<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-47750
PROSPECTUS
4,500,000 Shares
[LOGO of ICOS CORPORATION]
Common Stock
We are selling 4,500,000 shares of our common stock.
Our common stock is traded on The Nasdaq National Market under the symbol
ICOS. On December 13, 2000, the closing sale price of our common stock as
quoted on The Nasdaq National Market was $39.50 per share.
Our business involves significant risks. These risks are described under the
caption "Risk Factors" beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
--------------------
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price................................... $37.00 $166,500,000
Underwriting discounts and commissions.................. $ 1.85 $ 8,325,000
Proceeds, before expenses, to ICOS...................... $35.15 $158,175,000
</TABLE>
The underwriters may also purchase up to an additional 675,000 shares of
common stock at the public offering price, less the underwriting discounts and
commissions, to cover over-allotments.
The underwriters expect to deliver the shares against payment in New York,
New York on December 19, 2000.
--------------------
SG COWEN
BANC OF AMERICA SECURITIES LLC
PRUDENTIAL VECTOR HEALTHCARE
a unit of Prudential Securities
ROBERTSON STEPHENS
RAGEN MacKENZIE
A Division of Wells Fargo Investments, LLC
December 13, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 1
Risk Factors............................................................... 5
Forward-Looking Statements................................................. 12
Use of Proceeds............................................................ 13
Price Range of Common Stock................................................ 13
Dividend Policy............................................................ 13
Capitalization............................................................. 14
Selected Consolidated Financial Data....................................... 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 16
Business................................................................... 22
Management................................................................. 40
Principal Stockholders..................................................... 43
Underwriting............................................................... 45
Legal Matters.............................................................. 46
Experts.................................................................... 46
Where You Can Find More Information........................................ 47
Information Incorporated by Reference...................................... 47
</TABLE>
----------------
You should rely only on information contained in or incorporated by reference
into this prospectus. We have not authorized anyone to provide you with
information that is different. We are offering to sell and seeking offers to
buy shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk Factors" and the consolidated financial
statements incorporated by reference into this prospectus, before making an
investment decision. Except where we state otherwise, the information we
present in this prospectus assumes no exercise of the underwriters' over-
allotment option.
ICOS Corporation
ICOS is a product-driven company that has expertise in both protein-based and
small molecule therapeutics. We combine our capabilities in molecular, cellular
and structural biology, high throughput drug screening, medicinal chemistry and
genomics to develop highly innovative products with significant commercial
potential. We apply our integrated approach to specific target areas where we
have expertise. We believe this strategy increases our chances of successfully
developing commercial products. These target areas include erectile
dysfunction, female sexual dysfunction, sepsis, pulmonary hypertension and
other cardiovascular diseases, inflammatory diseases and cancer. To compensate
for the risks associated with clinical development, we seek to develop a number
of product candidates in parallel. These product candidates encompass a variety
of molecular mechanisms and targets to treat diverse medical conditions.
Our late-stage clinical product candidates
. Cialis(TM), which is currently being evaluated for the treatment of
erectile dysfunction. In Phase 2 clinical trials conducted to date,
Cialis has improved patients' ability to attain and maintain an erection
sufficient for sexual intercourse and increased both the percentage of
successful sexual attempts reported by patients in patient diaries as
well as the proportion of experiences satisfying to both patients and
partners. We are currently conducting Phase 3 clinical trials for Cialis
in a number of countries and expect to initiate additional clinical
trials. We plan to submit a new drug application for Cialis to the United
States Food and Drug Administration, or FDA, in the second half of 2001,
subject to successfully concluding our clinical trials;
. Pafase(R), which is currently being evaluated for the treatment of
sepsis. We intend to begin a pivotal Phase 3 clinical trial of Pafase in
the first quarter of 2001; and
. Sitaxsentan, which is currently being evaluated for the treatment of
pulmonary hypertension. Preliminary analysis of available patient data
from an open-label Phase 2a clinical trial suggests that sitaxsentan may
provide clinical benefit to patients diagnosed with some types of
pulmonary hypertension. We intend to begin a pivotal Phase 2b/3 clinical
trial of sitaxsentan in the first quarter of 2001.
Our early clinical and preclinical product candidates
We continue to develop a broad portfolio of product candidates encompassing a
variety of therapeutic approaches to address needs in both chronic and acute
diseases. We seek to regenerate this product pipeline continuously through our
own internal discovery efforts and by seeking in-licensing opportunities. The
following are our early clinical or preclinical product candidates:
. Cialis, in Phase 2 clinical trials for the treatment of female sexual
dysfunction;
. IC14, in Phase 1 clinical trials for the treatment of sepsis;
1
<PAGE>
. IC485, in late-stage preclinical development for the treatment of chronic
inflammatory diseases, such as chronic obstructive pulmonary disease and
rheumatoid arthritis;
. IC747, in late-stage preclinical development for the treatment of chronic
inflammatory diseases, such as psoriasis;
. TBC3711, in late-stage preclinical development for the treatment of
chronic heart failure and essential hypertension; and
. Cell cycle checkpoint/DNA repair inhibitors, in preclinical development
for the treatment of cancer.
Our collaborations
We have established collaborations with pharmaceutical and biotechnology
companies to enhance our internal development capabilities and to offset a
substantial portion of the financial risk of developing our product candidates.
At the same time, we maintain substantial rights to the product candidates
covered by these collaborations, which provide us the opportunity to
participate in a significant portion of the potential economic benefit of these
product candidates. For example:
. in 1997, we established Suncos Corporation, a joint venture entity with
Suntory Limited, for the development of Pafase;
. in 1998, we established Lilly ICOS LLC, a joint venture entity with Eli
Lilly and Company, for the development of Cialis; and
. in June 2000, we established ICOS-Texas Biotechnology L.P., a limited
partnership with Texas Biotechnology Corporation, for the development of
endothelin antagonists, including sitaxsentan.
We have incurred significant operating losses since we began operations in
September 1990. As of September 30, 2000, we had an accumulated deficit of
$175.3 million. Although we have product candidates in late-stage clinical
development, we have not completed clinical development or received regulatory
approval for any product candidates, and therefore have not generated revenues
from the sale of any products. We cannot assure you that we will complete the
development of or successfully commercialize any of our product candidates.
We were incorporated in Delaware in September 1989. References in this
prospectus to "ICOS," "we," "our" and "us" refer to ICOS Corporation and our
wholly owned subsidiaries. Our principal executive offices are located at
22021-20th Avenue S.E., Bothell, Washington 98021 and our telephone number is
(425) 485-1900. Our Internet address is www.icos.com. Information contained on
our Web site does not constitute a part of this prospectus.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by ICOS.................... 4,500,000 shares
Common stock to be outstanding after this
offering....................................... 51,430,877 shares
Use of proceeds................................. For funding research and
clinical development,
commercialization of our
potential products and
general corporate purposes
Nasdaq National Market symbol................... ICOS
</TABLE>
The number of shares of our common stock to be outstanding after this
offering is based on the number of shares of common stock outstanding as of
September 30, 2000. This number does not include:
. 7,709,424 shares subject to issuance as of September 30, 2000 upon
exercise of stock options outstanding under our stock option plans, of
which options to purchase 5,023,314 shares were exercisable as of
September 30, 2000 at a weighted-average exercise price of $14.26 per
share;
. 10,327,500 shares subject to issuance as of September 30, 2000 upon
exercise of outstanding warrants at a weighted-average exercise price of
$40.88; and
. 2,645,446 shares reserved for issuance as of September 30, 2000 upon
exercise of stock options that were available for grant as of September
30, 2000 under our 1999 Stock Option Plan.
3
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
The following summary consolidated financial data for the years ended
December 31, 1995 through December 31, 1999 are derived from our audited
consolidated financial statements, and the consolidated financial data for the
nine-month periods ended September 30, 1999 and September 30, 2000 are derived
from our unaudited interim consolidated financial statements. The as adjusted
information in the consolidated balance sheet data as of September 30, 2000
reflects the receipt of the estimated net proceeds from the sale by us of the
4,500,000 shares of common stock in this offering at the public offering price
of $37.00 per share.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Total revenue........... $ 1,500 $ 2,000 $ 31,576 $110,768 $ 79,600 $ 49,787 $ 31,698
Operating expenses:
Research and
development.......... 24,039 30,011 42,783 76,978 100,541 77,252 63,603
General and
administrative....... 2,482 2,555 2,737 4,031 5,259 3,558 4,253
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses........... 26,521 32,566 45,520 81,009 105,800 80,810 67,856
-------- -------- -------- -------- -------- -------- --------
Operating income
(loss)................. (25,021) (30,566) (13,944) 29,759 (26,200) (31,023) (36,158)
Other income (expense),
net.................... 1,652 2,071 1,929 2,199 (6,995) (6,521) (14,841)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes........... (23,369) (28,495) (12,015) 31,958 (33,195) (37,544) (50,999)
Income taxes--current... -- -- -- 648 -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $(23,369) $(28,495) $(12,015) $ 31,310 $(33,195) $(37,544) $(50,999)
======== ======== ======== ======== ======== ======== ========
Net income (loss) per
common share--basic.... $ (0.73) $ (0.77) $ (0.30) $ 0.78 $ (0.76) $ (0.87) $ (1.11)
======== ======== ======== ======== ======== ======== ========
Net income (loss) per
common share--diluted.. $ (0.73) $ (0.77) $ (0.30) $ 0.67 $ (0.76) $ (0.87) $ (1.11)
======== ======== ======== ======== ======== ======== ========
Weighted-average common
shares outstanding--
basic.................. 32,194 36,805 39,595 40,139 43,449 43,134 45,851
======== ======== ======== ======== ======== ======== ========
Weighted-average common
shares outstanding--
diluted................ 32,194 36,805 39,595 46,849 43,449 43,134 45,851
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30, 2000
-------------------
As
Actual Adjusted
--------- --------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents, investment securities
available for sale and interest receivable.............. $ 53,310 $210,935
Working capital.......................................... 53,572 211,197
Total assets............................................. 95,966 253,591
Long-term debt........................................... -- --
Accumulated deficit...................................... (175,309) (175,309)
Stockholders' equity..................................... 73,511 231,136
</TABLE>
4
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. You should also refer to the other information in this
prospectus, including our financial statements and the related notes
incorporated by reference into this prospectus. The risks and uncertainties
described below are not the only risks and uncertainties we face. Additional
risks and uncertainties not presently known to us or that we currently deem
immaterial also may impair our business operations. If any of the following
risks actually occur, our business, results of operations and financial
condition would suffer. In that event the trading price of our common stock
could decline, and you may lose all or part of your investment in our common
stock. The risks discussed below also include forward-looking statements and
our actual results may differ substantially from those discussed in these
forward-looking statements.
Risks Related to Our Business
We have a history of losses and anticipate continued losses.
We have incurred significant operating losses since we began operations in
September 1990. As of September 30, 2000, we had an accumulated deficit of
$175.3 million. We have not yet completed the development of any products and,
consequently, have not generated revenues from the sale of products. Our
operating losses have been increasing during the past several years and will
continue to increase in subsequent years as we attempt to complete development
of our potential products, obtain necessary regulatory approvals and
manufacture and market these product candidates. In particular, we expect to
incur substantial marketing and other costs related to commercializing Cialis
if we are able to complete clinical trials and obtain regulatory approval for
this product candidate. Even if we do successfully develop products that can be
marketed, we will need to generate significant revenues from those products to
achieve and maintain profitability. We currently do not expect to achieve
profitability for at least the next three years. Even if we do become
profitable, we cannot assure you that we would be able to sustain or increase
profitability on a quarterly or annual basis.
Our operating results are subject to fluctuations that may cause our stock
price to decline.
Our operating results have fluctuated in the past and are likely to continue
to do so in the future. Our revenue is unpredictable and may fluctuate due to
the timing of non-recurring licensing fees, reimbursements earned by us for
manufacturing services, and achievement of milestones under new and existing
licensing and collaborative agreements. Revenue historically recognized under
our prior collaborative agreements may not be an indicator of revenue from any
future collaborations. In addition, our expenses are unpredictable and may
fluctuate from quarter to quarter due to the timing of expenses, which may
include payments owed by us under licensing or collaborative arrangements. We
believe that quarter-to-quarter comparisons of our operating results are not a
good indicator of our future performance and should not be relied upon to
predict the future performance of our stock price.
It is possible that in the future our operating results in a particular
quarter or quarters will not meet the expectations of securities analysts or
investors, causing the market price of our common stock to decline. In the
past, companies that have experienced decreases in the market price of their
stock have been subject to securities class action litigation. A securities
class action lawsuit against us could result in substantial costs and a
diversion of our management's attention and resources.
Our clinical trials may fail to demonstrate the safety and effectiveness of our
product candidates, which could prevent or significantly delay their regulatory
approval.
Any failure or substantial delay in completing clinical trials for our
product candidates, and in particular Cialis, may severely harm our business.
Before obtaining regulatory approval for the sale of any of our potential
products, we must subject these product candidates to extensive preclinical and
clinical testing to
5
<PAGE>
demonstrate their safety and effectiveness for humans. Clinical trials are
time-consuming and expensive and may take years to complete, and we have
conducted only a limited number of clinical trials to date. We may not complete
our clinical trials of product candidates under development, and the results of
the trials may fail to demonstrate the safety or effectiveness of such product
candidates to the extent necessary to obtain regulatory approvals or to make
commercialization of the product candidates worthwhile. At any time during
these clinical trials, factors such as ineffectiveness of the product
candidate, discovery of unacceptable toxicities or side effects, development of
disease resistance or other physiological factors, or delays in patient
enrollment could cause us to interrupt, limit, delay or abort the development
of these product candidates.
In addition, larger and later-stage clinical trials may not produce the same
results as early-stage trials. Many companies in the pharmaceutical and
biotechnology industries, including us, have suffered significant setbacks in
clinical trials, even after promising results had been obtained in earlier
trials. For example, our Phase 3 clinical trial of product candidate
LeukArrest(TM) for the treatment of ischemic stroke was stopped after an
interim analysis. Similarly, our trial data for product candidate ICM3 did not
show sufficiently promising results to warrant further study for the treatment
of psoriasis. We may at times elect to use aggressive clinical strategies to
advance product candidates through clinical development as rapidly as possible.
For example, we may commence clinical trials without conducting preclinical
animal testing, or we may conduct later-stage trials based on limited early-
stage data. As a result, we anticipate that only some of our product candidates
may show safety and effectiveness in clinical trials and many may encounter
difficulties or delays during clinical development.
Government regulatory authorities may not approve our product candidates.
We cannot assure you that we will receive the regulatory approvals necessary
to commercialize our product candidates, which could cause our business to
fail. Our product candidates are subject to extensive and rigorous government
regulation. The FDA regulates, among other things, the development, testing,
manufacture, safety, efficacy, record-keeping, labeling, storage, approval,
advertising, promotion, sale and distribution of biopharmaceutical products. If
our potential products are marketed abroad, they will also be subject to
extensive regulation by foreign governments. None of our product candidates has
been approved for sale in the United States or any foreign market. In addition,
we have only limited experience in filing and pursuing applications necessary
to gain regulatory approvals, which may impede our ability to obtain such
approvals.
The regulatory review and approval process, which includes preclinical
studies and clinical trials of each product candidate, is lengthy, expensive
and uncertain. Securing FDA approval requires the submission of extensive
preclinical and clinical data and supporting information to the FDA for each
indication to establish the product candidate's safety and effectiveness. The
approval process may take many years to complete and may involve ongoing
requirements for post-marketing studies. Any FDA or other regulatory approval
of our product candidates, once obtained, may be withdrawn. The effect of
government regulation may be to:
. delay marketing of potential products for a considerable period of time;
. limit the indicated uses for which potential products may be marketed;
. impose costly requirements on our activities; and
. provide competitive advantage to other pharmaceutical and biotechnology
companies.
In addition, regulatory compliance may prevent us from introducing new or
improved products or may require us to stop marketing potential products. If we
fail to comply with the laws and regulations pertaining to our business, we may
be subject to sanctions, including the temporary or permanent suspension of
operations, product recalls, marketing restrictions and civil and criminal
penalties.
6
<PAGE>
If we are unable to obtain the additional funding we need to develop and market
our potential products, we may be required to delay, scale back or eliminate
expenditures for some of our programs or grant rights to third parties to
develop and market our potential products.
Our business does not currently generate the cash needed to finance our
operations. We will require substantial financial resources to conduct the
time-consuming and costly research, preclinical development, clinical trials
and regulatory approval and marketing activities necessary to commercialize our
potential products. We may need to seek additional funding through public or
private financings, including equity financings, and through other
arrangements, including collaborative arrangements. Poor financial results,
unanticipated expenses or unanticipated opportunities that require financial
commitments could give rise to additional financing requirements sooner than we
expect. However, financing may be unavailable when we need it or may not be
available on acceptable terms. If we raise additional funds by issuing equity
or convertible debt securities, the percentage ownership of our existing
stockholders would be reduced, and these securities might have rights superior
to those of our common stock. If we are unable to raise additional funds when
we need them, we may be required to delay, scale back or eliminate expenditures
for some of our development programs or grant rights to third parties to
develop and market product candidates that we would prefer to develop and
market internally. If we are required to grant such rights, the ultimate value
of these product candidates to us would be reduced.
If we fail to negotiate or maintain successful collaborative arrangements with
third parties, our development and marketing activities may be delayed or
reduced.
We have entered into, and we expect to enter into in the future,
collaborative arrangements with third parties to perform research, development,
regulatory compliance, manufacturing or marketing activities relating to some
or all of our product candidates. If we fail to secure or maintain successful
collaborative arrangements, our development and marketing activities may be
delayed or reduced. Currently, we have collaborative arrangements with Eli
Lilly, Suntory, Texas Biotechnology and other companies and research
laboratories. We may be unable to negotiate additional collaborative
arrangements or, if necessary, modify our existing arrangements on acceptable
terms.
Our collaborative agreements can be terminated under certain conditions by
our partners. In addition, our partners may separately pursue competing
products, therapeutic approaches or technologies to develop treatments for the
diseases targeted by us or our collaborative efforts. Even if our partners
continue their contributions to the collaborative arrangements, they may
nevertheless determine not to actively pursue the development or
commercialization of any resulting products. Also, our partners may fail to
perform their obligations under the collaborative arrangements or may be slow
in performing their obligations. In these circumstances, our ability to develop
and market potential products could be severely limited.
If we are unable to protect our intellectual property rights adequately, the
value of our potential products could be diminished.
Our success is dependent in part on obtaining, maintaining and enforcing our
patents and other proprietary rights. Patent law relating to the scope of
claims in the biotechnology field in which we operate is still evolving and
surrounded by a great deal of uncertainty. Accordingly, we cannot assure you
that our pending patent applications will result in issued patents. Because
patent applications in the United States are maintained in secrecy until a
patent issues, we cannot assure you that others have not filed patent
applications for technology covered by our pending applications or that we were
the first to invent the technology. There may be third-party patents or patent
applications relevant to our potential products that may block or compete with
the technologies covered by our patent applications.
In addition, although we own a number of patents, the issuance of a patent is
not conclusive as to its validity or enforceability, and third parties may
challenge the validity or enforceability of our patents. We cannot assure you
how much protection, if any, will be given to our patents if we attempt to
enforce them and
7
<PAGE>
they are challenged in court or in other proceedings. It is possible that a
competitor may successfully challenge our patents or that challenges will
result in limitations of their coverage. In addition, the cost of litigation to
uphold the validity of patents can be substantial. If we are unsuccessful in
such litigation, third parties may be able to use our patented technologies
without paying licensing fees or royalties to us.
Moreover, competitors may infringe our patents or successfully avoid them
through design innovation. To prevent infringement or unauthorized use, we may
need to file infringement claims, which are expensive and time-consuming. In
addition, in an infringement proceeding a court may decide that a patent of
ours is not valid, or may refuse to stop the other party from using the
technology at issue on the ground that its technology is not covered by our
patents. Policing unauthorized use of our intellectual property is difficult,
and we cannot assure you that we will be able to prevent misappropriation of
our proprietary rights, particularly in countries where the laws may not
protect such rights as fully as in the United States.
In addition to our patented technology, we also rely on unpatented
technology, trade secrets and confidential information. We may not be able to
effectively protect our rights to this technology or information. Other parties
may independently develop substantially equivalent information and techniques
or otherwise gain access to or disclose our technology. We require each of our
employees, consultants and corporate partners to execute a confidentiality
agreement at the commencement of an employment, consulting or collaborative
relationship with us. However, these agreements may not provide effective
protection of our technology or information or, in the event of unauthorized
use or disclosure, they may not provide adequate remedies.
We may be subject to substantial costs and liability or be prohibited from
commercializing our potential products as a result of patent infringement
litigation and other proceedings relating to patent rights.
Patent litigation is very common in the biopharmaceutical industry. We cannot
assure you that third parties will not assert patent or other intellectual
property infringement claims against us with respect to our technologies. Any
claims that might be brought against us relating to infringement of patents may
cause us to incur significant expenses and, if successfully asserted against
us, may cause us to pay substantial damages. Even if we were to prevail, any
litigation could be costly and time-consuming and could divert the attention of
our management and key personnel from our business operations. Furthermore, as
a result of a patent infringement suit, we may be forced to stop or delay
developing, manufacturing or selling potential products that incorporate the
challenged intellectual property unless we enter into royalty or license
agreements. We may not be able to obtain royalty or license agreements on terms
acceptable to us, if at all. Even if we were able to obtain licenses to such
technology, some licenses may be non-exclusive, thereby giving our competitors
access to the same technologies licensed to us. Ultimately we may be unable to
commercialize some of our potential products or may have to cease some of our
business operations, which could severely harm our business.
In addition, we may have to resort to costly and time-consuming proceedings
and litigation to determine the validity and scope of the proprietary rights of
others. For example, we, Eli Lilly and eleven other companies are currently
involved in an opposition proceeding before the European Patent Office in which
we are opposing a patent granted by the European Patent Office to Pfizer Inc.
This patent claims the use of the composition of sildenafil citrate, also known
as Viagra(R), and related compounds for the treatment of erectile dysfunction
and also claims the use of a cyclic GMP PDE inhibitor and more specifically a
PDE5 inhibitor for the treatment of erectile dysfunction. Viagra targets the
same medical conditions that our product candidate Cialis targets. This patent
has been nationalized by Pfizer in most European countries, and Lilly ICOS has
brought suits challenging the patent in three European countries. It is
expected that decisions by the European Patent Office and the trial courts in
the three countries will be appealed by the party that does not prevail. These
appeals could take years. If Pfizer's patent is ultimately upheld by the
European Patent Office or the courts in European countries, we may be subject
to litigation by Pfizer in Europe. We also may be prohibited from marketing
Cialis for the treatment of erectile dysfunction in some or all European
countries, or may be required to enter into licensing agreements to market
Cialis in Europe. These agreements may not be available on commercially
reasonable terms. If Pfizer were to obtain a comparable patent in the United
States, we may
8
<PAGE>
be involved in further litigation to determine whether our manufacture, use,
sale or offer for sale of Cialis infringes such a patent, and to determine the
validity and scope of such a patent.
Furthermore, after seeking advice of counsel, we may undertake research and
development with respect to potential products even when we are aware of third-
party patents that may be relevant to these potential products, on the basis
that such third-party patents may be challenged or licensed by us. If our
subsequent challenges to such patents were not to prevail, we may be subject to
patent infringement claims. In addition, if our subsequent attempts to license
such patents were to prove unsuccessful, we may not be able to commercialize
these potential products after having incurred significant expenditures.
We may be unable to establish the manufacturing capabilities necessary to
develop and commercialize our potential products.
Currently, we do not have facilities to manufacture small molecule product
candidates, such as Cialis, and we do not have sufficient manufacturing
capacity to manufacture our biological product candidates in quantities
necessary for commercial sale. In addition, our manufacturing capacity may be
inadequate to complete all clinical trials contemplated by us over time. We
intend to rely in part on third-party contract manufacturers to produce large
quantities of drug materials needed for clinical trials and commercialization
of our potential products. Third-party manufacturers may not be able to meet
our needs with respect to timing, quantity or quality of materials. If we are
unable to contract for a sufficient supply of needed materials on acceptable
terms, or if we should encounter delays or difficulties in our relationships
with manufacturers, our clinical trials may be delayed, thereby delaying the
submission of product candidates for regulatory approval and the market
introduction and subsequent commercialization of our potential products. Any
such delays may lower our revenues and potential profitability.
Manufacturing product candidates in compliance with regulatory requirements
is complex, time-consuming and expensive. If we make changes in our
manufacturing processes, the FDA and corresponding foreign authorities may
require us to demonstrate that the changes have not caused the resulting drug
material to differ significantly from the drug material previously produced.
Also, we may want to rely on results of prior preclinical studies and clinical
trials performed using the previously produced drug material. Depending on the
type and degree of differences between the newer and older drug material, we
may be required to conduct additional animal studies or human clinical trials
to demonstrate that the newly produced drug material is sufficiently similar to
the previously produced drug material. We have made manufacturing changes and
are likely to make additional manufacturing changes for the production of our
product candidates currently in clinical development, such as Cialis and
Pafase. These manufacturing changes could result in delays in development or
regulatory approval or in reduction or interruption of commercial sales of our
potential products and could impair our competitive position.
We may develop our manufacturing capacity in part by expanding our current
facilities or building new facilities. Either of these activities would require
substantial additional funds and we would need to hire and train significant
numbers of employees to staff these facilities. We may not be able to develop
manufacturing facilities that are sufficient to produce drug materials for
clinical trials or commercial use. Moreover, we and any third-party
manufacturers that we may use must continually adhere to current Good
Manufacturing Practice regulations enforced by the FDA through its facilities
inspection program. If our facilities or the facilities of third-party
manufacturers cannot pass a pre-approval plant inspection, the FDA pre-market
approval of our product candidates will not be granted. In complying with these
regulations and foreign regulatory requirements, we and any of our third-party
manufacturers will be obligated to expend time, money and effort in production,
record-keeping and quality control to assure that our potential products meet
applicable specifications and other requirements. If we or any of our third-
party manufacturers fail to comply with these requirements, we may be subject
to regulatory sanctions.
9
<PAGE>
We may be unable to establish sales and marketing capabilities necessary to
successfully commercialize our potential products.
We currently have no direct sales capabilities and only limited marketing
capabilities. We anticipate relying on third parties to market and sell some of
our primary product candidates. For example, we have entered into an agreement
with Eli Lilly to co-promote Cialis in North America and Europe. If we decide
to market our potential products through a direct sales force, we would need to
either hire a sales force with expertise in pharmaceutical sales or contract
with a third party to provide a sales force to meet our needs. We may be unable
to establish marketing, sales and distribution capabilities necessary to
commercialize and gain market acceptance for our potential products. In
addition, co-promotion or other marketing arrangements with third parties to
commercialize potential products could significantly limit the revenues we
derive from these potential products, and these third parties may fail to
commercialize our potential products successfully.
We may be unable to compete successfully in the markets for pharmaceutical and
biotechnological products.
The markets in which we compete are well established and intensely
competitive. We may be unable to compete successfully against our current and
future competitors. Our failure to compete successfully may result in pricing
reductions, reduced gross margins and failure to achieve market acceptance for
our potential products.
A number of pharmaceutical and biotechnology companies are currently
developing products targeting the same diseases and medical conditions that we
target, and some of our competitors' products have entered clinical trials or
already are commercially available. For example, Pfizer has already
successfully commercialized Viagra, a competitor of our product candidate
Cialis, and Eli Lilly is currently seeking regulatory approval for a product
for the treatment of sepsis that may compete with Pafase. In addition, our
potential products, if approved and commercialized, will compete against well-
established existing therapeutic products that are currently reimbursed by
government health administration authorities, private health insurers and
health maintenance organizations.
Our competitors include pharmaceutical companies, biotechnology companies,
chemical companies, academic and research institutions and government agencies.
Many of these organizations have substantially more experience and more
capital, research and development, regulatory, manufacturing, sales, marketing,
human and other resources than we do. As a result, they may:
. develop products that are safer or more effective than our product
candidates;
. obtain FDA and other regulatory approvals or reach the market with their
products more rapidly than we can, reducing the potential sales of our
product candidates;
. devote greater resources to market or sell their products;
. adapt more quickly to new technologies and scientific advances;
. initiate or withstand substantial price competition more successfully
than we can;
. have greater success in recruiting skilled scientific workers from the
limited pool of available talent;
. more effectively negotiate third-party licensing and collaborative
arrangements; and
. take advantage of acquisition or other opportunities more readily than
we can.
We face and will continue to face intense competition from other companies
for collaborative arrangements with pharmaceutical and biotechnology companies,
for relationships with academic and research institutions, and for licenses to
proprietary technology. In addition, we anticipate that we will face increased
competition in the future as new companies enter our markets and as scientific
developments surrounding protein-based and small molecule therapeutics continue
to accelerate.
10
<PAGE>
The failure to attract or retain key management and technical personnel could
harm our business.
We are highly dependent on the efforts and abilities of our current
management and key technical personnel. Our success will depend in part on
retaining the services of our existing management and key personnel and
attracting and retaining new highly qualified personnel. Failure to retain our
existing key management and technical personnel or to attract additional highly
qualified personnel could, among other things:
. compromise our ability to negotiate additional collaborative
arrangements;
. delay our ongoing discovery research efforts;
. delay preclinical or clinical testing of our product candidates;
. delay the regulatory approval process; or
. prevent us from successfully commercializing our product candidates.
In our field, competition for qualified management and technical personnel is
intense. Currently, competition is particularly acute due to the low
unemployment rate experienced nationally. For example, we currently do not have
a full-time chief financial officer. In addition, many of the companies with
which we compete for experienced personnel have greater financial and other
resources than we do. As a result of these factors, we may be unsuccessful in
recruiting and retaining sufficient qualified personnel.
Our business may be harmed if we cannot obtain sufficient quantities of raw
materials.
We depend on outside vendors for the timely supply of raw materials used to
conduct preclinical testing and clinical trials of product candidates. Once a
supplier's materials have been selected for use in our manufacturing process,
the supplier in effect becomes a sole or limited source of that raw material
due to regulatory compliance procedures. Our business could be harmed if our
third-party suppliers were to cease production or otherwise fail to supply us
with quality raw materials in a timely manner and we were unable to contract
for these services with alternative suppliers on acceptable terms.
Risks Related to Our Industry
Our product candidates, even if approved by the FDA or foreign regulatory
agencies, may not achieve market acceptance among hospitals, insurers or
patients.
Our product candidates, even if approved by the FDA or foreign regulatory
agencies, may fail to achieve market acceptance, which would impair our ability
to become profitable. We believe that market acceptance of our potential
products will depend on our ability to provide acceptable evidence of safety,
effectiveness and limited side effects, our ability to provide these potential
products at reasonable prices and the availability of third-party reimbursement
for these potential products. In addition, market acceptance depends on the
effectiveness of our marketing strategy, and, to date, we have very limited
sales and marketing experience or capabilities.
Rapid changes in technology and industry standards could render our potential
products unmarketable.
We are engaged in a field characterized by extensive research efforts and
rapid technological development. New drug discoveries and developments in our
field and other drug discovery technologies are accelerating. Our competitors
may develop technologies and products that are more effective than any we
develop or that render our technology and potential products obsolete or
noncompetitive. In addition, our potential products could become unmarketable
if new industry standards emerge. To be successful, we will need to enhance our
product candidates and design, develop and market new product candidates that
keep pace with new technological and industry developments.
11
<PAGE>
We may be required to defend lawsuits or pay damages in connection with the
alleged or actual harm caused by our product candidates.
We face an inherent business risk of exposure to product liability claims in
the event that the use of our product candidates is alleged to have resulted in
harm to others. This risk exists in clinical trials as well as in commercial
distribution. In addition, the pharmaceutical and biotechnology industries in
general have been subject to significant medical malpractice litigation. We may
incur significant liability if product liability or malpractice lawsuits
against us are successful. Although we maintain product liability insurance, we
cannot be sure that this coverage is adequate or that it will continue to be
available to us on acceptable terms.
We may incur substantial environmental liability arising from our activities
involving the use of hazardous materials.
Our research and development activities involve the controlled use of
chemicals, viruses, radioactive compounds and other hazardous materials. If an
accident involving these materials occurs, we could be held liable for any
damages that result, and that liability could exceed our resources. We are
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of hazardous materials and certain
waste products. Although we believe that our operations comply with the
standards prescribed by these laws and regulations, we cannot completely
eliminate the risk of accidental contamination or injury from these materials.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "anticipate,"
"believe," "continue," "could," "estimate," "expect," "intend," "may," "might,"
"plan," "potential," "predict," "should" or "will" or the negative of such
terms or other comparable terminology. These statements are only predictions
and involve known and unknown risks, uncertainties and other factors, including
the risks outlined under "Risk Factors," that may cause our or our industry's
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee future
results, performance or achievements. You should not place undue reliance on
these forward-looking statements.
12
<PAGE>
USE OF PROCEEDS
We expect to receive approximately $157.6 million in net proceeds from the
sale of the 4,500,000 shares of common stock offered by us in this offering at
the public offering price of $37.00 per share ($181.4 million if the
underwriters exercise their over-allotment option in full), after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us.
We expect to use the net proceeds from this offering to fund research and
clinical development, commercialization of our potential products and for
general corporate purposes. We expect to use approximately 55-75% of the net
proceeds to fund research and clinical development, approximately 20-35% to
fund commercialization of our potential products, and approximately 5-15% for
general corporate purposes. These projected uses are estimates and
approximations only and do not represent firm commitments by us. Our actual
uses of proceeds may deviate from our projections. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in interest-
bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock trades on The Nasdaq National Market under the symbol ICOS.
The following table sets forth, for the periods indicated, the high and low
sale prices per share of our common stock as reported on The Nasdaq National
Market.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year Ended December 31, 1998
First Quarter.................................................. $19.00 $12.13
Second Quarter................................................. 24.50 13.00
Third Quarter.................................................. 24.67 14.63
Fourth Quarter................................................. 29.88 14.75
Fiscal Year Ended December 31, 1999
First Quarter.................................................. $38.13 $24.25
Second Quarter................................................. 48.50 30.25
Third Quarter.................................................. 42.75 24.00
Fourth Quarter................................................. 34.00 25.19
Fiscal Year Ending December 31, 2000
First Quarter.................................................. $68.00 $28.00
Second Quarter................................................. 47.00 26.88
Third Quarter.................................................. 60.00 43.06
Fourth Quarter (through December 13, 2000)..................... 56.88 38.50
</TABLE>
On December 13, 2000, the closing sale price of our common stock as quoted on
The Nasdaq National Market was $39.50 per share. As of September 30, 2000,
there were approximately 2,515 holders of record of our common stock. Because
many of these shares are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of stockholders
represented by these record holders.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently intend to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.
13
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2000:
. on an actual basis; and
. on an as adjusted basis to reflect the sale of the 4,500,000 shares of
common stock offered by us at the public offering price of $37.00 per
share, less underwriting discounts and commissions and estimated offering
expenses payable by us, and the application of these proceeds as set
forth in the "Use of Proceeds" section.
The information set forth below should be read in conjunction with our
consolidated financial statements and related notes incorporated by reference
into this prospectus.
<TABLE>
<CAPTION>
September 30, 2000
--------------------
As
Actual Adjusted
--------- ---------
(in thousands)
<S> <C> <C>
Long-term debt........................................... $ -- $ --
Stockholders' equity:
Preferred stock, par value $0.01 per share; 2,000,000
shares authorized; no shares issued and outstanding... -- --
Common stock, par value $0.01 per share; 100,000,000
shares authorized; 46,930,877 shares issued and
outstanding, actual; 51,430,877 shares issued and
outstanding, as adjusted.............................. 469 514
Additional paid-in capital............................. 248,391 405,971
Accumulated other comprehensive loss................... (40) (40)
Accumulated deficit.................................... (175,309) (175,309)
--------- ---------
Total stockholders' equity............................. 73,511 231,136
--------- ---------
Total capitalization................................. $ 73,511 $ 231,136
========= =========
</TABLE>
This information does not include:
. 7,709,424 shares subject to issuance as of September 30, 2000 upon
exercise of stock options outstanding under our stock option plans, of
which options to purchase 5,023,314 shares were exercisable as of
September 30, 2000 at a weighted-average exercise price of $14.26 per
share;
. 10,327,500 shares subject to issuance as of September 30, 2000 upon
exercise of outstanding warrants at a weighted-average exercise price of
$40.88; and
. 2,645,446 shares reserved for issuance as of September 30, 2000 upon
exercise of stock options that were available for grant as of September
30, 2000 under our 1999 Stock Option Plan.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data set forth below for
the years ended December 31, 1997, 1998 and 1999 as well as the selected
consolidated balance sheet data set forth below as of December 31, 1998 and
1999 are derived from our audited consolidated financial statements, which are
incorporated by reference into this prospectus. The selected consolidated
statement of operations data set forth below for the years ended December 31,
1995 and 1996 as well as the selected consolidated balance sheet data set forth
below as of December 31, 1995, 1996 and 1997 are derived from our audited
consolidated financial statements, which are not included or incorporated by
reference into this prospectus. The selected consolidated statement of
operations data set forth below for the nine- month periods ended September 30,
1999 and September 30, 2000 and the selected consolidated balance sheet data as
of September 30, 2000 are derived from our unaudited interim consolidated
financial statements, which are incorporated by reference into this prospectus
and have been prepared on the same basis as the audited consolidated financial
statements and, in management's opinion, contain all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of
the financial position at that date and the results of operations for these
periods. The operating results for the nine-month periods are not necessarily
indicative of our results for the full year. The following selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes in our annual report on
Form 10-K for the year ended December 31, 1999 and our quarterly report on Form
10-Q for the nine months ended September 30, 2000, both of which are
incorporated by reference into this prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------------------ ------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
Consolidated Statement of Operations Data: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Collaborative research & development from
related parties......................... $ -- $ -- $ 21,076 $ 33,758 $ 64,100 $ 49,287 $ 31,698
License of technology to related
parties................................. -- -- 8,500 75,000 15,000 -- --
Other.................................... 1,500 2,000 2,000 2,010 500 500 --
-------- -------- -------- -------- -------- -------- --------
Total revenue........................... 1,500 2,000 31,576 110,768 79,600 49,787 31,698
Operating expenses:
Research and development................. 24,039 30,011 42,783 76,978 100,541 77,252 63,603
General and administrative............... 2,482 2,555 2,737 4,031 5,259 3,558 4,253
-------- -------- -------- -------- -------- -------- --------
Total operating expenses................ 26,521 32,566 45,520 81,009 105,800 80,810 67,856
-------- -------- -------- -------- -------- -------- --------
Operating income (loss).................... (25,021) (30,566) (13,944) 29,759 (26,200) (31,023) (36,158)
Other income (expense):
Equity in losses of affiliates........... -- -- (226) (191) (12,042) (10,168) (18,922)
Investment income........................ 1,768 2,070 2,164 2,369 4,292 3,097 3,184
Interest expense......................... (52) -- -- -- -- -- --
Other, net............................... (64) 1 (9) 21 755 550 897
-------- -------- -------- -------- -------- -------- --------
Other income (expense), net............. 1,652 2,071 1,929 2,199 (6,995) (6,521) (14,841)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes.......... (23,369) (28,495) (12,015) 31,958 (33,195) (37,544) (50,999)
Income taxes--current...................... -- -- -- 648 -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).......................... $(23,369) $(28,495) $(12,015) $ 31,310 $(33,195) $(37,544) $(50,999)
======== ======== ======== ======== ======== ======== ========
Net income (loss) per common share--basic.. $ (0.73) $ (0.77) $ (0.30) $ 0.78 $ (0.76) $ (0.87) $ (1.11)
======== ======== ======== ======== ======== ======== ========
Net income (loss) per common share--
diluted................................... $ (0.73) $ (0.77) $ (0.30) $ 0.67 $ (0.76) $ (0.87) $ (1.11)
======== ======== ======== ======== ======== ======== ========
Weighted-average common shares
outstanding--basic........................ 32,194 36,805 39,595 40,139 43,449 43,134 45,851
======== ======== ======== ======== ======== ======== ========
Weighted-average common shares
outstanding--diluted...................... 32,194 36,805 39,595 46,849 43,449 43,134 45,851
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------- September 30,
1995 1996 1997 1998 1999 2000
-------- --------- --------- -------- --------- -------------
Consolidated Balance Sheet Data: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents, investment
securities available
for sale and interest receivable.......... $ 21,376 $ 41,820 $ 25,773 $ 78,065 $ 69,254 $ 53,310
Working capital............................ 17,665 39,575 24,536 71,743 75,035 53,572
Total assets............................... 37,735 58,205 54,065 113,347 112,788 95,966
Long-term debt............................. -- -- -- -- -- --
Accumulated deficit........................ (81,915) (110,410) (122,425) (91,115) (124,310) (175,309)
Stockholders' equity....................... 33,292 55,267 49,872 98,733 99,399 73,511
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and related notes incorporated by reference
into this prospectus. This discussion contains forward-looking statements based
on current expectations that are subject to risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. Our actual
results and the timing of events could differ materially from those anticipated
or implied by the forward-looking statements discussed here as a result of
various factors, including, among others, those set forth under "Risk Factors,"
"Business," and elsewhere in this prospectus.
Overview
ICOS is a product-driven company that is developing and has expertise in both
protein-based and small molecule therapeutics. We combine our capabilities in
molecular, cellular and structural biology, high throughput drug screening,
medicinal chemistry and genomics to develop highly innovative products with
significant commercial potential. We and our partners currently have three
product candidates in late-stage clinical development: Cialis, which is in
Phase 3 clinical trials; Pafase, which we anticipate will enter Phase 3
clinical trials in the first quarter of 2001; and sitaxsentan, which we
anticipate will enter Phase 2b/3 clinical trials in the first quarter of 2001.
We plan to submit a new drug application for Cialis in the second half of 2001,
subject to successfully concluding our clinical trials. To enhance our internal
development efforts, we have established collaborations with other
pharmaceutical and biotechnology companies, including Eli Lilly, Suntory and
Texas Biotechnology.
We recognize revenue for our contracts for research and development efforts,
including those under collaborative agreements, as the related expenses are
incurred. Payments received that are related to future performance are deferred
and recognized as revenue over the appropriate future performance periods.
We recognize our share of the operating results of our collaborations in
proportion to our ownership interest in the collaboration and record it as
equity in income (losses) of affiliates. Losses relating to our collaborations
are recognized only to the extent we have made or are committed to make capital
contributions to the collaboration. Operating results of our collaborations
include expenses related to research and development efforts that we recognize
as revenue. Due to the nature of our collaborative agreements, cost
reimbursement revenue, which is included in collaborative research and
development revenue from related parties, largely depends on the continued
progression of clinical trial and development activities.
Cost reimbursement revenue includes revenue recognized pursuant to our
product development agreement with ICOS Clinical Partners, L.P., a limited
partnership composed of private investors to fund development of certain of our
product candidates. Proceeds received under this agreement are apportioned
between collaborative research and development revenue from related parties and
additional paid-in capital for the purchase of warrants. The amount recognized
as revenue under this agreement is based on a relationship between costs
incurred and available funding. As of September 30, 2000, there remained
approximately $4.3 million available to be recognized as revenue under this
agreement through March 31, 2001.
We have incurred significant operating losses since we began operations in
September 1990. As of September 30, 2000, we had an accumulated deficit of
$175.3 million. We expect that our operating expenses will increase during 2000
and subsequent years as we attempt to complete development of our product
candidates, obtain necessary regulatory approvals and manufacture and market
these product candidates. In particular, we expect to incur substantial
marketing and other costs related to commercializing Cialis if we are able to
complete clinical trials and obtain regulatory approval for this product
candidate. We may also incur costs and make capital contributions under our
collaborative agreements with Eli Lilly, Suntory and Texas Biotechnology
related to the development of Cialis, Pafase and sitaxsentan, respectively. The
clinical and development activities of our affiliates are not entirely within
our control. We expect that the net proceeds from
16
<PAGE>
this offering will allow us to pursue our internal research and development
activities more aggressively and may provide us increased flexibility in
establishing future collaborations. As a result of these factors, we expect to
incur losses for at least the next three years.
Our results of operations may vary significantly from period to period and
will depend on, among other factors, the timing of expenses, payments received
from collaborations and the progress of our research and development efforts.
We may experience significant fluctuations in both cost reimbursement revenue
and revenue from the license of technology to related parties from one period
to the next. Revenue from the license of technology to related parties may be
tied to the achievement of research and development objectives or milestones
and may also depend on the success of our clinical trial and development
efforts. In addition, significant changes in joint venture activities could
cause fluctuations in the amount of affiliate losses from period to period.
Results of Operations
Nine Months Ended September 30, 2000 Compared With Nine Months Ended September
30, 1999
Revenue
Revenue for the first nine months of 2000 decreased 36% to $31.7 million
compared to $49.8 million for the first nine months of 1999. Revenue for the
first nine months of 2000 consisted primarily of cost reimbursement revenue of
$10.6 million from Suncos, $6.8 million from ICOS Clinical Partners, $13.3
million from Lilly ICOS and $1.0 million from ICOS-Texas Biotechnology. Revenue
for the first nine months of 1999 consisted of cost reimbursement revenue of
$21.8 million from Suncos, $13.4 million from ICOS Clinical Partners and $14.1
million from Lilly ICOS, and $0.5 million received under a research and
development agreement with Abbott Laboratories. The decrease in revenue
reflects a reduction in reimbursable clinical trial and development expenses
primarily associated with Pafase as well as a reduction in available funding
from ICOS Clinical Partners during the first nine months of 2000 compared to
the first nine months of 1999.
Operating expenses
Research and development. Research and development expense consists primarily
of costs associated with conducting basic research, clinical trials for our
product candidates and other costs incurred in direct support of those
activities. Research and development expense for the first nine months of 2000
decreased 18% to $63.6 million compared to $77.3 million for the first nine
months of 1999. This decrease was primarily due to the discontinuation of
clinical activity associated with product candidate LeukArrest in 2000 as well
as the completion in 2000 of multiple Pafase clinical studies that were ongoing
during 1999. The decrease was partially offset by increased research and
development expense associated with sitaxsentan and our small molecule product
candidates IC485 and IC747. Research and development expense for the first nine
months of 2000 also reflects costs related to the acquisition of additional
technology rights and LFA-1 compounds from Abbott Laboratories.
General and administrative. General and administrative expense consists
primarily of costs associated with corporate support functions, general
management and other activities not directly related to research and
development efforts. General and administrative expense for the first
nine months of 2000 increased 20% to $4.3 million compared to $3.6 million for
the first nine months of 1999. This increase was primarily due to certain
management transition costs incurred during the first nine months of 2000.
Equity in losses of affiliates
Equity in losses of affiliates represents our share of the operating losses
of our collaborations and is primarily related to the continued progression of
our clinical trial activities. Equity in losses of affiliates increased 86% to
$18.9 million during the first nine months of 2000 compared to $10.2 million
during the first nine months of 1999. This increase was primarily due to
continued progression of our clinical trial activity for Cialis as well as our
share of losses related to the start-up activities of ICOS-Texas Biotechnology,
partially
17
<PAGE>
offset by lower costs associated with clinical trial activity for Pafase. In
addition, in the third quarter of 2000, we began to recognize our share of
Lilly ICOS's losses because we will now provide our proportionate share of the
funding of Lilly ICOS's operations pursuant to our collaboration agreement with
Eli Lilly. Under the terms of that agreement, Eli Lilly was obligated to make
scheduled cash contributions to fund the costs of the joint venture's
operations. Costs incurred by the joint venture that exceed Eli Lilly's
scheduled cash contributions are to be funded via additional capital
contributions from each of the joint venture partners. During the third quarter
of 2000, Eli Lilly's scheduled cash contributions were fully committed to fund
Lilly ICOS's existing obligations; consequently, we became responsible for
funding a proportionate share of the joint venture's ongoing operating
activities. Our equity in the losses of Lilly ICOS for the first nine months of
2000 was $9.4 million.
Investment income
Investment income for the first nine months of 2000 increased 3% to $3.2
million compared to $3.1 million for the first nine months of 1999. This
increase was primarily due to higher yields on investment balances during the
first nine months of 2000.
Year Ended December 31, 1999 Compared With Year Ended December 31, 1998
Revenue
Revenue for the year ended December 31, 1999 decreased 28% to $79.6 million
compared to $110.8 million for the year ended December 31, 1998. Revenue in
1999 included $15.0 million in license fees from Lilly ICOS as a result of the
initiation of a Phase 3 clinical trial for Cialis. Revenue for 1999 also
included cost reimbursement revenue of $25.1 million from Suncos, $19.1 million
from ICOS Clinical Partners and $19.9 million from Lilly ICOS, and $0.5 million
received under our research and development agreement with Abbott Laboratories.
Revenue in 1998 consisted of a one-time $75.0 million license fee payment upon
the formation of Lilly ICOS with Eli Lilly, cost reimbursement revenue of $15.1
million from ICOS Clinical Partners, $14.9 million from Suncos and $3.8 million
from Lilly ICOS, and $2.0 million received under our research and development
agreement with Abbott Laboratories. The increase in cost reimbursement revenue
in 1999 compared to 1998 was primarily the result of the progression of our
clinical trial and development activities.
Operating expenses
Research and development. Research and development expense increased 31% to
$100.5 million in 1999 compared to $77.0 million in 1998. This increase was
primarily related to the progression of clinical trials for Cialis, Pafase,
IC14 and LeukArrest, as well as expansion of other product development efforts.
General and administrative. General and administrative expense increased 30%
to $5.3 million in 1999 from $4.0 million in 1998. This increase was primarily
due to the addition of management and administrative personnel to support our
product development activities and costs incurred to register Series B warrants
issued pursuant to an agreement with ICOS Clinical Partners.
Equity in losses of affiliates
Equity in losses of affiliates increased to $12.0 million in 1999 compared to
$0.2 million in 1998. This increase was primarily due to the fact that in 1999
we made an equity investment in Suncos of $15.0 million and recorded
approximately $11.8 million as our share of Suncos's current year net loss.
Prior to 1999, our equity investment in Suncos had a zero basis for financial
reporting purposes, and, accordingly, no loss was recognized. Our investment in
Lilly ICOS had a zero basis for financial reporting purposes at December 31,
1999.
Investment income
Investment income increased 79% to $4.3 million in 1999 compared to $2.4
million in 1998. This increase was primarily due to higher average cash
available for investment in 1999 compared to 1998.
18
<PAGE>
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Revenue
Revenue for the year ended December 31, 1998 increased 251% to $110.8 million
compared to $31.6 million for the year ended December 31, 1997. Revenue in 1998
consisted of a one-time $75.0 million license fee payment upon formation of
Lilly ICOS with Eli Lilly, cost reimbursement revenue of $15.1 million from
ICOS Clinical Partners, $14.9 million from Suncos and $3.8 million from Lilly
ICOS, and $2.0 million received under our research and development agreement
with Abbott Laboratories. Revenue in 1997 consisted of cost reimbursement
revenue of $18.4 million from ICOS Clinical Partners and $11.2 million from
Suncos, and $2.0 million received under our agreement with Abbott Laboratories.
Revenue from ICOS Clinical Partners in 1997 included both a one-time license
fee and reimbursement for development costs incurred by us on behalf of ICOS
Clinical Partners. The increase in cost reimbursement revenue in 1998 compared
to 1997 was primarily due to the progression of our clinical trial and
development activities.
Operating expenses
Research and development. Research and development expense increased 80% to
$77.0 million in 1998 compared to $42.8 million in 1997. This increase was
primarily due to costs related to the progression of clinical trials for
Cialis, Pafase, LeukArrest and ICM3, commencement of clinical trials for IC14,
and expansion of other product development efforts.
General and administrative. General and administrative expense increased 47%
to $4.0 million in 1998 compared to $2.7 million in 1997. This increase was
primarily due to the addition of personnel to support our research and
development activities and costs incurred to establish our joint venture with
Eli Lilly.
Investment income
Investment income in 1998 increased 9% to $2.4 million compared to $2.2
million in 1997. This increase was primarily due to higher average cash
available for investment in 1998 compared to 1997.
Income taxes - current
A provision for federal income taxes of $0.6 million was recorded in 1998 for
alternative minimum tax on our earnings.
Liquidity and Capital Resources
As of September 30, 2000, we had cash, cash equivalents, investment
securities available for sale and interest receivable of $53.3 million compared
with $69.3 million as of December 31, 1999.
We used $42.7 million in cash for operating activities during the first nine
months of 2000 compared to $30.9 million during the first nine months of 1999.
The primary operating uses of cash during the first nine months of 2000 relate
to our clinical trial activities associated with Cialis and Pafase as well as
the expansion of other product development efforts. Current year cash outflows
also reflect costs related to the acquisition of technology rights and
LFA-1 compounds from Abbott Laboratories. The primary operating uses of cash
during the first nine months of 1999 relate to our clinical trial activities
associated with Cialis, Pafase and LeukArrest as well as the expansion of other
product development efforts.
We generated $24.8 million in cash from investing activities during the first
nine months of 2000 compared to using $53.1 million in cash during the first
nine months of 1999. Significant cash inflows from investing activities during
the first nine months of 2000 included a $22.1 million net decrease in our
short-term investment portfolio and $7.3 million received upon the repayment of
a loan to ICOS Clinical Partners. Significant cash outflows during the first
nine months of 2000 included a $2.0 million capital contribution upon the
formation of ICOS-Texas Biotechnology and $2.5 million invested in capital
equipment and leasehold
19
<PAGE>
improvements to support our research and development activities. The primary
investing uses of cash during the first nine months of 1999 included a
$38.7 million net increase in our short-term investment portfolio,
$10.2 million in equity investments in affiliates and $4.2 million invested in
property, plant and equipment.
We generated $24.1 million in cash from financing activities during the first
nine months of 2000 compared to $26.6 million during the first nine months of
1999. The primary cash inflows in both periods relate to proceeds received from
the exercise of stock options and warrants.
Our future cash requirements will depend on various factors, many of which
are beyond our control, including:
. continued progress in our research and development programs;
. the results of clinical trials and preclinical studies;
. acquisitions of products or technologies, if any;
. relationships with corporate collaborators;
. capital contributions to our joint ventures, including Lilly ICOS;
. royalty payments to ICOS Clinical Partners upon commercialization of
Pafase;
. competing technological and market developments;
. the time and costs involved in filing and prosecuting patents and
enforcing and defending patent claims;
. the regulatory process; and
. the time and costs of manufacturing, scale-up and commercialization
activities.
We have engaged in collaborations and joint development agreements with other
parties where the work and strategies of the other parties complement ours. In
some instances, these relationships may involve commitments by us to fund some
or all of certain development programs. Although corporate collaborations,
partnerships and joint ventures have provided cost reimbursement revenue to us
in the past, we cannot assure you that this type of revenue will be available
to us in the future.
We intend to expand our operations and hire the additional personnel
necessary to continue development of our current portfolio of product
candidates in clinical trials, as well as to continue discovery and preclinical
research to identify additional product candidates. We also intend to pursue
pre-marketing activities necessary to bring our product candidates to market
and to establish marketing capabilities if and when a product candidate is
ready for commercialization. We anticipate that expansion of these activities
will increase operating expenses in the future. Furthermore, we will need to
make incremental expenditures for additional laboratory, production and office
facilities to accommodate the activities and personnel associated with this
increased development effort.
We anticipate that the net proceeds from this offering, combined with our
existing cash, interest income from cash investments, anticipated payments from
Suncos, Lilly ICOS and ICOS Clinical Partners, and cash flow from other
operating activities, will be adequate to satisfy our cash requirements for at
least the next 18 months. However, depending on our product development
efforts, we may need additional financing prior to that time. Additional
financing may not be available when we need it or may be unavailable on
acceptable terms. If we are unable to raise additional funds when we need them,
we may be required to delay, scale back or eliminate expenditures for some of
our development programs or grant rights to third parties to develop and market
product candidates that we would prefer to develop and market internally.
Recent Accounting Pronouncements
In June 2000, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101B, or SAB 101B. SAB 101B delays the effective date of Staff
Accounting Bulletin No. 101, or SAB 101, "Revenue
20
<PAGE>
Recognition in Financial Statements," to no later than the fourth quarter of
fiscal years beginning after December 15, 1999. SAB 101 provides guidance on
revenue recognition and the Commission staff's views on the application of
accounting principles to selected revenue recognition issues. We have completed
a preliminary analysis of the effect of SAB 101 on our consolidated financial
statements. We have concluded that the primary effect of SAB 101 is related to
previously recognized revenue of approximately $85 million from all of the
licensing fees we have previously received. These fees are related to research
and development efforts for product candidates where we are providing
continuing services related to product development. It is likely that these
fees will be deferred and the revenue recognized over the product development
period based on estimated total development costs. Any adjustment will be
recorded in the fourth quarter of 2000 and will be reflected as a cumulative
effect of an accounting change as of January 1, 2000. The adjustment will be
reflected again in future revenue, generally through 2001. We continue to
assess the impact of SAB 101 on previously recognized revenue of $15 million
from milestone payments we have previously received. Accounting for payments
such as these which are part of multiple element revenue arrangements is
currently under consideration by the Emerging Issues Task Force of the
Financial Accounting Standards Board. We are evaluating whether these payments
represent separate earnings processes or if they might be deferred in a manner
similar to licensing fees.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation: an
Interpretation of APB Opinion No. 25." Interpretation No. 44 clarifies the
application of Accounting Principles Board Opinion No. 25, or APB 25, and
became effective on July 1, 2000. Interpretation No. 44 clarifies the
definition of "employee" for purposes of applying APB 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation
awards in a business combination. Our adoption of Interpretation No. 44 on July
1, 2000 did not have a material impact on our consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 is effective for fiscal years
beginning after June 15, 2000. SFAS 133, as amended, requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. We do not expect that the adoption of SFAS 133 will have a
material impact on our consolidated financial statements as we do not currently
hold any derivative instruments.
21
<PAGE>
BUSINESS
Overview
ICOS is a product-driven company that has expertise in both protein-based and
small molecule therapeutics. We combine our capabilities in molecular, cellular
and structural biology, high throughput drug screening, medicinal chemistry and
genomics to develop highly innovative products with significant commercial
potential. We apply our integrated approach to specific target areas where we
have expertise. We believe this strategy increases our chances of successfully
developing commercial products.
We and our partners have the following product candidates in clinical
development:
. Cialis, which is being developed in collaboration with Eli Lilly and is
in Phase 3 clinical trials for the treatment of erectile dysfunction and
in Phase 2 clinical trials for the treatment of female sexual
dysfunction;
. Pafase, which is being developed in collaboration with Suntory and is
anticipated to enter Phase 3 clinical trials for the treatment of sepsis
in the first quarter of 2001;
. Sitaxsentan, which is being developed in collaboration with Texas
Biotechnology and is anticipated to enter Phase 2b/3 clinical trials for
the treatment of pulmonary hypertension in the first quarter of 2001; and
. IC14, which is in Phase 1 clinical trials for the treatment of sepsis.
Business Strategy
Our objective is to become a leading biopharmaceutical company focused on the
discovery, development and commercialization of innovative drugs. We intend to
accomplish this objective by:
Obtaining regulatory approval for and successfully commercializing Cialis and
Pafase. We intend to complete clinical trials and obtain regulatory approval of
Cialis and Pafase. These product candidates target significant markets. We
intend to increase awareness of the benefits of these product candidates over
existing therapies through sales and marketing efforts. We plan to continue
working with Eli Lilly with respect to Cialis and Suntory with respect to
Pafase in developing and establishing market awareness of these product
candidates.
Diversifying our portfolio of product candidates. We continue to develop a
broad portfolio of product candidates encompassing a variety of therapeutic
approaches to address both chronic and acute diseases. For example, we are
currently developing product candidates targeting erectile dysfunction, female
sexual dysfunction, sepsis, pulmonary hypertension and other cardiovascular
diseases, inflammatory diseases and cancer. The task of developing therapeutics
to treat these diseases is difficult and time consuming. In our industry, a
large number of product candidates that enter clinical testing fail to achieve
regulatory approval. To compensate for this risk, we plan to continue
developing a number of product candidates in parallel.
Using our internal capabilities to discover and develop novel product
candidates. Since our inception, we have focused our research and development
efforts on both protein-based and small molecule therapeutics. Using our
capabilities in molecular, cellular and structural biology, high throughput
drug screening, medicinal chemistry and genomics, we have successfully
identified novel product candidates and obtained patents for these candidates.
We believe that proteins and small molecules will be primary areas for
pharmaceutical development for the foreseeable future, particularly as genomic
research identifies novel disease targets. We plan to continue our discovery
and development efforts in these areas, emphasizing diseases and medical
conditions for which current therapies are substandard or unavailable and for
which the market opportunities are large.
Identifying attractive acquisition and in-licensing candidates. In addition
to our own development efforts, we plan to continue to identify opportunities
to acquire or in-license late-stage product candidates. Our
22
<PAGE>
IC14 and sitaxsentan product candidates are the result of such acquisition and
in-licensing efforts. We believe that we are well positioned to attract
additional product candidates as a result of our demonstrated experience and
success in negotiating and completing such acquisitions and arrangements.
Forming strategic collaborations. We intend to continue partnering with large
pharmaceutical companies and other biotechnology companies. We have established
corporate collaborations to enhance the development of product candidates while
maintaining substantial rights, thereby offsetting a substantial portion of the
financial risk of developing these product candidates. For example, we have
entered into collaborations with Eli Lilly, Suntory and Texas Biotechnology.
Collaborations such as these generally enable us to develop a greater number of
product candidates than otherwise would be possible, lower the significant
financial investment required to develop these product candidates, and provide
us with domestic and international marketing and sales expertise for our
partnered product candidates if approved. When we enter into collaborations, we
seek to retain strategically important sales and marketing rights in order to
optimize the value of our drug development opportunities.
Expanding our intellectual property portfolio. We intend to aggressively
pursue protection for our proprietary technology and other intellectual
property. We believe that establishing a strong proprietary position could
provide an important competitive advantage in our target markets. We have
aggressively pursued comprehensive patent protection of our product candidates.
We own or exclusively license 131 United States patents and we have 118 patent
applications pending in the United States that we have filed on our own behalf
or on behalf of our joint ventures or exclusive licensors. When appropriate, we
also seek foreign patent protection and to date we own or exclusively license
82 foreign patents.
23
<PAGE>
Development Pipeline
We are developing several product candidates targeting a variety of serious
diseases and medical conditions. The charts below summarize our product
development programs in which we are conducting clinical trials or are engaged
in preclinical development or research. In the status column of the charts:
"Research" indicates the research phase of the product identification process
for compounds for which activity in target human biological assay systems has
been demonstrated in laboratory tests, but which have not yet been tested in
non-human animal models of specific human diseases; "Preclinical" indicates
evaluation of lead or preferred compounds for safety, pharmacology and proof of
efficacy in non-human animal model systems; "Phase 1" indicates a clinical
trial for safety, pharmacology and dose-determining drug regimen; "Phase 2"
indicates a clinical trial to determine dosing and efficacy; "Phase 2a"
indicates a small clinical trial to determine potential therapeutic doses;
"Phase 2b" indicates a larger clinical trial to determine efficacy of chosen
therapeutic doses; and "Phase 3" indicates a confirmatory clinical trial to
determine efficacy and safety as primary support for regulatory approval. We
expect to enroll patients in the Phase 3 clinical trial of Pafase and in the
Phase 2b/3 clinical trial of sitaxsentan for the treatment of pulmonary
hypertension in the first quarter of 2001.
We have retained significant marketing rights to each of the product
candidates covered by partnership arrangements. For example, we have retained
co-promotion rights to Cialis in North America and Europe, have retained
marketing rights to Pafase in the United States and share marketing rights to
Pafase with Suntory outside of Japan and the United States, and share worldwide
marketing rights to sitaxsentan with Texas Biotechnology.
Clinical Development Pipeline
<TABLE>
<CAPTION>
Product Candidate Target Indication Status Partner
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Cialis Erectile dysfunction Phase 3 Eli Lilly and Company
Female sexual dysfunction Phase 2
--------------------------------------------------------------------------------
Pafase Sepsis Phase 3 Suntory Limited
--------------------------------------------------------------------------------
Pulmonary hypertension Phase 2b/3
Sitaxsentan Chronic heart failure Phase 2a Texas Biotechnology
Essential hypertension Phase 2a Corporation
--------------------------------------------------------------------------------
IC14 Sepsis Phase 1
</TABLE>
Preclinical and Research Pipeline
<TABLE>
<CAPTION>
Product Candidate Target Indication Status
------------------------------------------------------------------------------------------------------
<S> <C> <C>
IC485 Chronic obstructive pulmonary disease Preclinical
Rheumatoid arthritis Preclinical
------------------------------------------------------------------------------------------------------
IC747 Psoriasis Preclinical
------------------------------------------------------------------------------------------------------
TBC3711 Chronic heart failure and essential Preclinical
hypertension
------------------------------------------------------------------------------------------------------
Cell cycle checkpoint/DNA repair inhibitors Cancer Preclinical
------------------------------------------------------------------------------------------------------
Chemokine receptor antagonists Allergic inflammatory diseases Research
------------------------------------------------------------------------------------------------------
Lipid and protein kinase inhibitors Inflammatory diseases Research
------------------------------------------------------------------------------------------------------
Other cell adhesion molecule Cardiovascular and Research
antagonists inflammatory diseases
------------------------------------------------------------------------------------------------------
Other phosphodiesterase inhibitors Multiple diseases Research
------------------------------------------------------------------------------------------------------
Novel antibiotics Infectious diseases Research
</TABLE>
24
<PAGE>
Cialis
We are evaluating Cialis, a small molecule compound that inhibits the
phosphodiesterase type 5 enzyme, or PDE5, for the treatment of erectile
dysfunction and female sexual dysfunction. In 1998, we formed a joint venture
entity with Eli Lilly called Lilly ICOS to develop and commercialize Cialis.
Clinical Applications
Erectile Dysfunction
Erectile dysfunction is a condition in which a man is unable to attain or
maintain an erection. Erectile dysfunction affects an estimated 70 million men
in North America and Europe, and it is increasingly recognized as a serious and
treatable medical condition. Erectile dysfunction is often associated with
underlying diseases such as diabetes, cardiovascular disease and depression, or
may be a consequence of prostate surgery, spinal cord injury or treatment with
certain medications. In the typical erection process, tactile and visual
stimuli lead to increased blood flow into penile tissue, resulting in an
erection. As part of this process, a chemical called cyclic GMP causes penile
blood vessels to dilate, allowing blood flow to increase. PDE5, an enzyme
present in penile blood vessels, removes cyclic GMP from penile tissue, thereby
allowing the penile blood vessels to return to their undilated state.
Inhibition of PDE5 can enhance blood flow to the penis, contributing to an
erection.
Current Treatment. Until 1998, treatments for erectile dysfunction were
primarily limited to the use of injectibles, vacuum pumps and prostheses, which
are inconvenient and unpleasant options that have restricted the size of the
treated population. With the introduction in 1998 of Viagra, the first
effective oral treatment for erectile dysfunction, millions of men were
motivated for the first time to acknowledge their affliction and seek
treatment. We believe that many men have ceased therapies for erectile
dysfunction due to ineffectiveness, unpleasant side effects or inconvenient
administration. We believe that as few as 10% of the men who could benefit from
orally administered treatment for erectile dysfunction are currently undergoing
treatment.
Potential Treatment by Cialis. Cialis is a small molecule compound that
inhibits PDE5, increasing cyclic GMP levels and consequently increasing blood
flow to the penis. We believe Cialis is a more promising therapy for erectile
dysfunction than current therapies because it has been shown in in vitro
studies to narrowly target PDE5, and therefore is expected to have fewer side
effects than other orally administered therapies. Cialis may encourage use
among the untreated population of erectile dysfunction patients in addition to
those currently using therapies for erectile dysfunction.
Development Status. To date, we have initiated over 50 Phase 1, 2 and 3
clinical trials evaluating Cialis for the treatment of erectile dysfunction.
For example, Cialis has been evaluated in three Phase 2 clinical trials
conducted in an outpatient setting. These trials were multicenter, randomized
and placebo-controlled. One of these trials assessed daily Cialis
administration at doses of 10 mg to 100 mg. In the other two trials, patients
used Cialis as needed at doses of 2 mg to 25 mg. In each of these studies,
questionnaires, patient diaries and partner diaries reported erectile function
in both pre-treatment periods and periods during which the patient was on
treatment. In all three studies, Cialis improved the patients' ability to
attain and maintain an erection sufficient for sexual intercourse and increased
both the percentage of successful sexual attempts reported by patients in
patient diaries as well as the proportion of experiences satisfying to both
patients and partners. The most frequently reported treatment-related side
effects in these studies were headache, back pain, muscle ache and heartburn-
like symptoms. Most of these side effects were mild to moderate in intensity
and decreased with continued treatment.
We are currently conducting Phase 3 clinical trials for Cialis in a number of
countries and expect to initiate additional clinical trials. We plan to submit
a new drug application for Cialis to the FDA in the second half of 2001,
subject to the successful conclusion of our clinical trials.
Female Sexual Dysfunction
Female sexual dysfunction is a general term that describes a variety of
conditions, including lack of sexual desire, lack of sexual arousal, inability
to achieve orgasm and pain during intercourse. Female sexual
25
<PAGE>
dysfunction has been reported to affect in excess of 40% of adult women.
Research in female sexual dysfunction is considerably less advanced than that
of erectile dysfunction. In addition, the factors that underlie female sexual
dysfunction are not well understood. Treatment for female sexual dysfunction is
currently primarily limited to counseling, hormonal treatment and vaginal
lubricants. These products may reduce discomfort but do not directly address
desire, arousal and orgasmic disorders.
We are evaluating Cialis for the treatment of some forms of female sexual
dysfunction based on its ability to target and inhibit PDE5. Research has shown
that PDE5 is present in the blood vessels of clitoral tissue. Also, inadequate
blood flow to clitoral tissue is thought to play a role in some patients
suffering from female sexual dysfunction. Inhibiting PDE5 may enhance blood
flow to clitoral tissue in these patients. Women were included in Phase 1
clinical trials of Cialis, and we recently initiated a Phase 2 clinical trial
to assess the safety and efficacy of Cialis in women suffering from female
sexual dysfunction.
Pafase
We are evaluating Pafase, a recombinant human protein, for the treatment of
sepsis and other diseases characterized by increased activity of platelet-
activating factor, or PAF. Pafase breaks down PAF, a chemical produced by the
body that generally acts to induce or increase inflammation. In 1997, we formed
a joint venture entity with Suntory called Suncos to develop and commercialize
Pafase. We are funding the development and commercialization of Pafase in part
through contributions from ICOS Clinical Partners, a limited partnership
composed of private investors.
Clinical Application
Sepsis
Sepsis is a life-threatening condition that can occur when the body's immune
system mounts a systemic inflammatory response to an infection. As part of this
immune response, immune system cells produce inflammatory agents, such as PAF,
which can induce fever, shock and sometimes organ failure. There are currently
over 500,000 reported cases of sepsis each year in the United States alone and
this number is increasing. The number of new cases of sepsis each year is
approximately the same as the combined number of new cases each year of
prostate, breast and lung cancer, the three most common forms of cancer. We
believe that approximately 40% of sepsis patients progress to septic shock, the
leading cause of death in hospital non-coronary intensive care units in the
United States. Septic shock accounts for a higher incidence of mortality than
breast cancer and congestive heart failure combined, with greater than 100,000
deaths per year in the United States alone.
Current Treatment. After over 25 years of investigation by pharmaceutical and
biotechnology companies and academic institutions of potential therapies for
patients with sepsis, treatment of the condition still is primarily limited to
antimicrobial therapy directed toward the underlying infection and supportive
measures for patients suffering from or at risk of developing multiple organ
dysfunction. Previous clinical trials in sepsis by pharmaceutical and
biotechnology companies have targeted various inflammatory mediators or
bacterial components. To date, these strategies have met with only limited
success. Currently, there are no approved drugs specifically targeting sepsis.
The biopharmaceutical industry is, however, actively undertaking efforts to
combat sepsis. In June 2000, Eli Lilly announced that a preliminary analysis of
a Phase 3 clinical trial of recombinant human-activated Protein C demonstrated
reduced mortality among sepsis patients. If this product candidate receives
regulatory approval, it may be the first therapy specifically marketed as a
treatment for sepsis. In consideration of the high mortality rate of sepsis
patients and the variety of underlying causes of sepsis, we anticipate that
multiple therapies may ultimately be required and used, alone or in
combination, to treat sepsis.
Potential Treatment by Pafase. Pafase is a recombinant form of a human enzyme
that destroys PAF, eliminating its inflammatory effects. PAF is implicated in
sepsis as well as acute respiratory distress syndrome and other debilitating
inflammatory conditions. We have demonstrated the inhibitory activity of Pafase
on PAF-induced inflammation in both in vitro and in vivo studies.
26
<PAGE>
Development Status. In 1999, we completed patient enrollment in a Phase 2
clinical trial to evaluate the safety and efficacy of Pafase in 240 patients
with either sepsis or multiple traumatic injuries who were at risk of
developing acute respiratory distress syndrome. Based on safety and efficacy
data obtained from clinical trials completed to date, we intend to initiate a
pivotal Phase 3 clinical trial of Pafase in sepsis patients in the first
quarter of 2001. This trial is expected to consist of approximately 2,500
patients from approximately 150 investigative sites.
Sitaxsentan and Other Endothelin Antagonists
Sitaxsentan is a small molecule that antagonizes, or blocks the action of,
endothelin, which is a potent blood vessel constrictor. Endothelin antagonists
are believed to be effective in the treatment of a variety of diseases where
the regulation of vascular constriction is important. These diseases include
pulmonary hypertension, chronic heart failure and essential hypertension. In
addition, endothelin antagonists may be useful for pain relief therapy for
advanced prostate cancer. In June 2000, we formed a joint venture entity with
Texas Biotechnology called ICOS-Texas Biotechnology to develop and
commercialize sitaxsentan and other endothelin antagonists.
Vascular endothelium, which is the innermost lining of the blood vessels,
plays a pivotal role in maintaining normal blood vessel tone, including blood
flow, by producing substances such as endothelin that regulate the delicate
balance between the dilation and constriction of blood vessels. Endothelin
binds to two distinct receptors, ET(A) and ET(B), on cell surfaces. In general,
ET(A) receptors are associated with vessel constriction, while ET(B) receptors
are associated with vessel dilation and endothelin clearance.
ICOS-Texas Biotechnology is developing a series of highly potent and
selective small molecule based ET(A) receptor antagonists. These compounds
inhibit endothelin from binding to the ET(A) receptor. One compound currently
in clinical development is sitaxsentan. Another compound with certain improved
properties, TBC3711, is in preclinical development.
Clinical Applications
Pulmonary Hypertension
Pulmonary hypertension is a condition that involves excessive pressure in the
pulmonary arteries, which are the blood vessels that connect the right side of
the heart to the lungs. Primary and secondary pulmonary hypertension is
estimated to afflict over 100,000 people worldwide. The life expectancy of
patients with untreated primary pulmonary hypertension is less than three years
after diagnosis.
Currently the only approved pharmaceutical therapy for severe pulmonary
hypertension is an intravenously administered form of prostacyclin. No oral
drug is currently approved for the treatment of pulmonary hypertension.
Patients currently using prostacyclin must receive continuous infusion of the
drug through an in-dwelling catheter, necessitating that they carry an infusion
pump with them at all times.
We believe an oral, highly targeted ET(A) receptor antagonist may be a more
effective treatment for patients suffering from pulmonary hypertension. ICOS-
Texas Biotechnology has completed an open-label Phase 2a clinical trial
evaluating sitaxsentan for the treatment of pulmonary hypertension. Preliminary
analysis of available patient data from this trial suggests that sitaxsentan
was well-tolerated and may provide clinical benefit to patients diagnosed with
some types of pulmonary hypertension. However, in a follow-on extension trial,
drug-related hepatitis was observed in two patients and one of these patients
died. ICOS-Texas Biotechnology intends to begin a pivotal Phase 2b/3 clinical
trial of sitaxsentan for the treatment of pulmonary hypertension in the first
quarter of 2001.
Additional Applications
We will continue to explore the utility and effectiveness of endothelin
antagonists in the following clinical applications:
Chronic Heart Failure. Chronic heart failure is a broad term that refers to
the heart's inability to pump blood at a rate consistent with the needs of the
human body. More than 10 million people in North America,
27
<PAGE>
Europe and Japan suffer from this condition. Chronic heart failure represents
the only form of heart disease that is rising in incidence and prevalence.
Approximately half of all chronic heart failure patients die within five years
of diagnosis, a mortality rate that exceeds most cancers. According to the
American Heart Association, more than 1 million patients in the United States
alone are hospitalized annually due to this disease. Chronic heart failure is
currently treated with a combination of drugs depending on the severity of the
disease. Standard medical therapy includes digitalis, diuretics, ACE-inhibitors
and beta-blockers.
We believe that endothelin antagonists may prove effective in combating
chronic heart failure through their novel therapeutic mechanism and may provide
additional benefit to patients who do not respond to other therapies. To date,
a Phase 2a clinical trial evaluating sitaxsentan for the treatment of chronic
heart failure has been conducted. This clinical trial evaluated the short-term
effects of sitaxsentan and demonstrated that this product candidate is capable
of reducing pulmonary systolic artery pressure, pulmonary vascular resistance
and right atrial pressure. Specifically, this trial demonstrated that
sitaxsentan was able to decrease endothelin levels and cause selective dilation
of blood vessels.
Essential Hypertension. Essential hypertension is a common condition that
refers to high blood pressure with no definable cause. There are over 200
million individuals with essential hypertension in North America, Europe and
Japan. Despite a range of medications available to treat essential
hypertension, many patients do not respond to these therapies and their
condition steadily worsens over time. We believe selective ET(A) receptor
antagonists may become an important option for these patients.
To date, a Phase 2a clinical trial evaluating sitaxsentan for the treatment
of essential hypertension has been conducted. This trial evaluated patients'
blood pressure levels over the course of two weeks with daily dosing of
sitaxsentan. The trial demonstrated that sitaxsentan is capable of reducing
sitting diastolic blood pressures to levels comparable with other anti-
hypertensive medications. We are not currently pursuing clinical trials
evaluating sitaxsentan for the treatment of essential hypertension.
IC14
IC14 is a monoclonal antibody that blocks the function of CD14, a receptor
found on the surfaces of certain white blood cells that plays a unique role in
the development of sepsis.
Clinical Application
Sepsis
We are developing IC14, in addition to Pafase, for the treatment of sepsis.
While Pafase is intended to treat sepsis by destroying PAF and eliminating its
inflammatory effects, IC14 is intended to treat sepsis at an earlier stage in
the inflammatory response by blocking the function of CD14. CD14 is unique in
its ability to recognize components from most types of microorganisms. Once
activated by the recognition of these microbial components, CD14 typically
triggers a localized inflammatory response that removes microorganisms at the
site of infection. However, in some cases, CD14 triggers a systemic
inflammatory response that may lead to sepsis and other life-threatening
conditions. In contrast to other potential targets, CD14 does not appear to be
a redundant component of the immune response that leads to sepsis. Not only
does CD14 recognize a diverse array of microbial components, but it is also
directly involved in activating multiple cell types that promote this immune
response, making it an attractive target for the treatment of sepsis. IC14 has
been shown to block CD14 in both in vitro and in vivo models in preclinical
studies.
In 1999, we conducted a bacterial toxin challenge study in 16 healthy
volunteers, which demonstrated that IC14 inhibited the inflammatory response to
specific bacterial toxins. IC14 blocked the release of greater than 95% of
tumor necrosis factor alpha, or TNF-alpha, and substantially reduced the
development of flu-like symptoms such as fever, nausea and muscle ache. We also
completed a Phase 1 safety study in 30 healthy volunteers in 1999 that
indicated IC14 was well tolerated at all doses administered. We are currently
testing IC14 in a Phase 1 clinical trial in patients with sepsis.
28
<PAGE>
Preclinical Programs
We continuously evaluate new product candidates as part of our discovery
research program. We use an integrated approach to this program that
incorporates genetics, biochemistry and cell biology. Our goal is to introduce
one or more of the following product candidates into clinical trials in 2001.
IC485
IC485 is an orally administered, small molecule inhibitor of the
phosphodiesterase type 4 enzyme, or PDE4. Inhibition of PDE4 with IC485 may
reduce the production of TNF-alpha. Clinical benefits in rheumatoid arthritis
and Crohn's disease have been observed in therapies that target TNF-alpha
production. Moreover, clinical efficacy has been observed with PDE4 inhibitors
in patients with asthma and in patients with chronic obstructive pulmonary
disease. Historically, drugs that have targeted PDE4 have induced side effects
such as nausea, vomiting and sedation, which has limited the clinical utility
of these drugs. In preclinical studies of IC485, vomiting and sedation were not
observed over a range of doses that inhibited TNF-alpha production,
demonstrating the potential utility of this product candidate over existing
therapies.
Chronic obstructive pulmonary disease and rheumatoid arthritis are under
consideration as the primary clinical applications for IC485. According to the
American Lung Association, approximately 16 million people in the United States
suffered from chronic obstructive pulmonary disease in 1995, with approximately
14 million cases manifested as chronic bronchitis and approximately 1.8 million
manifested as emphysema. Rheumatoid arthritis is another chronic inflammatory
disease which affects approximately 2.1 million adults in the United States.
Sales of TNF-alpha inhibitors that are administered by injection have increased
since their market launch.
IC747
IC747 is an orally administered small molecule antagonist of the cell
adhesion molecule LFA-1, which is expressed by white blood cells. Many chronic
inflammatory diseases are thought to be driven by abnormal activation of T
lymphocytes, a type of white blood cell. In our preclinical studies, we have
demonstrated that IC747 binds to LFA-1 and inhibits T lymphocyte activation.
LFA-1 antagonists such as IC747 may be particularly desirable for the
treatment of psoriasis, a chronic T lymphocyte-driven skin disorder afflicting
approximately 3 million people in the United States. There is currently no
effective, well-tolerated treatment available for this disorder. Other chronic
diseases for which LFA-1 antagonists may prove useful are asthma and rheumatoid
arthritis. In the United States, an estimated 17 million people suffer from
asthma while approximately 2.1 million are afflicted with rheumatoid arthritis.
LFA-1 antagonists also may help prevent organ rejection for the 20,000 cases of
solid organ transplant conducted in the United States each year. Genentech,
Inc. and XOMA Corporation have demonstrated the effectiveness of an LFA-1
antibody in a Phase 2 clinical trial in psoriasis patients. Currently,
psoriasis is the first clinical target for which we contemplate developing
IC747. In June 2000, we amended a 1995 collaborative agreement with Abbott
Laboratories, acquiring exclusive global rights to the LFA-1 program covered by
the agreement.
Cell Cycle Checkpoint/DNA Repair Inhibitors
Resistance of tumor cells to radiation or chemotherapy is due in part to
cellular enzymes collectively termed cell cycle checkpoint/DNA repair enzymes.
These enzymes are proteins that recognize and repair potentially lethal defects
in cellular DNA introduced by radiation or chemotherapeutic agents. In
preclinical tests, we are currently evaluating and optimizing lead compounds
that inhibit two key enzymes involved in this process. We are assessing these
compounds for their ability to selectively increase the sensitivity of tumors
versus normal tissue to radiation or chemotherapeutic agents, thereby enhancing
the success and minimizing the toxic effects of conventional treatments for
many different types of tumors.
29
<PAGE>
According to the American Cancer Society, cancer is a major cause of death in
the United States, second only to cardiovascular disease. Because our cell
cycle checkpoint/DNA repair inhibitors potentially sensitize human cancer cells
to chemotherapy and radiation therapy, they could potentially treat various
forms of cancer, including the most common and lethal forms, such as prostate,
breast, lung and colon cancer, as well as less common forms that are very
poorly treated, such as pancreatic cancer.
Research Programs
Since our inception we have placed a strong emphasis on generating novel drug
candidates from our own internal research activities. Over the past ten years,
we have assembled a highly integrated multidisciplinary research staff of
approximately 150 professionals. Our staff includes:
. molecular biologists and biochemists who identify new genes or proteins
that are either product candidates or targets for product candidates; and
. medicinal chemists, robotics experts and pharmacologists who create,
evaluate and optimize new product candidates.
To use our expertise most effectively, we have concentrated our product
discovery efforts on specific gene families, including phosphodiesterases, cell
adhesion molecules and cell cycle checkpoint enzymes. In each case, we seek
first to identify all the members of the family, understand the distribution of
each member within the body and, through multiple functional tests, determine
which are most likely to impact human disease in a manner that can lead to
therapeutic treatment. Once a given target is linked to an important biological
function, such as activation of white blood cells, it is screened by our
robotics group against a complex library of small organic molecules, from which
lead compounds are identified. These lead compounds are tested against
structurally related targets encoded within the same family of genes and then
optimized through repetitive cycles of chemical modification to yield a final
product candidate. During the optimization process our chemists and
pharmacologists work together to build other attractive characteristics into
the product candidate, such as the capacity to be administered orally and
maintained at appropriate levels in the bloodstream. The advantage of this gene
family approach is that the initial efforts that yield a promising product
candidate targeting one family member also provide valuable information about
how to create product candidates that target other members of the gene family.
For example, novel structural information regarding how IC747 interacts with
its target, LFA-1, has been used to identify lead compounds that selectively
block the function of other structurally related targets. This approach not
only provides additional opportunities in other therapeutic areas but also
markedly reduces the effort required to produce the next product candidate.
Our current discovery research programs are directed toward the discovery of
new product candidates for the treatment of various diseases, including
allergic and other inflammatory diseases, cardiovascular diseases and
infectious diseases. Compounds in the research phase of the product
identification process are those for which activity in the target human
biological assay systems has been demonstrated in laboratory tests. These
compounds have not yet been tested in non-human animal models of specific human
diseases. These compounds include:
. antagonists of a chemokine receptor that promotes the exit of certain
white blood cells from the bloodstream to sites of inflammation, which
are potentially important in allergic inflammatory diseases such as
asthma and skin inflammation;
. inhibitors of certain lipid and protein kinases, which are enzymes that
regulate activation of white blood cell types that participate in
inflammatory and degenerative diseases such as chronic obstructive
pulmonary disease and osteoporosis;
. compounds that block the function of other cell adhesion molecules that
are potentially important in diseases such as rheumatoid arthritis and
asthma, and in blood clotting disorders;
. lead inhibitors of other members of the PDE family of enzymes, including
those that may be involved in regulating neurodegenerative diseases such
as Parkinson's disease; and
. molecules that represent lead compounds for new classes of antibiotics.
30
<PAGE>
Collaborations and Licensing Agreements
We have entered into arrangements with other parties to access technology and
to facilitate and fund the development and marketing of several of our product
candidates. Our collaborations and licensing agreements include:
Eli Lilly and Company
In October 1998, ICOS and Eli Lilly formed Lilly ICOS, a 50/50-owned limited
liability company, to develop and commercialize PDE5 inhibitors. Lilly ICOS is
developing Cialis as an oral therapeutic agent for the treatment of both
erectile dysfunction and female sexual dysfunction. Under the terms of this
arrangement, we received a $75.0 million payment upon formation of the joint
venture and an additional $15.0 million payment in 1999 upon initiation of a
Phase 3 clinical trial program for Cialis. We could receive additional payments
based on the progression of Cialis through development. The joint venture was
initially capitalized by Eli Lilly through cash contributions and the
contribution by us of an exclusive worldwide license to intellectual property
relating to PDE5 inhibitors, including intellectual property associated with
Cialis and its research platform. Both ICOS and Eli Lilly provide Lilly ICOS
with research and development services, and, through September 2000, we have
recorded cost reimbursement revenue related to these services of $37.0 million.
The joint venture will market any products resulting from this collaborative
effort in North America and the countries in the European Union or European
Free Trade Area through the services of ICOS and Eli Lilly. For countries
outside North America and these European countries, Lilly ICOS has granted Eli
Lilly an exclusive license to develop, manufacture and commercialize the PDE5
inhibitors developed in the collaboration in exchange for royalty payments.
Suntory Limited
In February 1997, ICOS and Suntory formed Suncos, a 50/50-owned corporation,
to develop and commercialize Pafase worldwide. Under the terms of this
arrangement, the joint venture was established with a $30 million cash
investment by Suntory to Suncos and subsequent capital contributions have been
made by both Suntory and ICOS in equal amounts. We granted Suncos an exclusive
license to all rights to Pafase on a worldwide basis. Suncos has granted
Suntory exclusive rights to develop and commercialize Pafase in Japan, and
Suncos has granted ICOS exclusive rights to develop and commercialize Pafase in
the United States. Suncos retains the rights to develop and commercialize
Pafase in the rest of the world. Suncos is managed jointly by Suntory and ICOS.
Both Suntory and ICOS provide Suncos with research and development services,
and, through September 2000, we have recorded cost reimbursement revenue
related to these services of $61.8 million. Suntory and ICOS will each pay
royalties to Suncos on sales of Pafase in their respective territories.
Texas Biotechnology Corporation
In June 2000, ICOS and Texas Biotechnology formed ICOS-Texas Biotechnology, a
50/50-owned limited partnership, to develop and commercialize endothelin
antagonists, such as sitaxsentan and TBC3711. Under the terms of this
arrangement, ICOS and Texas Biotechnology will equally fund the development of
endothelin antagonists and equally share in the profits of the partnership. We
made an initial $2.0 million payment to Texas Biotechnology and may make
further milestone payments of up to $53.5 million. Texas Biotechnology made an
initial contribution to ICOS-Texas Biotechnology of an exclusive worldwide
license to the intellectual property associated with endothelin antagonists,
including patent rights and technical information. Both parties will provide
the partnership with research and development services, and, through September
2000, we have recorded cost reimbursement revenue related to these services of
$1.0 million. ICOS-Texas Biotechnology will manufacture, market and sell any
products resulting from the collaboration worldwide.
Abbott Laboratories
In April 1995, we formed a collaboration with Abbott Laboratories to discover
small molecule drugs that modulate the intracellular signaling connections of
certain intercellular adhesion molecules and integrins. In
31
<PAGE>
September 1997, we expanded and extended this relationship to include small
molecule antagonists of the extracellular domains of certain integrins and
intercellular adhesion molecules. The research program under the collaboration
which provided us with research funding from Abbott Laboratories was completed
at the end of its term on April 1, 1999. Under the terms of the arrangement,
each company received exclusive development and commercialization rights to
drugs relating to specific molecular targets with royalties and milestone
obligations to the other party. Each party was responsible for the development,
registration and commercialization of its own product candidates. In addition,
the collaboration provided us with a library of chemical compounds for use in
our own discovery programs. In June 2000, we amended the arrangement by
acquiring Abbott Laboratories' worldwide rights to all compounds developed in
connection with the collaboration, including LFA-1 antagonists such as IC747.
Abbott Laboratories will receive royalties and milestone payments on any
products that we market that incorporate these compounds.
Other Collaborations and Licensing Agreements
We have also entered into collaborative arrangements regarding the following
product candidates:
. IC14. We have entered into a sub-licensing arrangement with Johnson &
Johnson and The Rockefeller University under which technology relating to
IC14 developed by Dr. Richard Ulevitch at The Scripps Clinic and Research
Foundation and Dr. Samuel Wright at The Rockefeller University was sub-
licensed to us. Under this arrangement, we received a sub-license to the
intellectual property relating to IC14 in exchange for royalty and future
milestone payments based on development of this product candidate. We
have exclusive rights to a portfolio of patents for the production and
commercialization of IC14.
. IC485. We have entered into a research and development arrangement with
Array BioPharma Inc. relating to IC485. Under this arrangement, we fund
the medicinal chemistry performed by Array relating to IC485. We receive
either an assignment of or a license to any and all intellectual property
developed by Array relating to IC485 in exchange for future milestone
payments based on development of this product candidate. We have
exclusive rights to the worldwide production and commercialization of
IC485.
. Cell cycle checkpoint/DNA repair inhibitors. We have entered into a
research and development arrangement with Array relating to multiple
research targets, including cell cycle checkpoint/DNA repair inhibitors,
and a research and development arrangement with DuPont Pharmaceuticals
Research Laboratories relating to a cell cycle checkpoint/DNA repair
inhibitor. Under these arrangements, we fund the medicinal chemistry
performed by Array and DuPont relating to the targets. We receive either
an assignment of or a license to any and all intellectual property
developed by Array or DuPont in exchange for future milestone payments
based on the development of any product candidates that may arise from
these arrangements. DuPont may also receive royalties on sales relating
to any product candidates arising from its arrangement with us. We have
exclusive rights to the worldwide production and commercialization of any
product candidates developed under these arrangements.
In addition, we have entered and continue to enter into licensing agreements
and research collaborations with institutions and scientists to expand our
access to new scientific developments, technologies and discoveries in certain
areas. We have contracted with several academic and institutional collaborators
to conduct research and development activities relating to our product
candidates. We have also entered into certain licensing agreements with respect
to specific technologies. These arrangements generally provide that we will
fund either the research or development of the technology, or both, and will
obtain an exclusive license or option to the technology developed, subject to
certain royalty and other obligations.
We have received approximately $200 million in aggregate milestone payments,
research and development funding and license fees from our collaborations and
licensing agreements from the time we began operations in September 1990
through September 30, 2000. We may receive up to approximately $105 million in
additional aggregate milestone payments, research and development funding and
license fees through the end of 2001, a substantial portion of which will be
received from joint ventures to which we make capital contributions. The actual
amount we receive, however, may differ substantially from this amount depending
32
<PAGE>
primarily on the level of research and development expenditures we incur that
are reimbursed by our joint ventures. We may receive additional amounts beyond
2001, but cannot reasonably estimate these amounts because they depend upon
several factors, some of which are beyond our control, including the
progression of product candidates through development and the amount and timing
of research and development expenditures by our joint ventures.
Patents and Proprietary Rights
Because of the length of time and expense associated with bringing new
products through development and the governmental approval process to the
marketplace, pharmaceutical and biotechnology companies have traditionally
placed considerable importance on obtaining and maintaining patent protection
for significant new technologies, products and processes. We have applied, and
are applying, for patents for our product candidates and aspects of our
technologies. We own or exclusively license 131 United States patents and we
have 118 patent applications pending in the United States that we have filed on
our own behalf or on behalf of our joint ventures or exclusive licensors. When
appropriate, we also seek foreign patent protection and to date we own or
exclusively license 82 foreign patents. Our ability, however, to obtain patents
in a timely manner, if at all, in foreign countries may be limited by the laws
of some of those countries. For example, many countries, including several
European countries, allow for an opposition period, often lasting many months,
after a patent is granted, providing third parties with the opportunity to
submit arguments that may call for the withdrawal of or limitations on the
affected patents.
Even if we are granted patents by government authorities, the enforceability
of patents issued to pharmaceutical and biotechnology companies has proven
highly uncertain. For example, legal considerations surrounding the validity of
patents in the fields of pharmaceuticals and biotechnology are in transition,
and we cannot assure you that the historical legal standards surrounding
questions of validity will continue to be applied or that current defenses
relating to issued patents in these fields will, in fact, be considered
sufficient in the future. In addition, we cannot assure you as to the degree
and range of protections any of our patents may afford us, whether patents will
be issued or the extent to which we will be successful in avoiding infringement
of patents granted to others. For example, patents which have already been
issued to us may be subjected to further governmental review that may
ultimately result in the reduction of their scope of protection, and pending
patent applications may have their requested breadth of protection
significantly limited before being issued, if issued at all. Furthermore, since
patent applications in the United States are maintained in secrecy until
patents are actually issued, and since publication of discoveries in scientific
or patent literature often lags behind actual discoveries, we cannot assure you
that we were the first creator of inventions covered by our patents or pending
patent applications or that we were the first to file patent applications for
these inventions. Pfizer, the maker of Viagra, has been granted a patent by the
European Patent Office claiming the use of a PDE5 inhibitor for the treatment
of erectile dysfunction, and likely has filed a patent application in the
United States seeking the same or similar claims. In addition, after seeking
advice of counsel, we may undertake research and development with respect to
potential products, even when we are aware of third-party patents that may be
relevant to these potential products, on the basis that such patents may be
challenged or licensed by us. If our subsequent challenges to or attempts to
license such patents were to prove unsuccessful, we may not be able to
commercialize our potential products after having incurred significant
expenditures, and may be subject to patent infringement claims. Under United
States federal law, companies are protected against claims of infringement for
using technology patented by others in clinical trials. Accordingly, we cannot
assure you that the absence of litigation with respect to our product
candidates in clinical development is an indication that our commercially
marketed products will not be found to infringe the patent rights of others.
Many pharmaceutical and biotechnology companies and university and research
institutions have filed patent applications or already have received patents in
our areas of product development. Many of these entities' applications and
patents may be competitive with or conflict with ours, and could prevent us
from obtaining patents or could call into question the validity of our existing
patents. For example, if various patents issued to others are upheld in the
courts or if certain patent applications filed by others are issued as patents
33
<PAGE>
and are upheld, we may be unable to market one or more of our product
candidates, or may be required to obtain a license to market those product
candidates. To contend with these possibilities, we have entered into some non-
exclusive license agreements and anticipate entering into additional license
agreements in the future with third parties for technologies that may be useful
or necessary for the manufacture or commercialization of some of our product
candidates. In addition, we have initiated discussions with commercial entities
that hold United States patents on technology or processes that we may find
necessary in order to engage in some of our activities. However, we cannot
assure you that these licenses, or any others, that we may be required to
obtain to market our product candidates will be available on commercially
reasonable terms, if at all, or that we will be able to develop alternative
technologies if we cannot obtain required licenses.
While we pursue patent protection and enforcement of our product candidates
and aspects of our technologies when appropriate, we also rely on trade
secrets, know-how and continuing technological advancement to develop and
maintain our competitive position. To protect this competitive position, we
regularly enter into confidentiality and proprietary information agreements
with third parties, including employees, suppliers and collaborators. Our
company employment policy requires each new employee to enter into an agreement
that contains provisions generally prohibiting the disclosure of confidential
information to anyone outside of the company and providing that any invention
conceived by an employee within the scope of his employment duties is the
exclusive property of ICOS. Furthermore, our know-how that is accessed by third
parties through collaborations and research and development contracts and
through our relationships with scientific consultants is generally protected
through confidentiality agreements with the appropriate parties. We cannot,
however, assure you that these protective arrangements will be honored by third
parties or that they will effectively protect our rights relating to unpatented
proprietary information, trade secrets and know-how. In addition, we cannot
assure you that other parties will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
our proprietary information and technologies.
To protect our rights to our patents and proprietary information, we may need
to litigate against infringing third parties, or avail ourselves of the courts
or participate in hearings to determine the scope and validity of our patent
rights, such as participation in interference proceedings to determine priority
of invention. These types of proceedings are often costly and could be very
time-consuming to us, and we cannot assure you that the deciding authorities
will rule in our favor. An unfavorable decision could allow third parties to
use our technology without being required to pay us licensing fees or may
compel us to license needed technologies to avoid infringing third-party patent
and proprietary rights. In addition, we may be required to defend ourselves in
patent suits brought by third parties who seek to enjoin our product
development efforts or seek damages for infringement. If we receive an
unfavorable judgment on any of these claims, we could be forced to, among other
things, alter our operations, pay licensing fees or discontinue developing or
marketing one or more of our potential products, as well as incur significant
legal expenses.
Pfizer has been granted a patent by the European Patent Office claiming the
use of the composition of sildenafil citrate, also known as Viagra, and related
compounds for the treatment of erectile dysfunction and the use of a cyclic GMP
PDE inhibitor and more specifically a PDE5 inhibitor for the treatment of
erectile dysfunction. We, Eli Lilly and eleven other companies have filed
opposition briefs in the European Patent Office opposing this patent. The
hearing for this proceeding may take place in the second quarter of 2001. A
nonbinding preliminary opinion was issued by one of the three examiners
composing the European Patent Office tribunal on October 14, 2000. The granted
European patent has been nationalized by Pfizer in most European countries.
Lilly ICOS has brought suits challenging the Pfizer patent in the Netherlands,
the United Kingdom and Belgium. The court in the Netherlands issued a judgment
on October 4, 2000 that the proceeding in the District Court of the Hague has
been adjourned and stayed pending the decision in the opposition proceeding
before the European Patent Office. The court in the United Kingdom issued a
judgment on November 8, 2000 that the Pfizer patent is invalid for obviousness.
We anticipate that the case in Belgium will go to trial in the first quarter of
2001. It is expected that decisions by the European Patent Office and the trial
courts in the three countries will be appealed by the party that does not
prevail. These appeals could take years.
34
<PAGE>
If Pfizer's patent is ultimately upheld by the European Patent Office or the
courts in European countries, we may be subject to litigation by Pfizer in
Europe. We also may be prohibited from marketing Cialis for the treatment of
erectile dysfunction in some or all European countries, or may be required to
enter into licensing agreements to market Cialis in Europe. We cannot assure
you that such agreements would be available on commercially reasonable terms,
if at all. If Pfizer were to obtain a comparable patent in the United States,
we may be involved in further litigation to determine whether our manufacture,
use, sale or offer for sale of Cialis infringes such a patent, and to determine
the validity and scope of such a patent.
Government Regulation
Regulation by government authorities in the United States, Europe, Japan and
other countries is a significant consideration in the manufacture and marketing
of our potential products and in our ongoing research and product development
activities. Virtually all of our product candidates, including those of Suncos,
Lilly ICOS and ICOS-Texas Biotechnology, will require regulatory approval by
government agencies prior to commercialization. Human therapeutic products are
subject to rigorous preclinical and clinical testing and other approval
requirements by the FDA and comparable agencies in foreign countries. The time
required for completing testing and obtaining approvals of our product
candidates is uncertain but often takes several years. Any delay in testing may
hinder product development. In addition, we may encounter delays in product
development or rejections of product applications due to changes in FDA or
foreign regulatory policies during the period of product development and
testing. Various federal, state and foreign statutes and regulations, including
the Federal Food, Drug and Cosmetic Act, also regulate the manufacturing,
safety, labeling, storage, record keeping, and marketing of our product
candidates, and failure to comply with these legal requirements may subject us
to, among other things, civil penalties, criminal prosecution and restrictions
on product development and production. The lengthy process of obtaining
regulatory approvals and ensuring compliance with appropriate statutes and
regulations requires the expenditure of substantial resources. Any delay or
failure by us, our joint ventures or our corporate partners to obtain
regulatory approvals could adversely affect our ability to commercialize our
product candidates, receive product, collaborative research or royalty payments
and generate sales revenue.
In general, the steps ordinarily required before a new therapeutic product
candidate may be marketed in the United States include:
. preclinical laboratory tests, animal tests and formulation studies;
. the submission to the FDA of an investigational new drug application,
which must become effective before clinical testing may begin;
. adequate and well-controlled clinical trials to establish the safety and
effectiveness of the product candidate for each indication;
. the submission of a new drug application or biologics license
application, as the case may be, to the FDA; and
. FDA review and approval of a new drug application or biologics license
application, as the case may be, prior to any commercial sale or shipment
of the product candidate.
Preclinical studies generally are conducted in the laboratory to evaluate the
potential safety and efficacy of a therapeutic product candidate and are
undertaken in compliance with Good Laboratory Practice regulations. The results
of these studies are submitted to the FDA as part of an investigational new
drug application, which must be reviewed by FDA personnel before clinical
testing may begin in the United States. Once the FDA is satisfied with or does
not comment on the submission, clinical trials on humans may begin, although
the FDA may put a hold on these trials at any time.
Clinical trials are conducted in accordance with Good Clinical Practice
regulations at sponsoring institutions under protocols detailing the objectives
of the trial, the parameters to be used in monitoring safety
35
<PAGE>
and the effectiveness criteria to be evaluated. Typically, clinical evaluation
involves three sequential phases, which may overlap. During Phase 1, clinical
trials are conducted with a relatively small number of subjects to determine
the early safety profile of a drug, as well as the pattern of drug distribution
and drug metabolism by the subject. In Phase 2, trials are conducted with
groups of patients afflicted by a specific target disease to determine
preliminary efficacy, optimal dosages and dosage tolerance, and to gather
additional safety data. In Phase 3, large-scale, multicenter comparative trials
are conducted with patients afflicted with a specific target disease to provide
data for the statistical proof of efficacy and safety as required by the FDA
and others. The FDA and the clinical trial sponsor may suspend clinical trials
at any time if it is believed that clinical subjects are being exposed to an
unacceptable health risk.
The results of preclinical and clinical testing of a product candidate, as
well as data relating to a product candidate's chemistry, pharmacology and
manufacture, are required to be submitted to the FDA in the form of a new drug
application for small molecule products or a biologics license application for
biological products in order to seek FDA approval. FDA approval of the new drug
application or biologics license application is required before marketing of a
product may begin in the United States, and the cost of this process may be
substantial. In response to a new drug application or biologics license
application, the FDA may grant marketing approval, request additional
information or deny the application if the FDA determines that the application
does not satisfy its regulatory approval criteria, including the pre-approval
of relevant product manufacturing facilities. The failure to obtain timely
permission for clinical testing or timely regulatory approval for product
marketing would materially affect us. Furthermore, the FDA may require testing
and surveillance programs to monitor the effect of a new product or may prevent
or limit future marketing of a product based on the results of these post-
marketing programs.
In addition, some of our product candidates, most notably sitaxsentan, which
is targeting pulmonary hypertension, may qualify as orphan drugs under the
Orphan Drug Act of 1983. This act generally provides incentives to
manufacturers to undertake development and marketing of products to treat
relatively rare diseases or those diseases which would likely affect fewer than
200,000 persons annually in the United States. A drug that receives orphan drug
designation by the FDA and is the first product to receive FDA marketing
approval for its product claim is entitled to various advantages, including a
seven-year exclusive marketing period in the United States for that product
claim. However, any drug that is considered by the FDA to be different from a
particular orphan drug, including any orphan drug of ours that has been so
designated by the FDA, is not precluded from sale in the United States during
the seven-year exclusive marketing period. We cannot assure you that any of our
product candidates will be designated as an orphan drug by the FDA or, if so
designated, will have a positive effect on our revenues.
In order to manufacture our potential products, a domestic drug manufacturing
facility must be registered with the FDA as a domestic drug manufacturing
establishment, must submit to periodic inspection by the FDA and must comply
with current Good Manufacturing Practice regulations. In addition, to supply
products for use in the United States, foreign manufacturing establishments
must comply with these regulations and are subject to periodic inspection by
the FDA or corresponding regulatory agencies in countries under reciprocal
agreements with the FDA.
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities may be necessary in foreign countries prior
to the commencement of marketing of a product in those countries. The approval
procedures vary among countries and can involve additional testing. The time
required to obtain approval may differ from that required for FDA approval.
Although there are some procedures for unified filings in some countries,
including some in Europe, in general each country has its own procedures and
requirements, many of which may be expensive and time-consuming. Accordingly,
there may be substantial delays in obtaining required approvals from foreign
regulatory authorities after the relevant applications are filed, if we
ultimately receive any approvals at all.
Our policy is to conduct our research activities in compliance with the
National Institute of Health Guidelines for Research Involving Recombinant DNA
Molecules. We are also subject to various federal, state
36
<PAGE>
and local laws, regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals, and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents, used
in connection with our work. The extent and character of government regulation
that might result from future legislation or administrative action, including
additions or changes to environmental laws, cannot be accurately predicted and
may materially affect our business operations and revenues.
Competition
Competition in the pharmaceutical and biotechnology industries is intense and
characterized by rapid technological development. We expect that our product
candidates will encounter significant competition. A number of pharmaceutical
and biotechnology companies are currently developing products targeting the
same diseases and medical conditions that we target, and some of our
competitors' products have entered clinical trials or are already commercially
available. For example, Pfizer has already successfully commercialized Viagra,
a competitor of our product candidate Cialis, and Eli Lilly is currently
seeking regulatory approval for a product for the treatment of sepsis that may
compete with Pafase. In addition, our potential products, if approved and
commercialized, will compete against well-established existing therapeutic
products that are currently reimbursed by government health administration
authorities, private health insurers and health maintenance organizations.
Our competitors include pharmaceutical companies, biotechnology companies and
chemical companies. Furthermore, significant levels of biotechnology research
now occur in universities, government agencies and other nonprofit research
institutions. These entities have become increasingly active in seeking patent
protection and licensing revenues for their research results, thereby providing
us with additional competition and potential costs to our operations. In
addition, many major pharmaceutical companies have made commercial arrangements
with other biotechnology companies or research institutions to further their
development of products that may compete with our potential products.
Many of our competitors have substantially more experience and more capital,
research and development, regulatory, manufacturing, sales, marketing, human
and other resources than we do. As a result, they may:
. develop products that are safer or more effective than our product
candidates;
. obtain FDA and other regulatory approvals or reach the market with their
products more rapidly than we can, reducing the potential sales of our
product candidates;
. devote greater resources to market or sell their products;
. adapt more quickly to new technologies and scientific advances;
. initiate or withstand substantial price competition more successfully
than we can;
. have greater success in recruiting skilled scientific workers from the
limited pool of available talent;
. more effectively negotiate third-party collaborative and licensing
arrangements; and
. take advantage of acquisition or other opportunities more readily than we
can.
We anticipate that we will face increased competition in the future as new
companies enter our markets and as scientific developments surrounding biologic
and small molecule therapeutics continue to accelerate. Through research and
discoveries, our competitors may render some or all of our product candidates
obsolete or unmarketable, and may succeed in developing products that are safer
and more effective than our potential products. Furthermore, even if our
product candidates prove superior to the products of our competitors, our
business could suffer as a result of collaborative partners independently
developing competing products through the use of product candidates we licensed
to them or developed through our collaborations.
37
<PAGE>
We believe the principal competitive factors affecting our markets are the
timing and scope of regulatory approvals, safety and effectiveness of
therapeutic products, cost and availability of these products, availability of
alternative treatments, third-party reimbursement programs and patent and
proprietary rights protection. Although we believe that we are well positioned
to compete adequately with respect to these factors in the future, our future
success is currently difficult to predict because all of our product candidates
are still in various stages of development and have yet to undergo regulatory
approval and commercialization.
Manufacturing
Since 1993, we have manufactured recombinant protein-based clinical materials
in our production facilities in Bothell, Washington, a suburb of Seattle, to
support our previous and current clinical trials. Our current facilities are
capable of utilizing both microbial- and mammalian-based production processes
and were designed to meet the FDA requirements for the production of purified
recombinant protein bulk product. We currently produce bulk product for our
product candidates Pafase and IC14 at our production facilities. Vialing and
other finishing steps in the manufacturing processes of Pafase and IC14 are
completed under contracts with Gensia Sicor Pharmaceuticals and several other
companies. We also will manufacture purified recombinant protein bulk product
for Seattle Genetics pursuant to an agreement signed in November 2000.
We currently do not have the facilities necessary for the production of small
molecule drugs. Our product candidate Cialis is currently manufactured by Eli
Lilly. We plan to use Nordic Synthesis AB to manufacture the active
pharmaceutical ingredient of our product candidate sitaxsentan. We have
established relationships with third-party manufacturers to produce the
required materials for our other small molecule programs in preclinical
studies. These manufacturers include Regis Chemical and Irix Pharmaceutical. We
cannot assure you that we will be able to maintain our current relationships
with third-party manufacturers and suppliers or establish future arrangements
with third-party manufacturers and suppliers on commercially reasonable terms,
if at all.
Marketing and Sales
We have very limited marketing and sales capabilities. We believe this level
of capacity is appropriate prior to the commercialization of our product
candidates. As we begin to approach our product launch dates, we are beginning
to expand our marketing and sales capabilities. We have employees with
significant commercial experience in marketing and sales from major
pharmaceutical companies who will oversee the development of our marketing and
sales infrastructure, including our Vice President of Marketing, who was hired
in June 2000. In addition to our own marketing and sales workforce, we
anticipate promoting our potential products in collaboration with marketing
partners or relying on relationships with one or more companies with
established distribution systems and direct sales forces to distribute and sell
our potential products, including, to a large degree, our joint venture
partners. For example, we anticipate that Cialis will be supported by marketing
and sales representatives from both Eli Lilly and ICOS.
Employees
As of September 30, 2000, we employed 383 individuals. Approximately 300 of
our employees are engaged in research or development activities and 83 in
general and administrative positions. We consider our employee relations to be
good. We have never had a work stoppage, and none of our employees is
represented under a collective bargaining agreement. We believe that our future
success is dependent in part on our ability to attract, integrate and retain
skilled scientific, sales and marketing, and senior management personnel.
Competition in our industry for these skilled workers is intense and we cannot
assure you that we will be able to attract, integrate and retain these
personnel.
Facilities
We lease or own approximately 220,000 square feet of space in five buildings
located in Bothell, Washington. Our leases expire between May 2002 and February
2004, with options to renew for additional
38
<PAGE>
four- or five-year periods. Our principal administrative offices, research
laboratories and clinical production facility occupy approximately 190,000
square feet. We sublease the remaining 30,000 square feet of space under short-
term operating leases expiring in 2001 and 2002, which provide extensions
through 2003 and 2004. We also have signed a lease beginning in April 2001 and
expiring in March 2006 for an additional 16,000 square feet, with options to
renew for additional five-year periods. In addition, in December 1992, we
purchased approximately 300,000 square feet of undeveloped land adjacent to our
main facilities. We believe this purchase gives us the flexibility to expand in
our current geographic location as and if our space needs increase in the
foreseeable future. Over the next several years, we plan to lease, acquire or
build additional facilities to accommodate the activities and personnel
necessary to further develop our product candidates.
Legal Proceedings
From time to time, we may become involved in litigation relating to claims
arising in the ordinary course of our business. We believe that there are no
claims or actions pending or threatened against us that, if adversely
determined, would have a material adverse effect on us.
39
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth information regarding our executive officers
and directors as of November 13, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Paul N. Clark........................... 53 Chairman of the Board, Chief
Executive Officer and President
Gary L. Wilcox, Ph.D. .................. 53 Executive Vice President,
Operations, Secretary and
Director
W. Michael Gallatin, Ph.D. ............. 47 Vice President and Scientific
Director
Thomas P. St. John, Ph.D. .............. 48 Vice President, Therapeutic
Development
Patrick W. Gray, Ph.D. ................. 49 Vice President, Science
Clifford J. Stocks...................... 42 Vice President, Business
Development
Leonard M. Blum......................... 39 Vice President, Marketing
Michael B. Stewart, M.D. ............... 50 Vice President, Clinical Affairs
Frank T. Cary(1)........................ 79 Director
James L. Ferguson(1)(2)................. 74 Director
William H. Gates III.................... 45 Director
David V. Milligan, Ph.D.(1)............. 60 Director
Robert W. Pangia........................ 48 Director
Alexander B. Trowbridge(2).............. 70 Director
Walter B. Wriston(2).................... 81 Director
</TABLE>
--------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Our certificate of incorporation, as amended, and bylaws, as amended, divide
our board of directors into three classes. The members of each class of
directors serve for staggered three-year terms.
Paul N. Clark has been one of our directors, Chief Executive Officer and
President since June 1999, and the Chairman of the Board since February 2000.
From 1984 to December 1998, Mr. Clark worked in various capacities for Abbott
Laboratories, a health care products manufacturer, retiring from Abbott
Laboratories as Executive Vice President and board member after serving
previously as Vice President from 1984 to 1990 and Senior Vice President from
1990 to 1998. His previous experience included senior positions with Marion
Laboratories, a pharmaceutical company, and Sandoz Pharmaceuticals (now
Novartis Corporation), a pharmaceutical company. Mr. Clark received his M.B.A.
from Dartmouth College, Amos Tuck School, and his B.S. in finance from the
University of Alabama.
Gary L. Wilcox, Ph.D. joined us in September 1993 as Executive Vice
President, Operations, and has been one of our directors since 1993. In April
1995, Dr. Wilcox was appointed our Corporate Secretary. From 1989 to 1993, Dr.
Wilcox served as Vice Chairman, Executive Vice President and Director of XOMA
Corporation, a biotechnology company. From 1982 to December 1989, he was the
President and Chief Executive Officer of International Genetic Engineering,
Inc. (known as Ingene), a biotechnology company, which he co-founded. In 1989,
Ingene was acquired by XOMA Corporation. Dr. Wilcox is currently a director of
London Pacific Group Limited and Pepperdine University. He received his Ph.D.
and M.A. in molecular biology and biochemistry, and his B.A. in cellular and
molecular biology from the University of California at Santa Barbara.
W. Michael Gallatin, Ph.D. has been our Vice President and Scientific
Director since April 1995. Dr. Gallatin joined us in 1990 as Director of the
Cell Adhesion Program and became a Senior Director, Science, in July 1992. He
was appointed Vice President, Biological Research, in October 1993. Prior to
joining
40
<PAGE>
us, Dr. Gallatin was a faculty member of the Fred Hutchinson Cancer Research
Center in Seattle, Washington, and an affiliate faculty member of the
Department of Microbiology at the University of Washington. He received his
Ph.D. in immunology from the University of Alberta and his B.S. in zoology from
Truman State University (formerly Northeast Missouri State University).
Thomas P. St. John, Ph.D. has been our Vice President, Therapeutic
Development, since October 1993. Dr. St. John joined us in September 1990 as
Director of the Structural Cell Biology Program and became a Senior Director,
Science, in July 1992. Prior to joining us, Dr. St. John was a faculty member
of the Fred Hutchinson Cancer Research Center in Seattle, Washington, and an
affiliate faculty member in the Department of Medicine and Department of
Genetics at the University of Washington. Dr. St. John received his Ph.D. in
biochemistry from Stanford University and his B.S. in biology from California
Institute of Technology.
Patrick W. Gray, Ph.D. has been our Vice President, Science, since January
1998. Dr. Gray joined us in September 1990 as Director of the Leukocyte
Biochemistry Program and became a Senior Director, Science, in July 1992. From
1980 to 1989, Dr. Gray was a scientist at Genentech, a pharmaceutical company.
Dr. Gray received his Ph.D. in chemistry from the University of Colorado and
his B.S. in biology from the University of Oregon.
Clifford J. Stocks has been our Vice President, Business Development, since
January 1999. Mr. Stocks joined us in February 1992 as a Business/Corporate
Development Manager and became Director, Business Development, in January 1993
and Senior Director, Business Development, in January 1997. From October 1989
to September 1991, Mr. Stocks was an Associate with Booz Allen & Hamilton, a
management consulting firm. Mr. Stocks received his M.B.A. from the University
of Chicago Graduate School of Business and his B.S. in biology from the
University of Utah.
Leonard M. Blum has been our Vice President, Marketing, since June 2000. From
August 1997 to June 2000, he served in various capacities for Merck Sharp &
Dohme Israel, a pharmaceutical company, including marketing director and
business unit director. He joined Merck in 1987, served in several positions in
the United States, and led sales and marketing teams in Germany, Israel and
Switzerland. His previous experience included service as an officer in the
United States Army and a corporate financial analyst with the investment
banking department at Shearson Lehman American Express, a financial services
company. Mr. Blum received his M.B.A. from the Stanford Graduate School of
Business and his A.B. in economics from Princeton University. He was a
Fulbright Scholar in International Economics at the University of Zurich.
Michael B. Stewart, M.D. joined us in October 2000 as Vice President,
Clinical Affairs. From September 1990 to March 2000, Dr. Stewart worked in
various capacities for Bristol-Myers Squibb Company, a global health and
personal care corporation, including serving as Vice President, Immunology,
Inflammation, Pulmonary and Dermatology, from December 1997 to March 2000, Vice
President, Research and Development, for Bristol-Myers Squibb's
Intercontinental Medicines Group from January 1996 to December 1997 and
Vice President, Scientific Affairs, for Bristol-Myers Squibb (Canada) from
January 1995 to January 1996. He received his M.D. from the University of
Maryland School of Medicine and his B.S. in natural sciences from Johns Hopkins
University.
Frank T. Cary has been one of our directors since January 1990. He was Chief
Executive Officer and Chairman of the Board of International Business Machines
Corporation, a business equipment manufacturer, from 1973 to 1980. He currently
serves as a director of Celgene Corporation, Cygnus, Inc., Lexmark
International Group, Inc., Lincare, Inc. and Vion Pharmaceuticals, Inc.
James L. Ferguson has been one of our directors since January 1990. From 1973
to 1989, he served in various capacities at General Foods Corporation, a food
manufacturing company, including Chief Executive Officer and President. Mr.
Ferguson currently serves as a director of Vion Pharmaceuticals, Inc., a member
of The Business Council and Council on Foreign Relations, a Trustee of the
Aspen Institute and a Life Trustee of Hamilton College.
41
<PAGE>
William H. Gates III has been one of our directors since July 1990. Mr. Gates
is a co-founder of Microsoft Corporation, a software company, and was its Chief
Executive Officer and Chairman of the Board from its incorporation in 1981
until January 2000, and he has been its Chief Software Architect and Chairman
of the Board since January 2000.
David V. Milligan, Ph.D. has been one of our directors since October 1995.
From May 1998 to the present, he has served as a vice president of Bay City
Capital, a San Francisco-based merchant bank. From 1979 to 1996, he served in
various capacities at Abbott Laboratories, retiring as Senior Vice President
and Chief Scientific Officer after previously heading both the diagnostics and
the pharmaceutical research and development sectors. Dr. Milligan is currently
non-executive Chairman of the Board of Caliper Technologies, Inc. and Versicor,
Inc.
Robert W. Pangia has been one of our directors since April 1990. Currently a
private investor, Mr. Pangia served from 1987 to 1996 as Executive Vice
President and Director of Investment Banking at PaineWebber Incorporated, an
investment banking and securities brokerage firm. From 1986 to 1987, he was a
Managing Director with Drexel Burnham Lambert, an investment banking firm. From
1977 to 1986, Mr. Pangia worked in various positions in the Corporate Financing
Department at Kidder Peabody & Co., an investment banking and securities
brokerage firm, including serving as Director of the Technology Finance Group.
He is currently a director of IDEC Pharmaceuticals, Inc.
Alexander B. Trowbridge has been one of our directors since January 1990.
From January 1990 to the present, he has served as President of Trowbridge
Partners, Inc., a business consulting firm. From 1980 to 1990, he was President
of the National Association of Manufacturers, a national trade association.
From 1976 to 1980, he was Vice Chairman of Allied Chemical Corporation, a
chemical manufacturing company, and he was President of The Conference Board, a
management and economic research organization, from 1970 to 1976. In 1967 and
1968, Mr. Trowbridge was United States Secretary of Commerce, and he served as
Assistant Secretary of Commerce from 1965 to 1967. He currently serves as a
director of E.M. Warburg-Pincus Funds, Harris Corporation and Sunoco, Inc.
Walter B. Wriston has been one of our directors since January 1990. From 1967
to 1984, he served as Chief Executive Officer of Citicorp and its subsidiary
Citibank, N.A., part of a national banking association, and he served as
Chairman of the Board of Citicorp and Citibank, N.A. from 1970 through 1984.
Mr. Wriston currently serves as a director of Cygnus, Inc. and Vion
Pharmaceuticals, Inc.
42
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of our outstanding common stock as of September 30, 2000, and as
adjusted to reflect the sale of the shares of common stock in this offering
for:
. each person who is known by us to own beneficially more than 5% of our
common stock;
. each of our directors;
. each of our executive officers named in the "Management" section; and
. all of our directors and executive officers as a group.
The term "beneficial ownership" includes shares over which the indicated
beneficial owner exercises voting and/or investment power. The rules of the
Securities Act of 1933, as amended, also deem common stock subject to options
or warrants currently exercisable, or exercisable within 60 days, to be
outstanding for purposes of computing the percentage ownership of the person
holding the options or warrants, but they do not deem that stock to be
outstanding for purposes of computing the percentage ownership of any other
person. The applicable percentage of ownership for each stockholder is based on
46,930,877 shares of common stock outstanding as of September 30, 2000,
together with applicable options and warrants for that stockholder. Except as
otherwise indicated, we believe the beneficial owners of the common stock
listed below, based on information furnished by them, have sole voting and
investment power over the number of shares listed opposite their names, subject
to applicable community property laws. The information provided in the table
below assumes no exercise of the underwriters' over-allotment option. Unless
otherwise indicated, the address for each of the individuals listed in the
table below is c/o ICOS Corporation, 22021 - 20th Avenue S.E., Bothell, WA
98021.
<TABLE>
<CAPTION>
Percent Beneficially
Owned
Shares ---------------------
Beneficially Before After
Name of Beneficial Owner Owned Offering Offering
------------------------ ------------ -------- --------
<S> <C> <C> <C> <C>
William H. Gates III(1).................... 5,707,259 12.0% 11.0%
c/o Michael Larson
2365 Carillon Point
Kirkland, WA 98033
George B. Rathmann, Ph.D.(2)............... 2,727,639 5.7 5.2
5404 Lake Washington Blvd. N.E., Apt. I
Kirkland, WA 94033
Gary L. Wilcox, Ph.D.(3)................... 557,612 1.2 1.1
Paul N. Clark(4)........................... 441,055 * *
W. Michael Gallatin, Ph.D.(5).............. 257,530 * *
Thomas P. St. John, Ph.D.(6)............... 254,313 * *
Frank T. Cary(7)........................... 183,363 * *
James L. Ferguson(8)....................... 171,648 * *
Walter B. Wriston(9)....................... 163,863 * *
Patrick W. Gray, Ph.D.(10)................. 156,647 * *
Robert W. Pangia(11)....................... 152,113 * *
Alexander B. Trowbridge(12)................ 149,113 * *
David V. Milligan, Ph.D.(13)............... 79,199 * *
Clifford J. Stocks(14)..................... 44,648 * *
Leonard M. Blum(15)........................ 10,417 * *
Michael B. Stewart, M.D. .................. 0 -- --
All directors and executive officers as a
group (15 persons)(16).................... 8,328,780 16.6 15.3
</TABLE>
--------
* Represents less than one percent.
43
<PAGE>
(1) Includes 656,000 shares subject to issuance upon exercise of warrants that
are exercisable within 60 days of September 30, 2000. Also includes 25,640
shares subject to issuance upon exercise of options that are exercisable
within 60 days of September 30, 2000.
(2) Represents 656,000 shares subject to issuance upon exercise of warrants
that are exercisable within 60 days of September 30, 2000, 100,000 shares
subject to issuance upon exercise of options that are exercisable within
60 days of September 30, 2000, and 1,971,639 shares held by the Rathmann
Family Revocable Trust.
(3) Represents 537,612 shares subject to issuance upon exercise of options
that are exercisable within 60 days of September 30, 2000 and 20,000
shares held by the Gary and Susan Wilcox Living Trust.
(4) Represents 441,055 shares subject to issuance upon exercise of options
that are exercisable within 60 days of September 30, 2000.
(5) Includes 215,030 shares subject to issuance upon exercise of options that
are exercisable within 60 days of September 30, 2000.
(6) Includes 4,000 shares subject to issuance upon exercise of warrants that
are exercisable within 60 days of September 30, 2000. Also includes
207,813 shares subject to issuance upon exercise of options that are
exercisable within 60 days of September 30, 2000.
(7) Includes 8,000 shares subject to issuance upon exercise of warrants that
are exercisable within 60 days of September 30, 2000. Also includes
144,113 shares subject to issuance upon exercise of options that are
exercisable within 60 days of September 30, 2000.
(8) Includes 16,000 shares subject to issuance upon exercise of warrants that
are exercisable within 60 days of September 30, 2000. Also includes
144,113 shares subject to issuance upon exercise of options that are
exercisable within 60 days of September 30, 2000.
(9) Includes 144,113 shares subject to issuance upon exercise of options that
are exercisable within 60 days of September 30, 2000.
(10) Includes 119,522 shares subject to issuance upon exercise of options that
are exercisable within 60 days of September 30, 2000.
(11) Represents 8,000 shares subject to issuance upon exercise of warrants that
are exercisable within 60 days of September 30, 2000, and 144,113 shares
subject to issuance upon exercise of options that are exercisable within
60 days of September 30, 2000.
(12) Includes 144,113 shares subject to issuance upon exercise of options that
are exercisable within 60 days of September 30, 2000.
(13) Includes 79,099 shares subject to issuance upon exercise of options that
are exercisable within 60 days of September 30, 2000.
(14) Represents 44,648 shares subject to issuance upon exercise of options that
are exercisable within 60 days of September 30, 2000.
(15) Represents 10,417 shares subject to issuance upon exercise of options that
are exercisable within 60 days of September 30, 2000.
(16) Includes 692,000 shares subject to issuance upon exercise of warrants that
are exercisable within 60 days of September 30, 2000. Also includes
2,401,401 shares subject to issuance upon exercise of options that are
exercisable within 60 days of September 30, 2000.
44
<PAGE>
UNDERWRITING
We and the underwriters named below, through their representatives SG Cowen
Securities Corporation, Banc of America Securities LLC, Prudential Securities
Incorporated, Robertson Stephens, Inc. and Ragen MacKenzie, A Division of Wells
Fargo Investments, LLC, have entered into an underwriting agreement with
respect to the shares being offered. Subject to the terms and conditions of the
underwriting agreement, each underwriter has severally agreed to purchase the
number of shares indicated in the following table at the public offering price
less the underwriting discounts and commissions set forth on the cover page of
this prospectus.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
SG Cowen Securities Corporation.................................... 1,464,000
Banc of America Securities LLC..................................... 658,800
Prudential Securities Incorporated................................. 658,800
Robertson Stephens, Inc. .......................................... 658,800
Ragen MacKenzie, A Division of Wells Fargo Investments, LLC........ 219,600
CIBC World Markets Corp. .......................................... 120,000
Crowell, Weedon & Co. ............................................. 120,000
Gerard Klauer Mattison & Co., Inc. ................................ 120,000
Janney Montgomery Scott LLC........................................ 120,000
J.P. Morgan Securities Inc. ....................................... 120,000
C.E. Unterberg, Towbin............................................. 120,000
UBS Warburg LLC.................................................... 120,000
---------
Total............................................................ 4,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are conditional and may be terminated at their discretion based on their
assessment of the state of the financial markets. The obligations of the
underwriters may also be terminated upon the occurrence of the events specified
in the underwriting agreement. The underwriters are severally committed to
purchase all of the common stock being offered if any shares are purchased,
other than those covered by the over-allotment option described below.
The underwriters propose to offer the common stock directly to the public at
the public offering price set forth on the cover page of this prospectus. The
underwriters may offer the common stock to securities dealers at that price
less a concession not in excess of $1.11 per share. Securities dealers may
reallow a concession not in excess of $0.10 per share to other dealers. After
the shares of common stock are released for sale to the public, the
underwriters may vary the offering price and other selling terms from time to
time.
We have granted the underwriters an option to purchase up to 675,000
additional shares of common stock at the public offering price set forth on the
cover of this prospectus to cover over-allotments, if any. This option is
exercisable for a period of 30 days. If the underwriters exercise their over-
allotment option, the underwriters have severally agreed, subject to
conditions, to purchase shares in approximately the same proportion as shown in
the table above.
<TABLE>
<CAPTION>
Without With
Per Share Option Option
--------- ------------ ------------
<S> <C> <C> <C>
Public offering price................... $37.00 $166,500,000 $191,475,000
Underwriting discount................... $ 1.85 $ 8,325,000 $ 9,573,750
Proceeds, before expenses, to ICOS...... $35.15 $158,175,000 $181,901,250
</TABLE>
We have agreed to indemnify the several underwriters against some
liabilities, including liabilities under the Securities Act, and to contribute
to payments that the underwriters may be required to make with respect to these
liabilities.
We, our directors and executive officers and a stockholder who collectively
beneficially hold an aggregate of 11,156,419 shares have agreed with the
underwriters that for a period of 90 days following the date of this
45
<PAGE>
prospectus, without the prior written consent of SG Cowen Securities
Corporation, we, our directors and executive officers and the stockholder will
not dispose of or hedge any shares of common stock or any securities
convertible into or exchangeable for common stock. This restriction will not
apply to the sale by directors and executive officers of up to an aggregate of
150,000 shares of common stock to pay for the exercise of vested stock options.
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids, and passive market making in
accordance with Regulation M under the Securities Exchange Act of 1934. Over-
allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying securities so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve purchases
of the common stock in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate member when
the common stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. In passive
market making, market makers in the common stock who are underwriters or
prospective underwriters may, subject to limitations, make bids for or
purchases of the common stock until the time, if any, at which a stabilizing
bid is made. These stabilizing transactions, syndicate covering transactions
and penalty bids may cause the price of the common stock to be higher than it
would otherwise be in the absence of these transactions. These transactions may
be effected on The Nasdaq National Market or otherwise and, if commenced, may
be discontinued at any time.
One of the underwriters, Prudential Securities Incorporated, also markets
online through its PrudentialSecurities.com division. Clients of Prudential
AdvisorSM may view offering terms and a prospectus online and place orders
through their financial advisors. Other than the prospectus in electronic
format, the information on this Web site is not intended to be part of this
prospectus or the registration statement of which this prospectus forms a part,
has not been approved or endorsed by us or any underwriter in such capacity and
should not be relied on by prospective investors.
We estimate that our out-of-pocket expenses for this offering will be
approximately $550,000.
LEGAL MATTERS
We are being represented by Perkins Coie LLP, Seattle, Washington, and the
underwriters are being represented by Shearman & Sterling, New York, New York.
The validity of the common stock offered by this prospectus will be passed on
by Perkins Coie LLP for us and by Shearman & Sterling for the underwriters.
EXPERTS
The consolidated financial statements of ICOS Corporation and subsidiary as
of December 31, 1999 and 1998 and for each of the years in the three-year
period ended December 31, 1999, and the financial statements of Suncos (a
development stage corporation) as of December 31, 1999 and 1998 and for each of
the years in the two-year period ended December 31, 1999 and the periods from
February 6, 1997 (inception) through December 31, 1997 and 1999 have been
incorporated by reference into this prospectus and in the registration
statement in reliance on the reports of KPMG LLP, independent certified public
accountants, incorporated by reference into this prospectus, and upon the
authority of that firm as experts in accounting and auditing.
The report of KPMG LLP covering the December 31, 1999 financial statements of
Suncos contains an explanatory paragraph that states that Suncos's recurring
losses from operations and accumulated deficit raise substantial doubt about
the entity's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of that
uncertainty.
46
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, as well as registration and
proxy statements and other information, with the Securities and Exchange
Commission. These documents may be read and copied at the Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549, or at the Commission's
regional offices located at 7 World Trade Center, Suite 1300, New York, New
York 10048, and at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You can get further information about the Commission's
Public Reference Room by calling 1-800-SEC-0330. The Commission also maintains
a Web site at http://www.sec.gov that contains reports, registration statements
and other information regarding registrants like us that file electronically
with the Commission.
This prospectus is part of a registration statement on Form S-3 filed by us
with the Commission under the Securities Act of 1933 with respect to this
offering of common stock. As permitted by the Commission, this prospectus does
not contain all the information in the registration statement filed with the
Commission. For a fuller understanding of this offering, you should refer to
the complete registration statement on Form S-3 that may be obtained from the
locations described above.
INFORMATION INCORPORATED BY REFERENCE
The Securities and Exchange Commission allows us to "incorporate by
reference" the information we file with the Commission, which means that we can
disclose important information to you by referring you to documents we have
filed with the Commission. We incorporate by reference the documents listed
below, and any additional documents filed by us with the Commission under
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, prior to the termination of this offering. The information we
incorporate by reference is part of this prospectus, and any later information
that we file with the Commission will automatically update and supersede this
information.
The documents we incorporate by reference are:
(1) our Annual Report on Form 10-K for the fiscal year ended December 31,
1999, including our amendments to this report filed on November 15,
2000 and December 6, 2000;
(2) our definitive proxy statement on Schedule 14A dated March 29, 2000;
(3) our Quarterly Reports on Form 10-Q for the quarters ended March 31,
2000, June 30, 2000 and September 30, 2000, including our amendment to
our Quarterly Report on Form 10-Q for the quarter ended September 30,
2000, filed on November 15, 2000;
(4) our Current Report on Form 8-K filed on March 14, 2000; and
(5) the description of our common stock contained in our registration
statement on Form 8-A, filed with the Commission on April 18, 1991,
under Section 12(g) of the Securities Exchange Act of 1934.
Documents incorporated by reference, excluding exhibits, are available from
us without charge. You may obtain documents incorporated by reference by
requesting them in writing from ICOS Corporation, 22021-20th Avenue S.E.,
Bothell, Washington 98021, Attention: Investor Relations Department, or by
calling (425) 485-1900.
----------------
ICOS, ICOS & Design and Pafase are registered trademarks of ICOS Corporation.
Other company names and trademarks included in this prospectus are trademarks,
registered trademarks or trade names of their respective owners.
47
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
4,500,000 Shares
[LOGO OF ICOS CORPORATION]
Common Stock
------------------------
PROSPECTUS
------------------------
SG COWEN
BANC OF AMERICA SECURITIES LLC
PRUDENTIAL VECTOR HEALTHCARE
a unit of Prudential Securities
ROBERTSON STEPHENS
RAGEN MacKENZIE
A Division of Wells Fargo Investments, LLC
December 13, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
