIBA Vision, Novartis Pharma AG and
Boehringer Ingelheim International GmbH. These collaborations increase our
financial resources, improve our technological strength and establish valuable
development and commercial relationships.
GENETROVE(TM) GENOMICS. In the company's GeneTrove division, we are
leveraging our antisense expertise to provide pharmaceutical and biotechnology
companies gene function and target validation information about genes that they
are interested in targeting for drug development. We can provide this
information rapidly and efficiently for partners with the proprietary methods
and systems that we have developed for our own use in creating antisense
inhibitors as drugs, because the scientific process is identical. We have
collaborations in place with three major pharmaceutical partners for these
services and plan to grow this business in the near term.
IBIS THERAPEUTICS(TM) TECHNOLOGY. With recently acquired knowledge of
RNA structures and new sequence data from the gene sequence ("genomic")
databases, Isis is developing a new drug discovery paradigm: specific targeting
of RNA with small molecule drugs. We are creating and using new software to
identify particular RNA structures to serve as targets for drugs. Our
proprietary molecular modeling techniques can be used to predict the shape of
drug binding pockets in RNA structures. With a working approximation of the
shape of the target, our Ibis Therapeutics division is designing libraries of
drug-like molecules that can bind to the RNA targets. We use mass spectrometry
to screen large numbers of small molecules against multiple RNA targets
simultaneously. We are applying this drug discovery approach initially to
anti-bacterials, and we believe that the technology will be useful in a broad
range of diseases.
ANTISENSE RESEARCH, DRUG DISCOVERY, DEVELOPMENT AND MANUFACTURING
Antisense research involves the following process: We identify a target
gene, learn its precise genetic sequence, or code, and then assemble a synthetic
strand of genetic code to complement the code of its RNA precisely. The product
we've created, the synthetic strand of DNA, is called an antisense inhibitor to
the target gene. Antisense inhibitors can be used in two ways: 1) directly as a
drug, because production of a disease-
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causing protein is prevented when the inhibitor binds to the gene and 2) as a
tool to understand a gene's function and value as a drug target.
Our antisense drug research programs focus on targets associated with
infectious, inflammatory, cardiovascular and metabolic diseases and cancer. Our
expertise in molecular biology and drug discovery enables rapid identification
of potent antisense inhibitors of disease causing proteins. We are then able to
specifically tailor the inhibitor to the particular disease indication targeted
through our medicinal chemistry expertise. Additionally, our medicinal chemistry
programs have developed novel chemistries that allow us to design new antisense
compounds that are potentially safer and more active than current antisense
drugs and which have the potential to allow more convenient forms of dosing,
including oral delivery.
In 1998, the U.S. Food and Drug Administration approved Vitravene(TM)
(fomivirsen) to treat CMV retinitis in AIDS patients. Vitravene(TM) is the first
antisense drug to be approved for marketing. CIBA Vision, our distribution
partner for this drug, launched Vitravene(TM) in November 1998. CIBA Vision is
the eye care unit of life sciences leader Novartis Pharma AG. In 1999,
Vitravene(TM) also received marketing approval in Europe and Brazil. We
currently have five antisense compounds in human clinical trials, with
additional compounds arising out of our broad research program in preclinical
development which are represented in the chart below:
ISIS DEVELOPMENT PIPELINE
[GRAPH]
ISIS 3521 is a potent, selective inhibitor of protein kinase C (PKC)
- -(alpha) gene expression that has demonstrated encouraging results in Phase I
trials. Phase II trials are being conducted in patients with a range of solid
tumors.
ISIS 5132, is a potent selective inhibitor of C-raf kinase. Phase II
trials are being conducted in patients with a range of solid tumors.
ISIS 2503 is a potent, selective antisense inhibitor of Ha-ras in Phase
II clinical trials in patients with a variety of solid tumors.
ISIS 2302 inhibits expression of intercellular adhesion molecule 1
(ICAM-1), a molecule involved in a variety of inflammatory diseases and
conditions. ISIS 2302 is in Phase IIa trials of a topical formulation for
psoriasis and an enema formulation for ulcerative colitis.
ISIS 14803 is an antisense inhibitor of the Hepatitis C Virus that is in
Phase I/II clinical trials in patients with chronic Hepatitis C.
ISIS 104838 is an inhibitor of inflammatory target TNF-(alpha) which is
involved in diseases such as rheumatoid arthritis and Crohn's disease.
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ISIS 107248 is an inhibitor of CD49d, which is involved in inflammatory
diseases such as multiple sclerosis.
We have successfully leveraged our technology through supportive
corporate collaborations with Elan Corporation, Merck & Co., AstraZeneca PLC,
Abbott Laboratories, Inc., CIBA Vision, Novartis Pharma AG and Boehringer
Ingelheim International GmbH. These collaborations increase our financial
resources, improve our technological strength and establish valuable development
and commercial relationships. As a result, we have been able, and expect to
continue, to pursue drug discovery and development activities aggressively. We
have retained substantial commercial rights to all of our drug candidates,
including those funded by corporate collaborators.
Isis has established a very strong patent position to cover its diverse
portfolio of inventions and intellectual property. As of February 28, 2000 we
have been issued or allowed more than 590 patents worldwide. A particularly
important patent covering RNase H1, the key enzyme responsible for the mechanism
of action of antisense gene inhibition, was issued to Isis in December 1999.
This important patent will significantly strengthen the dominant position of
Isis in both antisense therapeutics and genomics.
We have focused significant efforts on developing cost-effective,
large-scale, Good Manufacturing Practices manufacturing capability for antisense
compounds. We currently manufacture antisense compounds to meet all of our
research and clinical needs, as well as the needs of our partners. We have
achieved significant manufacturing cost reductions through chemistry and process
improvements. We believe that, with reasonably anticipated benefits resulting
from increases in scale, we will be able to manufacture antisense compounds at
commercially attractive prices. Under the terms of our agreement with CIBA
Vision, Isis manufactures all of the commercial supplies of Vitravene(TM).
In December 1999, the unexpected failure of our pivotal clinical trial
of ISIS 2302 in Crohn's disease prompted the restructuring of the company. In
January 2000, we announced a restructuring plan to reduce expenses and focus
resources on the development of antisense drugs with significant commercial
potential. In conjunction with this restructuring, we will reduce Isis'
workforce by approximately 140 employees in the first four months of 2000. We
estimate that the costs associated with this restructuring will approximate $2
million. Under the restructuring plan, Isis will have cash and committed funds
sufficient to support activities for at least three years. We expect to make
significant progress toward our primary goals of commercializing antisense
drugs, creating value from both our Ibis and GeneTrove divisions, and building
shareholder value in that time frame.
GENETROVE(TM) DIVISION - ANTISENSE TARGET VALIDATION AND GENE
FUNCTIONALIZATION
Our GeneTrove division uses antisense as a tool to provide vital
information about human genes: what they do, how they behave within cells and
biological systems, whether they are important in disease, whether they would
make good drug targets. The processes involved in answering these questions are
called gene functionalization and target validation. We have created and/or
integrated proprietary systems to functionalize and validate gene targets in a
highly efficient manner, as these processes are fundamental to our core research
in identifying antisense drug candidates.
We are also performing these genomics services for three pharmaceutical
company partners. Our collaboration with Abbott Laboratories began in 1998, with
Aventis S.A. (formerly Rhone-Poulenc Rorer) began in 1999 and with Astra-Zeneca
in 2000. With the windfall of gene sequence information now available to
pharmaceutical and biotechnology companies, there is significant demand for
services such as ours in order to understand and prioritize the gene targets in
drug discovery programs and expedite discovery of drug development candidates.
We intend to grow our GeneTrove business this year by marketing the speed,
accuracy and efficiency of our genomics capabilities to new partners.
IBIS DIVISION - RNA SMALL MOLECULE DRUG DISCOVERY
Through the development of antisense technology, we have amassed
expertise in RNA structure and function. We have combined this understanding
with innovations in medicinal chemistry, bioinformatics, comparative genomics,
and mass spectrometry to develop a novel proprietary drug discovery program that
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targets the structured regions of RNA as the binding site for small molecule
drugs. In this program we have developed proprietary technologies to:
1) Compare gene sequences across and within species to identify
target sites in structured RNA;
2) Predict structure of RNA from genome sequence data;
3) Quickly create and screen large libraries of small molecule
compounds designed to bind RNA; and
4) Screen for RNA-binding molecules using novel mass spectrometry.
As an example of the power of this technology, we expect to be
able to screen 10,000 compounds against 10 RNA targets per day.
While our initial area of focus is in discovering novel antibacterial
drugs, we believe the Ibis technology has potential in cancer, central nervous
system disease, inflammation and degenerative diseases of aging. To date, we
have funded the Ibis program through grants from the Defense Advanced Research
Projects Agency. The technology has now reached an appropriate level of maturity
to enable us to market it to potential pharmaceutical industry partners, and we
plan to grow this business by establishing new collaborations.
ISIS DRUG DISCOVERY AND DEVELOPMENT
Isis' efforts as a drug discovery and development company have focused
on RNA. RNA is a novel target for drug discovery, and Isis has established a
dominant position in RNA research. We have assembled a team of world-class
scientists whose expertise in molecular and cellular biology, medicinal
chemistry, RNA biochemistry, bioinformatics and pharmacology has been centered
on RNA. When our knowledge in these core disciplines is combined with our
clinical development capabilities, we have an integrated platform from which to
develop of important new drugs to treat disease and improve the lives of
patients. Our work in RNA-based drug discovery and development work has produced
two important drug-discovery technologies: antisense and Ibis RNA-targeted small
molecule discovery. From these technologies we have developed a robust pipeline
of promising new drugs and efficient genomics tools that unlock value from gene
sequence data.
ANTISENSE TECHNOLOGY PLATFORM
ANTISENSE DRUG DISCOVERY
Almost all human diseases are a result of inappropriate protein
production or performance. Traditional drugs are designed to interact with the
proteins in the body that are supporting or causing a disease. Antisense
technology is different than traditional drug development because it targets
disease-causing proteins before they are produced. Antisense drugs can be
designed to treat a wide range of diseases, including infectious, inflammatory
and cardiovascular diseases and cancer.
Antisense technology represents a new model for drug discovery because
it focuses on compounds that interact with messenger RNA or mRNA, which has not
been a site for traditional drug interaction. Using the information contained in
mRNA, we design chemical structures, easily recognized by the body, which
resemble mRNA and DNA. These potent "antisense" oligonucleotides inhibit the
production of disease-causing proteins. This method of drug design is highly
productive, and in ten years we have created a substantial pipeline of drug
candidates, including 5 compounds currently in clinical trials.
Design of antisense compounds is less complex, more rapid and more
efficient than traditional drug design directed at protein targets. Traditional
drug design usually begins by characterizing the three-dimensional structure of
the protein target in order to design a prototype drug to interact with it.
Proteins are complex molecules with structures that are difficult to predict.
Antisense compounds, on the other hand, are designed to bind to mRNA structures,
which are more easily understood and predicted. Prototype antisense drugs can be
designed as soon as the sequence for the mRNA receptor is identified.
Our early research efforts focused on answering basic questions
regarding antisense-based therapeutics, including their stability, their ability
to be taken up by the target cells, their efficacy and the cost
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of manufacturing them. In the ten years since our founding, we have made
significant progress in understanding and using antisense technology to create
drugs, and have established a leadership position in this field.
THE MECHANISM OF ANTISENSE DRUGS
Genes carry the information that cells need to produce proteins.
Specific genes contain information to produce specific proteins at the genetic
level. The human genome, and its collection of more than 100,000 genes, contains
the information required for the human body to produce all proteins. Genes are
made up of DNA, a molecule that contains the information about when and how much
of which protein to produce, depending on what function is to be performed. The
DNA molecule is a "double helix"--a duplex of entwined strands. In each strand,
the building blocks of DNA, the nucleotides, are bound or "paired" with
complementary nucleotides on the other strand. The precise sequence of a
nucleotide chain, called the "sense" sequence, is a blueprint for the
information that is used during protein production. The sequence of a nucleotide
chain that is precisely complementary to a given sense sequence is called its
"antisense" sequence.
In the cell nucleus, the information in the gene necessary for the
production of a protein is copied from one strand of DNA into precursor mRNA
through a process called transcription. After processing into mature mRNA, the
mRNA moves from the nucleus of the cell into the cell cytoplasm, which contains
amino acids. The information encoded in a single mRNA is then translated into
many copies of the sequence of amino acids that builds the protein.
Antisense drugs are mirror or complementary images of small segments of
mRNA. To create antisense drugs, nucleotides are linked together in short chains
called oligonucleotides. Each antisense drug is designed to bind to a specific
sequence of nucleotides in its mRNA target to inhibit production of the protein
encoded by the target mRNA. By preventing the production of the disease-causing
protein and acting in the early stage of the disease-causing process, antisense
drugs have the potential to provide greater therapeutic benefit than traditional
drugs, which do not act until after the disease causing protein has been
produced.
Antisense drugs can be designed to be much more selective than
traditional drugs. Because antisense drugs interact by binding to mRNA and not,
as traditional drugs do, by binding to proteins, antisense drugs are able to
selectively inhibit one protein among a closely related group of proteins
without having an impact on the other members of the group. As a result, we are
able to design antisense drugs that selectively inhibit the disease-causing
member of the group without interfering with those members of the group
necessary for normal bodily functions. As a result of this unique selectivity,
antisense drugs have the potential to be far less toxic than traditional drugs
because they can be designed to minimize the impact on unintended targets.
ISIS' GENETROVE(TM) DIVISION
ANTISENSE TARGET VALIDATION AND GENE FUNCTIONALIZATION
Historically, the genomics industry has been focused on identifying and
cataloging all of the genes in the human genome. This stage of the process is
almost completed. The next steps in the process of making drugs and creating
value from genomics are to identify the functions of the 100,000 plus human
genes (gene functionalization) and to identify which genes are good targets for
drugs (target validation). While this is a challenging task, Isis has developed
its GeneTrove division, responsible for the company's antisense target
validation and gene functionalization program that can provide this genomic
information in an efficient and cost effective manner.
GeneTrove's antisense target validation and gene functionalization
program is based on Isis' expertise in producing highly specific antisense
inhibitors to genes and on a variety of specialized technology that the company
has created and/or integrated. Our antisense inhibitors can be used in cellular
assays and in animal models of disease to rapidly determine the pharmacological
impact of inhibiting the expression of a single gene target and to determine the
role of the targeted gene in human disease. Once we have shown that a target is
important in human disease, traditional drug discovery can be used to develop
drugs to inhibit the target, or the specific antisense inhibitor used to
validate the target can be rapidly developed as a drug.
Specialized technologies employed by our GeneTrove division include:
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- A proprietary automated rapid throughput screening process that
streamlines the creation of optimized, target-specific antisense
inhibitors. We are using this system to build a large
proprietary database of inhibitors to more than 100 gene targets
per year. We are filing patent applications on these gene
targets as rapidly as they can be produced, thus expanding our
proprietary position in gene function and antisense.
- Comparative genomics and covariance analysis, fields that Isis
has pioneered, provide key insights into biological function and
pathways. The process involves the comparison of molecules and
molecular systems of different organisms to find similarities
and differences across species. By determining how the molecules
of biological systems co-vary, we gain insights about how the
component parts of complex systems fit together. By assessing
the evolutionary position at which genes become expressed or
diverge, genes can be placed in likely pathways and we can
achieve a great deal of understanding about gene function.
- Low-density DNA arrays developed by GeneTrove use proprietary
chemistry. When used in parallel with commercial arrays,
GeneTrove can acquire unique data, including insights regarding
gene function in normal and disease processes and can also
identify potential toxicological problems associated with
modulation of a particular gene.
- A proprietary bioinformatics database, called MetaGraph, is
capable of assimilating vast quantities of genomics data and
finding relationships in complex data arrays.
GeneTrove has already achieved many significant accomplishments. With a
relatively small-scale effort, Isis has identified antisense inhibitors to more
than 500 genes, patented many of these findings and expects to create antisense
inhibitors to all important human genes over the next several years. As
inhibitors to these genes are created and tested, the data are being
incorporated into our pathway-oriented genomic database. To date, over 20
pathways have been characterized, including: MAP-kinases, apoptosis, NF-Kappa B,
cell adhesion, and TNF signaling and insulin signaling. We have established
Isis' first three target validation and gene functionalization partnerships with
Abbott Laboratories, Aventis and AstraZenca and we are pursuing additional
partnerships.
IBIS TECHNOLOGY PLATFORM
RNA-TARGETED SMALL MOLECULE DRUG DISCOVERY
Ibis Therapeutics is our program to discover low molecular weight,
potentially orally bioavailable drugs that work by binding to RNA. Ibis
leverages our success in pioneering RNA-targeted drug discovery and development
and expands our ability to convert genomics data into drug discovery
information.
In Ibis, we have developed proprietary technologies in four key areas:
- Mining genomes for structured RNA in therapeutic targets;
- Predicting the three-dimensional structure of RNA from genome
sequence data and designing RNA-targeted small molecules;
- Synthesizing libraries of compounds designed to find RNA; and
- Screening for RNA-binding molecules using novel massively
parallel screening technology and producing lead compounds for
further optimization and development.
With Ibis, we are developing and integrating genome mining software to
identify these RNA structural motifs in therapeutic targets of interest. We can
predict the three-dimensional shape of these motifs from biochemical probes of
RNA structure and molecular modeling methods. We have made a fundamental
breakthrough in the development of a parallel high-throughput screening strategy
to identify small molecules that bind RNA targets using high resolution mass
spectrometry. In a MASS (multitarget affinity/specificity screening) assay, each
compound and each target RNA is labeled by its exact molecular mass. Since every
small molecule is labeled uniquely, a large mixture can be screened in the
presence of several RNA targets simultaneously. The identity of the small
molecule, the RNA target that it binds, its binding affinity and the
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location of the binding site on the RNA can be determined in one rapid set of
experiments. Using this technology, we expect to be able to screen 10,000
compounds per day against 10 RNA targets.
Our initial area of focus in Ibis is discovering novel antibacterial
compounds. The technology has potential application in cancer, central nervous
system disease, inflammation, as well as degenerative diseases of aging. To
date, we have funded Ibis through government sponsored grants from the Defense
Advanced Research Projects Agency and the National Institute of Standards and
Technology. Our goal for Ibis is for it to be self-funding through corporate
partner support. We will move Ibis toward this goal by providing drug candidates
for development and providing optimized leads to pharmaceutical partners for
development and commercialization.
PRODUCTS APPROVED AND UNDER DEVELOPMENT
Our drug discovery programs use antisense and combinatorial drug
discovery technologies to identify compounds to treat infectious and
inflammatory diseases and cancer. The following table outlines each product
under development, its target, disease indication and development status, as
well as Isis' commercial rights.
ISIS PRODUCTS IN DEVELOPMENT
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DISEASE
COMPOUND TARGET INDICATION DEVELOPMENT STATUS(1) COMMERCIAL RIGHTS
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Vitravene CMV Cytomegalovirus Approved for Isis/CIBA Vision(2)
(fomivirsen) Retinitis marketing in the
U.S., Europe and
Brazil. Other market
applications under
review.
ISIS 3521 PKC-(alpha) Cancer Phase II Isis
ISIS 5132 C-raf kinase Cancer Phase II Isis
ISIS 2503 Ha-ras Cancer Phase II Isis
ISIS 2302 ICAM-1 Psoriasis Phase II Isis
(topical)
Ulcerative Phase II
colitis (enema)
ISIS 14803 HCV Hepatitis C Phase I/II HepaSense, Ltd.(3)
ISIS 104838 TNF-(alpha) Inflammation IND Candidate Isis/ Orasense, Ltd.(4)
ISIS 107248 CD49d Inflammation IND Candidate Isis
</TABLE>
(1) An "IND candidate" is a compound for which IND-enabling toxicology and
pharmacokinetic studies have been initiated and IND preparation has
begun.
(2) CIBA Vision has the exclusive right to distribute fomivirsen.
(3) HepaSense is a joint venture of Isis and Elan.
(4) Orasense, a joint venture of Isis and Elan, owns the rights to an oral
formulation of ISIS 104838.
We also have a significant research program with the potential to yield
additional development candidates in the future. As described in the section of
this report entitled "Risk Factors - Uncertainties
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Associated with Clinical Trials," the product candidates listed in the preceding
table may not progress beyond their current status or yield a commercially
viable product.
INFECTIOUS DISEASES
CYTOMEGALOVIRUS (CMV) RETINITIS. Individuals with suppressed immune
systems, such as those with AIDS resulting from the HIV virus, are susceptible
to opportunistic infections caused by CMV. In the AIDS population, retinitis
caused by CMV is the primary cause of blindness. There are more than 270,000
active AIDS cases in the United States. The introduction of new anti-HIV drugs,
particularly protease inhibitors and combination treatment regimens, has
prolonged survival in HIV-infected individuals. Over the last three years, this
has resulted in a decline in mortality from AIDS, accompanied by a decline in
the incidence of many opportunistic infections including CMV. Currently approved
drugs for CMV retinitis are ganciclovir, foscarnet, cidofovir and fomivirsen.
Foscarnet and cidofovir are available in intravenous (IV) dosing forms only.
Ganciclovir is available in IV and oral doses, as well as in an intraocular
implant form.
VITRAVENE(TM) (FOMIVIRSEN). In August 1998, the FDA approved
Vitravene(TM) to treat CMV retinitis in AIDS patients. Vitravene(TM) is an
antisense compound discovered by Isis. CIBA Vision, our worldwide distribution
partner for this drug, launched Vitravene(TM) in November 1998. CIBA Vision is a
subsidiary of Novartis Pharma AG. See "Collaborative Agreements - CIBA Vision."
In 1999 Vitravene(TM) also received marketing approval in Europe and Brazil. We
delivered our first commercial shipment of Vitravene(TM) to our partner CIBA
Vision in 1998, earning product revenue of $560,000 in that year. No commercial
shipments of Vitravene(TM) were made in 1999, and no product revenue was earned.
HEPATITIS C (HCV). HCV continues to represent a major public health
challenge. This potentially deadly disease affects the liver and can eventually
cause liver cancer and death. It is estimated that almost four million people in
the United States are infected with HCV and 8,000 to 10,000 people are expected
to die from this disease each year. Interferon-a therapy, used alone or in
combination with ribovirin, is widely used in an attempt to eradicate this virus
from chronically infected individuals, but long-term remissions are achieved in
only about 20% of patients even after six months of therapy. Better, safer and
more effective treatments are urgently needed, as current therapies have limited
efficacy and potentially serious toxicities.
ISIS 14803. Our antisense inhibitor of HCV, ISIS 14803, may represent a
significant therapeutic advance in treating this serious viral epidemic. ISIS
14803 is designed to inhibit the replication of HCV. In preclinical studies,
ISIS 14803 demonstrated specific reduction of the HCV RNA expression in both
cell cultures and mouse model systems. Under a joint venture agreement signed in
January 2000, ISIS 14803 is being co-developed with Elan Corporation, a leader
in the area of drug delivery.
A Phase I/II clinical study of ISIS 14803 began in early 2000. This
study will evaluate safety and efficacy. Patients in this Phase I/II trial will
receive ISIS 14803 intravenously 3 times a week for 4 weeks. Studies of the
subcutaneous delivery of ISIS 14803 are also planned. Subsequently, studies of
ISIS 14803 using Elan's MEDIPAD, a minimally invasive microinfusion pump, will
be initiated.
CANCER
Much of our work in the area of cancer is focused on specific targets
within multigene families believed to be involved in both normal and abnormal
cell differentiation and cell growth. Members of multigene families, called
isotypes, are extremely similar to one another at the protein level but most
likely serve different biological functions. Since traditional drugs are not
specific enough to inhibit one isotype within a family without affecting the
function of the other related isotypes, it has been difficult to determine the
functional differences among them. There is growing evidence that certain
isotypes might be involved in abnormal cell differentiation or proliferation.
Antisense drug discovery technology exploits the differences among the isotypes
at the mRNA level to design drugs that can inhibit specific isotypes. Selective
inhibition of a single isotype may result in less toxicity. Much of our work has
focused on multigene families in the signal transduction pathway, the method by
which various cellular and extra cellular proteins communicate information
necessary for cell function and growth. Disruptions in the production or
behavior of signal transduction proteins are involved in numerous proliferative
disorders, including cancer.
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Clinical trials of our anticancer compounds have demonstrated that
antisense drugs can be effective cancer therapeutics. In these trials, our
compounds were well tolerated, with none of the serious side effects associated
with standard cancer chemotherapies such as bone marrow or immune system
suppression, gastrointestinal distress or hair loss.
ISIS 3521. ISIS 3521 is an antisense compound in Phase II clinical
development which inhibits the production of one particular isotype (the (alpha)
isotype) of protein kinase C. PKC is a key enzyme in signal transduction, and
PKC isotypes are associated with both normal and abnormal cell growth. We have
been able to specifically inhibit the production of the PKC-(alpha) isotype
without inhibiting the production of other isotypes, thus allowing the
inhibition of the isotype believed to be involved in abnormal cell growth
without inhibiting the isotypes required for healthy cells to grow.
ISIS 3521 is nearing the completion of Phase II clinical trials as an
anticancer agent, both alone and in combination with traditional cancer
chemotherapies. The Phase II trials are studying the effect of this drug in
treating a variety of cancer tumors. This compound inhibits protein kinase
C-(alpha), or PKC-(alpha), a protein associated with abnormal cell growth. Based
on promising data from a Phase I/II study, we plan to initiate Phase III
clinical trials of ISIS 3521 for patients with non-small cell lung cancer in
late 2000. Results from the Phase I/II trial show that of 17 patients with
non-small cell lung cancer, 15 have benefitted from the drug. Eleven of the 17
patients (65%) have experienced partial responses. One patient had a minor
response and 3 patients had stable disease lasting 4 to 8 months. Only 4 of 17
patients have died, with the longest survival being 23 months following study
entry. With a median of 10 months of follow-up, 77% of the patients are alive
and continuing to be evaluated.
In Phase I and Phase II studies, ISIS 3521 stabilized disease, reduced
tumor mass and reduced tumor markers in patients with lung cancer, ovarian
cancer and lymphoma. In those trials, ISIS 3521 caused no significant side
effects. In a Phase II study of ISIS 3521 as a single agent in the treatment of
patients with refractory non-Hodgkin's lymphoma, 1 of 7 patients treated so far
has had a partial response and one other is too early to evaluate.
The Phase I studies included 56 patients with various types of cancer
that had not responded to standard treatment. In these Phase I trials, the drug
was well-tolerated by patients with no significant side effects. We also saw
preliminary evidence of anticancer activity.
ISIS 2503. Substantial evidence exists supporting a direct role for ras
gene products in the development and maintenance of human cancer. Ras proteins
are involved in passing information between cells. Ras, in both normal and
mutated forms, is associated with abnormal cell growth and, as such, is
associated with cancer. ISIS 2503, a potent selective inhibitor of Harvey ras,
has been shown to inhibit abnormal cell growth by inhibiting expression of ras
genes in cell culture and animal models. ISIS 2503 has also inhibited the growth
of multiple different human cancers in nude mouse xenograft models.
In Phase I studies, ISIS 2503 was well-tolerated, with no clinically
significant toxicities observed among 22 patients with a variety of solid tumors
who received the drug by 14-day continuous infusion repeated every 21 days.
Prolonged stable disease was observed in 4 patients on this trial, including one
patient with pancreatic cancer who had disease stabilization for 8 treatment
courses administered over 6 months.
In Phase II trials of ISIS 2503, the compound is being evaluated both
alone and in combination with traditional cancer chemotherapies in patients with
colon, breast, pancreatic and lung cancers. The colon cancer trial is near
completion with no significant evidence of activity while early results in lung
cancer suggest improvement in cancer-related symptoms. ISIS 2503 has been
well-tolerated, with no clinically significant toxicities observed among
patients with a variety of solid tumors. A Phase I trial of ISIS 2503 plus
gemcitabine has been completed and will be followed by a Phase II study in
patients with cancer of the pancreas.
ISIS 5132. ISIS 5132 is an antisense compound which inhibits the
expression of C-raf kinase, another molecular target involved in cell signaling.
C-raf kinase is a member of the raf kinase multi-gene family and is associated
with abnormal cell growth. ISIS 5132 selectively inhibits C-raf kinase without
inhibiting the production of other members of that multigene family. Published
results from a human clinical trial show that ISIS 5132 reduced the levels of
its target RNA, c-raf-1 after intravenous administration.
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ISIS 5132 is in Phase II clinical trials as an anticancer agent. The
Phase II trials are studying the effect of this drug in treating a variety of
cancer tumors. In Phase I clinical trials, ISIS 5132 showed evidence of
antitumor activity in patients with ovarian, renal, pancreatic, and colon
cancers. In those trials, ISIS 5132 was well-tolerated and caused no clinically
significant side effects. A trial in ovarian cancer has not yet been completed.
There are no current plans to develop this drug further in the other tumor types
that have been studied (prostate cancer, colon cancer, non-small cell lung
cancer). Several patients in this trial experienced disease stabilization.
INFLAMMATORY DISEASES
Cell adhesion molecules make up a large family of related proteins and
represent targets for treating inflammatory diseases. Inflammation is a key
component of a large number of acute and chronic diseases. Although inflammation
is part of a normal localized protective response that the human body uses to
destroy infectious agents or repair injured tissue, disruptions of normal
inflammatory responses often lead to inflammatory diseases. These inflammatory
responses result in or contribute to a diverse set of diseases that can affect
many organs of the body ranging from the skin to the brain. Common inflammatory
diseases include rheumatoid arthritis, psoriasis, asthma and inflammatory bowel
disease. Inflammation also occurs as a result of burn, shock or organ
transplantation.
We have focused on a number of targets in our cell adhesion molecule
program. Our most advanced cell adhesion research and development effort has
been focused on the intercellular adhesion molecule ("ICAM") family and in
particular, ICAM-1. ICAM-1 facilitates the migration of immune cells involved in
both chronic and acute inflammation, allowing us to target both conditions.
Over-expression of ICAM-1 has been demonstrated in a wide variety of
inflammatory disorders, such as rheumatoid arthritis, asthma, psoriasis, organ
transplant rejection and inflammatory bowel diseases. While it is unlikely that
over-expression of ICAM-1 is a cause of these disorders, ICAM-1 is thought to
contribute to the pathology of these diseases and conditions. We have identified
lead compounds for other adhesion molecules including CD49d (VLA-4).
In addition to cell adhesion molecules, we have active research programs
targeting other steps in the inflammatory process. In particular, we have
identified antisense inhibitors which selectively inhibit the expression of
cytokines such as tumor necrosis factor-(alpha) (TNF-(alpha)), interleukin 5
(IL-5) and the IL-5 receptor. Lead antisense compounds targeting these proteins
are showing promising activity in multiple models of inflammatory diseases.
ISIS 2302. ISIS 2302, the most advanced compound in our cell adhesion
program, selectively inhibits ICAM-1 gene expression. In Phase I testing of ISIS
2302 in healthy volunteers, the compound was well tolerated at all doses. We
conducted Phase II trials in five disease indications: Crohn's disease,
psoriasis, ulcerative colitis, prevention of kidney transplant rejection and
rheumatoid arthritis. The Phase II studies involved 20 to 40 patients each and,
in general, were randomized and placebo-controlled.
- CROHN'S DISEASE. Crohn's disease is a serious inflammatory
disease that affects the intestines and other parts of the
digestive tract. A patient with Crohn's disease suffers chronic
and often severe episodes of diarrhea, abdominal pain, rectal
bleeding and fever. Approximately 400,000 people in North
America and a similar number in Europe are afflicted with
Crohn's disease. Based on the positive results of a Phase II
study, we decided to initiate a pivotal quality trial of ISIS
2302 in Crohn's disease. That 300 patient trial was completed in
December 1999. The data from that clinical trial did not
demonstrate efficacy and the profile of the drug did not support
an NDA filing. The efficacy demonstrated, using the combined
primary end point of clinical remission plus complete steroid
withdrawal, was approximately 20% in all three arms of the
study. This negative outcome was unexpected. In late 1998, the
company conducted an 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.
In the trial, the effects of two weeks and four weeks of
treatment with ISIS 2302 were compared to placebo. The analysis
of the data from the study failed to demonstrate the same
efficacy profile of ISIS 2302 seen in the interim analysis. At
the interim analysis, ISIS 2302 induced steroid-free complete
clinical remissions in 29% of the drug-treated patients versus a
placebo response rate of 14%.
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This was statistically different (p=0.047). Both the 2- and
4-week dose groups had similar results. In the placebo group,
34% of the patients discontinued from the study prematurely
because of lack of response, while only 16% of the ISIS 2302
patients discontinued early. This also was statistically
significant (p=0.020). Other measures of efficacy also favored
ISIS 2302 in the interim analysis.
In the second half of the study, the results were significantly
different than the interim analysis. Only 12% of the ISIS 2302
treated patients enrolled in the second half of the study
achieved steroid-free remission. This differs from the results
in the initial 150 patients (p=0.0047). In the second half of
the study, only 6% of the placebo patients discontinued from the
study prematurely because of lack of response. This differed
significantly from the results in the first half of the study
(p=0.0004). In contrast, the early discontinuation rate for lack
of clinical response in the drug treated arms was 20%, not
significantly different from the results in the first 150
patients. The safety database has not yet been fully analyzed;
however, the drug was well tolerated. The second half of the
trial differs statistically from the first half in every
meaningful parameter. We are in the process of determining if we
can identify those factors that contributed to the differences
between the two halves of the study.
- PSORIASIS. In early 2000, we initiated Phase II trials of ISIS
2302 for psoriasis as a topical cream formulation. Plaque
psoriasis is the most common form of psoriasis, and is an
uncomfortable, disfiguring and incurable skin disorder that
affects two to four percent of the nation's population.
Psoriasis produces recurrent skin lesions that may involve up to
80-90 percent of the body surface. A conveniently dosed topical
cream formulation that is shown to be safe and effective would
represent a significant improvement in treatment for patients
and a significant commercial opportunity.
- KIDNEY TRANSPLANT REJECTION. The Phase II study in kidney
transplant rejection, which has been proceeding at a pace
mandated by the regulatory authorities as they carefully monitor
clinical studies in this patient population, is nearing
completion. However, due to the competitive picture and the cost
of development, we have put the development of ISIS 2302 for
organ transplants on hold. We will also limit our investment in
the development of ISIS 2302 as an enema formulation for
treatment of ulcerative colitis.
- RHEUMATOID ARTHRITIS. We completed the Phase II study in
rheumatoid arthritis. We saw evidence of therapeutic activity.
ISIS 2302 was well tolerated, and the safety profile of the drug
continues to be attractive. Based on this outcome, we are
pursuing development of a second-generation, orally active
antisense inhibitor of ICAM-1 in lieu of continuing development
of ISIS 2302 in rheumatoid arthritis. We continue to believe
that inhibition of ICAM-1 is a promising anti-inflammatory
strategy in rheumatoid arthritis and will continue to test
second-generation inhibitors of this target for this disease.
ISIS 104838. ISIS 104838 is a second-generation antisense inhibitor of
TNF-(alpha). This compound has shown promising results in models of inflammatory
disease. In clinical trials it will be evaluated as a possible treatment for a
variety of inflammatory diseases including rheumatoid arthritis and Crohn's
disease. We are preparing to file an IND for ISIS 104838 and plan to initiate
Phase I clinical studies in the first half of 2001. An oral formulation of ISIS
104838 is being developed co-developed with Elan under our Orasense joint
venture.
ISIS 107248. ISIS 107248 is a second-generation antisense inhibitor of
CD49d (VLA-4). This compound, which will be evaluated as a possible treatment
for a variety of inflammatory diseases including multiple sclerosis, is
currently undergoing preclinical toxicology and pharmacokinetic studies. We are
preparing to file an IND for ISIS 107248 and plan to initiate Phase I clinical
studies in 2001.
RESEARCH PROGRAMS
We combine our core technology programs in medicinal chemistry, RNA
biochemistry, and molecular and cellular biology with molecular target-focused
drug discovery efforts to design drug candidates. The goal of our target-based
research programs is to identify antisense, Ibis and GeneTrove drug candidates
to treat diseases for which there are substantial markets and for which there is
a need for better drugs. In addition, our research programs focus on identifying
next-generation compounds to serve as backup compounds to our
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current products in development and development candidates. Our Ibis drug
discovery program is currently focused on identifying broad-spectrum
antibacterial agents with a focus on important drug-resistant infections.
Our core technology programs can support multiple target-based antisense
research programs without significantly increasing costs. Through these
programs, we can efficiently explore numerous disease targets and identify the
best lead compounds to advance into preclinical development. We are currently
pursuing antisense, Ibis and GeneTrove drug discovery programs focused on
various anti-viral and anti-bacterial targets, inflammatory disease targets, and
other key molecular targets that might play critical roles in cancer.
COLLABORATIVE AGREEMENTS
Our strategy is to use alliances with other companies and equity-based
financing to increase our financial resources, reduce risk, and retain an
appropriate level of ownership of products currently in development. Through
alliances with major pharmaceutical companies, we can obtain funding, expand
existing programs, learn of new technologies, and gain additional expertise in
developing and marketing products.
ELAN - HEPATITIS C
In January 2000, Isis and Elan Corporation agreed to form a new
subsidiary of Isis to develop an antisense drug, ISIS 14803, to treat patients
chronically infected with the Hepatitis C virus (HCV). The new subsidiary is
called HepaSense and will develop and commercialize this novel therapeutic for
HCV while investigating delivery of the therapeutic with Elan's proprietary
MEDIPAD(R) Drug Delivery System, a disposable subcutaneous infusion device. The
combination of a novel drug for HCV with a convenient delivery method could
result in a very attractive product for this international public health
problem. ISIS 14803 began Phase I clinical trials in early 2000.
Isis and Elan have each licensed significant technology to HepaSense. As
part of the transaction, Elan will purchase $7.5 million of Isis Common Stock in
April 2000 and may purchase an additional $7.5 million of common stock upon
completion of a mutually agreed milestone. Both investments will be at a premium
to Isis' market price. Elan also purchased Isis Series B Preferred Stock which
will be convertible in the future into either Isis stock or stock in HepaSense.
In addition, Elan will make available to Isis a $12.0 million line of credit for
Isis' funding commitment to HepaSense.
ISIS 14803 is an antisense drug that inhibits HCV replication. In
preclinical studies, ISIS 14803 demonstrated specific reduction of the HCV RNA
expression in both cell cultures and mouse model systems. A Phase I/II clinical
study of ISIS 14803 began in early 2000. This study will evaluate safety and
efficacy. Patients in this Phase I/II trial will receive ISIS 14803
intravenously 3 times a week for 4 weeks. Studies of the subcutaneous delivery
of ISIS 14803 are also planned. Subsequently, Isis will initiate studies of ISIS
14803 using Elan's MEDIPAD. Elan's proprietary subcutaneous MEDIPAD(R) Drug
Delivery System combines the convenience of a transdermal patch with the drug
delivery capabilities of an infusion pump. This system can be
self-administrated, is disposable and inexpensive. It can be used to infuse drug
over 24 and 48-hour timeframes. Elan and its collaborators presently have
multiple drugs in clinical trials being administered using the MEDIPAD(R)
System.
ELAN - ORAL FORMULATION
In April 1999, Isis and Elan formed a new subsidiary to develop a
platform technology for the oral delivery of antisense drugs. Isis is the
majority shareholder in this new subsidiary, named Orasense. The first oral drug
Orasense is working on is ISIS 104838, Isis' antisense inhibitor of tumor
necrosis factor - (alpha) (TNF-(alpha)). TNF-(alpha) is a gene that has been
implicated in a wide range of inflammatory diseases.
Elan made a $27 million equity investment in Isis, consisting of $15
million of common stock purchased at a premium to market and $12 million of
convertible exchangeable preferred stock. Elan also received warrants
exercisable in five years. Elan has the right to convert the preferred stock
into either an ownership interest in Isis or in Orasense.
Isis has made substantial progress in oral formulations of antisense
drugs, achieving significant oral bioavailability by combining novel chemistries
and formulation approaches. Elan, a world leader in oral drug
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delivery technology, has demonstrated the oral delivery and bioavailability of
large macromolecules with size and charge properties similar to many antisense
drugs. Both companies are combining existing technologies and expertise with new
research efforts towards the goal of building a proprietary, platform technology
for the oral delivery of antisense drugs.
ASTRAZENECA
In December 1998, we established an antisense collaboration with
AstraZeneca PLC to discover, develop and commercialize novel antisense drugs
targeting specific genes associated with cancer. In this collaboration, we are
creating antisense candidates and are working together with AstraZeneca to
optimize them. AstraZeneca will develop drugs arising out of the collaboration.
AstraZeneca will pay us technology access fees and provide research funding as
well as milestone payments and royalties for any drugs progressing into clinical
development and onto the market. The initial term of this collaboration is three
years. In 1998, AstraZeneca paid $2 million in technology access fees. In 1999,
AstraZeneca paid $2.9 million for research support and fees. While the initial
focus of this collaboration is on a limited number of cancer targets, we can,
with AstraZeneca, also pursue additional targets in cancer and expand the
collaboration to targets in other therapeutic areas. The agreement also provides
that the collaboration can also be extended beyond its initial term.
MERCK
In June 1998, we established a research collaboration with Merck & Co.
to discover small molecule drug candidates to treat patients infected with
Hepatitis C virus. Our chemists, working together with Merck scientists, will
design, synthesize and evaluate novel compounds that Merck will screen in its
proprietary enzymatic assays for identifying Hepatitis C virus replication
inhibitors. Merck will commercialize any drugs arising from the collaboration,
and we retain the right to use technology developed in the collaboration in our
antisense program. The three-year collaboration provides us with annual research
support plus a technology access fee and milestone payments and royalties upon
commercialization. In 1998 and 1999, we received $3.9 million and $2.5 million,
respectively, from Merck under the terms of this agreement.
CIBA VISION
In 1997, we entered into an agreement with CIBA Vision, granting it
exclusive worldwide distribution rights for Vitravene(TM). Under the terms of
the agreement, we will receive $20 million in pre-commercial fees and
milestones. As of December 31, 1999, we have received a total of $15 million of
these pre-commercial fees and milestones. While CIBA Vision will market and sell
Vitravene(TM) worldwide, we will manufacture and sell Vitravene(TM) to CIBA
Vision, at a price that will allow us to share the commercial value of the
product with CIBA Vision. The FDA approved Vitravene(TM) for commercial
marketing in August 1998. In 1999 Vitravene(TM) received marketing approval in
Europe and Brazil. 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, and no product revenue
was earned. See "Products Under Development - Cytomegalovirus (CMV) Retinitis."
BOEHRINGER INGELHEIM
In 1995, we and Boehringer Ingelheim formed an alliance to combine the
clinical development and research programs of both companies in the field of
cell adhesion. The collaboration supported the clinical development of ISIS 2302
in a number of different diseases, and the discovery of both small molecule and
antisense inhibitors to various novel call adhesion targets. In 1999, we
reacquired ISIS 2302 from Boehringer Ingelheim. Under the terms of the
renegotiated agreement, Isis has sole responsibility for the development and
commercialization of ISIS 2302 and other antisense inhibitors of cell adhesion
molecules discovered during the collaboration. Boehringer Ingelheim will receive
a royalty on the commercial sales of these antisense drugs. Boehringer Ingelheim
now has sole responsibility for the development and commercialization of any
small molecule inhibitors of cell adhesion molecules discovered during the
collaboration, with Isis receiving a royalty on the commercial sales of these
small molecule drugs.
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In addition to funding one-half of the collaboration's research and
development, Boehringer Ingelheim made additional investments in ISIS and
provided us with a line of credit. As of December 31, 1999, outstanding
borrowings under this line of credit totaled $ 22.6 million. The line of credit
is no longer available for additional borrowing.
ISIS 2302 is in Phase II clinical trials for psoriasis, ulcerative
colitis and renal transplant rejection. We are also evaluating data from a Phase
III study of ISIS 2302 in Crohn's disease to determine if further development is
warranted. See "Products Under Development - Inflammatory Diseases."
As of February 25, 2000, Boehringer Ingelheim owned approximately 8% of
our outstanding Common Stock.
NOVARTIS
We began our research and development collaboration with Novartis (then
called Ciba-Geigy Limited) in 1990. The research portion of the collaboration
ended in September 1998, having produced two drugs currently in development,
ISIS 3521 and ISIS 5132. Novartis funded the clinical development of ISIS 3521
and ISIS 5132 through Phase II. In late 1999, Novartis chose to conclude its
participation in the development of ISIS 3521 and ISIS 5132 at the completion of
the current Phase II clinical trials. See "Products Under Development - Cancer -
ISIS 3521; -- ISIS 5132." As of February 25, 2000, Novartis owned approximately
7% of our outstanding Common Stock.
GENETROVE ANTISENSE TARGET VALIDATION AND GENE FUNCTIONALIZATION
COLLABORATIONS
With the entire human genome expected to be sequenced by the year 2003,
identification and understanding of those genes that play a key role in disease
will become increasingly important to pharmaceutical companies to develop of
novel drugs. Antisense technology can be used to provide functional data on the
importance of a specific gene in causing or maintaining a disease. Antisense
technology uses genetic sequence information to rapidly design inhibitors of any
gene target. Because of their exquisite specificity, antisense inhibitors can
inhibit the selected gene only, without an impact on other closely related
genes. As a result, antisense inhibitors allow the identification of function of
that single gene target more precisely than any other method.
GeneTrove, Isis' antisense target validation and gene functionalization
program, provides genomic information with unsurpassed productivity and
efficiency to pharmaceutical companies. Using the proprietary chemistries and
systems developed by Isis, we can move from in vitro analysis to animal model in
one step and provide solutions to our partner's queries within weeks.
GeneTrove's capabilities are validated by our accomplishments. GeneTrove has
identified antisense inhibitors to more than 500 genes and we have patented many
of these findings. In addition, we have characterized over 20 pathways,
including: MAP-kinases, apoptosis, NF-Kappa B, cell adhesion, and TNF signaling
and insulin signaling. We have also validated more than 20 gene targets in
animal models. Importantly, our technology has been embraced by three major
pharmaceutical partners, which are using our capabilities to help evaluate,
select and prioritize genes as potential drug targets.
ASTRAZENECA
In January 2000, we entered into a target validation collaboration with
AstraZeneca. The collaboration will use our target validation technology to
assess and prioritize genes identified within AstraZeneca's genomics programs.
This collaboration will enable AstraZeneca to determine the function and
therapeutic value of novel gene targets and to use this information about gene
function to develop pharmaceutical products. It also provides Isis with valuable
information on these targets to assist in the development of novel antisense
drugs. The initial term of this collaboration is three years.
AVENTIS
In September 1999, we entered into a target validation collaboration
with Aventis (formerly Rhone-Poulenc Rorer). The collaboration will use our
target validation technology to assess genes identified within Aventis' genomics
programs. This collaboration will enable RPR to determine the function and
therapeutic value of numerous novel gene targets and to use this information
about gene function to develop
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pharmaceutical products. It also provides Isis with valuable information on
these targets to assist in the development of novel antisense drugs. The initial
term of this collaboration is three years. RPR will pay Isis research fees and
milestone payments based on the success of the program. We received payments
totaling $613,000 in 1999.
ABBOTT LABORATORIES
In December 1998, we entered into a target validation collaboration with
Abbott Laboratories, Inc. The collaboration utilizes our target validation
technology to enable Abbott to validate numerous gene targets, identify the
function of these genes and prioritize the targets. Abbott will pay us an
upfront fee, research fees, and milestone payments and royalties on net sales of
any Abbott non-antisense product arising from the collaboration. We will also
receive rights to develop drugs targeting Abbott proprietary genes for Abbott.
The initial term of this collaboration is two years. We received payments
totaling $250,000 in 1998 and $1 million in 1999.
MANUFACTURING
In the past, production of chemically modified oligonucleotides, like
those used in our research and development programs, was generally expensive and
difficult, except in small quantities. As a result, we dedicated significant
resources to focus on ways to improve manufacturing capacity. Because all
oligonucleotide compounds are made of variants of the same nucleotide building
blocks and are produced using the same types of equipment, we found that the
same techniques used to efficiently manufacture one oligonucleotide drug product
proved helpful in improving the manufacturing processes for many other
oligonucleotide products. Through the development of several proprietary
chemical processes for scaling up manufacturing capabilities, we have been able
to greatly reduce the cost of producing oligonucleotide compounds. For example,
we have significantly reduced the cost of raw materials, while at the same time
greatly increasing our capacity to make the compounds. We have both internal
programs and outside collaborations with various industry vendors to allow for
even greater production.
We have sufficient manufacturing capacity to meet both current and
future research and clinical needs both for ourselves and for our partners. We
also believe that we have, or will be able to develop or acquire, sufficient
supply capacity to meet our anticipated commercial needs. We also believe that
with reasonably anticipated benefits from increases in scale, we will be able to
manufacture antisense compounds at commercially competitive prices.
In 1998, we established an antisense oligonucleotide manufacturing
collaboration with Avecia Life Science Molecules, a leading supplier of chemical
and biological compounds to the pharmaceutical and biotechnology industries.
Access to an alternate manufacturing source will provide greater flexibility in
production scheduling and will reduce our risk of dependence on a single
manufacturing site for all of our clinical needs. We are not required to make
any capital investment to create this manufacturing capability.
In 1999, we established a commercial-scale manufacturing collaboration
with Abbott Laboratories. This collaboration combines Abbott's process
development expertise and manufacturing capability with Isis' proprietary
oligonucleotide manufacturing technology.
PATENTS AND PROPRIETARY RIGHTS
Our success will depend, in part, on our ability to obtain patent
protection for our products in the United States and other countries. We file
applications, as appropriate, for patents covering our products and processes.
As of February 28, 2000, we have been issued or allowed more than 590 patents
worldwide and have filed more than 532 patent applications in the United States
and counterparts of many of these applications in other countries. Patents
issued or applied for cover the following types of inventions, processes and
products:
- Composition of matter claims to core chemistries for
oligonucleotide structures, which cover our rights to the
building blocks of our compounds;
- Composition of matter claims to messenger RNA target sequences,
which cover our rights to the genetic sequences that our
compounds target;
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- Use claims for using oligonucleotides targeted to particular
disease targets, which cover our right to use oligonucleotide
based drugs to treat specific diseases;
- Method claims for the manufacture of oligonucleotides, which
cover our new, improved or more cost effective ways to
manufacture oligonucleotides;
- Composition of matter claims to RNA structural elements, which
cover our rights for discovery of small molecules that bind to
these RNA structural elements;
- Method claims for analyzing the interaction of small molecules
with RNA, which cover our novel discovery methods using mass
spectrometry to analyze the interaction of small molecules with
RNA;
- Method claims for optimizing the interaction of drug substances
with their target molecules, which cover our mass spectrometry
based structural activity relationship discovery methods, i.e.,
SAR by mass spectrometer; and
- Methods claims for rapidly discovering antisense
oligonucleotides, which cover our rapid through-put method of
discovering antisense oligonucleotides.
In December 1999 Isis was issued U.S Patent 6,001,653, covering Human
RNase H1. RNase H1 is a cellular enzyme that degrades RNA when antisense drugs
bind to RNA. Most antisense inhibitors work through this mechanism of action and
it has proven to be the most potent and broadly useful mechanism of action for
antisense inhibitors used as drugs and as tools in target validation. Our patent
covers the DNA sequence for Human RNase H1, methods of making any antisense
inhibitor or drug using the RNase H1 mechanism, and methods of screening to
identify effective antisense inhibitors of genes that use RNase H1.
We believe the RNase H1 patent has the potential to benefit Isis in many
ways. It solidifies our dominance in antisense technology by further
strengthening our vast patent estate. It also enhances our attractiveness as a
partner for both therapeutic research collaborations and for genomic
collaborations. In addition, we anticipate that this patent will produce
significant revenues for the company in the form of licensing fees.
We have obtained licenses from various parties that we deem to be
necessary or desirable for the manufacture, use or sale of our products. These
licenses (both exclusive and non-exclusive) generally require us to pay
royalties to the parties on product sales. We may not be able to obtain licenses
to other required technology or, if obtainable, such technology may not be
available at reasonable cost. Our failure to obtain a license to any technology
required to commercialize our products may have a material adverse impact on our
business.
We consider that in the aggregate our issued patents, patent
applications and licenses under patents owned by third parties are important to
our success. The patent positions of pharmaceutical, biopharmaceutical and
biotechnology firms are generally uncertain and involve complex legal and
factual questions. Consequently, even though we are currently pursuing patent
applications with the U.S. and foreign patent offices, we do not know whether
any of the pending applications will result in the issuance of any additional
patents or whether any issued patents will provide significant proprietary
protection or will be circumvented or invalidated. Litigation, which could
result in substantial cost to us, may also be necessary to enforce any patents
issued to us or to determine the scope and validity of others' proprietary
rights in court or in administrative proceedings. In addition, to determine the
priority of inventions, we may find it necessary to participate in interference
proceedings declared by the U. S. Patent and Trademark Office or in opposition,
nullity or other proceedings before foreign agencies with respect to any of our
existing or future patents or patent applications, which could result in
substantial cost to us. We may find it necessary to participate, at substantial
cost, in International Trade Commission proceedings to abate importation of
goods that would compete unfairly with our products.
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<PAGE> 19
GOVERNMENT REGULATION
Our manufacture and potential sale of therapeutics are subject to
extensive regulation by United States and foreign governmental authorities. In
particular, pharmaceutical products are subject to rigorous preclinical and
clinical testing and other approval requirements by the FDA in the United States
under the Federal Food, Drug and Cosmetic Act and by comparable agencies in most
foreign countries. Various federal, state and foreign statutes also govern or
influence the manufacture, safety, labeling, storage, record keeping and
marketing of such products. Pharmaceutical manufacturing facilities are also
regulated by state, local and other authorities. Obtaining approval from the FDA
and other regulatory authorities for a new therapeutic may take several years
and involve substantial expenditures. Moreover, ongoing compliance with these
requirements can require the expenditure of substantial resources. Difficulties
or unanticipated costs may be encountered by us or our licensees or marketing
partners in their respective efforts to secure necessary governmental approvals,
which could delay or preclude us or our licensees or marketing partners from
marketing their products. In conjunction with obtaining approval of
Vitravene(TM), we successfully passed the manufacturing pre-approval inspection
by the FDA. Approval of each new therapeutic will require a rigorous
manufacturing pre-approval inspection by regulatory authorities.
In addition to regulations enforced by the FDA, we are also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state and local
regulations.
COMPETITION
For many of their applications antisense based drugs as well as Ibis
small molecules will be competing with existing therapies for market share. In
addition, a number of companies are pursuing the development of
oligonucleotide-based technology and the development of pharmaceuticals
utilizing such technology. These companies include specialized pharmaceutical
firms and large pharmaceutical companies acting either independently or together
with biopharmaceutical companies. Many of our existing or potential competitors
have substantially greater financial, technical and human resources than we do
and may be better equipped to develop, manufacture and market products. In
addition, many of these companies have extensive experience in preclinical
testing and human clinical trials. These companies may develop and introduce
products and processes competitive with or superior to ours. Furthermore,
academic institutions, government agencies and other public and private
organizations conducting research may seek patent protection and may establish
collaborative arrangements for product and clinical development.
Vitravene(TM) and our other products under development address numerous
markets. Our competition has been and will continue to be determined in part by
the diseases for which our compounds are developed and ultimately approved by
regulatory authorities. For certain of our products, an important factor in
competition may be the timing of market introduction of competitive products.
Accordingly, the relative speed with which we can develop products, complete the
clinical trials and approval processes and supply commercial quantities of the
products to the market is an important competitive factor. We expect that
competition among products approved for sale will be based, among other things,
on product efficacy, safety, reliability, availability, price and patent
position.
The development by others of new treatments for the diseases for which
we are developing compounds could render our compounds non-competitive or
obsolete. Furthermore, because of the fundamental differences between antisense
and other technologies, there may be applications for which the products of one
technology are superior to those of another. We are aware of several companies
with late-stage compounds in development for diseases we are pursuing.
Our competitive position also depends upon our ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales.
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<PAGE> 20
EMPLOYEES
As of February 25, 2000, we employed 352 individuals. After the
restructuring is completed in the first four months of 2000, we expect to employ
approximately 276 individuals, of whom 87 hold advanced degrees. A significant
number of our management and professional employees have had prior experience
with pharmaceutical, biotechnology or medical product companies. We believe that
we have been highly successful in attracting skilled and experienced scientific
personnel; however, competition for such personnel is intensifying. None of our
employees is covered by collective bargaining agreements, and management
considers relations with its employees to be good.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of February 29,
2000 are as follows:
STANLEY T. CROOKE, M.D., Ph.D....54
Chairman of the Board, President and Chief Executive Officer
Dr. Crooke was a founder of the Company and has been its Chief Executive
Officer and a director since January 1989 and has served as President since
February 1999. He was elected Chairman of the Board in February 1991. Dr. Crooke
previously served as President of the Company from January 1989 to May 1994.
From 1980 until January 1989, Dr. Crooke was employed by SmithKline Beckman
Corporation, a pharmaceutical company, most recently as President of Research
and Development of SmithKline & French Laboratories. Dr. Crooke is a director of
Valentis, Inc., Idun Pharmaceuticals, Inc., and SYNSORB Biotech, Inc., and EPIX
Medical, Inc. He is also an adjunct professor of pharmacology at the Baylor
College of Medicine and the University of California, San Diego.
B. LYNNE PARSHALL....44
Executive Vice President, Chief Financial Officer and Secretary
Ms. Parshall has served as Executive Vice President since December 1995,
Chief Financial Officer of the Company since June 1994, and Secretary since
November 1991. From February 1993 to December 1995, she was a Senior Vice
President of the Company, and from November 1991 to February 1993, she was a
Vice President of the Company. Prior to joining Isis, Ms. Parshall practiced law
at Cooley Godward LLP, counsel to the Company, where she was a partner from 1986
to 1991. Ms. Parshall served as Vice President of Business Development of
Biotrack, Inc., a medical device company, during 1988 and 1989.
DEBBY JO BLANK, M.D....48
Executive Vice President
Dr. Blank joined Isis in March 1999 as Executive Vice President. Prior
to joining the Company, she was the President and Chief Operating Officer of
Cypress Bioscience, Inc. from 1996 to 1999. She also held various senior
management positions at Advanced Technology Laboratories, Syntex Laboratories,
Inc., The DuPont Merck Pharmaceutical Company, and E.I. DuPont & Company.
C. FRANK BENNETT, Ph.D.....43
Vice President, Biology
Dr. Bennett has served as Vice President, Biology since June 1995. From
March 1993 to June 1995, he was Director, Molecular Pharmacology, and from May
1992 to March 1993, he was an Associate Director in the Molecular and Cellular
Biology department. Prior to joining Isis in 1989, Dr. Bennett was employed by
SmithKline and French Laboratories in various research positions.
DAVID J. ECKER, Ph.D.....45
Vice President & Managing Director, Ibis Therapeutics
Dr. Ecker was a founder of the Company and has served as Vice President
& Managing Director of Ibis Therapeutics, a division of Isis Pharmaceuticals,
since June 1995. He served as Vice President, Biology from July 1993 to June
1995, as Executive Director, Molecular and Cellular Biology from February 1993
to July 1993,
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<PAGE> 21
and as Director, Molecular and Cellular Biology from February 1989 to February
1993. From 1984 until February 1989, he was employed by SmithKline and French
Laboratories in a variety of research positions.
PATRICIA LOWENSTAM....53
Vice President, Human Resources
Ms. Lowenstam has served as Vice President, Human Resources since
January 1995. She joined Isis in August 1992 as Director, Human Resources and
served in that capacity until January 1995. Prior to joining Isis, she held
senior management positions in Human Resources with Quotron systems, Inc.,
Citicorp, Zales Jewelers, and the May Company.
RISK FACTORS
Please consider the following risk factors carefully in addition to the
other information contained in this report.
OUR BUSINESS WILL SUFFER IF WE FAIL TO OBTAIN REGULATORY APPROVAL FOR OUR
PRODUCTS.
We must conduct time-consuming, extensive and costly clinical trials, in
compliance with U.S. Food and Drug Administration regulations, to show the
safety and efficacy of each of our drug candidates, as well as 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, 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
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<PAGE> 22
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 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 December 31, 1999, our accumulated losses were approximately $257 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;
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<PAGE> 23
- 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.
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.
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<PAGE> 24
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. During the last twelve months, the market price of our common
stock has ranged from $4 per share to $39 per share. The market price can be
affected by many factors, including, for example, fluctuation in our operating
results, announcements of technological innovations or new drug products being
developed by us or our competitors, governmental regulation, regulatory
approval, developments in patent or other proprietary rights, public concern
regarding the safety of our drugs and general market conditions.
PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW MAY PREVENT
STOCKHOLDERS FROM RECEIVING A PREMIUM FOR THEIR SHARES.
Our certificate of incorporation provides for classified terms for the
members of the Board of Directors. Our certificate also includes a provision
that requires at least 66-2/3% of our voting stockholders to approve a merger or
certain other business transactions with, or proposed by, 15% or more of our
voting stockholders, except in cases where certain directors approve the
transaction or certain minimum price criteria and other procedural requirements
are met.
Our certificate of incorporation also requires that any action
required or permitted to be taken by our stockholders must be taken at a duly
called annual or special meeting of stockholders and may not be taken by written
consent. In addition, special meetings of our stockholders may be called only by
the board of directors, the chairman of the board or the president, or by any
holder of 10% or more of 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.
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ITEM 2. PROPERTIES
We occupy approximately 170,000 square feet of laboratory and office
space (including a 12,000 square foot GMP manufacturing suite) in five buildings
located on our "campus" in Carlsbad, California. Three of these buildings are
owned by Isis and, as of December 31, 1999, secure approximately $7.8 million in
indebtedness of the Company. Two of the buildings are leased under lease
agreements expiring in 2007 and 2010. We have also leased 1,600 sq. ft. of
office space in the United Kingdom to accommodate employees supervising European
clinical trials. We believe that our facilities will be adequate to meet our
needs through 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded publicly through the Nasdaq National Market
under the symbol "ISIP." The following table presents quarterly information on
the price range of the common stock. This information indicates the high and low
sale prices reported by the Nasdaq National Market. These prices do not include
retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
HIGH LOW
-------- ------
<S> <C> <C>
1998
First Quarter $ 16.06 $12.00
Second Quarter $ 16.25 $11.63
Third Quarter $ 16.00 $ 7.00
Fourth Quarter $ 13.31 $ 8.88
1999
First Quarter $ 15.25 $ 8.94
Second Quarter $ 12.19 $ 9.25
Third Quarter $ 13.81 $ 9.16
Fourth Quarter $ 17.38 $ 3.88
</TABLE>
As of January 31, 2000, there were approximately 1,278 stockholders of
record of our common stock. We have never paid dividends and do not anticipate
paying any dividends in the foreseeable future. Under the terms of certain term
loans, we are restricted from paying cash dividends until the loans are fully
repaid. See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
RECENT SALES OF UNREGISTERED SECURITIES
On April 20, 1999, in conjunction with the formation of the Orasense
joint venture, Isis sold 120,150 shares of Isis' Series A Convertible Preferred
Stock to Elan International Services for $12,015,000. In conjunction with this
transaction, Isis also sold 910,844 shares of Isis' Common Stock to EIS for
$15,000,000, and issued to EIS a warrant to purchase up to 215,000 shares of
Isis' Common Stock at $24 per share. The term of the warrant is 5 years. We
expect that the proceeds from the sale of these securities will be used for
general
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<PAGE> 26
corporate purposes, including, but not limited to, funding the research and
development activities of the Orasense joint venture.
At any time after March 31, 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 March 31, 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.
At any time until June 30, 2002, the holders of Preferred Stock may
exchange their Preferred Stock with Isis for common shares of Orasense held by
Isis that represent 30.1% of the total outstanding capital stock of Orasense.
The exchange right will terminate if the 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.
Until March 31, 2002, EIS will, at Isis' request, purchase convertible
debt of Isis in an amount equal to Isis' share of budgeted funding for Orasense.
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 in Isis' Common Stock. Isis will use the proceeds of
the sale of the convertible debt to provide additional development funding to
Orasense.
The issuance and sale of these securities was intended to be exempt from
registration and prospectus delivery requirements under the Securities Act of
1933, as amended, by virtue of Section 4(2) thereof due to, among other things,
(i) the limited number of persons to whom the shares were issued, (ii) the
distribution of disclosure documents to the investor, (iii) the fact that such
person represented and warranted to Isis, among other things, that such person
was acquiring the shares for investment only and not with a view to the resale
or distribution thereof, and (iv) the fact that certificates representing the
shares were issued with a legend to the effect that such shares had not been
registered under the Securities Act or any state securities laws and could not
be sold or transferred in the absence of such registration or an exemption
therefrom.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Research and development revenues $ 33,925 $ 38,611 $ 32,722 $ 22,663 $ 12,966
Research and development expenses 66,413 62,200 55,940 45,653 33,175
Net loss applicable to common stock (59,645) (42,983) (31,066) (26,521) (23,712)
Basic and diluted net loss per share (2.08) (1.60) (1.17) (1.04) (1.10)
Shares used in computing basic and
diluted net loss per share 28,703 26,873 26,456 25,585 21,514
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments $ 52,839 $ 58,848 $ 86,786 $ 77,624 $ 77,407
Working capital 44,213 40,651 62,573 56,300 60,040
Total assets 103,107 96,074 117,881 101,305 99,569
Long-term debt and capital lease
obligations, less current portion 87,254 77,724 56,452 19,864 4,714
Accumulated deficit (256,761) (197,116) (154,133) (123,067) (96,546)
Stockholders' equity (deficit) 869 (4,186) 34,852 58,385 75,850
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Since its inception in January 1989, almost all of Isis' resources have
been devoted to our research, drug discovery and drug development programs. We
are not yet profitable and expect to continue to have operating losses for the
next several years. Our revenue comes from collaborative research and
development agreements with pharmaceutical companies, research grants and
interest income. The revenue from the collaboration agreements increases the
amount of research and development activity that we are able to fund and offsets
a portion of our research and development costs. See Item 1,
"Business--Collaborative Agreements." In 1998, we received approval from the
U.S. Food and Drug Administration ("FDA") to begin marketing our first product,
Vitravene(TM), a drug used to treat CMV retinitis.
RESULTS OF OPERATIONS
Years Ended December 31, 1999 and December 31, 1998
Our revenue from collaborative research and development agreements was
$33.9 million for the year ended December 31, 1999, compared with $38.6 million
in 1998, a decrease of 12%. The decrease was principally due to $5.0 million of
revenue recognized in 1998 from licensing certain patents. Revenue earned in
1999 from licensing patents was not significant. 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, and no product revenue was earned.
In April 1999, Isis and Elan Corporation formed a joint venture to
develop a platform technology for the oral delivery of antisense drugs. The
joint venture, Orasense Ltd. is a Bermuda limited company. 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 1999, Isis recognized
$4.4 million in contract revenue for research and development activities
performed for Orasense.
Research and development expenses rose 7% to $66.4 million in 1999 from
$62.2 million in 1998. The increase in research and development expenses
occurred because compounds in preclinical and clinical development continued to
advance into more expensive stages of development. We expect that research and
development expenses will decrease from the 1999 levels as the company
implements the restructuring plan announced in January 2000. Operating expenses
in 1998 included a $5.2 million write-off of acquired patents. No similar
expenses were incurred in 1999.
General and administrative expenses were $10.6 million for 1999,
compared with $9.5 million in 1998. This increase was primarily due to expanded
business development and investor relations activities and support of our
increasing research and development efforts. We expect that general and
administrative expenses will decrease from the 1999 levels as the company
implements its restructuring plan.
Interest income declined to $2.5 million in 1999 from $4.2 million in
1998. This decrease was primarily due to lower levels of cash and short-term
investments during 1999.
Interest expense increased to $11.4 million in 1999, compared with $9.4
million in 1998. This increase in interest expense was due primarily to
borrowing a total of $40 million in 1997 and 1998 under the terms of ten-year
private debt financings. Under the terms of the private debt financing
arrangements, payment of both principal and interest is deferred for the first
five years. During the third and fourth quarters of 1999, the company also
borrowed $2.3 million from Elan related to the Orasense joint venture. The terms
of the Elan debt also provide that the payment of principal and interest is
deferred for five years. Therefore, of the $11.4 million interest expense in
1999, $8.1 million was accrued under the long-term debt agreements and will not
require current cash payment.
Our net loss for 1999 was $59.6 million, or $2.08 per share, compared to
$43.0 million, or $1.60 per share, for 1998. The 1999 loss included $7.2 million
for Isis' equity in the loss of Orasense. Isis' loss from operations was $43.1
million in 1999, compared to $37.8 million in 1998. We expect that operating
losses will be
25
<PAGE> 28
reduced from the 1999 level, as we implement our restructuring plan. Operating
losses may fluctuate from quarter to quarter because of differences in the
timing of revenue and expense recognition.
At December 31, 1999, our net operating loss carryforward for
federal income tax purposes was approximately $246 million. The net operating
loss and research credit carryforwards make up the majority of our deferred tax
assets. We will only be able to use the net operating loss and research credits,
and realize the benefit of these deferred tax assets, if we become profitable.
We have fully reserved all of our deferred tax assets, as their realization is
uncertain. Our research credit carryforward for federal income tax purposes was
approximately $11 million. Our federal net operating loss and research credit
carryforwards will begin expiring in 2004 unless previously utilized. Our net
operating loss and tax credit carryforwards will be subject to an annual
limitation regarding utilization against taxable income in future periods, due
to "change of ownership" provisions of the Tax Reform Act of 1986. We believe
that such limitation will not have a material adverse impact on the benefits
that may arise from our net operating loss and tax credit carryforwards.
However, there may or may not be additional limitations arising from any future
changes in ownership that may have a material adverse impact on Isis.
We believe that inflation and changing prices have not had a material
effect on our operations to date.
Years Ended December 31, 1998 and December 31, 1997
Our revenue from collaborative research and development agreements was
$38.6 million in 1998 and $32.7 million in 1997, an increase of 18%. The receipt
of $5 million from CpG ImmunoPharmaceuticals, Inc. for a license to certain
issued patents together with $1.8 million in from a research collaboration with
Merck contributed to this revenue increase. We delivered our first commercial
shipment of Vitravene(TM) in 1998, earning product revenue of $0.6 million.
Research and development expenses amounted to $62.2 million in 1998 and
$55.9 million in 1997. This increase in research and development expenses
resulted from Isis' growing preclinical and clinical development activities.
Operating expenses also included $5.2 million related to the write-off
of acquired patents.
General and administrative expenses were $9.5 million in 1998, compared
with $8.1 million in 1997. This increase was due to expanded business
development and investor relations activities and support of our increasing
research and development efforts.
Interest expense increased to $9.4 million in 1998 from $3.6 million in
1997. This increase was due to borrowing a total of $40 million in the fourth
quarter of 1997 and the second quarter of 1998. This borrowing was under the
terms of ten-year private debt financings.
Our net loss was $43.0 million, or $1.60 per share, in 1998 and $31.1
million, or $1.17 per share, in 1997.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations with revenue from contract research and
development, by selling equity securities and by issuing long-term debt. From
our inception through December 31, 1999, we have earned approximately $180
million in revenue from contract research and development. We have also raised
net proceeds of approximately $250 million from the sale of equity securities
since Isis was founded. We have borrowed approximately $72 million under
long-term debt arrangements to finance a portion of our operations.
As of December 31, 1999, we had cash, cash equivalents and short-term
investments of $52.8 million and working capital of $44.2 million. In
comparison, we had cash, cash equivalents and short-term investments of $58.8
million and working capital of $40.7 million as of December 31, 1998. This
decrease in cash and short-term investments resulted from the funding of
operating losses, investments in capital equipment and building improvements,
investment in the Orasense Ltd. joint venture and principal payments on debt and
capital lease obligations. This decrease was offset in part by the sale of $15
million of common stock and $12 million of convertible preferred stock to Elan
Corporation in conjunction with the Orasense joint venture. Other sources
26
<PAGE> 29
of funding in 1999 included $37.3 million from our issuance of common stock and
$3.2 million from long term debt financing.
The agreement with Elan International Services Ltd. provides us with
access to up to $18.4 million in convertible debt. This debt is to be used to
support the Orasense joint venture collaboration. Restrictions on the
availability of the debt facility are based on the anticipated collaboration
costs and the amount of funds available to us. As of December 31, 1999, the
outstanding balance under this line of credit was $2.3 million. See Note 3 to
the Financial Statements, "Long-term obligations and commitments."
In 1997 and 1998, we borrowed a total of $40 million in private
transactions. The loans must be repaid on November 1, 2007, and bear interest at
14% per annum. No payments of either principal or interest are required during
the first 5 years of the loans. After the first 5 years, interest must be paid
quarterly until the end of the loans. No principal payments are required until
November 1, 2007. In conjunction with this transaction, we issued warrants to
purchase 800,000 shares of common stock at a price of $25 per share. The
warrants issued in connection with these financings expire on November 1, 2004.
The warrants have been valued at a combined total of $5.4 million. This amount
has been credited to stockholders' equity. Because interest is deferred during
the first 5 years, the combined principal balance of both borrowings will accrue
to a total of $78 million on November 1, 2002. The debt under these arrangements
is carried on the balance sheet net of the unamortized amount allocated to the
warrants and including accrued interest. The combined carrying amount of these
notes at December 31, 1999 was $49,086,000. See Note 3 to the Financial
Statements, "Long-term obligations and commitments".
As of December 31, 1999, our long-term obligations (including current
portion) totaled $91.1 million, compared to $81.3 million at December 31, 1998.
This increase was due to the accrual of interest on the private debt financing
together with the additional debt acquired during the year as described above.
Additional capital lease financing to fund equipment acquisitions also
contributed to the increase. We expect that capital lease obligations will
increase over time to fund capital equipment acquisitions required for our
business. We will continue to use lease lines as long as the terms continue to
remain commercially attractive. We believe that our existing cash, cash
equivalents and short-term investments, combined with interest income, committed
contract revenue and committed equity funding will be sufficient to meet our
anticipated requirements for at least three years.
IMPACT OF YEAR 2000 COMPUTER ISSUES
In 1998 and 1999 SEC filings, the Company discussed the nature and
progress of its plans to become Year 2000 ready. In late 1999, the Company
completed its remediation and testing of systems. As a result of those planning
and implementation efforts, the Company experienced no significant disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000 date
change. The Company expensed approximately $150,000 during 1999 in connection
with remediating its systems. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. The Company will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
ITEM 7A. 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
27
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and supplementary data required by this item
are filed as exhibits hereto, are listed under Item 14(a)(1) and (2), and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the caption "Election of
Directors" contained in our definitive Proxy Statement (the "Proxy Statement")
which will be filed on or before April 24, 2000 with the Securities and Exchange
Commission in connection with the solicitation of proxies for our 2000 Annual
Meeting of stockholders to be held on June 8, 2000.
The required information concerning our Executive Officers is contained
in Item 1, Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information under the caption "Executive Compensation" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the information under the captions "Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information under the caption "Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions" contained in the Proxy Statement.
28
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements
The financial statements required by this item are submitted in a
separate section beginning on page 36 of this Report.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 36
Balance Sheets at December 31, 1999 and 1998 37
Statements of Operations for the years ended December 31, 1999, 1998 and 1997 38
Statements of Stockholders' Equity (deficit) for the years ended December 31,
1999, 1998 and 1997 39
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 40
Notes to Financial Statements 41
</TABLE>
(A)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
None required.
(A)(3) INDEX TO EXHIBITS
See Index to Exhibits on pages 33 through 35.
The following management compensatory plans and arrangements are required to be
filed as exhibits to this Report pursuant to Item 14(c):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.2 -- Registrant's 1989 Stock Option Plan, as amended.(5)
10.3 -- Revised form of Incentive Stock Option Agreement under the 1989
Stock Option Plan.(2)
10.4 -- Revised form of Supplemental Stock Option Agreement under
the 1989 Stock Option Plan.(2)
10.5 -- Form of Incentive Stock Option Agreement dated January 1, 1995
under the 1989 Stock Option Plan entered into between Registrant
and certain of its officers together with related schedule.(3)
10.6 -- Form of Supplemental Stock Option Agreement dated January 1,
1995 under the 1989 Stock Option Plan entered into between
Registrant and certain of its officers together with related
schedule.(3)
10.7 -- Registrant's 1992 Non-Employee Directors Stock Option Plan, as
amended.(2)
10.8 -- Revised form of Supplemental Stock Option Agreement under
Registrant's 1992 Non-Employee Directors' Stock Option Plan.(4)
10.9 -- Form of Supplemental Stock Option Agreement dated January 6,
2000 under the 1989 Stock Option Plan.
10.10 -- Form of Performance-Based Supplemental Stock Option Agreement
dated January 6, 2000 under the 1989 Stock Option Plan entered
into between Registrant and certain of its officers together
with related schedule.
10.11 -- Registrant's 2000 Employee Stock Purchase Plan.
10.12 -- Form of Employee Assignment of Patent Rights.(1)
10.13 -- Registrant's 2000 Broad-Based Equity Incentive Stock Option
Plan.
</TABLE>
29
<PAGE> 32
<TABLE>
<S> <C>
10.14 -- Form of Supplemental Stock Option Agreement dated January 6,
2000 under the 2000 Broad-Based Equity Incentive Stock Option
Plan.
10.15 -- Form of Supplemental Stock Option Agreement dated January 6,
2000 under the 2000 Broad-Based Equity Incentive Stock Option
Plan entered into between the Registrant and its directors.
10.16 -- Severance Agreement dated January 11, 2000 entered into between
Registrant and its executive officers, together with related
schedule.
</TABLE>
----------------
(1) Filed as an exhibit to the Registrant's Registration Statement on
Form S-1 (No. 33-39640) or amendments thereto and incorporated herein by
reference.
(2) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 and incorporated herein by
reference.
(3) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated herein by reference.
(b) REPORTS ON FORM 8-K
On January 28, 2000, the Registrant filed the following report on
Form 8-K:
Report dated January 14, 2000 which described the joint venture the
Registrant entered into with Elan Corporation, plc. No financial
statements were filed with this report on Form 8-K. Eight documents,
including the Subscription, Joint Development and Operating Agreement,
security and warrant purchase agreements and related license agreements
(with certain confidential information deleted) were filed as exhibits
to the report.
(c) EXHIBITS
The exhibits required by this Item are listed under Item 14(a)(3).
(d) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules required by this Item are listed under
Item 14(a)(2).
30
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 14 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized on the
27th day of March, 2000.
ISIS PHARMACEUTICALS, INC.
By: /s/ STANLEY T. CROOKE, M.D., Ph.D.
----------------------------------
Stanley T. Crooke, M.D., Ph.D.
Chairman of the Board, President and
Chief Executive Officer
(Principal executive officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoint Stanley T. Crooke and B. Lynne Parshall, or any of
them, his or her attorney-in-fact, each with the power of substitution, for him
or her in any and all capacities, to sign any amendments to this Report, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ STANLEY T. CROOKE, M.D., Ph.D. Chairman of the Board, March 27, 2000
- ---------------------------------- Chief Executive Officer and
Stanley T. Crooke, M.D., Ph.D. Director (Principal
executive officer)
/s/ B. LYNNE PARSHALL Executive Vice President and March 27, 2000
- ---------------------------------- Chief Financial Officer
B. Lynne Parshall (Principal financial and
accounting officer)
/s/ CHRISTOPHER F. O. GABRIELI Director March 27, 2000
- ------------------------------
Christopher F. O. Gabrieli
/s/ ALAN C. MENDELSON Director March 27, 2000
- ------------------------------
Alan C. Mendelson
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ WILLIAM R. MILLER Director March 27, 2000
- ------------------------------
William R. Miller
/s/ MARK B. SKALETSKY Director March 27, 2000
- ------------------------------
Mark B. Skaletsky
/s/ LARRY SOLL Director March 27, 2000
- ------------------------------
Larry Soll
/s/ JOSEPH H. WENDER Director March 27, 2000
- ------------------------------
Joseph H. Wender
</TABLE>
32
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
3.1 -- Amended and Restated Certificate of Incorporation.(1)
3.2 -- Bylaws.(1)
4.1 -- Reference is made to Exhibits 3.1, 3.2 and 10.19.
4.2 -- Ciba-Geigy Investor Rights Agreement between the Registrant and
Novartis AG, formerly Ciba-Geigy Limited("Novartis"), dated
November 9, 1990.(1)
4.3 -- Voting Rights Agreement among the Registrant, Novartis and Dr.
Crooke, dated November 9, 1990.(1)
4.4 -- Specimen stock certificate.(1)
9.1 -- Reference is made to Exhibit 4.4.
10.1 -- Form of Indemnification Agreement entered into between the
Registrant and its Directors and officers with related
schedule.(1)
10.2 -- Registrant's 1989 Stock Option Plan, as amended.(10)
10.3 -- Revised form of Incentive Stock Option Agreement under the 1989
Stock Option Plan.(8)
10.4 -- Revised form of Supplemental Stock Option Agreement under
the 1989 Stock Option Plan.(8)
10.5 -- Form of Incentive Stock Option Agreement dated January 1, 1995
under the 1989 Stock Option Plan entered into between Registrant
and certain of its officers together with related schedule.(4)
10.6 -- Form of Supplemental Stock Option Agreement dated January 1,
1995 under the 1989 Stock Option Plan entered into between
Registrant and certain of its officers together with related
schedule.(4)
10.7 -- Registrant's 1992 Non-Employee Directors Stock Option Plan, as
amended.(8)
10.8 -- Revised form of Supplemental Stock Option Agreement under
Registrant's 1992 Non-Employee Directors' Stock Option Plan.(9)
10.9 -- Form of Supplemental Stock Option Agreement dated January 6,
2000 under the 1989 Stock Option Plan.
10.10 -- Form of Performance-Based Supplemental Stock Option Agreement
dated January 6, 2000 under the 1989 Stock Option Plan entered
into between Registrant and certain of its officers together
with related schedule.
10.11 -- Registrant's 2000 Employee Stock Purchase Plan.
10.12 -- Form of Employee Assignment of Patent Rights.(1)
10.13 -- Registrant's 2000 Broad-Based Equity Incentive Stock Option
Plan.
10.14 -- Form of Supplemental Stock Option Agreement dated January 6,
2000 under the 2000 Broad-Based Equity Incentive Stock Option
Plan.
10.15 -- Form of Supplemental Stock Option Agreement dated January 6,
2000 under the 2000 Broad-Based Equity Incentive Stock Option
Plan entered into between the Registrant and its directors.
10.16 -- Severance Agreement dated January 11, 2000 entered into between
Registrant and its executive officers, together with related
schedule.
10.17 -- Amended and Restated Research, Development and Licensing
Agreement by and between Isis Pharmaceuticals, Inc. and Novartis
AG dated February 13, 1996(with certain confidential information
deleted).(7)
10.18 -- Stock Purchase Agreement between the Registrant and Boehringer
Ingelheim International GmbH, dated as of July 18, 1995 (with
certain confidential information deleted).(5)
10.19 -- Collaborative Agreement between the Registrant and Boehringer
Ingelheim International GmbH, dated as of July 18, 1995 (with
certain confidential information deleted).(6)
10.20 -- Agreement between Registrant and CIBA Vision Corporation dated
July 10, 1997 (with certain confidential information
deleted).(9)
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10.21 -- Amendment No. 2 to the Agreement between the Company and CIBA
Vision Corporation, dated September 14, 1998 (with certain
confidential information deleted).(12)
10.22 -- Imperial Bank Note Secured by Deed of Trust dated March 24, 1997
in the amount of $6,000,000, together with the related Deed of
Trust and Assignment of Rents dated March 24, 1997.(9)
10.23 -- Imperial Bank Note Secured by Deed of Trust dated March 24, 1997
in the amount of $3,706,620, together with the related Deed of
Trust and Assignment of Rents dated March 24, 1997.(9)
10.24 -- Purchase Agreement for 14% Senior Subordinated Discount Notes
due November 1, 2007 and Warrants for Common Stock dated October
24, 1997 (with certain confidential information deleted).(10)
10.25 -- First Supplement to Purchase Agreement for 14% Senior
Subordinated Discount Notes due November 1, 2007 and Warrants
for Common Stock dated May 1, 1998 (with certain confidential
information deleted).(11)
10.26 -- Asset Purchase Agreement between Registrant and Gen-Probe
Incorporated dated December 19, 1997 (with certain confidential
information deleted).(10)
10.27 -- Research Collaboration and License Agreement between Merck &
Co., Inc. and the Registrant dated June 1, 1998 (with certain
confidential information deleted).(11)
10.28 -- Research and Development Agreement between the Registrant and
Zeneca Limited, dated December 18, 1998 (with certain
confidential information deleted).(14)
10.29 -- Patent Rights Purchase Agreement between the Registrant and
Gilead Sciences, Inc., dated December 18, 1998 (with certain
confidential information deleted).(13)
10.30 -- Subscription, Joint Development and Operating Agreement, dated
April 20, 1999 by and among Registrant, Elan Corporation, plc,
Elan International Services, Ltd. and Orasense, Ltd. (with
certain confidential information deleted); together with the
related Securities Purchase Agreement, Convertible Promissory
Note, Warrant to Purchase Shares of Common Stock, Registration
Rights Agreements and License Agreements.(16)
10.31 -- Agreement dated August 31, 1999 between Boehringer Ingelheim
International GmbH and Isis Pharmaceuticals, Inc.; together with
related Amendment to the Stock Purchase Agreement.(17)
10.32 -- Subscription, Joint Development and Operating Agreement, dated
January 14, 2000 by and among Registrant, Elan Corporation, plc,
Elan International Services, Ltd. and HepaSense, Ltd. (with
certain confidential information deleted); together with the
related Securities Purchase Agreement, Convertible Promissory
Note, Warrant to Purchase Shares of Common Stock, Registration
Rights Agreements and License Agreements.(18)
23.1 -- Consent of Ernst & Young LLP, Independent Auditors.
24.1 -- Power of Attorney. Reference is made to page 31.
27.1 -- Financial Data Schedule.
99.1 -- Form of Confidentiality Agreement.(15)
</TABLE>
- ------------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (No. 33-39640) or amendments thereto and incorporated herein by
reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 (No. 33-42970) and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1992 and incorporated herein by
reference.
(4) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Report on Form 8-K dated July
18, 1995 and incorporated herein by reference.
34
<PAGE> 37
(6) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995 and incorporated herein by
reference.
(7) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by reference.
(8) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 and incorporated herein by
reference.
(9) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 and incorporated herein by
reference.
(10) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated herein by reference.
(11) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 and incorporated herein by
reference.
(12) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998 and incorporated herein by
reference.
(13) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by reference.
(14) Filed as an exhibit to the Registrant's Annual Report on Form 10-K
(Amendment No. 2) for the year ended December 31, 1998 and incorporated
herein by reference.
(15) Filed as an exhibit to the Registrant's Registration Statement on Form
S-3 (No. 333-71911) or amendments thereto for the year ended December
31, 1998 and incorporated herein by reference.
(16) Filed as an exhibit to the Registrant's Report on Form 8-K dated April
20, 1999 and incorporated herein by reference.
(17) Filed as an exhibit to the Registrant's Report on Form 8-K dated August
31, 1999 and incorporated herein by reference.
(18) Filed as an exhibit to the Registrant's Report on Form 8-K dated January
28, 2000 and incorporated herein by reference.
35
<PAGE> 38
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Isis Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Isis Pharmaceuticals,
Inc. as of December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Isis
Pharmaceuticals, Inc. at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
San Diego, California
January 28, 2000,
except for paragraph 3
of Note 8, as to which
the date is March 8, 2000
36
<PAGE> 39
ISIS PHARMACEUTICALS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 35,296 $ 27,618
Short-term investments 17,543 31,230
Contracts receivable 5,429 3,466
Prepaids and other current assets 929 873
--------- ---------
Total current assets 59,197 63,187
Property, plant and equipment, net 23,945 21,542
Patent costs, net 11,250 9,113
Investment in joint venture 6,991 --
Deposits and other assets 1,724 2,232
--------- ---------
$ 103,107 $ 96,074
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 3,148 $ 2,977
Accrued payroll and related expenses 1,215 3,088
Accrued liabilities 2,563 2,714
Deferred contract revenues 4,166 10,176
Current portion of long-term obligations 3,892 3,581
--------- ---------
Total current liabilities 14,984 22,536
Long-term obligations, less current portion 87,254 77,724
Commitments (See Note 3)
Stockholders' equity (deficit):
Series A Convertible Exchangeable 5% Preferred stock,
$.001 par value, 15,000,000 shares authorized,
120,150 shares and no shares issued and
outstanding at December 31, 1999 and 1998, respectively 12,315 --
Accretion of Preferred stock dividend 120 --
Common stock, $.001 par value; 50,000,000 shares authorized,
31,613,000 shares and 27,053,000 shares issued and
outstanding at December 31, 1999 and 1998, respectively 32 27
Additional paid-in capital 245,192 192,737
Accumulated other comprehensive income (loss) (29) 166
Accumulated deficit (256,761) (197,116)
--------- ---------
Total stockholders' equity (deficit) 869 (4,186)
--------- ---------
$ 103,107 $ 96,074
========= =========
</TABLE>
See accompanying notes.
37
<PAGE> 40
ISIS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Research and development revenues
under collaborative agreements $ 29,523 $ 38,611 $ 32,722
Research and development revenues
from joint venture 4,402 -- --
Product revenues -- 560 --
-------- -------- --------
33,925 39,171 32,722
-------- -------- --------
Expenses:
Research and development 66,413 62,200 55,940
Write-off of acquired patents -- 5,238 --
General and administrative 10,571 9,511 8,078
-------- -------- --------
Total operating expenses 76,984 76,949 64,018
-------- -------- --------
Loss from operations (43,059) (37,778) (31,296)
Equity in loss of joint venture (7,242) -- --
Interest income 2,500 4,150 3,815
Interest expense (11,424) (9,355) (3,585)
-------- -------- --------
Net loss (59,225) (42,983) (31,066)
Accretion of dividend on preferred stock (420) -- --
-------- -------- --------
Net loss applicable to common stock $(59,645) $(42,983) $(31,066)
======== ======== ========
Basic and diluted net loss per share $ (2.08) $ (1.60) $ (1.17)
======== ======== ========
Shares used in computing basic and
diluted net loss per share 28,703 26,873 26,456
======== ======== ========
</TABLE>
See accompanying notes.
38
<PAGE> 41
ISIS PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------------- COMMON STOCK
ACCRUED ------------------------
DESCRIPTION SHARES AMOUNT DIVIDEND SHARES AMOUNT
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- $ -- 26,201 $ 26
Comprehensive Income
Net loss -- -- -- -- --
Changes in unrealized gains and
(losses), net of income taxes -- -- -- -- --
Comprehensive income (loss)
Options exercised and employee
Stock purchase plan -- -- -- 454 1
Issuances of warrants to purchase
Common stock -- --
Compensation relating to the
Granting of options -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1997 -- -- -- 26,655 27
--------- --------- --------- --------- ---------
Comprehensive Income
Net loss -- -- -- -- --
Change in unrealized gains and
(losses), net of income taxes -- -- -- -- --
Comprehensive income (loss)
Options exercised and employee
Stock purchase plan -- -- -- 398 --
Issuances of warrants to purchase
Common stock -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1998 -- -- -- 27,053 27
--------- --------- --------- --------- ---------
Comprehensive Income
Net loss -- -- -- -- --
Change in unrealized gains and
(losses), net of income taxes -- -- -- -- --
Comprehensive income (loss)
Issuance of preferred stock 120 12,015 -- -- --
Dividends accrued -- -- 420 -- --
Conversion of preferred stock
dividends -- 300 (300) -- --
Issuances of common stock, net of
repurchases and offering costs -- -- -- 3,974 4
Warrants exercised -- -- -- 157 --
Options exercised and employee
stock purchase plan -- -- -- 429 1
Compensation relating to the
granting of options -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1999 120 $ 12,315 $ 120 31,613 $ 32
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
PAID IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
CAPITAL INCOME/(LOSS) DEFICIT EQUITY
--------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 181,248 $ 178 $(123,067) $ 58,385
Comprehensive Income
Net loss -- -- (31,066) (31,066)
Changes in unrealized gains and
(losses), net of income taxes -- (13) -- (13)
---------
Comprehensive income (loss) (31,079)
---------
Options exercised and employee
Stock purchase plan 3,306 -- -- 3,307
Issuances of warrants to purchase
Common stock 3,780 -- -- 3,780
Compensation relating to the
Granting of options 459 -- -- 459
--------- --------- --------- ---------
Balance at December 31, 1997 188,793 165 (154,133) 34,852
--------- --------- --------- ---------
Comprehensive Income
Net loss -- -- (42,983) (42,983)
Change in unrealized gains and
(losses), net of income taxes -- 1 -- 1
---------
Comprehensive income (loss) (42,982)
---------
Options exercised and employee
Stock purchase plan 2,298 -- -- 2,298
Issuances of warrants to purchase
Common stock 1,646 -- -- 1,646
--------- --------- --------- ---------
Balance at December 31, 1998 192,737 166 (197,116) (4,186)
--------- --------- --------- ---------
Comprehensive Income
Net loss -- -- (59,645) (59,645)
Change in unrealized gains and
(losses), net of income taxes -- (195) -- (195)
---------
Comprehensive income (loss) (59,840)
---------
Issuance of preferred stock -- -- -- 12,015
Dividends accrued -- -- -- 420
Conversion of preferred stock
dividends -- -- -- --
Issuances of common stock, net of
repurchases and offering costs 49,051 -- -- 49,055
Warrants exercised 17 -- -- 17
Options exercised and employee
stock purchase plan 3,250 -- -- 3,251
Compensation relating to the
granting of options 137 -- -- 137
--------- --------- --------- ---------
Balance at December 31, 1999 $ 245,192 $ (29) $(256,761) $ 869
========= ========= ========= =========
</TABLE>
See accompanying notes.
39
<PAGE> 42
ISIS PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net loss $(59,225) $(42,983) $(31,066)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 5,196 4,258 3,178
Deferred interest on long term debt 8,077 6,112 654
Equity in losses of joint venture 7,242 -- --
Write-off of acquired patents -- 5,238 --
Compensation expense related to grant of options 137 -- 459
Changes in operating assets and liabilities:
Contracts receivable (1,963) (3,177) (289)
Prepaids and other current assets (56) 1,202 (343)
Accounts payable 171 134 481
Accrued payroll and related expenses (1,873) 846 753
Accrued liabilities (60) (1,633) 1,584
Deferred contract revenues (6,010) (4,717) 4,689
-------- -------- --------
Net cash used in operating activities (48,364) (34,720) (19,900)
-------- -------- --------
Investing activities:
Short-term investments 13,492 17,455 (8,155)
Property, plant and equipment (4,791) (4,434) (3,454)
Patent costs (2,642) (3,882) (1,455)
Investment in joint venture (14,233) -- --
Deposits and other assets 276 (30) (2,098)
-------- -------- --------
Net cash provided by (used in) investing activities (7,898) 9,109 (15,162)
-------- -------- --------
Financing activities:
Net proceeds from issuance of equity 64,338 3,944 7,087
Proceeds from long-term borrowing 3,233 13,354 32,666
Principal payments on debt and capital lease obligations (3,631) (2,171) (3,671)
-------- -------- --------
Net cash provided by financing activities 63,940 15,127 36,082
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 7,678 (10,484) 1,020
Cash and cash equivalents at beginning of year 27,618 38,102 37,082
-------- -------- --------
Cash and cash equivalents at end of year $ 35,296 $ 27,618 $ 38,102
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 2,402 $ 3,191 $ 2,644
Supplemental disclosures of non-cash investing and
financing activities:
Additions to debt and capital lease obligations for
acquisitions of property, plant and equipment $ 2,071 $ 2,068 $ 2,953
Additions to debt for patent acquisitions $ -- $ 3,238 $ --
Conversion of preferred stock dividends into
preferred stock $ 300 $ -- $ --
</TABLE>
See accompanying notes.
40
<PAGE> 43
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and business activity--Isis Pharmaceuticals was
incorporated in California on January 10, 1989. In conjunction with its initial
public offering, Isis was reorganized as a Delaware corporation, as Isis
Pharmaceuticals, Inc., in April 1991. Isis was organized principally to develop
human therapeutic drugs using antisense and combinatorial technology.
Basic net loss per share--Basic earnings per share is based on weighted
average common shares outstanding and excludes any dilutive effects of options,
warrants and convertible securities. Dilutive earnings per share includes the
dilutive effects of options, warrants and convertible securities. Options and
warrants to purchase common stock were not included in the computation of
diluted net loss per share because the effect would be antidilutive.
Contract revenues and expenses--Contract revenues consist of
non-refundable research and development funding and are recorded as earned based
on the performance requirements of the collaborative research and development
contracts. Contract fees for which no further performance obligations exist are
recognized when the payments are received or when the collection is assured.
Payments received in excess of amounts earned are recorded as deferred contract
revenues. Research and development costs are expensed as incurred. For the years
ended December 31, 1999, 1998 and 1997, costs and expenses of approximately
$26,000,000, $35,000,000 and $31,000,000, respectively, were related to
collaborative research and development arrangements.
Revenue recognition--Isis recognizes revenue from product sales at the
time of shipment. An estimate is made of the amount of the product that may be
returned and current period sales are reduced accordingly. License fees consist
of non-refundable fees from the sale of license rights to our proprietary
technologies. Revenue from these fees is recorded when no further performance
obligations exist in accordance with Staff Accounting Bulletin No. 101.
Cash equivalents and short-term investments--Cash equivalents and
short-term investments consist of highly liquid debt instruments. Isis considers
instruments with original maturities of less than 90 days to be cash
equivalents. Isis has recorded its cash equivalents and short-term investments
at fair market value as of December 31, 1999, and has classified all of its
investments as available-for-sale. Unrealized gains and losses, net of the
related tax effect, are included in accumulated other comprehensive income
(loss), a separate component of stockholders' equity (deficit). See Note 2 -
Investments.
41
<PAGE> 44
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999
Property, plant and equipment--Property, plant and equipment is stated
at cost and consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Land $ 1,163 $ 1,163
Buildings and improvements 16,911 16,084
Equipment 31,075 25,324
Furniture and fixtures 1,510 1,227
-------- --------
50,659 43,798
Less accumulated depreciation (26,714) (22,256)
-------- --------
$ 23,945 $ 21,542
======== ========
</TABLE>
Depreciation of property, plant and equipment is provided on the straight-line
method over estimated useful lives as follows:
<TABLE>
<S> <C>
Building 31.5 years
Improvements 15 years
Equipment 2.5-5 years
Furniture and fixtures 5 years
</TABLE>
Patent costs--Isis capitalizes certain costs related to patent
applications, principally consisting of legal and filing fees. These costs are
regularly reviewed to determine that they include costs for patent applications
Isis is pursuing. Costs related to applications that are not being actively
pursued are evaluated under Accounting Principles Board Statement 17: Intangible
Assets and are adjusted to an appropriate amortization period, which results in
an immediate write-off. Accumulated patent costs are amortized on a
straight-line basis over their estimated economic lives of approximately 10
years, beginning with the date the patents are issued. The weighted average
remaining life of issued patents was 7.6 years at December 31, 1999 and 8.2
years for December 31, 1998. Accumulated amortization was $999,000 at December
31, 1999 and $493,000 at December 31, 1998.
Investment in joint venture--On April 20, 1999, Isis and Elan
Corporation, plc formed a joint venture to develop technology for the
formulation of oral oligonucleotide drugs. The joint venture, Orasense, Ltd., a
Bermuda limited company, is initially owned 80.1% by Isis 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
accounts for its investment in Orasense under the equity method of accounting.
Long-lived assets-- Long-lived assets are reviewed for potential
impairment annually or when events and circumstances warrant an earlier review.
When an evaluation is required, we compare the estimated future undiscounted
cash flows associated with the asset to the asset's carrying amount to determine
if a write-down to fair market value is required.
Use of estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts
42
<PAGE> 45
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Comprehensive income (loss)--Statement of Financial Accounting Standards
(FAS) 130, "Reporting Comprehensive Income" requires Isis to display
comprehensive income (loss) and its components as part of Isis' full set of
financial statements. The measurement and presentation of net income (loss) did
not change. Comprehensive income (loss) is comprised of net income (loss) and
certain changes in equity that are excluded from net income (loss).
Specifically, FAS 130 requires unrealized holding gains and losses on Isis'
available-for-sale securities, which were reported separately in stockholders'
equity, to be included in accumulated other comprehensive income (loss).
Comprehensive income (loss) for the years ended December 31, 1999, 1998 and 1997
have been reflected in the Consolidated Statement of Stockholders' Equity
(Deficit).
Reclassification--Certain prior period amounts have been reclassified to
conform to current presentation.
2. INVESTMENTS
Isis invests its excess cash in U.S. Government securities and debt
instruments of financial institutions and corporations with strong credit
ratings. Isis has established guidelines relative to diversification and
maturities that maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
Isis has not experienced any losses on its short-term investments. As of
December 31, 1999, 75% of the debt securities held by Isis had a contractual
maturity of one year or less, and the remaining 25% of the portfolio was due
within 2.5 years.
The following is a summary of Isis' short-term investments, accounted
for as available-for-sale securities:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
-----------------------------------------------
GROSS
UNREALIZED ESTIMATED
COST GAINS (LOSSES) FAIR VALUE
------- -------------- ----------
DECEMBER 31, 1999 (in thousands)
<S> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
agencies $ 7,311 ($ 29) $ 7,282
U.S. corporate debt securities 10,261 (0) 10,261
------- ------- -------
Total debt securities $17,572 ($ 29) $17,543
======= ======= =======
DECEMBER 31, 1998
U.S. Treasury securities and
obligations of U.S. Government
agencies $20,700 $ 86 $20,786
U.S. corporate debt securities 10,364 80 10,444
------- ------- -------
Total debt securities $31,064 $ 166 $31,230
======= ======= =======
</TABLE>
43
<PAGE> 46
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999
3. LONG-TERM OBLIGATIONS AND COMMITMENTS
Between 1997 and 1998, Isis obtained a total of $40,060,000 in private
debt financing. The terms of the financing provide for a 10 year maturity on the
debt, interest of 14% per annum and deferred interest payments for the first 5
years of the loan. After the first 5 years, interest must be paid quarterly
until the end of the loan, November 1, 2007. No principal repayments are
required until the end of the loan. Because interest is deferred during the
first 5 years, the principal balance will be $78 million on November 1, 2002. In
conjunction with the debt financing, Isis issued warrants to the lender to
purchase shares of common stock, exercisable at $25 per share. Isis issued
warrants for a total of 800,000 common shares. The fair value of the warrants
was estimated using the Black-Scholes option pricing model, with the following
assumptions: expected life of 4.5 years, expected dividend yield of zero percent
and expected volatility of 60 percent. The assumed risk free interest rate was
5.9%. A total fair value of $5,426,000 was calculated for the warrants and was
credited to equity. The allocation of value to the warrants creates an effective
debt discount which is amortized using the effective interest method. The
effective interest rate of this debt is approximately 16%, including the effect
of the discount amortization. The debt is carried on the balance sheet net of
the unamortized amount allocated to the warrants, and including accrued
interest. The carrying amount at December 31, 1999 was $49,086,000. The fair
value of this debt at December 31, 1999 approximated $52,000,000. The fair value
of the long-term debt is estimated using discounted cash flow analyses, based on
current borrowing rates for similar types of borrowing arrangements.
In 1997, Isis obtained 2 new term loans from a bank to refinance
existing notes secured by real property and to fund facilities expansion. Both
notes are secured by Isis' real property and bear interest at the prime interest
rate plus 0.5%. The first note in the amount of $3,707,000 requires monthly
principal repayments of $12,433 plus interest with the remaining principal
balance due in April 2002. The balance of the note at December 31, 1999 was
$3,290,000. The second note in the amount of $6,000,000 requires monthly
principal repayments of $50,000 plus related interest with the remaining
principal balance due in July 2002. The balance at December 31, 1999 was
$4,500,000. As of December 31, 1999, the carrying value of these variable rate
long-term notes approximated fair value.
In 1996 and 1997, Isis borrowed a total of $22,576,000 under a
$40,000,000 line of credit made available under the terms of its collaborative
agreement with Boehringer Ingelheim International GmbH. The borrowed funds were
used to fund research and development costs associated with the collaboration.
Borrowings under the line of credit bear interest at the 7 year U.S.
interbanking rate plus 2.0%, determined at the time each advance was made.
Interest payments are due twice each year with principal repayment due 7 years
after the advance date. The principal may be repaid in cash or stock, at Isis'
option. If Isis elects to repay the loan in shares of Isis common stock,
repayment will be made at a share price equal to 90% of the average market value
over the 20 trading days preceding the maturity date. The balance under this
line of credit as of December 31, 1999 was $22,576,000, which approximated fair
value.
In December 1998, Isis purchased from Gilead Sciences, Inc., the
holdings of its antisense patent estate. This acquisition includes patents and
patent applications covering a broad proprietary suite of antisense chemistry
and antisense drug delivery systems. The purchase price was $6,000,000 payable
in four installments over three years. The first payment for $2,000,000 was paid
in December 1998 and an additional $1,000,000 was paid in December 1999. Isis
has recorded the net present value of the future
44
<PAGE> 47
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999
payments, using a discount rate of 10%, as a long-term obligation on the balance
sheet. The balance of this obligation at December 31, 1999 was $2,568,000, which
approximated fair value.
Between September and November 1999, Isis borrowed a total of $2,213,000
under a $18,400,000 debt facility made available under the terms of its joint
venture with Elan Corporation, plc. The borrowed funds were used to fund
research and development costs associated with the joint venture. The terms of
the financing provide for a 6 year maturity on the debt, with interest at 12%
per annum, compounded semi-annually. No principal or interest payments are
required until the end of the loan. Because interest is deferred during the
first 5 years, the principal balance will be $4.2 million on April 19, 2005. The
principal may be repaid in cash or stock, at Isis' option. If Isis elects to
repay the loan in shares of Isis common stock, repayment will be made at a share
price equal to the average market value over the 60 trading days ending two
business days prior to the maturity date. The balance under this borrowing
facility as of December 31, 1999 was $2,284,000, which approximated fair value.
In September 1999, Isis borrowed $1,019,000 from Abbott Laboratories to
be used by Isis as its contribution toward costs associated with Abbott's design
and construction of a facility for commercial scale manufacturing of
oligonucleotides. The terms of the financing provide for a 2 year maturity on
the debt, with an annual interest rate of 2% over the Citibank prime rate
calculated at the date of borrowing and reset annually. Interest is payable
annually. The principal, which is due at maturity, can be paid in cash, stock
based on 100% of the average closing price for the 20 trading days preceding
loan maturity, or through increasing the price Isis would pay for the
oligonucleotides produced by Abbott until the loan is repaid. The balance under
this borrowing facility as of December 31, 1999 was $1,019,000, which
approximated fair value.
Isis leases equipment and certain office and lab space under
non-cancelable operating and capital leases with terms through February 2007.
Annual future minimum payments under operating leases and other long-term
obligations as of December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL CONTRACT LONG-TERM
LEASES LEASES OBLIGATIONS DEBT
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
2000 $ 1,930 $ 2,638 $ 1,000 $ 3,427
2001 2,023 2,226 2,000 3,364
2002 1,824 1,191 9,611
2003 1,772 516 28,955
2004 1,594 17,592
Thereafter 6,070 148,981
--------- --------- --------- ---------
Total minimum payments $ 15,213 $ 6,571 $ 3,000 211,930
=========
Less amount representing interest (750) (432) (129,173)
--------- --------- ---------
Present value of future minimum payments 5,821 2,568 82,757
Less current portion (2,230) (913) (749)
--------- --------- ---------
Total $ 3,591 $ 1,655 $ 82,008
========= ========= =========
</TABLE>
Rent expense for the years ended December 31, 1999, 1998, and 1997 was
$1,736,000, $1,760,000 and $1,431,000, respectively. Cost of equipment under
capital leases at December 31, 1999 and 1998 was $8,394,000 and $7,101,000,
respectively. Accumulated depreciation of equipment under capital leases at
December 31, 1999 and 1998 was $4,633,000 and $3,140,000, respectively.
45
<PAGE> 48
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999
4. STOCKHOLDERS' EQUITY
Stock Option Plans and Other Employee Option Grants--In June 1989, Isis
adopted a stock option plan which provides for the issuance of incentive and
non-qualified stock options for the purchase of up to 10,200,000 shares of
common stock to its employees and certain other individuals. In addition to the
options issued under the terms of the 1989 plan, non-qualified options to
purchase 319,000 shares of common stock have been granted to certain employees.
The plan also includes provisions for the issuance of stock pursuant to
restricted stock purchases and bonuses. Typically options expire 10 years from
the date of grant. Options granted after December 31, 1995 vest over a 4 year
period, with 25% exercisable at the end of 1 year from the date of the grant and
the balance vesting ratably thereafter. Options granted before January 1, 1996
generally vest over a 5 year period. At December 31, 1999, a total of 5,127,000
shares were exercisable, and 945,000 were available for future grant.
In July 1992, Isis adopted the 1992 Non-Employee Directors' Stock Option
Plan which provides for the issuance of non-qualified stock options for the
purchase of up to 300,000 shares of common stock to its non-employee directors.
Options under this plan expire 10 years from the date of grant. Options granted
after December 31, 1995 become exercisable in 4 equal annual installments
beginning 1 year after the date of grant. Options granted before January 1, 1996
vest over a 5 year period. At December 31, 1999, 163,000 shares issued under
this plan were exercisable and 60,000 Shares were available for future grant.
The following table summarizes stock option activity for the years ended
December 31, 1997 through December 31, 1999 (in thousands, except per share
data):
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVG
SHARES PRICE PER SHARE PRICE/SHARE
--------- ----------------- ------------
<S> <C> <C> <C>
Outstanding at December 31, 1996 6,093 $ .14 to $20.00 $ 8.48
Granted 1,071 13.19 to 19.88
Exercised (395) .14 to 16.00
Terminated (327) 3.75 to 18.25
------
Outstanding at December 31, 1997 6,442 .14 to 20.00 9.80
Granted 1,168 7.06 to 15.44
Exercised (320) .14 to 14.50
Terminated (304) 3.75 to 20.00
------
Outstanding at December 31, 1998 6,986 .14 to 19.88 10.27
Granted 1,539 4.00 to 18.00
Exercised (333) .14 to 14.50
Terminated (490) 3.88 to 19.75
------
Outstanding at December 31, 1999 7,702 .43 to 19.88 10.68
======
</TABLE>
46
<PAGE> 49
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999
The following table summarizes information concerning currently
outstanding and exercisable options (in thousands, except contractual life and
exercise price data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED
NUMBER REMAINING WEIGHTED NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE EXERCISE
EXERCISE PRICE AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 PRICE
- -------------- -------------- ----------- -------------- -------------- ---------
<S> <C> <C> <C> <C> <C
$ 0.43 - $ 5.38 881 4.16 $ 3.76 870 $ 3.75
$ 5.50 - $ 6.75 1,091 3.51 $ 6.28 1,088 $ 6.28
$ 6.81 - $ 9.75 942 3.41 $ 8.49 855 $ 8.40
$ 9.88 - $12.00 992 8.14 $10.92 298 $11.14
$12.06 - $12.75 970 7.08 $12.36 575 $12.37
$12.81 - $13.13 1,362 7.51 $13.02 620 $13.12
$13.18 - $17.75 873 6.83 $14.68 534 $14.81
$17.88 - $19.88 591 6.72 $18.11 450 $18.11
----- -----
$ 0.43 - $19.88 7,702 5.95 $10.68 5,290 $9.81
===== =====
</TABLE>
Employee Stock Purchase Plan--In 1991, the Board of Directors adopted
the Employee Stock Purchase Plan and reserved 500,000 shares of common stock for
issuance thereunder. The plan permits full-time employees to purchase common
stock through payroll deductions (which cannot exceed 10% of each employee's
compensation) at the lower of 85% of fair market value at the beginning of the
offer or the end of each six-month purchase period. During 1999, 96,000 shares
were issued to employees at prices ranging from $8.71 to $10.73 per share. At
December 31, 1999, 45,000 shares were available for purchase under this plan.
Stock-Based Employee Compensation--Isis has adopted the disclosure-only
provision of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation expense has been
recognized for the stock option plans. Had compensation expense been determined
consistent with Statement No. 123, Isis' net loss and basic net loss per share
would have been changed to the following pro forma amounts (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net loss - as reported $ (59,645) $ (42,983) $ (31,066)
Net loss - pro forma (69,446) (49,761) (38,004)
Basic net loss per share - as reported $ (2.08) $ (1.60) $ (1.17)
Basic net loss per share - pro forma (2.42) (1.85) (1.44)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1998 and 1999: expected life of 1 year from vesting date
for regular employees, 2 years from vesting date for Directors and Vice
Presidents, and 4 years from vesting date for Executive Officers; expected
dividend yield of zero percent and expected volatility of 60 percent. The risk -
free interest rate was based on the Treasury Bill rate at the end of each year
47
<PAGE> 50
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999
during 1997, 1998 and 1999. The weighted average risk free interest rates for
1997, 1998 and 1999 were 5.7%, 4.6%, and 6.2%, respectively. All options granted
during the year were valued using the same risk-free rate for the year. The
weighted average fair value of options granted was $8.50 for 1997, $5.98 for
1998 and $6.41 for 1999.
Warrants -- In 1997 and 1998, Isis issued 500,000 and 300,000 warrants,
respectively, in conjunction with a private debt financing agreement. As of
December 31, 1999, all of the warrants remain outstanding at an exercise price
of $25 per share. The warrants expire November 1, 2004. See Note 3.
In 1999, Isis issued 215,000 warrants to Elan International Services,
Ltd. as part of the joint venture collaboration between Isis and Elan. As of
December 31, 1999, all of the warrants remain outstanding at an exercise price
of $24 per share. The warrants expire April 19, 2004.
As of December 31, 1999, total common shares reserved for future
issuance was 9,722,000.
5. INCOME TAXES
Significant components of Isis' deferred tax assets as of December 31,
1999 and 1998 are shown below. Valuation allowances of $113,814,000 and
$90,931,000 have been recognized for 1999 and 1998, respectively, to offset the
net deferred tax assets as realization of such assets is uncertain.
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Deferred tax assets:
Capitalized research expense $ 9,800,000 $ 8,320,000
Net operating loss carryforwards 87,990,000 69,661,000
Research and development credits 13,910,000 10,849,000
Other, net 6,404,000 5,314,000
------------- -------------
Total deferred tax assets 118,104,000 94,144,000
Deferred tax liabilities:
Patent expense (4,290,000) (3,213,000)
------------- -------------
Total deferred tax liabilities (4,290,000) (3,213,000)
Total net deferred tax assets 113,814,000 90,931,000
Valuation allowance for deferred tax assets (113,814,000) (90,931,000)
------------- -------------
Net deferred tax assets $ 0 $ 0
------------- -------------
</TABLE>
At December 31, 1999, approximately $5,114,000 of the valuation
allowance for deferred tax assets relates to stock option deductions which, when
recognized, will be allocated directly to additional paid-in capital.
At December 31, 1999, Isis had federal and California tax net operating
loss carryforwards of approximately $245,904,000 and $33,451,000, respectively.
Isis also had federal and California research credit carryforwards of
approximately $10,678,000 and $4,970,000, respectively. The difference between
the tax loss carryforwards for federal and California purposes was attributable
to the capitalization of research and development expenses for California tax
purposes and a required 50% limitation in the utilization of California loss
carryforwards. The federal tax loss carryforward and the research credit
carryforwards will begin expiring
48
<PAGE> 51
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999
in 2004 unless previously utilized. Approximately $198,000 of the California tax
loss carryforward expired during 1999 and the related deferred tax asset and tax
loss carryforward amounts have been reduced accordingly. The remaining
California tax loss carryforward will begin expiring in 2000, unless utilized.
Annual use of Isis' net operating loss and credit carryforwards will be
limited under the Internal Revenue Code as a result of cumulative changes in
ownership of more than 50% during the periods ended December 31, 1989 and 1991.
However, Isis believes that such limitations will not have a material impact
upon the utilization of the carryforwards.
6. RESEARCH AND DEVELOPMENT COLLABORATIVE ARRANGEMENTS AND LICENSING AGREEMENTS
In 1990, Isis entered into a collaborative agreement with Novartis to
discover and investigate oligonucleotide compounds active against specific
targets. In 1996, Isis and Novartis signed a definitive agreement broadening the
companies' antisense research and development collaboration to include the
development of ISIS 3521 and ISIS 5132, anticancer compounds that were
discovered through the research collaboration. The broadened collaboration also
included research to discover additional therapeutic compounds. Under the terms
of the expanded collaboration, Novartis funded the development of both ISIS 3521
and ISIS 5132. During 1999, Novartis concluded its participation in the
development of ISIS 3521 and ISIS 5132. Included in the statement of operations
for the years ended December 31, 1999, 1998 and 1997 are contract revenues
arising from this collaboration totaling $7,527,000, $15,641,000 and
$21,106,000, respectively.
In July 1997, Isis and CIBA Vision Corporation entered into an agreement
granting CIBA Vision exclusive worldwide distribution rights for Vitravene(TM)
(fomivirsen). Under the terms of the agreement, Isis will manufacture and sell
Vitravene(TM) to CIBA Vision at a price that will allow Isis and CIBA Vision to
share the commercial value of the product. CIBA Vision will market and sell
Vitravene(TM) worldwide and will be responsible for regulatory approvals outside
of the United States and Europe. Additionally, CIBA Vision received the option
to acquire the exclusive license to market and distribute a second generation
antisense compound to treat CMV retinitis (ISIS 13312) which Isis is currently
developing. At the inception of the agreement, CIBA Vision paid us a $5 million
non-refundable pre-commercial fee to partially reimburse Isis for the costs
incurred in discovering and developing Vitravene(TM) to that point. That payment
was recognized as revenue in 1997 and included in the statement of operations as
contract revenue. In August 1998, the FDA approved Vitravene(TM) for marketing,
and in the fourth quarter of the year CIBA Vision began selling Vitravene(TM)
commercially. Isis delivered its first commercial shipment of Vitravene(TM) to
CIBA Vision in the third quarter of 1998 and recorded $560,000 in net product
revenues. Isis did not recognize any revenue during 1999 for sales of
Vitravene(TM) but expects to recognize modest revenues early in 2000. Under the
CIBA Vision agreement, Isis received a $2,500,000 milestone payment in 1999 and
earned contract revenue of $7,500,000 in 1998 and $5,000,000 (which represents
the pre-commercial fee described above) in 1997.
In July 1995, Isis and Boehringer Ingelheim International GmbH signed
definitive agreements and completed the formation of a major collaboration in
cell adhesion drug design, discovery, development and commercialization.
Boehringer Ingelheim purchased 2,000,000 shares of common stock for $28,500,000
in cash plus certain license rights. Of the $28,500,000, $21,300,000 was
accounted for as equity and $7,200,000 was accounted for as deferred revenue,
representing Boehringer Ingelheim's advance payment of research and
49
<PAGE> 52
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999
development costs under the collaboration. In December 1996, coinciding with the
achievement of a milestone, Boehringer Ingelheim purchased 409,000 shares of
common stock for $10,000,000. Of that total, $6,000,000 was accounted for as
equity and $4,000,000 as deferred revenue. In September 1999 we announced that
we had reacquired full rights to ISIS 2302 from Boehringer Ingelheim. Boehringer
Ingelheim and Isis provided equal funding for the combined research and
development program. Boehringer Ingelheim had also provided Isis with a line of
credit to be used in support of the combined programs. As of December 31, 1999,
the outstanding balance under this line of credit was $22,576,000. Since we have
reacquired the rights to ISIS 2302, there will be no further draws against this
line. The statement of operations for the years ended December 31, 1999, 1998
and 1997 reflects contract revenues of $6,974,000, $6,544,000 and $5,603,000,
respectively, from this collaboration.
In June 1998, Isis entered into a research collaboration with Merck &
Co. to discover small molecule drug candidates to treat patients infected with
Hepatitis C virus ("HCV"). Isis and Merck will design, synthesize, and evaluate
novel compounds that Merck will screen in its proprietary assays for identifying
HCV replication inhibitors. Merck will commercialize drugs arising from the
collaboration, and Isis retains the right to use technology developed in the
collaboration in our antisense program. The three year collaboration provides us
with annual research support plus technology access fees, and milestone payments
and royalties upon commercialization. The statement of operations for the years
ended December 31, 1999 and 1998, reflects contract revenues of $3,500,000 and
$3,875,000, respectively, from Merck under the terms of this agreement.
In August 1998, Isis granted an exclusive license to our patents
covering immune stimulation by phosphorothioate oligonucleotides to CpG
ImmunoPharmaceuticals, Inc. The agreement grants exclusive worldwide rights to
the methods and applications covered by issued U.S. Patents No. 5,663,153; No.
5,723,335; and related patent applications, not including claims for antisense
therapeutics. Under the terms of the agreement, Isis received $5 million in 1998
and a 5% equity position in CpG ImmunoPharmaceuticals, Inc. Isis will also
receive a portion of any sublicensing revenue relating to the technology. In
1998, Isis recorded revenue for the $5 million licensing fee, as there are no
further performance obligations. Isis did not record revenue for the value of
the 5% equity position, since realization of this asset is uncertain.
In November 1998, Isis sublicensed to Pantheco A/S, a Danish
biotechnology company, our Peptide Nucleic Acid technology for the creation of
anti-infective drugs. As the exclusive licensee, Isis will retain the rights for
all other areas of human therapeutics. As part of this transaction, Isis
received a 24.9% equity position in Pantheco A/S. Isis did not record any
revenue related to this transaction, since realization of the value of the
equity interest in Pantheco is uncertain.
In December 1998, Isis purchased from Gilead Sciences, Inc. the holdings
of its antisense patent estate. This acquisition includes patents and patent
applications covering a broad proprietary suite of antisense chemistry and
antisense drug delivery systems. The purchase price was $6,000,000 payable in
four installments over three years. Isis made the initial $2,000,000 payment in
December 1998 and a second payment of $1,000,000 in December 1999. Isis has
recorded the net present value of the future payments as a long-term obligation
on the balance sheet. The balance of this obligation as of December 31, 1999 and
December 31, 1998 was $2,568,000 and $3,238,000, respectively. Isis acquired the
Gilead patents to enhance its dominant proprietary position in antisense
technology. Isis also believes that the acquisition of the Gilead patents may
reduce the risk of possible future patent infringement claims. Effort will be
required by Isis' scientists to determine if the acquired patents can be
developed into potentially viable products. The scope of the effort to be
invested by Isis' scientists is within the bounds of its existing research and
development budgets. Because Isis scientists are just beginning to work with the
Gilead patents and there is no assurance that research and development efforts
related to these patents will be successful, Isis wrote off the acquired patents
in 1998.
50
<PAGE> 53
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999
In December 1998, Isis entered into a collaborative research agreement
with AstraZeneca Pharmaceuticals to discover, develop and commercialize novel
antisense-based cancer drugs. Under the terms of this collaboration, Isis will
create and, with AstraZeneca, screen antisense-based candidates for certain
cancer targets. The agreement specifies that Isis will receive from AstraZeneca
at least $7 million for a technology access fee and annual research funding
during the first two years of the collaboration. Isis estimates that it may
potentially receive more than $40 million from this collaboration, including a
technology access fee, annual research funding, and milestone payments for drugs
progressing into clinical development. Isis will receive royalties on the sales
of any marketed drug arising out of the collaboration. The initial term of the
research collaboration is three years. In December 1998, AstraZeneca paid
$2,000,000 in technology access fees which was accounted for as deferred
revenue. The statement of operations for the year ended December 31, 1999
reflects contract revenues of $3,420,000 from AstraZeneca under the terms of
this agreement.
Also in December 1998, Isis entered into a research collaboration with
Abbott Laboratories, Inc. to prioritize drug development targets using Isis'
Antisense Target Validation Technology. The collaboration will enable Abbott to
validate numerous gene targets, identify the function of these genes and
prioritize the targets. Isis received from Abbott an upfront fee, and will
receive quarterly research fees, milestone payments and royalties on net sales
of any Abbott non-antisense product arising from the collaboration. Isis will
receive rights to Abbott genes to develop antisense drugs. The initial term of
the research collaboration is two years. In December 1998, Isis received an
initial payment of $250,000 which was accounted for as deferred revenue. The
statement of operations for the year ended December 31, 1999 reflects contract
revenues of $1,250,000 from Abbott under the terms of this agreement.
In April 1999, Isis and Elan Corporation, plc formed a joint venture to
develop technology for the formulation of oral oligonucleotide drugs. The joint
venture, Orasense, Ltd. is a Bermuda limited company which is currently owned
80.1% by Isis 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 a proprietary oligonucleotide, 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
royalties on 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. In April 1999, Isis contributed $12,015,000
to Orasense as the purchase price for 9,612 shares of Orasense common stock.
During the year, Elan purchased convertible debt from Isis in the amount of
$2,213,000, which Isis used to provide additional development funding to
Orasense. For the year ended December 31, 1999, Isis recorded $4,402,000 in
revenue from Orasense, and recorded $7,242,000 as equity in the net loss of
Orasense.
In September 1999, Isis entered into a collaboration with Aventis S.A.
(formerly Rhone-Poulenc Rorer) under which Isis will use its prorietary
Antisense Target Validation technology to assess genes identified within
Aventis' genomics programs. This collaboration will enable Aventis to determine
the function and therapeutic value of numerous novel gene targets and use this
information about gene function to develop pharmaceutical products. It also will
provide Isis with valuable information on these targets to assist in the
development of novel antisense drugs. The agreement specifies that Isis will
receive from Aventis a commitment fee, as well as success and proof of concept
fees, based on Isis demonstrating target inhibition as specified in the
contract. Isis will be entitled to certain milestone payments based on
milestones achieved by Aventis. Isis will also be obligated to pay certain
milestone payments based on milestones achieved by Isis. In addition, Isis will
be required to pay Aventis royalty payments based on net sales of any Isis
royalty bearing
51
<PAGE> 54
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999
products. In 1999, Isis received $613,000 in commitment and proof of concept
fees from Aventis. The statement of operations for the year ended December 31,
1999 reflects contract revenues of $200,000 from Aventis under the terms of this
agreement, with the balance recorded on the balance sheet as deferred revenue.
7. JOINT VENTURE SUPPLEMENTARY DISCLOSURE
Due to the significant minority investor rights retained by Elan
Corporation, plc and its subsidiaries, Isis accounts for its investment in
Orasense under the equity method of accounting. The following table presents
summary financial information (in thousands, except per share amounts) for
Orasense, Ltd as of December 31, 1999.
<TABLE>
<CAPTION>
1999
--------
BALANCE SHEET:
- --------------
Assets
------
<S> <C>
Cash and cash equivalents $ 6
In-license costs, net 11,250
--------
Total assets $ 11,256
========
Liabilities and Stockholders' Equity
Amounts due to affiliates $ 2,534
Common stock, $1.00 par value; 12,000 shares
authorized, 12,000 shares outstanding
at December 31, 1999 12
Additional paid-in capital 17,751
Accumulated deficit (9,041)
--------
Total liabilities and stockholders' equity $ 11,256
========
RESULTS OF OPERATIONS:
Revenues $ --
--------
Research and development expenses 9,041
--------
Net loss $ (9,041)
========
</TABLE>
52
<PAGE> 55
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999
8. SUBSEQUENT EVENTS
In December 1999, the unexpected failure of our pivotal clinical trial
of ISIS 2302 in Crohn's disease prompted the restructuring of the company. In
January 2000, we announced a restructuring plan to reduce expenses and focus
resources on the development of antisense drugs with significant commercial
potential. In conjunction with this restructuring, we will reduce Isis'
workforce by approximately 140 employees in the first four months of 2000. We
estimate that costs associated with this restructuring will approximate $2
million which will be recorded in the first quarter of 2000.
In January 2000, Isis and Elan Corporation agreed to form a new
subsidiary of Isis to develop an antisense drug, ISIS 14803, to treat patients
chronically infected with Hepatitis C virus (HCV). The new subsidiary 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(R) 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. As part of the transaction, Elan will purchase
$7.5 million of Isis common stock in April 2000 and potentially an additional
$7.5 million of common stock upon completion of a mutually agreed milestone.
Both tranches will be purchased at a premium to Isis' market price. Elan will
also purchase Isis Series B Preferred Stock which will be convertible in the
future into either Isis common stock or stock in HepaSense. In addition, Elan
will make available to Isis a $12.0 million line of credit for Isis' funding
commitment to HepaSense.
On March 8, 2000, we sold 1,000,000 shares of our common stock to an
institutional investor at a negotiated price of $27.25 per share. In addition,
during the first quarter of 2000 we sold 1,551,614 shares of our common stock to
Ridgeway Investment Limited at an average purchase price of $9.67 per share
under the terms of the Common Stock Purchase Agreement filed as an exhibit to
the prospectus dated December 6, 1999. The $9.67 per share average purchase
price reflects the average trading prices of the common stock on the Nasdaq
National Market during the respective drawdown periods. We did not pay any other
compensation in conjunction with these sales of our common stock.
53
<PAGE> 1
EXHIBIT 10.9
Optionee: Date:
-------------------------------------------------- ---------------
ISIS PHARMACEUTICALS, INC.
SUPPLEMENTAL STOCK OPTION AGREEMENT
Isis Pharmaceuticals, Inc. (the "Company"), pursuant to its 1989 Stock Option
Plan (the "Plan") has this day granted to the undersigned optionee, an option to
purchase shares of the common stock of the Company ("Common Stock") as described
herein. This option is not intended to qualify and will not be treated as an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended from time to time (the "Code"). This option is
subject to all of the terms and conditions as set forth herein and on Attachment
I hereto, which is incorporated herein in its entirety.
Number of Shares Subject to Option:________
VESTING SCHEDULE:
<TABLE>
<S> <C>
Number of Shares (installment) Date of Earliest Exercise (vesting)(1)
--------------------- ---------------------
--------------------- ---------------------
Exercise Price Per Share: (2) Expiration Date: (3)
----- ---------------------------
Percentage of Full-Time Work: 100%
------
Isis Pharmaceuticals, Inc.
By: Optionee:
-------------------------------------- ----------------------------------
Duly authorized on behalf of Address:
the Board of Directors
</TABLE>
OPTIONEE:
Acknowledges receipt of the option as described herein and the attachments
referenced therein and understands that all rights and liabilities with respect
to this option are set forth in the option and the Plan; and acknowledges that
as of the date of grant of this option, it sets forth the entire understanding
between the optionee and the Company regarding the acquisition of stock in the
Company and supersedes all prior oral and written agreements on that subject.
(1) The option will vest monthly with 4.167% of the total grant vesting each
month; provided, however, that during any period in which the undersigned
provides service at less than the Percentage of Full-Time Work set forth above,
a reduced number of shares will vest as follows: the percentage of shares which
will vest during such period of reduced service will equal (a) the percentage of
shares that would vest as set forth on this schedule, multiplied by (b) the
percentage of full-time work furnished during the period of reduced service
divided by the Percentage of Full Time Work as set forth above. Increases of
work percentage up to but not in excess of the Percentage of Full Time Work
specified above will result in a corresponding increase in the percentage of
shares vesting. This reduction in vesting will not apply during any period of
paid leave or the first 20 weeks of a period of unpaid leave. No shares will
vest during unpaid leave after the first 20 weeks of such leave. Shares which do
not vest because of reductions in work percentage or unpaid leave will be
canceled and no longer subject to this option.
(2) Not less than 85% of the fair market value of the Common Stock on the date
of grant of this option.
(3) Less than 10 years from the date of grant of this option.
<PAGE> 1
EXHIBIT 10.10
Optionee: Date:
--------------------------- ----------
ISIS PHARMACEUTICALS, INC.
SUPPLEMENTAL STOCK OPTION AGREEMENT
Isis Pharmaceuticals, Inc. (the "Company"), pursuant to its 1989 Stock Option
Plan (the "Plan") has this day granted to the undersigned optionee, an option to
purchase shares of the common stock of the Company ("Common Stock") as described
herein. This option is not intended to qualify and will not be treated as an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended from time to time (the "Code"). This option is
subject to all of the terms and conditions as set forth herein and on Attachment
I hereto, which is incorporated herein in its entirety.
Number of Shares Subject to Option:__________
VESTING SCHEDULE:
<TABLE>
<CAPTION>
Number of Shares (installment) Date of Earliest Exercise (vesting)(1)
- ------------------------------ ------------------------------------
<S> <C>
------------ --------------
------------ --------------
------------ --------------
>>
------------ --------------
<< >>
------------ --------------
</TABLE>
*THIS OPTION WILL NOT BE EXERCISABLE, INCLUDING ANY VESTED SHARES, UNTIL THE
FOLLOWING OBJECTIVES ARE MET: (1) AS OF DECEMBER 31, 2000, THE AMOUNT OF CASH
AVAILABLE TO THE COMPANY IS GREATER THAN $40 MILLION; (2) THE COMPANY REACHES A
"GO/NO GO" DECISION ON FOUR PRODUCT OPPORTUNITIES (INDICATIONS); (3) THE
RESTRUCTURING OF THE COMPANY, AS DESCRIBED IN THE RESTRUCTURING PLAN PRESENTED
TO THE BOARD OF DIRECTORS ON JANUARY 6, 2000, IS SUCCESSFUL; AND (4) THE COMPANY
HAS COMPLETED AT LEAST ONE NEW CORPORATE PARTNERSHIP. IF SUCH OBJECTIVES ARE NOT
MET BY JANUARY 6, 2002 OR WAIVED BY THE BOARD OF DIRECTORS, THIS OPTION WILL
TERMINATE.
<TABLE>
<S> <C>
Exercise Price Per Share: << >>(2) Expiration Date:<< >>(3)
----------------------- -----------------
Isis Pharmaceuticals, Inc.
By: Optionee:
--------------------------------- -------------------------
Duly authorized on behalf of Address:
the Board of Directors
</TABLE>
OPTIONEE:
Acknowledges receipt of the option as described herein and the attachments
referenced therein and understands that all rights and liabilities with respect
to this option are set forth in the option and the Plan; and acknowledges that
as of the date of grant of this option, it sets forth the entire understanding
between the optionee and the Company regarding the acquisition of stock in the
Company and supersedes all prior oral and written agreements on that subject.
(1) After the first year, the option will vest monthly with 2.08% of the total
grant vesting each month; provided, however, that during any period in which the
undersigned provides service at less than the Percentage of Full-Time Work set
forth above, a reduced number of shares will vest as follows: the percentage of
shares which will vest during such period of reduced service will equal (a) the
percentage of shares that would vest as set forth on this schedule, multiplied
by (b) the percentage of full-time work furnished during the period of reduced
service divided by the Percentage of Full Time Work as set forth above.
Increases of work percentage up to but not in excess of the Percentage of Full
Time Work specified above will result in a corresponding increase in the
percentage of shares vesting. This reduction in vesting will not apply during
any period of paid leave or the first 20 weeks of a period of unpaid leave. No
shares will vest during unpaid leave after the first 20 weeks of such leave.
Shares which do not vest because of reductions in work percentage or unpaid
leave will be canceled and no longer subject to this option.
(2) Not less than 85% of the fair market value of the Common Stock on the date
of grant of this option.
(3) Less than 10 years from the date of grant of this option.
<PAGE> 2
ISIS PHARMACEUTICALS, INC.
SUPPLEMENTAL STOCK OPTION AGREEMENT
SCHEDULE
<TABLE>
<CAPTION>
NAME OF OPTIONEE NUMBER OF SHARES
---------------- ----------------
<S> <C>
Stanley T. Crooke 250,000
B. Lynne Parshall 170,000
Debby Jo Blank 100,000
</TABLE>
<PAGE> 1
EXHIBIT 10.11
ISIS PHARMACEUTICALS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
APPROVED BY THE BOARD OF DIRECTORS JANUARY 6, 2000
APPROVED BY STOCKHOLDERS JUNE 8, 2000
1. PURPOSE.
(a) The purpose of this 2000 Employee Stock Purchase Plan (the "Plan")
is to provide a means by which employees of Isis Pharmaceuticals, Inc. (the
"Company") and its Affiliates, as defined in Subsection 1(b), which are
designated as provided in Subsection 2(b), may be given an opportunity to
purchase common stock of the Company (the "Common Stock"). This Plan supersedes
and replaces the Employee Stock Purchase Plan adopted by the Company on
September 5, 1991.
(b) The word "Affiliate" as used in the Plan means any parent
corporation or subsidiary corporation of the Company, as those terms are defined
in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended (the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of
its employees, to secure and retain the services of new employees, and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.
(d) The Company intends that the rights to purchase stock of the Company
granted under the Plan be considered options issued under an "employee stock
purchase plan" as that term is defined in Section 423(b) of the Code.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors (the
"Board") of the Company unless and until the Board delegates administration to a
Committee, as provided in Subsection 2(c). Whether or not the Board has
delegated administration, the Board shall have the final power to determine all
questions of policy and expediency that may arise in the administration of the
Plan.
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) To determine when and how rights to purchase stock of the
Company shall be granted and the provisions of each offering of such rights
(which need not be identical).
1.
<PAGE> 2
(ii) To designate from time to time which Affiliates of the
Company shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and rights granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully effective.
(iv) To amend the Plan as provided in Section 13.
(v) To terminate or suspend the Plan as provided in Section 15.
(vi) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company and its Affiliates and to carry out the intent that the Plan be treated
as an "employee stock purchase plan" within the meaning of Section 423 of the
Code.
(c) The Board may delegate administration of the Plan to a Committee
composed of not fewer than two (2) members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 12 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to rights granted under
the Plan shall not exceed in the aggregate two hundred thousand (200,000) shares
of Common Stock (the "Reserved Shares"). As of the first nine (9) anniversaries
of the Effective Date of the Plan, the number of Reserved Shares will be
increased automatically by the lesser of (i) one percent (1%) of the total
number of shares of Common Stock outstanding on such anniversary date or (ii)
two hundred thousand (200,000) shares. If any right granted under the Plan shall
for any reason terminate without having been exercised, the Common Stock not
purchased under such right shall again become available for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. GRANT OF RIGHTS; OFFERING.
The Board or the Committee may from time to time grant or provide for
the grant of rights to purchase Common Stock of the Company under the Plan to
eligible employees (an "Offering") on a date or dates (the "Offering Date(s)")
selected by the Board or the Committee. Each Offering shall be in such form and
shall contain such terms and conditions as the Board or the Committee shall deem
appropriate, which shall comply with the requirements of Section
2.
<PAGE> 3
423(b)(5) of the Code that all employees granted rights to purchase stock under
the Plan shall have the same rights and privileges. The terms and conditions of
an Offering shall be incorporated by reference into the Plan and treated as part
of the Plan. The provisions of separate Offerings need not be identical, but
each Offering shall include (through incorporation of the provisions of this
Plan by reference in the document comprising the Offering or otherwise) the
period during which the Offering shall be effective, which period shall not
exceed twenty-seven (27) months beginning with the Offering Date, and the
substance of the provisions contained in Sections 5 through 8, inclusive.
5. ELIGIBILITY.
(a) Rights may be granted only to employees of the Company or, as the
Board or the Committee may designate as provided in Subsection 2(c), to
employees of any Affiliate of the Company. Except as provided in Subsection
5(b), an employee of the Company or any Affiliate shall not be eligible to be
granted rights under the Plan unless, on the Offering Date, such employee has
been in the employ of the Company or any Affiliate for such continuous period
preceding such grant as the Board or the Committee may require, but in no event
shall the required period of continuous employment be greater than two (2)
years. In addition, unless otherwise determined by the Board or the Committee
and set forth in the terms of the applicable Offering, no employee of the
Company or any Affiliate shall be eligible to be granted rights under the Plan,
unless, on the Offering Date, such employee's customary employment with the
Company or such Affiliate is for at least twenty (20) hours per week and at
least five (5) months per calendar year. The Company, in its sole discretion,
may exclude from participation in the Plan employees of the Company or any
Affiliate of the Company who reside and/or perform services in certain specific
jurisdictions if the laws of those jurisdictions make participation in the Plan
impractical.
(b) The Board or the Committee may provide that each person who, during
the course of an Offering, first becomes an eligible employee of the Company or
designated Affiliate will, on a date or dates specified in the Offering which
coincides with the day on which such person becomes an eligible employee or
occurs thereafter, receive a right under that Offering, which right shall
thereafter be deemed to be a part of that Offering. Such right shall have the
same characteristics as any rights originally granted under that Offering, as
described herein, except that:
(i) the date on which such right is granted shall be the
"Offering Date" of such right for all purposes, including determination of the
exercise price of such right;
(ii) the period of the Offering with respect to such right shall
begin on its Offering Date and end coincident with the end of such Offering; and
(iii) the Board or the Committee may provide that if such person
first becomes an eligible employee within a specified period of time before the
end of the Offering, he or she will not receive any right under that Offering.
3.
<PAGE> 4
(c) No employee shall be eligible for the grant of any rights under the
Plan if, immediately after any such rights are granted, such employee owns stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or of any Affiliate. For purposes of this
Subsection 5(c), the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any employee, and stock which such employee
may purchase under all outstanding rights and options shall be treated as stock
owned by such employee.
(d) An eligible employee may be granted rights under the Plan only if
such rights, together with any other rights granted under "employee stock
purchase plans" of the Company and any Affiliates, as specified by Section
423(b)(8) of the Code, do not permit such employee's rights to purchase stock of
the Company or any Affiliate to accrue at a rate which exceeds twenty-five
thousand dollars ($25,000) of fair market value of such stock (determined at the
time such rights are granted) for each calendar year in which such rights are
outstanding at any time.
(e) Officers of the Company and any designated Affiliate shall be
eligible to participate in Offerings under the Plan; provided, however, that the
Board may provide in an Offering that certain employees who are highly
compensated employees within the meaning of Section 423(b)(4)(D) of the Code
shall not be eligible to participate.
6. RIGHTS; PURCHASE PRICE.
(a) On each Offering Date, each eligible employee, pursuant to an
Offering made under the Plan, shall be granted the right to purchase up to the
number of shares of Common Stock of the Company purchasable with a percentage
designated by the Board or the Committee not exceeding ten percent (10%) of such
employee's Earnings (as defined in Subsection 7(a)) during the period which
begins on the Offering Date (or such later date as the Board or the Committee
determines for a particular Offering) and ends on the date stated in the
Offering, which date shall be no later than the end of the Offering. In
addition, the Board or the Committee may specify a maximum dollar amount that
each employee may use to purchase shares during any Offering made under the
Plan. The Board or the Committee shall establish one or more dates during an
Offering (the "Exercise Date(s)") on which rights granted under the Plan shall
be exercised and purchases of Common Stock carried out in accordance with such
Offering.
(b) In connection with each Offering made under the Plan, the Board or
the Committee may specify a maximum number of shares that may be purchased by
any employee as well as a maximum aggregate number of shares that may be
purchased by all eligible employees pursuant to such Offering. In addition, in
connection with each Offering that contains more than one Exercise Date, the
Board or the Committee may specify a maximum aggregate number of shares which
may be purchased by all eligible employees on any given Exercise Date under the
Offering. If the aggregate purchase of shares upon exercise of rights granted
under the Offering would exceed any such maximum aggregate number, the Board or
the Committee shall make a pro rata allocation of the shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.
4.
<PAGE> 5
(c) The purchase price of stock acquired pursuant to rights granted
under the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair
market value of the stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair
market value of the stock on the Exercise Date.
7. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a) An eligible employee may become a participant in the Plan pursuant
to an Offering by delivering a participation agreement to the Company within the
time specified in the Offering, in such form as the Company provides. Each such
agreement shall authorize payroll deductions of up to the maximum percentage
specified by the Board or the Committee of such employee's Earnings during the
Offering. "Earnings" is defined as the total compensation paid to an employee
including all salary, wages (including amounts thereof elected to be deferred by
the employee, that would otherwise have been paid, under any arrangement
established by the Company that is intended to comply with Section 125, Section
401(k), Section 402(h) or Section 403(b) of the Code or that provides
non-qualified deferred compensation), which shall include overtime pay,
commissions, bonuses and other remuneration paid directly to the employee, but
shall exclude profit sharing, the cost of employee benefits paid for by the
Company or an Affiliate, education or tuition reimbursements, imputed income
arising under any group insurance or benefit program, traveling expenses,
business and moving expense reimbursements, income received in connection with
stock options, contributions made by the Company or an Affiliate under any
employee benefit plan, and similar items of compensation, as determined by the
Board or the Committee. The payroll deductions made for each participant shall
be credited to an account for such participant under the Plan and shall be
deposited with the general funds of the Company. A participant may reduce
(including to zero) or increase such payroll deductions, and an eligible
employee may begin such payroll deductions, after the beginning of any Offering
only as provided for in the Offering. A participant may make additional payments
into his or her account only if specifically provided for in the Offering and
only if the participant has not had the maximum permitted amount withheld during
the Offering.
(b) At any time during an Offering, a participant may terminate his or
her payroll deductions under the Plan and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company
provides. Such withdrawal may be elected at any time prior to the end of the
Offering except as provided by the Board or the Committee in the Offering. Upon
such withdrawal from the Offering by a participant, the Company shall distribute
to such participant all of his or her accumulated payroll deductions (reduced to
the extent, if any, such deductions have been used to acquire stock for the
participant) under the Offering, without interest, and such participant's
interest in that Offering shall be automatically terminated. A participant's
withdrawal from an Offering will have no effect upon such participant's
eligibility to re-enroll in the Offering or to participate in any other
Offerings under the Plan but such participant will be required to deliver a new
participation agreement in order to participate in subsequent Offerings under
the Plan.
5.
<PAGE> 6
(c) Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon cessation of any participating employee's employment
with the Company and any designated Affiliate, for any reason, and the Company
shall distribute to such terminated employee all of his or her accumulated
payroll deductions (reduced to the extent, if any, such deductions have been
used to acquire stock for the terminated employee), under the Offering, without
interest.
(d) Rights granted under the Plan shall not be transferable by a
participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in Section 14 and, otherwise during his
or her lifetime, shall be exercisable only by the person to whom such rights are
granted.
8. EXERCISE.
(a) On each Exercise Date specified therefor in the relevant Offering,
each participant's accumulated payroll deductions and other additional payments
specifically provided for in the Offering (without any increase for interest)
will be applied to the purchase of whole shares of stock of the Company, up to
the maximum number of shares permitted pursuant to the terms of the Plan and the
applicable Offering, at the purchase price specified in the Offering. No
fractional shares shall be issued upon the exercise of rights granted under the
Plan. The amount, if any, of accumulated payroll deductions remaining in each
participant's account after the purchase of shares which is less than the amount
required to purchase one share of stock on the final Exercise Date of an
Offering shall be held in each such participant's account for the purchase of
shares under the next Offering under the Plan, unless such participant withdraws
from such next Offering, as provided in Subsection 7(b), or is no longer
eligible to be granted rights under the Plan, as provided in Section 5, in which
case such amount shall be distributed to the participant after such final
Exercise Date, without interest. The amount, if any, of accumulated payroll
deductions remaining in any participant's account after the purchase of shares
which is equal to the amount required to purchase whole shares of stock on the
final Exercise Date of an Offering shall be distributed in full to the
participant after such Exercise Date, without interest.
(b) No rights granted under the Plan may be exercised to any extent
unless the shares to be issued upon such exercise under the Plan (including
rights granted thereunder) are covered by an effective registration statement
pursuant to the Securities Act of 1933, as amended (the "Securities Act") and
the Plan is in material compliance with all applicable state, foreign and other
securities and other laws applicable to the Plan. If on an Exercise Date in any
Offering hereunder the Plan is not so registered or in such compliance, no
rights granted under the Plan or any Offering shall be exercised on such
Exercise Date, and the Exercise Date shall be delayed until the Plan is subject
to such an effective registration statement and such compliance, except that the
Exercise Date shall not be delayed more than twelve (12) months and the Exercise
Date shall in no event be more than twenty-seven (27) months from the Offering
Date. If on the Exercise Date of any Offering hereunder, as delayed to the
maximum extent permissible, the Plan is not registered and in such compliance,
no rights granted under the Plan or any Offering shall be exercised and all
payroll deductions accumulated during the Offering (reduced to the extent, if
6.
<PAGE> 7
any, such deductions have been used to acquire stock) shall be distributed to
the participants, without interest.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the rights granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such rights.
(b) The Company shall seek to obtain from each federal, state, foreign
or other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of stock upon exercise of
the rights granted under the Plan. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such rights unless and until
such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to rights granted under the
Plan shall constitute general funds of the Company.
11. RIGHTS AS A STOCKHOLDER.
A participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until the participant's shareholdings acquired upon
exercise of rights under the Plan are recorded in the books of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject
to any rights granted under the Plan, due to a change in corporate
capitalization and without the receipt of consideration by the Company (through
reincorporation, stock dividend, stock split, reverse stock split, combination
or reclassification of shares), the Plan will be appropriately adjusted in the
class(es) and maximum number of securities subject to the Plan pursuant to
subsection 3(a), and the outstanding rights will be appropriately adjusted in
the class(es) and number of securities and price per share of stock subject to
such outstanding rights. Such adjustments shall be made by the Board, the
determination of which shall be final, binding and conclusive.
(b) In the event of: (1) a dissolution, liquidation or sale of all or
substantially all of the assets of the Company, (2) a merger or consolidation in
which the Company is not the surviving corporation, or (3) a reverse merger in
which the Company is the surviving corporation but the shares of Common Stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or otherwise
or (4) any other capital reorganization in which more than fifty percent (50%)
of the securities of the Company entitled to vote are sold or otherwise
exchanged, then any surviving corporation may assume outstanding rights or
substitute similar rights for those under the Plan. In the event
7.
<PAGE> 8
that no surviving corporation assumes such outstanding rights or substitutes
similar rights therefor, participants' accumulated payroll deductions will be
used to purchase Common Stock immediately prior to the transaction described
above and the participants' rights under the ongoing Offering terminated
immediately following such purchase.
13. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(i) Increase the number of shares reserved for rights under the
Plan;
(ii) Modify the provisions as to eligibility for participation
in the Plan (to the extent such modification requires stockholder approval in
order for the Plan to obtain employee stock purchase plan treatment under
Section 423 of the Code or to comply with the requirements of Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended ("Rule
16b-3")); or
(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to obtain employee stock
purchase plan treatment under Section 423 of the Code or to comply with the
requirements of Rule 16b-3.
It is expressly contemplated that the Board may amend the Plan in any respect
the Board deems necessary or advisable to provide eligible employees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to employee stock purchase plans
and/or to bring the Plan and/or rights granted under it into compliance
therewith.
(b) Rights and obligations under any rights granted before amendment of
the Plan shall not be impaired by any amendment of the Plan, except with the
consent of the person to whom such rights were granted, or except as necessary
to comply with any laws or governmental regulations, or except as necessary to
ensure that the Plan and/or rights granted under the Plan comply with the
requirements of Section 423 of the Code.
14. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who is
to receive any shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to the end of an
Offering but prior to delivery to the participant of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death during an Offering.
(b) Such designation of beneficiary may be changed by the participant at
any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary
8.
<PAGE> 9
validly designated under the Plan who is living at the time of such
participant's death, the Company shall deliver such shares and/or cash to the
executor or administrator of the estate of the participant, or if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its sole discretion, may deliver such shares and/or cash to the
spouse or to any one or more dependents or relatives of the participant, or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate.
15. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board in its discretion, may suspend or terminate the Plan at
any time. No rights may be granted under the Plan while the Plan is suspended or
after it is terminated.
(b) Rights and obligations under any rights granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except as expressly provided in the Plan or with the consent of the person
to whom such rights were granted, or except as necessary to comply with any laws
or governmental regulation, or except as necessary to ensure that the Plan
and/or rights granted under the Plan comply with the requirements of Section 423
of the Code.
(c) Notwithstanding the foregoing, the Plan shall terminate and no
rights may be granted under the Plan after the tenth anniversary of the
Effective Date.
16. EFFECTIVE DATE OF PLAN.
The Plan shall become effective on the date on which it is adopted by
the Board (the "Effective Date"), but no rights granted under the Plan shall be
exercised unless and until the Plan has been approved by the stockholders of the
Company within twelve (12) months before or after the date the Plan is adopted
by the Board, which date may be prior to the Effective Date.
9.
<PAGE> 1
EXHIBIT 10.13
ISIS PHARMACEUTICALS, INC.
2000 BROAD-BASED EQUITY INCENTIVE PLAN
ADOPTED JANUARY 6, 2000
1.
<PAGE> 2
ISIS PHARMACEUTICALS, INC.
2000 BROAD-BASED EQUITY INCENTIVE PLAN
ADOPTED JANUARY 6, 2000
1. PURPOSES.
(a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive
Stock Awards are the Employees, Directors and Consultants of the Company and its
Affiliates.
(b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a
means by which eligible recipients of Stock Awards may be given an opportunity
to benefit from increases in value of the Common Stock through the granting of
the following Stock Awards: (i) Supplemental Stock Options, (ii) stock bonuses
and (iii) rights to acquire restricted stock.
(c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain
the services of the group of persons eligible to receive Stock Awards, to secure
and retain the services of new members of this group and to provide incentives
for such persons to exert maximum efforts for the success of the Company and its
Affiliates.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation
of the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a committee of one or more members of the Board
appointed by the Board in accordance with subsection 3(c).
(e) "COMMON STOCK" means the common stock of the Company.
(f) "COMPANY" means Isis Pharmaceuticals, Inc., a Delaware corporation.
(g) "CONSULTANT" means any person, including an advisor, (i) engaged by
the Company or an Affiliate to render consulting or advisory services and who is
compensated for such services or (ii) who is a member of the Board of Directors
of an Affiliate. However, the term "Consultant" shall not include either
Directors who are not compensated by the Company for their services as Directors
or Directors who are merely paid a director's fee by the Company for their
services as Directors.
(h) "CONTINUOUS SERVICE" means that the Participant's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated.
2.
<PAGE> 3
The Participant's Continuous Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Participant renders
service to the Company or an Affiliate as an Employee, Consultant or Director or
a change in the entity for which the Participant renders such service, provided
that there is no interruption or termination of the Participant's Continuous
Service. For example, a change in status from an Employee of the Company to a
Consultant of an Affiliate or a Director will not constitute an interruption of
Continuous Service. The Board or the chief executive officer of the Company, in
that party's sole discretion, may determine whether Continuous Service shall be
considered interrupted in the case of any leave of absence approved by that
party, including sick leave, military leave or any other personal leave.
(i) "COVERED EMPLOYEE" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to shareholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.
(j) "DIRECTOR" means a member of the Board of Directors of the Company.
(k) "DISABILITY" means the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.
(l) "EMPLOYEE" means any person employed by the Company or an Affiliate.
Mere service as a Director or payment of a director's fee by the Company or an
Affiliate shall not be sufficient to constitute "employment" by the Company or
an Affiliate.
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Common Stock) on the date of grant, or if the date of grant is
not a market trading day, then the last market trading day prior to the date of
grant, as reported in The Wall Street Journal or such other source as the Board
deems reliable.
(ii) In the absence of such markets for the Common Stock, the
Fair Market Value shall be determined in good faith by the Board.
(o) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or a subsidiary, does
not receive compensation (directly or indirectly) from the Company or its parent
or a subsidiary for services rendered as a consultant or in any capacity other
than as a Director (except for an amount as to which disclosure would not be
required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act ("Regulation S-K")), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K and is not engaged in a
3.
<PAGE> 4
business relationship as to which disclosure would be required under Item 404(b)
of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for
purposes of Rule 16b-3.
(p) "OFFICER" means a person who possesses the authority of an "officer"
as that term is used in Rule 4460(i)(1)(A) of the Rules of the National
Association of Securities Dealers, Inc. For purposes of the Plan, a person in
the position of "Vice President" or higher shall be classified as an "Officer"
unless the Board or Committee expressly finds that such person does not possess
the authority of an "officer" as that term is used in Rule 4460(i)(1)(A) of the
Rules of the National Association of Securities Dealers, Inc.
(q) "OPTION" means a Supplemental Stock Option granted pursuant to the
Plan.
(r) "OPTIONHOLDER" means a person to whom an Option is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding
Option.
(s) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury Regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(t) "PARTICIPANT" means a person to whom a Stock Award is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Stock Award.
(u) "PLAN" means this Isis Pharmaceuticals, Inc. 2000 Broad-Based Equity
Incentive Plan.
(v) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.
(w) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(x) "STOCK AWARD" means any right granted under the Plan, including an
Option, a stock bonus and a right to acquire restricted stock.
(y) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
(z) "SUPPLEMENTAL STOCK OPTION" means an Option not intended to qualify
as an "incentive stock option" within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
4.
<PAGE> 5
(aa) "TEN PERCENT SHAREHOLDER" means a person who owns (or is deemed to
own pursuant to Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or of any of its Affiliates.
(bb) "TERMS OF SUPPLEMENTAL STOCK OPTION" means a written agreement
between the Company and an Optionholder evidencing the terms and conditions of
an individual Option grant. Each Terms of Supplemental Stock Option shall be
subject to the terms and conditions of the Plan.
3. ADMINISTRATION.
(a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless
and until the Board delegates administration to a Committee, as provided in
subsection 3(c).
(b) POWERS OF BOARD. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; what type or combination of types of Stock Award shall be
granted; the provisions of each Stock Award granted (which need not be
identical), including the time or times when a person shall be permitted to
receive Common Stock pursuant to a Stock Award; and the number of shares of
Common Stock with respect to which a Stock Award shall be granted to each such
person.
(ii) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in Section
12.
(iv) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) DELEGATION TO COMMITTEE.
(i) GENERAL. The Board may delegate administration of the Plan
to a Committee or Committees of one (1) or more members of the Board, and the
term "Committee" shall apply to any person or persons to whom such authority has
been delegated. If administration is delegated to a Committee, the Committee
shall have, in connection with the administration of the Plan, the powers
theretofore possessed by the Board, including the power to delegate to a
subcommittee any of the administrative powers the Committee is authorized to
exercise (and references in this Plan to the Board shall thereafter be to the
Committee or subcommittee), subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to
time by the Board. The Board may abolish the Committee at any time and revest in
the Board the administration of the Plan.
5.
<PAGE> 6
(ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED.
At such time as the Common Stock is publicly traded, in the discretion of the
Board, a Committee may consist solely of two or more Outside Directors, in
accordance with Section 162(m) of the Code, and/or solely of two or more
Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of such
authority, the Board or the Committee may (1) delegate to a committee of one or
more members of the Board who are not Outside Directors the authority to grant
Stock Awards to eligible persons who are either (a) not then Covered Employees
and are not expected to be Covered Employees at the time of recognition of
income resulting from such Stock Award or (b) not persons with respect to whom
the Company wishes to comply with Section 162(m) of the Code and/or) (2)
delegate to a committee of one or more members of the Board who are not
Non-Employee Directors the authority to grant Stock Awards to eligible persons
who are not then subject to Section 16 of the Exchange Act.
(d) EFFECT OF BOARD'S DECISION. All determinations, interpretations and
constructions made by the Board in good faith shall not be subject to review by
any person and shall be final, binding and conclusive on all persons.
4. SHARES SUBJECT TO THE PLAN.
(a) SHARE RESERVE. Subject to the provisions of Section 11 relating to
adjustments upon changes in Common Stock, the Common Stock that may be issued
pursuant to Stock Awards shall not exceed in the aggregate 1,990,000 shares of
Common Stock.
(b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall
for any reason expire or otherwise terminate, in whole or in part, without
having been exercised in full, the shares of Common Stock not acquired under
such Stock Award shall revert to and again become available for issuance under
the Plan.
(c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may
be unissued shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Stock Awards may be granted
to Employees, Directors and Consultants.
(b) RESTRICTIONS ON ELIGIBILITY. Notwithstanding the foregoing, the
aggregate number of shares issued pursuant to Stock Awards granted to Officers
and Directors cannot exceed forty percent (40%) of the number of shares reserved
for issuance under the Plan as determined at the time of each such issuance to
an Officer or Director, except that there shall be excluded from this
calculation shares issued to Officers not previously employed by the Company
pursuant to Stock Awards granted as an inducement essential to such individuals
entering into employment contracts with the Company.
(c) CONSULTANTS.
(i) A Consultant shall not be eligible for the grant of a Stock
Award if, at the time of grant, a Form S-8 Registration Statement under the
Securities Act ("Form S-8") is not
6.
<PAGE> 7
available to register either the offer or the sale of the Company's securities
to such Consultant because of the nature of the services that the Consultant is
providing to the Company, or because the Consultant is not a natural person, or
as otherwise provided by the rules governing the use of Form S-8, unless the
Company determines both (i) that such grant (A) shall be registered in another
manner under the Securities Act (e.g., on a Form S-3 Registration Statement) or
(B) does not require registration under the Securities Act in order to comply
with the requirements of the Securities Act, if applicable, and (ii) that such
grant complies with the securities laws of all other relevant jurisdictions.
(ii) Form S-8 generally is available to consultants and advisors
only if (i) they are natural persons; (ii) they provide bona fide services to
the issuer, its parents, its majority-owned subsidiaries or majority-owned
subsidiaries of the issuer's parent; and (iii) the services are not in
connection with the offer or sale of securities in a capital-raising
transaction, and do not directly or indirectly promote or maintain a market for
the issuer's securities.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) TERM. The term of an Option shall be the term determined by the
Board, either at the time of grant of the Option or as the Option may be amended
thereafter.
(b) CONSIDERATION. The purchase price of Common Stock acquired pursuant
to an Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised or (ii) at
the discretion of the Board at the time of the grant of the Option (or
subsequently in the case of a Supplemental Stock Option) (1) by delivery to the
Company of other Common Stock, (2) according to a deferred payment or other
similar arrangement with the Optionholder or (3) in any other form of legal
consideration that may be acceptable to the Board. Unless otherwise specifically
provided in the Option, the purchase price of Common Stock acquired pursuant to
an Option that is paid by delivery to the Company of other Common Stock
acquired, directly or indirectly from the Company, shall be paid only by shares
of the Common Stock of the Company that have been held for more than six (6)
months (or such longer or shorter period of time required to avoid a charge to
earnings for financial accounting purposes). At any time that the Company is
incorporated in Delaware, payment of the Common Stock's "par value," as defined
in the Delaware General Corporation Law, shall not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(c) TRANSFERABILITY OF A SUPPLEMENTAL STOCK OPTION. A Supplemental Stock
Option shall be transferable to the extent provided in the Terms of Supplemental
Stock Option.
7.
<PAGE> 8
If the Supplemental Stock Option does not provide for transferability, then the
Supplemental Stock Option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during the lifetime of
the Optionholder only by the Optionholder. Notwithstanding the foregoing, the
Optionholder may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionholder, shall thereafter be entitled to exercise the Option.
(d) VESTING GENERALLY. The total number of shares of Common Stock
subject to an Option may, but need not, vest and therefore become exercisable in
periodic installments that may, but need not, be equal. The Option may be
subject to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board may
deem appropriate. The vesting provisions of individual Options may vary. The
provisions of this subsection 6(e) are subject to any Option provisions
governing the minimum number of shares of Common Stock as to which an Option may
be exercised.
(e) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise such Option as of the date of
termination) but only within such period of time ending on the earlier of (i)
the date three (3) months following the termination of the Optionholder's
Continuous Service (or such longer or shorter period specified in the Terms of
Supplemental Stock Option), or (ii) the expiration of the term of the Option as
set forth in the Terms of Supplemental Stock Option. If, after termination, the
Optionholder does not exercise his or her Option within the time specified in
the Terms of Supplemental Stock Option, the Option shall terminate.
(f) EXTENSION OF TERMINATION DATE. An Optionholder's Terms of
Supplemental Stock Option may also provide that if the exercise of the Option
following the termination of the Optionholder's Continuous Service (other than
upon the Optionholder's death or Disability) would be prohibited at any time
solely because the issuance of shares of Common Stock would violate the
registration requirements under the Securities Act, then the Option shall
terminate on the earlier of (i) the expiration of the term of the Option set
forth in the Terms of Supplemental Stock Option, or (ii) the expiration of a
period of three (3) months after the termination of the Optionholder's
Continuous Service during which the exercise of the Option would not be in
violation of such registration requirements.
(g) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise such Option as of the date of termination), but only
within such period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period specified in
the Terms of Supplemental Stock Option) or (ii) the expiration of the term of
the Option as set forth in the Terms of Supplemental Stock Option. If, after
termination, the Optionholder does not exercise his or her Option within the
time specified herein, the Option shall terminate.
(h) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous
Service terminates as a result of the Optionholder's death or (ii) the
Optionholder dies within the period (if any) specified in the Terms of
Supplemental Stock Option after the termination of the
8.
<PAGE> 9
Optionholder's Continuous Service for a reason other than death, then the Option
may be exercised (to the extent the Optionholder was entitled to exercise such
Option as of the date of death) by the Optionholder's estate, by a person who
acquired the right to exercise the Option by bequest or inheritance or by a
person designated to exercise the Option upon the Optionholder's death pursuant
to subsection 6(d), but only within the period ending on the earlier of (1) the
date eighteen (18) months following the date of death (or such longer or shorter
period specified in the Terms of Supplemental Stock Option) or (2) the
expiration of the term of such Option as set forth in the Terms of Supplemental
Stock Option. If, after death, the Option is not exercised within the time
specified herein, the Option shall terminate.
(i) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares of Common Stock subject to the Option prior to the full vesting of
the Option. Any unvested shares of Common Stock so purchased may be subject to a
repurchase option in favor of the Company or to any other restriction the Board
determines to be appropriate. The Company will not exercise its repurchase
option until at least six (6) months (or such longer or shorter period of time
required to avoid a charge to earnings for financial accounting purposes) have
elapsed following exercise of the Option unless the Board otherwise specifically
provides in the Option.
(j) RE-LOAD OPTIONS.
(i) Without in any way limiting the authority of the Board to
make or not to make grants of Options hereunder, the Board shall have the
authority (but not an obligation) to include as part of any Terms of
Supplemental Stock Option a provision entitling the Optionholder to a further
Option (a "Re-Load Option") in the event the Optionholder exercises the Option
evidenced by the Terms of Supplemental Stock Option, in whole or in part, by
surrendering other shares of Common Stock in accordance with this Plan and the
terms and conditions of the Terms of Supplemental Stock Option. Unless otherwise
specifically provided in the Option, the Optionholder shall not surrender shares
of Common Stock acquired, directly or indirectly from the Company, unless such
shares have been held for more than six (6) months (or such longer or shorter
period of time required to avoid a charge to earnings for financial accounting
purposes).
(ii) Any such Re-Load Option shall (1) provide for a number of
shares of Common Stock equal to the number of shares of Common Stock surrendered
as part or all of the exercise price of such Option; (2) have an expiration date
which is the same as the expiration date of the Option the exercise of which
gave rise to such Re-Load Option; and (3) have an exercise price which is equal
to one hundred percent (100%) of the Fair Market Value of the Common Stock
subject to the Re-Load Option on the date of exercise of the original Option.
Notwithstanding the foregoing, a Re-Load Option shall be subject to the same
exercise price and term provisions heretofore described for Options under the
Plan.
(iii) There shall be no Re-Load Options on a Re-Load Option. Any
such Re-Load Option shall be subject to the availability of sufficient shares of
Common Stock under subsection 4(a) and shall be subject to such other terms and
conditions as the Board may
9.
<PAGE> 10
determine which are not inconsistent with the express provisions of the Plan
regarding the terms of Options.
7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.
(a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such form
and shall contain such terms and conditions as the Board shall deem appropriate.
The terms and conditions of stock bonus agreements may change from time to time,
and the terms and conditions of separate stock bonus agreements need not be
identical, but each stock bonus agreement shall include (through incorporation
of provisions hereof by reference in the agreement or otherwise) the substance
of each of the following provisions:
(i) CONSIDERATION. A stock bonus may be awarded in consideration
for past services actually rendered to the Company or an Affiliate for its
benefit.
(ii) VESTING. Shares of Common Stock awarded under the stock
bonus agreement may, but need not, be subject to a share repurchase option in
favor of the Company in accordance with a vesting schedule to be determined by
the Board.
(iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the
event a Participant's Continuous Service terminates, the Company may reacquire
any or all of the shares of Common Stock held by the Participant which have not
vested as of the date of termination under the terms of the stock bonus
agreement.
(iv) TRANSFERABILITY. Rights to acquire shares of Common Stock
under the stock bonus agreement shall be transferable by the Participant only
upon such terms and conditions as are set forth in the stock bonus agreement, as
the Board shall determine in its discretion, so long as Common Stock awarded
under the stock bonus agreement remains subject to the terms of the stock bonus
agreement.
(b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement
shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate. The terms and conditions of the restricted stock
purchase agreements may change from time to time, and the terms and conditions
of separate restricted stock purchase agreements need not be identical, but each
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions:
(i) PURCHASE PRICE. The purchase price under each restricted
stock purchase agreement shall be such amount as the Board shall determine and
designate in such restricted stock purchase agreement. The purchase price shall
not be less than eighty-five percent (85%) of the Common Stock's Fair Market
Value on the date such award is made or at the time the purchase is consummated.
(ii) CONSIDERATION. The purchase price of Common Stock acquired
pursuant to the restricted stock purchase agreement shall be paid either: (i) in
cash at the time of purchase; (ii) at the discretion of the Board, according to
a deferred payment or other similar arrangement with the Participant; or (iii)
in any other form of legal consideration that may be
10.
<PAGE> 11
acceptable to the Board in its discretion; provided, however, that at any time
that the Company is incorporated in Delaware, then payment of the Common Stock's
"par value," as defined in the Delaware General Corporation Law, shall not be
made by deferred payment.
(iii) VESTING. Shares of Common Stock acquired under the
restricted stock purchase agreement may, but need not, be subject to a share
repurchase option in favor of the Company in accordance with a vesting schedule
to be determined by the Board.
(iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the
event a Participant's Continuous Service terminates, the Company may repurchase
or otherwise reacquire any or all of the shares of Common Stock held by the
Participant which have not vested as of the date of termination under the terms
of the restricted stock purchase agreement.
(v) TRANSFERABILITY. Rights to acquire shares of Common Stock
under the restricted stock purchase agreement shall be transferable by the
Participant only upon such terms and conditions as are set forth in the
restricted stock purchase agreement, as the Board shall determine in its
discretion, so long as Common Stock awarded under the restricted stock purchase
agreement remains subject to the terms of the restricted stock purchase
agreement.
8. COVENANTS OF THE COMPANY.
(a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.
(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from
each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Stock Awards and to issue and sell shares
of Common Stock upon exercise of the Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any
such Stock Award. If, after reasonable efforts, the Company is unable to obtain
from any such regulatory commission or agency the authority which counsel for
the Company deems necessary for the lawful issuance and sale of Common Stock
under the Plan, the Company shall be relieved from any liability for failure to
issue and sell Common Stock upon exercise of such Stock Awards unless and until
such authority is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of Common Stock pursuant to Stock Awards shall
constitute general funds of the Company.
10. MISCELLANEOUS.
(a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the
power to accelerate the time at which a Stock Award may first be exercised or
the time during which a Stock Award or any part thereof will vest in accordance
with the Plan, notwithstanding the provisions in the Stock Award stating the
time at which it may first be exercised or the time during which it will vest.
11.
<PAGE> 12
(b) SHAREHOLDER RIGHTS. No Participant shall be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any shares of
Common Stock subject to such Stock Award unless and until such Participant has
satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
(c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant any right to continue to serve the Company or an Affiliate in
the capacity in effect at the time the Stock Award was granted or shall affect
the right of the Company or an Affiliate to terminate (i) the employment of an
Employee with or without notice and with or without cause, (ii) the service of a
Consultant pursuant to the terms of such Consultant's agreement with the Company
or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the
Company or an Affiliate, and any applicable provisions of the corporate law of
the state in which the Company or the Affiliate is incorporated, as the case may
be.
(d) INVESTMENT ASSURANCES. The Company may require a Participant, as a
condition of exercising or acquiring Common Stock under any Stock Award, (i) to
give written assurances satisfactory to the Company as to the Participant's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (ii) to
give written assurances satisfactory to the Company stating that the Participant
is acquiring Common Stock subject to the Stock Award for the Participant's own
account and not with any present intention of selling or otherwise distributing
the Common Stock. The foregoing requirements, and any assurances given pursuant
to such requirements, shall be inoperative if (1) the issuance of the shares of
Common Stock upon the exercise or acquisition of Common Stock under the Stock
Award has been registered under a then currently effective registration
statement under the Securities Act or (2) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the Common Stock.
(e) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a
Stock Award Agreement, the Participant may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of Common
Stock under a Stock Award by any of the following means (in addition to the
Company's right to withhold from any compensation paid to the Participant by the
Company) or by a combination of such means: (i) tendering a cash payment; (ii)
authorizing the Company to withhold shares of Common Stock from the shares of
Common Stock otherwise issuable to the Participant as a result of the exercise
or acquisition of Common Stock under the Stock Award, provided, however, that no
shares of Common Stock are withheld with a value exceeding the minimum amount of
tax required to be withheld by law; or (iii) delivering to the Company owned and
unencumbered shares of Common Stock.
12.
<PAGE> 13
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common
Stock subject to the Plan, or subject to any Stock Award, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject to the Plan
pursuant to subsection 4(a), and the outstanding Stock Awards will be
appropriately adjusted in the class(es) and number of securities and price per
share of Common Stock subject to such outstanding Stock Awards. The Board shall
make such adjustments, and its determination shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a transaction "without receipt of consideration" by the
Company.)
(b) CHANGE IN CONTROL--DISSOLUTION OR LIQUIDATION. In the event of a
dissolution or liquidation of the Company, then all outstanding Stock Awards
shall terminate immediately prior to such event.
(c) CHANGE IN CONTROL - ASSET SALE, MERGER, CONSOLIDATION OR REVERSE
MERGER. In the event of (i) a sale, lease or other disposition of all or
substantially all of the assets of the Company, (ii) a merger or consolidation
in which the Company is not the surviving corporation or (iii) a reverse merger
in which the Company is the surviving corporation but the shares of Common Stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, then any surviving corporation or acquiring corporation shall assume
any Stock Awards outstanding under the Plan or shall substitute similar stock
awards (including an award to acquire the same consideration paid to the
shareholders in the transaction described in this subsection 11(c) for those
outstanding under the Plan). In the event any surviving corporation or acquiring
corporation refuses to assume such Stock Awards or to substitute similar stock
awards for those outstanding under the Plan, then with respect to Stock Awards
held by Participants whose Continuous Service has not terminated, the vesting of
such Stock Awards (and, if applicable, the time during which such Stock Awards
may be exercised) shall be accelerated in full, and the Stock Awards shall
terminate if not exercised (if applicable) at or prior to such event. With
respect to any other Stock Awards outstanding under the Plan, such Stock Awards
shall terminate if not exercised (if applicable) prior to such event.
12. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may
amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in Common Stock, no amendment shall be effective unless
approved by the shareholders of the Company to the extent shareholder approval
is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3
or any Nasdaq or securities exchange listing requirements.
13.
<PAGE> 14
(b) SHAREHOLDER APPROVAL. The Board may, in its sole discretion, submit
any other amendment to the Plan for shareholder approval, including, but not
limited to, amendments to the Plan intended to satisfy the requirements of
Section 162(m) of the Code and the regulations thereunder regarding the
exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to certain executive officers.
(c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board
may amend the Plan in any respect the Board deems necessary or advisable to
provide eligible Employees with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
and/or to bring the Plan and/or Options into compliance therewith.
(d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Participant and (ii) the Participant
consents in writing.
(e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to
time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) PLAN TERM. The Board may suspend or terminate the Plan at any time.
Unless sooner terminated, the Plan shall terminate on the day before the tenth
(10th) anniversary of the date the Plan is adopted by the Board or approved by
the shareholders of the Company, whichever is earlier. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall
not impair rights and obligations under any Stock Award granted while the Plan
is in effect except with the written consent of the Participant.
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective on January 6, 2000.
15. CHOICE OF LAW.
The law of the State of Delaware shall govern all questions concerning
the construction, validity and interpretation of this Plan, without regard to
such state's conflict of laws rules.
14.
<PAGE> 15
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. PURPOSES.............................................................................2
2. DEFINITIONS..........................................................................2
3. ADMINISTRATION.......................................................................5
4. SHARES SUBJECT TO THE PLAN...........................................................6
5. ELIGIBILITY..........................................................................6
6. OPTION PROVISIONS....................................................................7
7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.......................................10
8. COVENANTS OF THE COMPANY............................................................11
9. USE OF PROCEEDS FROM STOCK..........................................................11
10. MISCELLANEOUS.......................................................................11
11. ADJUSTMENTS UPON CHANGES IN STOCK...................................................13
12. AMENDMENT OF THE PLAN AND STOCK AWARDS..............................................13
13. TERMINATION OR SUSPENSION OF THE PLAN...............................................14
14. EFFECTIVE DATE OF PLAN..............................................................14
15. CHOICE OF LAW.......................................................................14
</TABLE>
i.
<PAGE> 1
EXHIBIT 10.14
Optionee: Date:
-------------------------------------------------- ---------------
ISIS PHARMACEUTICALS, INC.
2000 PLAN SUPPLEMENTAL STOCK OPTION AGREEMENT
Isis Pharmaceuticals, Inc. (the "Company"), pursuant to its 2000 Broad-Based
Equity Incentive Plan (the "Plan") has this day granted to the undersigned
optionee, an option to purchase shares of the common stock of the Company
("Common Stock") as described herein. This option is not intended to qualify and
will not be treated as an "incentive stock option" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended from time to time (the
"Code"). This option is subject to all of the terms and conditions as set forth
herein and on Attachment I hereto, which is incorporated herein in its entirety.
Number of Shares Subject to Option:________
VESTING SCHEDULE:
<TABLE>
<S> <C>
Number of Shares (installment) Date of Earliest Exercise (vesting)(1)
--------------------- ---------------------
--------------------- ---------------------
--------------------- ---------------------
--------------------- ---------------------
Exercise Price Per Share: (2) Expiration Date:(3)
----- Percentage of Full-Time Work: 100%
------
Isis Pharmaceuticals, Inc.
By: Optionee:
-------------------------------------- ----------------------------------
Duly authorized on behalf of Address:
the Board of Directors
</TABLE>
OPTIONEE:
Acknowledges receipt of the option as described herein and the attachments
referenced therein and understands that all rights and liabilities with respect
to this option are set forth in the option and the Plan; and acknowledges that
as of the date of grant of this option, it sets forth the entire understanding
between the optionee and the Company regarding the acquisition of stock in the
Company and supersedes all prior oral and written agreements on that subject.
(1) After the first year, the option will vest monthly with 2.08% of the total
grant vesting each month; provided, however, that during any period in which the
undersigned provides service at less than the Percentage of Full-Time Work set
forth above, a reduced number of shares will vest as follows: the percentage of
shares which will vest during such period of reduced service will equal (a) the
percentage of shares that would vest as set forth on this schedule, multiplied
by (b) the percentage of full-time work furnished during the period of reduced
service divided by the Percentage of Full Time Work as set forth above.
Increases of work percentage up to but not in excess of the Percentage of Full
Time Work specified above will result in a corresponding increase in the
percentage of shares vesting. This reduction in vesting will not apply during
any period of paid leave or the first 20 weeks of a period of unpaid leave. No
shares will vest during unpaid leave after the first 20 weeks of such leave.
Shares which do not vest because of reductions in work percentage or unpaid
leave will be canceled and no longer subject to this option.
(2) Not less than 85% of the fair market value of the Common Stock on the date
of grant of this option.
(3) Less than 10 years from the date of grant of this option.
<PAGE> 2
ATTACHMENT I
TERMS OF SUPPLEMENTAL STOCK OPTION
The grant hereunder is in connection with and in furtherance of the
Company's 2000 Broad-Based Equity Incentive Plan (the "Plan") for participation
of the Company's employees (including officers), directors or consultants and is
intended to comply with the provisions of Rule 701 promulgated by the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Act").
The details of your option are as follows:
1. The total number of shares of Common Stock subject to this option is
set forth on the first page of the Supplemental Stock Option Agreement. Subject
to the limitations contained herein, this option is exercisable with respect to
each installment indicated in the Vesting Schedule set forth on the first page
of the Supplemental Stock Option Agreement on or after the date of vesting
applicable to such installment.
2. Notwithstanding any provision in the Plan to the contrary, in the
event of a Change in Control (as defined below) then the vesting and
exercisability of this stock option will be accelerated in full; provided,
however, that if such potential acceleration of the vesting and exercisability
of this stock option would cause a contemplated Change in Control transaction
that would otherwise be eligible to be accounted for as a "pooling-of-interests"
transaction to become ineligible for such accounting treatment under generally
accepted accounting principles as determined by the Company's independent
certified public accountants prior to the Change of Control, such acceleration
will not occur.
For purposes of this paragraph 2 only, Change in Control means: (i) a
sale of all or substantially all of the assets of the Company; (ii) a merger or
consolidation in which the Company is not the surviving corporation and in which
beneficial ownership of securities of the Company representing at least fifty
percent (50%) of the combined voting power entitled to vote in the election of
Directors has changed; (iii) a reverse merger in which the Company is the
surviving corporation but the shares of Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise, and in which beneficial
ownership of securities of the Company representing at least fifty percent (50%)
of the combined voting power entitled to vote in the election of Directors has
changed; or (iv) an acquisition by any person, entity or group within the
meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable
successor provisions (excluding any employee benefit plan, or related trust,
sponsored or maintained by the Company or subsidiary of the Company or other
entity controlled by the Company) of the beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable
successor rule) of securities of the Company representing at least fifty percent
(50%) of the combined voting power entitled to vote in the election of
Directors.
3. (a) The Exercise Price of this option is set forth on the first
page of the Supplemental Stock Option Agreement.
(b) Payment of the exercise price per share is due in full in
cash (including check) upon exercise of all or any part of each installment
which has become exercisable by you.
4. The minimum number of shares with respect to which this option may be
exercised at any one time is 1,000, unless the number of shares available for
exercise (that is, the remaining vested shares pursuant to paragraph 1) equals
less than 1,000 shares, in which case the minimum number of shares exercised
must equal the number of shares then vested.
5. Notwithstanding anything to the contrary contained herein, this
option may not be exercised unless the shares issuable upon exercise of this
option are then registered under the Act or, if such shares are not then so
registered, the Company has determined that such exercise and issuance would be
exempt from the registration requirements of the Act.
6. The term of this option commences on the date hereof and, unless
sooner terminated as set forth below or in the Plan, terminates on the
Expiration Date. This option shall terminate prior to the expiration of its term
as follows: 3 months after the termination of your employment with the Company
or an Affiliate of the Company (as defined in the Plan) for any reason or for no
reason unless:
(a) such termination of employment is due to your Disability, in
which event the option shall terminate on the earlier of the termination date
set forth above or 1 year following such termination of employment;
(b) such termination of employment is due to your death, in
which event the option shall terminate on the earlier of the termination date
set forth above or 18 months after your death; or
<PAGE> 3
(c) during any part of such 3 month period the option is not
exercisable solely because of the condition set forth in paragraph 5 above, in
which event the option shall not terminate until the earlier of the termination
date set forth above or until it shall have been exercisable for an aggregate
period of 3 months after the termination of employment; or
(d) exercise of the option within 3 months after termination of
your employment with the Company or with an Affiliate would result in liability
under Section 16(b) of the Securities Exchange Act of 1934, in which case the
option will terminate on the earlier of the termination date set forth above,
the 10th day after the last date upon which exercise would result in such
liability or 6 months and 10 days after the termination of your employment with
the Company or an Affiliate.
However, this option may be exercised following termination of employment only
as to that number of shares as to which it was exercisable on the date of
termination of employment under the provision of paragraph 1 of this option.
7. (a) This option may be exercised, to the extent specified above,
by delivering a notice of exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours.
(b) By exercising this option you agree that:
(i) the Company may require you to enter an arrangement
providing for the cash payment by you to the Company of any tax withholding
obligation of the Company arising by reason of: the exercise of this option; the
lapse of any substantial risk of forfeiture to which the shares are subject at
the time of exercise; or the disposition of shares acquired upon such exercise.
8. This option is not transferable except by will or by the laws of
descent and distribution, and is exercisable during your lifetime only by you;
notwithstanding the foregoing, you may transfer part or all of this option to
any of the following:
(i) your spouse, children (by birth or adoption), stepchildren,
grandchildren, or parents;
(ii) a trust or other entity established solely for your benefit
or the benefit of your spouse, children (by birth or adoption), stepchildren,
grandchildren, or parents for estate planning purposes; or,
(iii) an organization which is exempt from taxation under
Section 501(c)(3) of the Code or to which tax-deductible charitable
contributions may be made under Section 170 of the Code.
Furthermore, you may, by delivering written notice to the Company, in a
form satisfactory to the Company, designate a third party who, in the event of
your death, will thereafter be entitled to exercise the option.
9. This option is not an employment contract and nothing in this option
shall be deemed to create in any way whatsoever any obligation on your part to
continue in the employ of the Company, or of the Company to continue your
employment with the Company. In the event that this option is granted to you in
connection with the performance of services as a consultant or director,
references to employment, employee and similar terms shall be deemed to include
the performance of services as a consultant or a director, as the case may be,
provided, however, that no rights as an employee shall arise by reason of the
use of such terms.
10. Any notices provided for in this option or the Plan shall be given
in writing and shall be deemed effectively given upon receipt or, in the case of
notices delivered by the Company to you, 5 days after deposit in the United
States mail, postage prepaid, addressed to you at the address specified on the
attached or at such other address as you hereafter designate by written notice
to the Company.
11. This option is subject to all the provisions of the Plan, a copy of
which is attached hereto and its provisions are hereby made a part of this
option, including without limitation the provisions of paragraph 6 of the Plan
relating to option provisions, and is further subject to all interpretations,
amendments, rules and regulations which may from time to time be promulgated and
adopted pursuant to the Plan. In the event of any conflict between the
provisions of this option and those of the Plan, the provisions of the Plan
shall control.
Attachments: 2000 Broad-Based Equity Incentive Plan
Notice of Exercise
<PAGE> 1
EXHIBIT 10.15
Optionee: Date:
-------------------------------------------------- ---------------
ISIS PHARMACEUTICALS, INC.
SUPPLEMENTAL STOCK OPTION AGREEMENT
(DIRECTOR)
Isis Pharmaceuticals, Inc. (the "Company"), pursuant to its 2000 Broad-Based
Equity Incentive Plan (the "Plan") has this day granted to the undersigned
optionee, an option to purchase shares of the common stock of the Company
("Common Stock") as described herein. This option is not intended to qualify and
will not be treated as an "incentive stock option" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended from time to time (the
"Code"). This option is subject to all of the terms and conditions as set forth
herein and on Attachment I hereto, which is incorporated herein in its entirety.
Number of Shares Subject to Option:________
VESTING SCHEDULE:
<TABLE>
<S> <C>
Number of Shares (installment) Date of Earliest Exercise (vesting)
--------------------- ---------------------
--------------------- ---------------------
--------------------- ---------------------
--------------------- ---------------------
Exercise Price Per Share: (1) Expiration Date: (2)
----------- ------------
Percentage of Full-Time Work: 100%
------
Isis Pharmaceuticals, Inc.
By: Optionee:
-------------------------------------- ----------------------------------
Duly authorized on behalf of Address:
the Board of Directors
</TABLE>
OPTIONEE:
Acknowledges receipt of the option as described herein and the attachments
referenced therein and understands that all rights and liabilities with respect
to this option are set forth in the option and the Plan; and acknowledges that
as of the date of grant of this option, it sets forth the entire understanding
between the optionee and the Company regarding the acquisition of stock in the
Company and supersedes all prior oral and written agreements on that subject.
(1) Not less than 85% of the fair market value of the Common Stock on the date
of grant of this option.
(2) Less than 10 years from the date of grant of this option.
<PAGE> 2
ATTACHMENT I
TERMS OF SUPPLEMENTAL STOCK OPTION
(DIRECTOR)
The grant hereunder is in connection with and in furtherance of the
Company's 2000 Broad-Based Equity Incentive Plan (the "Plan") for participation
of the Company's employees (including officers), directors or consultants and is
intended to comply with the provisions of Rule 701 promulgated by the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Act").
The details of your option are as follows:
1. The total number of shares of Common Stock subject to this option is
set forth on the first page of the Supplemental Stock Option Agreement. Subject
to the limitations contained herein, this option is exercisable with respect to
each installment indicated in the Vesting Schedule set forth on the first page
of the Supplemental Stock Option Agreement on or after the date of vesting
applicable to such installment.
2. Notwithstanding any provision in the Plan to the contrary, in the
event of a Change in Control (as defined below) then the vesting and
exercisability of this stock option will be accelerated in full; provided,
however, that if such potential acceleration of the vesting and exercisability
of this stock option would cause a contemplated Change in Control transaction
that would otherwise be eligible to be accounted for as a "pooling-of-interests"
transaction to become ineligible for such accounting treatment under generally
accepted accounting principles as determined by the Company's independent
certified public accountants prior to the Change of Control, such acceleration
will not occur.
For purposes of this paragraph 2 only, Change in Control means: (i) a
sale of all or substantially all of the assets of the Company; (ii) a merger or
consolidation in which the Company is not the surviving corporation and in which
beneficial ownership of securities of the Company representing at least fifty
percent (50%) of the combined voting power entitled to vote in the election of
Directors has changed; (iii) a reverse merger in which the Company is the
surviving corporation but the shares of Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise, and in which beneficial
ownership of securities of the Company representing at least fifty percent (50%)
of the combined voting power entitled to vote in the election of Directors has
changed; or (iv) an acquisition by any person, entity or group within the
meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable
successor provisions (excluding any employee benefit plan, or related trust,
sponsored or maintained by the Company or subsidiary of the Company or other
entity controlled by the Company) of the beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable
successor rule) of securities of the Company representing at least fifty percent
(50%) of the combined voting power entitled to vote in the election of
Directors.
3. (a) The Exercise Price of this option is set forth on the first
page of the Supplemental Stock Option Agreement.
(b) Payment of the exercise price per share is due in full in
cash (including check) upon exercise of all or any part of each installment
which has become exercisable by you.
4. The minimum number of shares with respect to which this option may be
exercised at any one time is 1,000, unless the number of shares available for
exercise (that is, the remaining vested shares pursuant to paragraph 1) equals
less than 1,000 shares, in which case the minimum number of shares exercised
must equal the number of shares then vested.
5. Notwithstanding anything to the contrary contained herein, this
option may not be exercised unless the shares issuable upon exercise of this
option are then registered under the Act or, if such shares are not then so
registered, the Company has determined that such exercise and issuance would be
exempt from the registration requirements of the Act.
6. The term of this option commences on the date hereof and, unless
sooner terminated as set forth below or in the Plan, terminates on the
Expiration Date. This option shall terminate prior to the expiration of its term
as follows: 3 months after the termination of your service as a Director with
the Company or an Affiliate of the Company (as defined in the Plan) for any
reason or for no reason unless:
(a) such termination of service is due to your Disability, in
which event the option shall
<PAGE> 3
terminate on the earlier of the termination date set forth above or 1 year
following such termination of service;
(b) such termination of service is due to your death, in which
event the option shall terminate on the earlier of the termination date set
forth above or 18 months after your death; or
(c) during any part of such 3 month period the option is not
exercisable solely because of the condition set forth in paragraph 5 above, in
which event the option shall not terminate until the earlier of the termination
date set forth above or until it shall have been exercisable for an aggregate
period of 3 months after the termination of service; or
(d) exercise of the option within 3 months after termination of
your service with the Company or with an Affiliate would result in liability
under Section 16(b) of the Securities Exchange Act of 1934, in which case the
option will terminate on the earlier of the termination date set forth above,
the 10th day after the last date upon which exercise would result in such
liability or 6 months and 10 days after the termination of your service with the
Company or an Affiliate.
However, this option may be exercised following termination of service only as
to that number of shares as to which it was exercisable on the date of
termination of service under the provision of paragraph 1 of this option.
7. (a) This option may be exercised, to the extent specified above,
by delivering a notice of exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours.
(b) By exercising this option you agree that:
(i) the Company may require you to enter an arrangement
providing for the cash payment by you to the Company of any tax withholding
obligation of the Company arising by reason of: the exercise of this option; the
lapse of any substantial risk of forfeiture to which the shares are subject at
the time of exercise; or the disposition of shares acquired upon such exercise.
8. This option is not transferable except by will or by the laws of
descent and distribution, and is exercisable during your lifetime only by you;
notwithstanding the foregoing, you may transfer part or all of this option to
any of the following:
(i) your spouse, children (by birth or adoption), stepchildren,
grandchildren, or parents;
(ii) a trust or other entity established solely for your benefit
or the benefit of your spouse, children (by birth or adoption), stepchildren,
grandchildren, or parents for estate planning purposes; or,
(iii) an organization which is exempt from taxation under
Section 501(c)(3) of the Code or to which tax-deductible charitable
contributions may be made under Section 170 of the Code.
Furthermore, you may, by delivering written notice to the Company, in a
form satisfactory to the Company, designate a third party who, in the event of
your death, will thereafter be entitled to exercise the option.
9. This option is not a service contract and nothing in this option
shall be deemed to create in any way whatsoever any obligation on your part to
continue as a Director of the Company, or of the Company to continue your
service with the Company. In the event that this option is granted to you in
connection with the performance of services as a consultant or director,
references to service, employee and similar terms shall be deemed to include the
performance of services as a consultant or a director, as the case may be,
provided, however, that no rights as an employee shall arise by reason of the
use of such terms.
10. Any notices provided for in this option or the Plan shall be given
in writing and shall be deemed effectively given upon receipt or, in the case of
notices delivered by the Company to you, 5 days after deposit in the United
States mail, postage prepaid, addressed to you at the address specified on the
attached or at such other address as you hereafter designate by written notice
to the Company.
11. This option is subject to all the provisions of the Plan, a copy of
which is attached hereto and its provisions are hereby made a part of this
option, including without limitation the provisions of paragraph 6 of the Plan
relating to option provisions, and is further subject to all interpretations,
amendments, rules and regulations which may from time to time be promulgated and
adopted pursuant to the Plan. In the event of any conflict between the
<PAGE> 4
provisions of this option and those of the Plan, the provisions of the Plan
shall control.
Attachments: 2000 Broad-Based Equity Incentive Plan
Notice of Exercise
<PAGE> 1
EXHIBIT 10.16
January 11, 2000
- --------------------------
- --------------------------
Isis Pharmaceuticals, Inc.
2292 Faraday Ave.
Carlsbad, CA 92008
Dear
----------------------
Isis Pharmaceuticals, Inc. ("Isis") is pleased to offer you certain severance
benefits in light of your contributions to Isis. As Isis has no policy or
procedure requiring such benefits, we request that you keep the terms and
conditions of this letter agreement confidential.
In the event that your employment is terminated without "cause" (as defined
herein) by Isis on or before December 31, 2001 (the "Severance Period"), you
will be eligible to receive a severance payment equal to a minimum of six (6)
months of your then current base salary, less payroll deductions and
withholdings. For purposes of this letter agreement, "cause" will be defined as
follows: (i) engaging or in any manner participating in any activity which is
competitive with or intentionally injurious to Isis or which violates any
provision of the Proprietary Information and Inventions Agreement; (ii)
commission of any fraud against Isis or use or appropriation for personal use or
benefit of any funds or properties of Isis not authorized by the Company to be
so used or appropriated; (iii) conviction of a crime involving dishonesty or
moral turpitude; (iv) conduct by you which in the good faith and reasonable
determination of the Company demonstrates gross unfitness to serve in your then
current capacity at Isis. In order to be eligible to receive the severance
payments described herein, you will be required to execute an Employee
Separation Agreement substantially in the form attached hereto as Exhibit A.
In the event that your employment is terminated during the Severance Period as a
result of a reduction of the Company's workforce or you elect to terminate your
employment with Isis as a result of substantial change in your primary job
duties, your severance payment shall be increased such that you receive a total
payment equal to twelve (12) months of your then current base salary, less
payroll deductions and withholdings.
<PAGE> 2
In the event that your employment is terminated by Isis during the Severance
Period as a result of a Change in Control (as defined herein), your severance
payment shall be increased such that you receive a total of twenty-four (24)
months of your then current base salary, less payroll deductions and
withholdings. For purposes of this letter agreement, Change in Control will be
defined as follows: (i) a sale of all or substantially all of the assets of
Isis; (ii) a merger or consolidation in which Isis is not the surviving
corporation and in which beneficial ownership of securities of Isis representing
at least fifty percent (50%) of the combined voting power entitled to vote in
the election of Directors has changed; (iii) a reverse merger in which Isis is
the surviving corporation but the shares of Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise, and in which beneficial
ownership of securities of Isis representing at least fifty percent (50%) of the
combined voting power entitled to vote in the election of Directors has changed;
or (iv) an acquisition by any person, entity or group within the meaning of
Section 13(d) or 14(d) of the Exchange Act, or any comparable successor
provisions (excluding any employee benefit plan, or related trust, sponsored or
maintained by Isis or subsidiary of Isis or other entity controlled by Isis) of
the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act, or comparable successor rule) of securities of Isis representing
at least fifty percent (50%) of the combined voting power entitled to vote in
the election of Directors.
Please keep in mind that this letter agreement is not intended to change your
status as an at-will employee with Isis. As with all employees at Isis, you or
Isis may terminate your employment at any time, for any reason whatsoever, with
or without cause or advance notice subject to the provisions set forth herein.
If you have any questions or comments regarding the terms and conditions of this
letter, please do not hesitate to contact me.
Very truly yours,
Isis Pharmaceuticals, Inc.
Patricia M. Lowenstam
Vice President, Human Resources
PML/jk
attachment
<PAGE> 3
SEVERANCE AGREEMENT
SCHEDULE
NAMES OF EXECUTIVE OFFICERS
WHO ARE PARTIES TO THE SEVERANCE AGREEMENT
------------------------------------------
Stanley T. Crooke
B. Lynne Parshall
Debby Jo Blank
C. Frank Bennett
David J. Ecker
Patricia Lowenstam
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-75068, 33-96138, and 333-71911 and Form S-8 No. 33-51236,
33-42970, 33-42356, 33-54840, 33-58450, 33-43330, 33-75150, 33-90780, 333-05825,
and 333-55683) of Isis Pharmaceuticals, Inc. of our report dated January 28,
2000, except for paragraph 3 of Note 8, as to which the date is March 8, 2000
with respect to the financial statements of Isis Pharmaceuticals, Inc. included
in this Annual Report (Form 10-K) for the year ended December 31, 1999.
ERNST & YOUNG LLP
San Diego, California
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information derived from the Company's
Balance Sheet as of December 31, 1999 and Statements of Operations for the Year
Ended December 31, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 35,296
<SECURITIES> 17,543
<RECEIVABLES> 5,429
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 59,197
<PP&E> 23,945
<DEPRECIATION> 0
<TOTAL-ASSETS> 103,107
<CURRENT-LIABILITIES> 14,984
<BONDS> 87,254
0
0
<COMMON> 32
<OTHER-SE> 837
<TOTAL-LIABILITY-AND-EQUITY> 103,107
<SALES> 0
<TOTAL-REVENUES> 33,925
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 76,984
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,424
<INCOME-PRETAX> (59,645)
<INCOME-TAX> 0
<INCOME-CONTINUING> (59,645)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (59,645)
<EPS-BASIC> (2.08)
<EPS-DILUTED> (2.08)
</TABLE>
