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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-19125
ISIS PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0336973
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2292 FARADAY AVE., CARLSBAD, CA 92008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
760-931-9200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
The approximate aggregate market value of the common stock held by
non-affiliates of the Registrant, based upon the last sale price of the common
stock reported on the National Association of Securities Dealers Automated
Quotation National Market System was $297,565,000 as of February 26, 1999.*
The number of shares of common stock outstanding as of February 26, 1999
was 27,169,623.
DOCUMENTS INCORPORATED BY REFERENCE
(TO THE EXTENT INDICATED HEREIN)
Registrant's definitive Proxy Statement which will be filed on or before
April 13, 1999 with the Securities and Exchange Commission in connection with
Registrant's annual meeting of stockholders to be held on May 12, 1999 is
incorporated by reference into Part III of this Report.
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- - Excludes 2,501,021 shares of common stock held by directors and officers and
stockholders whose beneficial ownership exceeds 10 percent of the shares
outstanding at February 26, 1999. Exclusion of shares held by any person
should not be construed to indicate that such person possesses the power,
direct or indirect, to direct or cause the direction of the management or
policies of the Registrant, or that such person is controlled by or under
common control with the Registrant.
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This Form 10-K contains forward-looking statements regarding the Company's
business, the therapeutic and commercial potential of its technologies and
products in development. Such statements are subject to certain risks and
uncertainties, particularly those risks or uncertainties inherent in the process
of discovering, developing and commercializing drugs that can be proven to be
safe and effective for use as human therapeutics, and the endeavor of building a
business around such potential products. Actual results could differ materially
from those discussed in this Form 10-K. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in this
Form 10-K including those identified in the section of Item 1 entitled "Risk
Factors." As a result, the reader is cautioned not to rely on these forward-
looking statements.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Isis Pharmaceuticals, Inc. is a leader in the discovery and development of
a new class of drugs based on antisense technology. With antisense technology,
we believe we can design drugs that are safer and more effective than
traditional drugs. We combine our expertise in molecular and cellular biology
with antisense drug discovery techniques to design drugs to fight a wide range
of diseases, including infectious and inflammatory diseases and cancer. In 1998,
our first drug was approved for commercial sale. In addition, we have five
antisense compounds in human clinical trials, with additional compounds arising
out of our broad research program in preclinical development.
Through our expertise in medicinal chemistry and RNA structure and
function, we have also developed a proprietary RNA-targeting drug discovery
program. This program is being run by our Ibis Therapeutics division and allows
us to use genomic information to identify novel structural targets and to
quickly create and screen, as potential drugs, large libraries of small molecule
compounds designed to inhibit those targets.
In August 1998, the U. S. Food and Drug Administration approved
Vitravene(TM) (fomivirsen) to treat CMV retinitis in AIDS patients.
Vitravene(TM) is the first antisense drug to be approved for marketing by the
FDA. CIBA Vision, our distribution partner for this drug, launched Vitravene(TM)
in November 1998. CIBA Vision is the eye care unit of life sciences leader
Novartis Pharma AG. In 1998, we also filed an application for European marketing
approval for Vitravene(TM). That application is presently being reviewed by the
European regulatory authorities.
This chart represents the pipeline of Isis products currently in
preclinical and clinical development:
ISIS DEVELOPMENT PIPELINE
[LOGO]
ISIS 2302 is in clinical trials to treat a variety of inflammatory diseases
and conditions. ISIS 2302 targets intercellular adhesion molecule-1, ICAM-1,
which is involved in many such diseases. We are testing ISIS 2302 against
Crohn's disease, psoriasis, ulcerative colitis, renal transplant rejection and
asthma. In a Phase II study of patients with Crohn's disease, an encouraging
number of patients receiving ISIS 2302 had their symptoms improve. A
statistically significant (p=0.0001) number were also able to reduce, and for
some patients completely eliminate, their steroid use, the most common treatment
for Crohn's disease. Because of these positive results, we began a pivotal
quality trial of ISIS 2302 in Crohn's disease in 1997. The 300 patient,
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pivotal quality trial in Crohn's disease should be completed in late 1999. We
continue to be optimistic about the potential of ISIS 2302 to treat Crohn's
disease. Toward that end, we are completing the pivotal trial and plan to move
expeditiously toward a regulatory submission, assuming that the data are
supportive.
The kidney transplant Phase II trial of ISIS 2302 is progressing, and we
anticipate completion in mid-1999. We will make the data available after
completion of the trial. We are also pursuing development of ISIS 2302 as a
topical treatment for psoriasis, as an enema formulation for treatment of
ulcerative colitis, and as an aerosol formulation for treatment of asthma. We
intend to initiate clinical trials in as many of these indications as resources
permit in the near term.
We recently completed the analysis of the Phase II, 43 patient study of
ISIS 2302 in rheumatoid arthritis. We saw evidence of therapeutic activity. ISIS
2302 was well tolerated, and the safety profile of the drug continues to be
attractive. Based on this outcome, we are pursuing development of a
second-generation, orally active antisense inhibitor of ICAM-1 in lieu of
continuing development of ISIS 2302 in rheumatoid arthritis. We continue to
believe that inhibition of ICAM-1 is a promising anti-inflammatory strategy in
rheumatoid arthritis and will continue to test second-generation inhibitors of
this target for this disease.
ISIS 3521 is in Phase II clinical trials as an anticancer agent, both alone
and in combination with traditional cancer chemotherapies. The Phase II trials
are studying the effect of this drug in treating a variety of cancer tumors.
This compound targets protein kinase C-X or PKC-X, a protein associated with
abnormal cell growth. We are developing ISIS 3521 as part of our collaboration
with Novartis. In Phase I trials, ISIS 3521 stabilized disease, reduced tumor
mass and reduced tumor markers in a number of patients with ovarian cancer,
lymphoma and lung cancer. In those trials, ISIS 3521 caused no significant side
effects. We have been conducting studies of ISIS 3521 in combination with
chemotherapy agents commonly used against a variety of tumors.
ISIS 5132 is also in Phase II clinical trials as an anticancer agent, both
alone and in combination with traditional cancer chemotherapies. The Phase II
trials are studying the effect of this drug in treating a variety of cancer
tumors. This compound targets C-raf kinase, another type of protein associated
with abnormal cell growth. We are also developing ISIS 5132 as part of our
collaboration with Novartis. In Phase I clinical trials, ISIS 5132 showed
evidence of antitumor activity in patients with ovarian, renal, pancreatic, and
colon cancers. In those trials, ISIS 5132 caused no significant side effects. We
have also been conducting studies of ISIS 5132 in combination with chemotherapy
agents commonly used against a variety of tumors.
ISIS 2503 has completed Phase I clinical trials as an anticancer agent.
This compound inhibits expression of Ha-ras, another protein associated with
cancer. Phase II trials will begin in early 1999. The Phase II trial will be
conducted in patients with a variety of solid tumors. We will initiate clinical
trials of ISIS 2503 in combination with conventional chemotherapy in the first
half of 1999.
ISIS 13312 is in Phase I clinical trials to treat CMV retinitis in AIDS
patients. ISIS 13312 is being evaluated in a small, open label, dose ranging
study in patients with advanced CMV retinitis. We have designed a prudent
development plan for this drug as a follow-on product to Vitravene(TM). Its
future will depend on the progress of treatments for AIDS and the market need.
This initial study should be completed in 1999.
We also have several antisense compounds in preclinical development, some
of which incorporate novel chemical classes that may provide improved potency,
reduced side effects, less frequent dosing and the possibility of oral delivery.
These include a compound inhibiting proteins critical for Hepatitis C gene
expression, inhibitors of inflammatory targets TNF-X and CD49d, and improved
antisense inhibitors of ICAM-1. Isis is also studying improved versions of C-raf
kinase and PKC-X in preclinical models.
We have many research programs that use both antisense and RNA-targeting
drug discovery technologies to identify compounds that inhibit molecular targets
associated with other diseases. Our antisense research programs focus on targets
associated with infectious, inflammatory, cardiovascular and metabolic diseases
and cancer. They combine our expertise in molecular biology and drug discovery
with antisense tools to enable rapid identification of potent inhibitors of
disease causing proteins. We are then able to apply our medicinal chemistry
expertise to specifically tailor a compound to the particular disease indication
targeted.
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Our medicinal chemistry programs have developed novel chemistries that allow us
to design new antisense compounds that are potentially safer and more active
than current antisense drugs and which have the potential to allow more
convenient forms of dosing including oral delivery. Our RNA-targeting program is
focused on identifying the structural elements of RNA targets which are
important in initiating or maintaining diseases, and designing compounds that
interfere with the function of these RNA targets, including those involved in
viral and bacterial infections. This program is also focused on designing small
molecules to block the production or function of cell adhesion molecules.
We have successfully leveraged our technology through supportive corporate
collaborations with Novartis, Boehringer Ingelheim, CIBA Vision, Merck & Co.,
Zeneca Pharmaceuticals and Abbott Laboratories. These collaborations increase
our financial resources, improve our technological strength and establish
valuable development and commercial relationships. As a result, we have been
able, and expect to continue, to pursue drug discovery and development
activities aggressively. We have retained substantial commercial rights to all
of our drug candidates, including those funded by corporate collaborators.
Our antisense target validation program utilizes antisense technology to
streamline the identification, functionalization, and validation of the role
novel gene targets play in human disease. This year, we established our first
antisense target validation collaboration with Abbott Laboratories. In this
collaboration, we are using our proprietary rapid throughput screening
technology to design, synthesize, screen and characterize inhibitors of Abbott's
novel gene targets. Abbott will use these antisense inhibitors to identify the
role of the gene target and its function in disease. This information will
enable Abbott to prioritize these novel targets for its drug discovery programs.
We have focused significant efforts on developing cost-effective,
large-scale, Good Manufacturing Practices manufacturing capability for antisense
compounds. We currently manufacture antisense compounds to meet all of our
research and clinical needs, as well as the needs of our partners. We have
achieved significant manufacturing cost reductions through chemistry and process
improvements. We believe that, with reasonably anticipated benefits resulting
from increases in scale, we will be able to manufacture antisense compounds at
commercially attractive prices. In conjunction with obtaining approval of
Vitravene(TM), we successfully passed the manufacturing pre-approval inspection
by the FDA. Under the terms of our agreement with CIBA Vision, Isis will
manufacture all of the commercial supplies of Vitravene(TM).
ISIS DRUG DISCOVERY AND DEVELOPMENT
The goal of drug discovery is to create chemical compounds that can help
fight or prevent disease. We founded our antisense and RNA-targeting drug
discovery programs on our expertise in medicinal chemistry, RNA biochemistry and
molecular and cellular biology. We have assembled a team of scientists skilled
in these core disciplines to apply the technology to both of our drug discovery
platforms. Once a drug is designed, our significant expertise in medicinal
chemistry enables us to specifically tailor the chemical structure of the lead
compound for its intended use.
Antisense Drug Discovery
Almost all human diseases are a result of inappropriate protein production
or performance. Traditional drugs are designed to interact with the proteins in
the body that are supporting or causing a disease. Antisense technology is
different than traditional drug development because it targets disease-causing
proteins before they are produced. Antisense drugs can be designed to treat a
wide range of diseases, including infectious, inflammatory and cardiovascular
diseases and cancer.
Antisense technology represents a new model for drug discovery because it
focuses on compounds that interact with messenger RNA or mRNA, which has not
been a site for traditional drug interaction. Using the information contained in
mRNA, we design chemical structures, easily recognized by the body, which
resemble mRNA and DNA. These potent "antisense" oligonucleotides inhibit the
production of disease-causing proteins. This method of drug design is highly
productive, and in ten years we have created a substantial pipeline of drug
candidates, including six compounds currently in clinical trials.
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Design of antisense compounds is less complex, more rapid and more
efficient than traditional drug design directed at protein targets. Traditional
drug design usually begins by characterizing the three-dimensional structure of
the protein target in order to design a prototype drug to interact with it.
Proteins are complex molecules with structures that are difficult to predict.
Antisense compounds, on the other hand, are designed to bind to mRNA structures,
which are more easily understood and predicted. Prototype antisense drugs can be
designed as soon as the sequence for the mRNA receptor is identified.
Our early research efforts focused on answering basic questions regarding
antisense-based therapeutics, including their stability, their ability to be
taken up by the target cells, their efficacy and the cost of manufacturing them.
In the ten years since our founding, we have made significant progress in
understanding and using antisense technology to create drugs, and have
established a leadership position in this field.
The Mechanism of Antisense Drugs
Genes carry the information that cells need to produce proteins. Specific
genes contain information to produce specific proteins at the genetic level. The
human genome and its collection of more than 100,000 genes contains the
information required for the human body to produce all proteins. Genes are made
up of DNA, a molecule that contains the information about when and how much of
which protein to produce, depending on what function is to be performed. The DNA
molecule is a "double helix" -- a duplex of entwined strands. In each strand,
the building blocks of DNA, the nucleotides, are bound or "paired" with
complementary nucleotides on the other strand. The precise sequence of a
nucleotide chain, called the "sense" sequence, is a blueprint for the
information that is used during protein production. The sequence of a nucleotide
chain that is precisely complementary to a given sense sequence is called its
"antisense" sequence.
In the cell nucleus, the information in the gene necessary for the
production of a protein is copied from one strand of DNA into precursor mRNA
through a process called transcription. After processing into mature mRNA, the
mRNA moves from the nucleus of the cell into the cell cytoplasm, which contains
amino acids. The information encoded in a single mRNA is then translated into
many copies of the sequence of amino acids that builds the protein.
Antisense drugs are mirror or complementary images of small segments of
mRNA. To create antisense drugs, nucleotides are linked together in short chains
called oligonucleotides. Each antisense drug is designed to bind to a specific
sequence of nucleotides in its mRNA target to inhibit production of the protein
encoded by the target mRNA. By preventing the production of the disease-causing
protein and acting in the early stage of the disease-causing process, antisense
drugs have the potential to provide greater therapeutic benefit than traditional
drugs, which do not act until after the disease causing protein has been
produced.
Antisense drugs can be designed to be much more selective than traditional
drugs. Because antisense drugs interact by binding to mRNA and not, as
traditional drugs do, by binding to proteins, antisense drugs are able to
selectively inhibit one protein among a closely related group of proteins
without having an impact on the other members of the group. As a result, we are
able to design antisense drugs that selectively inhibit the disease-causing
member of the group without interfering with those members of the group
necessary for normal bodily functions. As a result of this unique selectivity,
antisense drugs have the potential to be far less toxic than traditional drugs
because they can be designed to minimize the impact on unintended targets.
RNA-targeting Drug Discovery
Ibis Therapeutics is our program to discover low molecular weight, orally
bioavailable drugs that work by binding to RNA. Ibis leverages our success in
pioneering RNA-targeted drug discovery and development and expands our ability
to convert genomics data into drug discovery information.
In Ibis, we have developed proprietary technologies in four key areas:
- Mining genomes for structured RNA in therapeutic targets;
- Predicting the three-dimensional structure of RNA from genome sequence
data and designing RNA-targeted small molecules;
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- Synthesizing libraries of compounds designed to find RNA; and
- Screening for RNA-binding molecules using novel massively parallel
screening technology and producing lead compounds for further
optimization and development.
With Ibis, we are developing and integrating genome mining software to
identify these RNA structural motifs in therapeutic targets of interest. We can
predict the three-dimensional shape of these motifs from biochemical probes of
RNA structure and molecular modeling methods. We have made a fundamental
breakthrough in the development of a parallel high-throughput screening strategy
to identify small molecules that bind RNA targets using high resolution mass
spectrometry. In a MASS (multitarget affinity/specificity screening) assay, each
compound and each target RNA is labeled by its exact molecular mass. Since every
small molecule is labeled uniquely, a large mixture (up to 500 compounds) can be
screened in the presence of up to 10 RNA targets simultaneously. The identity of
the small molecule, the RNA target that it binds, its binding affinity and the
location of the binding site on the RNA can be determined in one rapid set of
experiments. Using this technology, we expect to be able to screen 10,000
compounds per day against 10 RNA targets.
Our initial area of focus in Ibis is discovering novel antibacterial
compounds. The technology has potential application in central nervous system
disease, inflammation, as well as degenerative diseases of aging. To date, we
have funded Ibis through government sponsored grants from the Defense Advanced
Research Projects Agency and the National Institute of Standards and Technology.
Our long-term goal for Ibis is that it be self-funding through corporate partner
support. We will move Ibis toward this goal by providing drug candidates for
development and providing optimized leads to pharmaceutical partners for
development and commercialization.
ANTISENSE TARGET VALIDATION
With the establishment of our first target validation partnership with
Abbott Laboratories, and with the potential for additional partnerships, we are
establishing antisense as an essential drug discovery tool for the genomics age.
Our Antisense Target Validation program produces highly specific antisense
inhibitors of novel gene products. These inhibitors can be used in cellular
assays and in animal models of disease to rapidly determine the pharmacological
impact of inhibiting the expression of a single gene target and to determine the
role of the targeted gene in human disease. Once we have shown that a target is
important in human disease, traditional drug discovery can be used to develop
drugs to inhibit the target, or the specific antisense drug used to validate the
target can be rapidly developed as a human therapeutic.
With antisense, we can rapidly identify active sites on a gene when only a
small fragment of the gene sequence is known. The rapid throughput design,
synthesis and optimization of antisense oligonucleotides dramatically reduces
the time required to validate novel targets. Once we know the mRNA sequence, an
antisense inhibitor can be synthesized in just a few days and be ready for
screening in vitro or in vivo. It can take a few more days to identify a lead
compound and, if needed, about a week to optimize the lead. This accelerated
process contrasts dramatically with the months required for small molecule lead
generation.
To take advantage of the use of antisense in functional genomics, we have
established a proprietary, automated rapid throughput screening process that
streamlines the creation of optimized, target-specific antisense inhibitors. We
are using this system to build a large proprietary database of inhibitors to
more than 100 gene targets per year. In addition to amassing a valuable bank of
potential product leads, we are also expanding our antisense proprietary
position. As rapidly as these gene targets can be produced, we can also file
patent applications.
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PRODUCTS APPROVED AND UNDER DEVELOPMENT
Our drug discovery programs use antisense and combinatorial drug discovery
technologies to identify compounds to treat infectious and inflammatory diseases
and cancer. The following table outlines each product under development, its
target, disease indication and development status, as well as Isis' commercial
rights.
ISIS PRODUCTS IN DEVELOPMENT
CLINICAL DEVELOPMENT
COMPOUND TARGET DISEASE INDICATION DEVELOPMENT STATUS(1) COMMERCIAL RIGHTS
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Vitravene CMV Retinitis Approved for Isis/CIBA Vision(2)
marketing in the U.S.
European market
application under
review.
ISIS 2302 ICAM-1 Crohn's disease Pivotal trial Isis/Boehringer
Kidney transplant Ingelheim(3)
rejection Phase II
Psoriasis (topical) IND candidate
Ulcerative colitis IND candidate
(enema)
ISIS 3521 PKC-(LOGO) Cancer Phase II Novartis(4)
ISIS 5132 C-raf kinase Cancer Phase II Novartis(4)
ISIS 2503 Ha-ras Cancer Phase II Isis
ISIS 13312 CMV Retinitis Phase I/II Isis/CIBA Vision(2)
ISIS 14803 HCV Hepatitis C IND Candidate Isis
TNF-(LOGO) Inflammation Preclinical Isis
CD49d Inflammation Preclinical Isis
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(1) An "IND candidate" is a compound for which IND-enabling toxicology and
pharmacokinetic studies have been initiated and IND preparation has begun.
"Preclinical" means that a lead compound has been identified which Isis has
determined is a candidate for commercial development. Preclinical
development activities include pharmacology, toxicology and pharmacokinetic
testing in preclinical models (in vitro and animal), formulation work and
manufacturing scale-up in preparation for submission of the necessary data
to comply with applicable regulations prior to commencement of human
testing. In some cases, we are developing compounds, such as Vitravene(TM),
to treat certain diseases for which no adequately predictive animal
efficacy model exists. As a result, we may only conduct in vitro efficacy
studies for such compounds, prior to testing the efficacy of the compounds
in humans, and drug candidates for these diseases must progress to Phase II
human clinical trials before we will have evidence of in vivo efficacy for
such compounds. Preclinical development includes studies which may provide
preliminary evidence of a compound's safety in animals but which may not,
without additional testing, be sufficient to commence human clinical trials.
Results obtained in preclinical studies are not necessarily indicative of
results that will be obtained in later stages of preclinical development or
in human clinical testing.
(2) CIBA Vision has the exclusive right to distribute fomivirsen. CIBA Vision
also has an option to acquire the exclusive license to market and distribute
ISIS 13312.
(3) Boehringer Ingelheim and we are co-developing ISIS 2302 and may develop
other cell adhesion compounds. The companies will split the profits equally
if ISIS 2302 is commercialized.
(4) We are developing ISIS 3521 and ISIS 5132 under the direction of Novartis
and at Novartis' expense, and may co-develop second generation compounds as
well.
We also have a significant research program with the potential to yield
additional development candidates in the future. As described in the section of
this report entitled "Risk Factors -- Uncertainties Associated with
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Clinical Trials," the product candidates listed in the preceding table may not
progress beyond their current status or yield a commercially viable product.
Infectious Diseases
CYTOMEGALOVIRUS(CMV) RETINITIS. Individuals with suppressed immune systems,
such as those with AIDS resulting from the HIV virus, are susceptible to
opportunistic infections caused by CMV. In the AIDS population, retinitis caused
by CMV is the primary cause of blindness. There are more than 270,000 active
AIDS cases in the United States. The introduction of new anti-HIV drugs,
particularly protease inhibitors and combination treatment regimens, has
prolonged survival in HIV-infected individuals. Over the last three years, this
has resulted in a decline in mortality from AIDS, accompanied by a decline in
the incidence of many opportunistic infections including CMV. Nevertheless,
because of side effects and poor compliance with prescribed treatment regimens,
many of the approximately 1 million HIV infected individuals will probably
ultimately progress to and through the advanced stages of AIDS. A significant
percentage of these AIDS patients may develop CMV retinitis. The drugs that are
available now for CMV retinitis, other than fomivirsen, have limitations,
including the creation of viral resistance. Currently approved drugs for CMV
retinitis are ganciclovir, foscarnet, cidofovir and fomivirsen. Foscarnet and
cidofovir are available in intravenous (IV) dosing forms only. Ganciclovir is
available in IV and oral doses, as well as in an intraocular implant form. In
order to begin and maintain IV treatment with ganciclovir and foscarnet,
patients require daily administrations of the drug through lines that are placed
permanently in the veins to allow easy access to the blood stream. Ganciclovir,
foscarnet and cidovovir are associated with significant toxic effects to the
body. Oral ganciclovir is approved for preventive treatment and maintenance
therapy, but is less effective than IV ganciclovir and still carries significant
side effects. The ganciclovir intraocular implant is a small disk that is
surgically implanted in the patient's eye and provides local sustained release
of the drug for up to eight months. However, this treatment is associated with
impaired vision for two to four weeks after implantation in most patients, and
the implant itself has also been associated with an increased incidence of
retinal detachment that can result in permanent blindness. There is a 12-18%
chance of retinal detachment after the first implant and a near 30% chance
following a second or third implant. Cidofovir is administered intravenously
less frequently than ganciclovir or foscarnet: weekly for the initial therapy
and every two weeks for maintenance therapy. Cidofovir is also associated with
significant toxicities, particularly to the kidney. For that reason, the patient
must take other drugs and follow strict safety measures over a period of
approximately 12 hours to manage toxicities.
VITRAVENE(TM) (FOMIVIRSEN). In August 1998, the FDA approved Vitravene(TM)
to treat CMV retinitis in AIDS patients. Vitravene(TM) is an antisense compound
discovered by Isis. CIBA Vision, our distribution partner for this drug,
launched Vitravene(TM) in November 1998. In 1998 we also filed an application
for European marketing approval. That application is currently being reviewed by
the European regulatory authorities.
As CMV retinitis patients are living longer with their disease due to
improvements in the management of HIV infection and AIDS, there is increasing
need for more CMV retinitis treatment options, particularly ones with novel
mechanisms of action such as Vitravene(TM). Local therapy with Vitravene(TM)
could provide therapeutic benefit without significant side effects or the need
for intravenous treatments. Treatment with oral ganciclovir or other systemic
CMV therapies in combination with Vitravene(TM) could be reserved for patients
who show evidence of the disease in other organs. Approximately one-third of the
patients diagnosed with CMV retinitis could develop systemic CMV disease, but,
in general, these disease manifestations are short-lived and require short
courses of therapy.
In July 1997, the Company entered into an agreement with CIBA Vision
Corporation (a Novartis subsidiary) granting CIBA Vision exclusive worldwide
distribution rights for Vitravene(TM). See "Collaborative Agreements -- CIBA
Vision."
ISIS 13312. ISIS 13312, a second generation compound, is based on novel,
improved antisense chemistry and is being tested in a Phase I clinical trial as
a local treatment for CMV retinitis in AIDS patients. Based on the results of
preclinical studies, ISIS 13312 appears to be less toxic and more stable than
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Vitravene. ISIS 13312 is being evaluated in a small, open label, dose ranging
study in patients with advanced CMV retinitis. We have designed a prudent
development plan for this drug as a follow-on product to Vitravene. Its future
will depend upon the progress of treatments for AIDS and the market need. This
initial study should be completed in 1999. CIBA Vision has an option to market
and distribute ISIS 13312 exclusively worldwide. See "Collaborative
Agreements -- CIBA Vision."
HEPATITIS C (HCV). HCV continues to represent a major public health
challenge. This potentially deadly disease affects the liver and can eventually
cause liver cancer and death. It is estimated that almost four million Americans
are infected with HCV and 8,000-10,000 people are expected to die from this
disease each year. Interferon -- a therapy is widely used in an attempt to
eradicate this virus from chronically infected individuals, but long-term
remissions are achieved in only about 20% of patients even after six months of
therapy. Better, safer and more effective treatments are urgently needed, as
current therapies have limited efficacy and potentially serious toxicities.
ISIS 14803 our antisense inhibitor of HCV, ISIS 14803, may represent a
significant therapeutic advance in treating this serious viral epidemic. Upon
binding to the complementary target sequence, ISIS 14803 inhibits expression of
HCV proteins required for viral replication. The ability of ISIS 14803 to
inhibit HCV gene expression in cell culture and in a novel in vivo mouse model
of HCV gene expression demonstrates the potential of this compound as a drug
development candidate. Preclinical toxicology and pharmacokinetics studies of
ISIS 14803 will begin in early 1999.
Inflammatory Diseases
Cell adhesion molecules make up a large family of related proteins and
represent targets for treating inflammatory diseases. Inflammation is a key
component of a large number of acute and chronic diseases. Although inflammation
is part of a normal localized protective response that the human body uses to
destroy infectious agents or repair injured tissue, disruptions of normal
inflammatory responses often lead to inflammatory diseases. These inflammatory
responses result in or contribute to a diverse set of diseases that can affect
many organs of the body ranging from the skin to the brain. Common inflammatory
diseases include rheumatoid arthritis, psoriasis, asthma and inflammatory bowel
disease. Inflammation also occurs as a result of burn, shock or organ
transplantation.
Some cell adhesion molecules are expressed on the surface of endothelial
cells which line the blood vessels of the body during periods of heightened
inflammatory or immune system response. These adhesion molecules act as anchors
for various types of immune cells circulating in the blood. Once the immune
cells are anchored to the endothelial cells by the cell adhesion molecules,
these immune cells can migrate between the endothelial cells, leave the blood
vessels and travel into tissues and organs where they can cause inflammation.
Left unchecked, these processes can result in acute and chronic tissue damage
and disease. Current anti-inflammatory agents and drugs that suppress the immune
system decrease the symptoms of inflammation but do little to change the course
of the underlying disease, or do so at the risk of substantial toxicity.
However, a drug that stops the production of cell adhesion molecules may prevent
the migration of immune cells from the blood vessels into tissue and therefore
modify the disease process with a more acceptable toxicity profile than do
currently available therapies.
We have focused on a number of targets in our cell adhesion molecule
program. Our most advanced cell adhesion research and development effort has
been focused on the intercellular adhesion molecule ("ICAM") family and in
particular, ICAM-1. ICAM-1 facilitates the migration of immune cells involved in
both chronic and acute inflammation, allowing us to target both conditions.
Over-expression of ICAM-1 has been demonstrated in a wide variety of
inflammatory disorders, such as rheumatoid arthritis, asthma, psoriasis, organ
transplant rejection and inflammatory bowel diseases. While it is unlikely that
over-expression of ICAM-1 is a cause of these disorders, ICAM-1 is thought to
contribute to the pathology of these diseases and conditions. We have identified
lead compounds for other adhesion molecules including CD49d (VLA-4), vascular
cell adhesion molecule 1 (VCAM-1) and platelet endothelial cell adhesion
molecule 1 (PECAM-1). We are currently evaluating those lead compounds in
inflammatory disease models.
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In addition to cell adhesion molecules, we have active research programs
targeting other steps in the inflammatory process. In particular, we have
identified antisense inhibitors which selectively inhibit the expression of
cytokines such as tumor necrosis factor-(LOGO) (TNF-(LOGO)), interleukin 5
(IL-5) and the IL-5 receptor. Lead antisense compounds targeting these proteins
are showing promising activity in multiple models of inflammatory diseases.
In 1995, Boehringer Ingelheim and we agreed to combine our respective
programs in the area of cell adhesion to form a jointly managed and funded
effort. This partnership combines Boehringer Ingelheim's significant expertise
in cell adhesion biology and its small molecule and monoclonal antibody-based
drug discovery efforts, including its state-of-the-art analysis technology, with
our antisense and combinatorial drug discovery programs. The collaboration uses
these multiple drug discovery programs to identify compounds that limit the
disease-related functions of cell adhesion molecules.
ISIS 2302. ISIS 2302, the most advanced compound in our cell adhesion
program, selectively inhibits ICAM-1 gene expression. In Phase I testing of ISIS
2302 in healthy volunteers, the compound was well tolerated at all doses. We
initiated Phase II trials in five disease indications: rheumatoid arthritis,
ulcerative colitis, Crohn's disease, psoriasis and prevention of renal
transplant rejection. The Phase II studies involve 20 to 40 patients each and,
in general, are randomized and placebo-controlled. We are choosing indications
for further development of ISIS 2302 based on results from these studies.
Crohn's disease is a serious inflammatory disease that affects the
intestines and other parts of the digestive tract. A patient with Crohn's
disease suffers chronic and often severe episodes of diarrhea, abdominal pain,
rectal bleeding and fever. Approximately 500,000 people in North America and
Europe worldwide are afflicted with Crohn's disease. In a randomized,
double-blinded, placebo-controlled 20-patient Phase II study of patients with
Crohn's disease, 15 patients were treated with ISIS 2302 and 5 patients received
a placebo. ISIS 2302 was administered every other day for 26 days (13 doses) by
2-hour intravenous infusion. At the end of the one-month treatment period, 7 of
15 patients treated with ISIS 2302 experienced disease remission (measured by a
Crohn's Disease Activity Index score of below 150) compared to zero patients in
remission in the placebo group. The duration of the remissions was prolonged,
with 5 of 7 remitting patients still in remission at the end of the 6-month
trial. Results of this study also showed a statistically significant lowering of
steroid use in the ISIS 2302 treated group compared to the placebo treated
group. The results also showed favorable trends both in the Endoscopic Index of
Severity (EIS), based on colonoscopic examination, and in the Inflammatory Bowel
Disease Questionnaire (IBDQ), a quality of life scale. Based on the results of
this study, Boehringer Ingelheim and we decided to initiate a pivotal quality
trial of ISIS 2302 in Crohn's disease. That 300 patient trial is progressing. It
should be completed late in 1999. At that point, we and Boehringer Ingelheim
will determine the pace and scope of our development and regulatory strategy,
based on the performance of the drug. At the end of 1998, we performed an
interim analysis of the results of this trial. The purpose of the analysis was
to support internal planning. Consistent with our original strategy and FDA
requirements, we will not make the results of that analysis public. We are
conducting additional studies of ISIS 2302 in Crohn's disease to determine
whether shorter courses of treatment or subcutaneous dosing can be effective.
These studies should be completed in 1999 and, if positive, may support easier,
more convenient dosing. The program may be expanded to include additional
pivotal studies based on analysis of the data from ongoing trials.
We recently completed the analysis of the Phase II, 43 patient study in
rheumatoid arthritis. We saw evidence of therapeutic activity. ISIS 2302 was
well tolerated, and the safety profile of the drug continues to be attractive.
Based on this outcome, we are pursuing development of a second-generation,
orally active antisense inhibitor of ICAM-1 in lieu of continuing development of
ISIS 2302 in rheumatoid arthritis. We continue to believe that inhibition of
ICAM-1 is a promising anti-inflammatory strategy in rheumatoid arthritis and
will continue to test second-generation inhibitors of this target for this
disease.
The Phase II study in kidney transplant rejection is also proceeding at a
pace mandated by the regulatory authorities, as they carefully monitor clinical
studies in this patient population. We anticipate that this study will be
completed in mid-1999. We will make the data available after the study is
completed.
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We are also pursuing development of ISIS 2302 as a topical treatment for
psoriasis, as an enema formulation for treatment of ulcerative colitis, and as
an aerosol formulation for treatment of asthma. Our goal is to initiate clinical
trials in as many of these indications as resources permit in the near term.
Boehringer Ingelheim and we will determine the timing of these initiatives.
Cancer
Much of our work in the area of cancer is focused on specific targets
within multigene families believed to be involved in both normal and abnormal
cell differentiation and cell growth. Members of multigene families, called
isotypes, are extremely similar to one another at the protein level but most
likely serve different biological functions. Since traditional drugs are not
specific enough to inhibit one isotype within a family without affecting the
function of the other related isotypes, it has been difficult to determine the
functional differences among them. There is growing evidence that certain
isotypes might be involved in abnormal cell differentiation or proliferation.
Antisense drug discovery technology exploits the differences among the isotypes
at the mRNA level to design drugs that can inhibit specific isotypes. Selective
inhibition of a single isotype may result in less toxicity. Much of our work has
focused on multigene families in the signal transduction pathway, the method by
which various cellular and extra cellular proteins communicate information
necessary for cell function and growth. Disruptions in the production or
behavior of signal transduction proteins are involved in numerous proliferative
disorders, including cancer.
Clinical trials of our anticancer compounds have demonstrated that
antisense drugs can be effective cancer therapeutics. In these trials, our
compounds were well tolerated, with none of the serious side effects associated
with standard cancer chemotherapies such as bone marrow or immune system
suppression, gastrointestinal distress or hair loss.
ISIS 3521. ISIS 3521 is an antisense compound in Phase II clinical
development which inhibits the production of one particular isotype (the
(LOGO)isotype) of protein kinase C. PKC is a key enzyme in signal transduction,
and PKC isotypes are associated with both normal and abnormal cell growth. We
have been able to specifically inhibit the production of the PKC-(LOGO) isotype
without inhibiting the production of other isotypes, thus allowing the
inhibition of the isotype believed to be involved in abnormal cell growth
without inhibiting the isotypes required for healthy cells to grow.
The Phase I studies included 56 patients with various types of cancer that
had not responded to standard treatment. In one study, 36 patients received the
drug via a 2-hour infusion 3 times per week for 3 weeks, with redosing every 4
weeks. In a second study, 20 patients received the drug via a 21-day continuous
infusion for 3 weeks repeated every 4 weeks. The primary endpoint of the Phase I
trials was safety, and all patients were assessed for antitumor effects. In
these Phase I trials, the drug was well-tolerated by patients with no
significant side effects. We also saw preliminary evidence of anticancer
activity. In the short infusion study, 1 patient with lymphoma experienced a
partial response (defined as a greater than 50% reduction in measurable disease)
that has continued for more than 16 months from the start of therapy. Another
patient with lymphoma has had a partial response lasting more than 8 months, and
1 patient with non-small cell lung cancer has experienced disease stabilization
for 8 months. In the continuous infusion study, 3 of 4 patients with ovarian
cancer showed a decrease in disease. One patient, whose abdominal mass had
doubled in size in the month prior to entering the study, experienced a partial
response for over 11 months before progressing. One patient experienced a 40%
decrease in CA-125, an ovarian tumor marker, for over 5 months and 1 patient
experienced a 75% decrease in CA-125 for more than 7 months.
We initiated Phase II clinical trials in the third quarter of 1997. In the
Phase II trials, we are evaluating ISIS 3521 in both single-agent and
combination studies in patients with a variety of solid tumors, including
ovarian, prostate, breast, brain, colon and lung cancers, and melanomas. We have
also been conducting trials of ISIS 3521 in combination with chemotherapy agents
commonly used against a variety of tumors. We anticipate that the Phase II
program and the Phase I combination trials will be completed in the second half
of 1999, at which point, we and our partner, Novartis, will determine next
development steps.
We are developing ISIS 3521 as part of our antisense research and
development collaboration with Novartis. Isis also has additional
PKC-(LOGO)inhibitors in preclinical development which incorporate second
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generation chemistry and which have the potential for increased safety and more
convenient dosing, possibly including oral delivery. Isis also has lead
compounds that inhibit two isotypes of the PKC family, including PKC-(LOGO),
believed to be involved in cancer and other diseases.
ISIS 5132. ISIS 5132 is an antisense compound which inhibits the expression
of C-raf kinase, another molecular target involved in cell signaling. C-raf
kinase is a member of the raf kinase multi-gene family and is associated with
abnormal cell growth. ISIS 5132 selectively inhibits C-raf kinase without
inhibiting the production of other members of that multigene family. Studies of
ISIS 5132 in cell culture and in nude mouse xenograft models using human tumor
cells show that ISIS 5132 inhibits expression of the target C-raf gene.
In Phase I clinical trials, ISIS 5132 was very well-tolerated. Several
patients in this trial experienced disease stabilization. In the 2-hour infusion
study, 1 patient with colon cancer experienced a decrease in CEA, a colon cancer
marker, with no growth in tumor for approximately 7 months. Another patient with
kidney cancer experienced disease stabilization for more than 9 months and
continues to be on study. In the continuous infusion study, 1 patient with
pancreatic cancer experienced disease stabilization for 7 months and continues
on study, 1 patient with kidney cancer experienced disease stabilization for 9
months, and 1 patient with ovarian cancer had a 97% drop in CA-125 after 6
months.
We initiated Phase II clinical trials of ISIS 5132 in the fourth quarter of
1997. In the Phase II trials, we are evaluating ISIS 5132 as a single-agent in
studies of patients with a variety of solid tumors, including prostate, breast,
ovarian, pancreatic, colon and both small-cell and non-small cell lung cancers.
We have also been conducting trials of ISIS 5132 in combination with
chemotherapy agents commonly used against a variety of tumors. We anticipate
that the Phase II program and the Phase I combination trials will be completed
in the second half of 1999, at which point, we and Novartis will determine next
development steps.
ISIS 2503. Substantial evidence exists supporting a direct role for ras
gene products in the development and maintenance of human cancer. Ras proteins
are involved in passing information between cells. Ras, in both normal and
mutated forms, is associated with abnormal cell growth and, as such, is
associated with cancer. ISIS 2503, a potent selective inhibitor of Harvey ras,
has been shown to inhibit abnormal cell growth by inhibiting expression of ras
genes in cell culture and animal models. ISIS 2503 has also inhibited the growth
of multiple different human cancers in nude mouse xenograft models.
In the fall of 1997, we initiated Phase I clinical trials of ISIS 2503.
This trial involved patients with a variety of solid tumors that had not
responded to standard cancer therapies. In Phase I clinical trials ISIS 2503 has
been well-tolerated and has displayed an excellent safety profile. The Phase I
trials are nearly complete. Once completed, data from these studies will be
analyzed and presented publicly in an appropriate scientific meeting.
Phase II trials of ISIS 2503 will begin in early 1999 and should take about
one year to complete. The Phase II program will include four different tumor
types and treat about 120 patients. Tumor types selected are those in which the
ras proteins are known to contribute to tumor development and maintenance. We
are particularly interested in testing ISIS 2503 in gastrointestinal cancers. We
will initiate clinical trials of ISIS 2503 in combination with conventional
chemotherapy in the first half of 1999.
RESEARCH PROGRAMS
We combine our core technology programs in medicinal chemistry, RNA
biochemistry, and molecular and cellular biology with molecular target-focused
drug discovery efforts to design drug candidates. The goal of our target-based
research programs is to identify antisense and Ibis drug candidates to treat
diseases for which there are substantial markets and for which there is a need
for better drugs. In addition, our research programs focus on identifying
next-generation compounds to serve as backup compounds to our current products
in development and development candidates. Our Ibis drug discovery program is
currently focused both on cell adhesion molecules in connection with our
collaboration with Boehringer Ingelheim and on identifying broad-spectrum
antibacterial agents with a focus on important drug-resistant infections.
Our core technology programs can support multiple target-based antisense
research programs without significantly increasing costs. Through these
programs, we can efficiently explore numerous disease targets and
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identify the best lead compounds to advance into preclinical development. We are
currently pursuing antisense and Ibis drug discovery programs focused on various
anti-viral and anti-bacterial targets, inflammatory disease targets, and other
key molecular targets that might play critical roles in cancer.
COLLABORATIVE AGREEMENTS
Our strategy is to use alliances with other companies and equity-based
financing to increase our financial resources, reduce risk, and retain an
appropriate level of ownership of products currently in development. Through
alliances with major pharmaceutical companies, we can obtain funding, expand
existing programs, learn of new technologies, and gain additional expertise in
developing and marketing products.
Novartis
We began our research and development collaboration with Novartis (then
called Ciba-Geigy Limited) in 1990. The research portion of the collaboration
ended in September 1998, having produced two drugs currently in development,
ISIS 3521 and ISIS 5132. At Novartis' expense, we are conducting clinical
development of ISIS 3521 and ISIS 5132. Novartis will pay us royalties on the
sales of any licensed compound. We have the right to commercially manufacture
ISIS 3521 and ISIS 5132 for additional royalties. See "Products Under
Development -- Cancer -- ISIS 3521; ISIS 5132." As of February 26, 1999,
Novartis owned approximately 9% of our outstanding Common Stock.
Boehringer Ingelheim
In July 1995, we and Boehringer Ingelheim formed an alliance to combine the
clinical development and research programs of both companies in the field of
cell adhesion. We contribute our expertise in antisense and combinatorial drug
discovery and Boehringer Ingelheim contributes its ongoing program in cell
adhesion biology and small molecule library screening capabilities. Both
companies provide ongoing funding for the combined research and development
program. Either party may terminate the funding requirements under the
collaboration agreement if, at the end of five years, there are no compounds
being developed or commercialized jointly.
In addition to funding one-half of the collaboration's research and
development, Boehringer Ingelheim will make additional investments in us as
certain development milestones are met. Boehringer Ingelheim has already paid us
a milestone payment of $10 million for the completion of the first Phase II
clinical trial of ISIS 2302 in Crohn's disease. It also provides us with a $40
million line of credit, which is available under certain circumstances. As of
December 31, 1998, outstanding borrowings under this line of credit totaled
$22.6 million.
The partnership includes development of ISIS 2302, an antisense inhibitor
of ICAM-1, and multiple other preclinical and research compounds targeting other
adhesion molecules. We and Boehringer Ingelheim will split the operating profits
associated with all future products of the partnership. If a partner chooses not
to continue to fund its share of the development expenses for a compound, it
will receive a certain amount of royalties on any future sales of such compounds
rather than a split of operating profits. Boehringer Ingelheim will market the
first two drugs resulting from the collaboration. Both companies will agree on
commercialization responsibilities for any products to follow.
ISIS 2302 is in a pivotal quality trial for Crohn's disease and clinical
trials of various stages for other indications. This compound is being developed
by an Isis-led project team as part of the collaboration. See "Products Under
Development -- Inflammatory Diseases."
As of February 26, 1999, Boehringer Ingelheim owned approximately 9% of our
outstanding Common Stock.
CIBA Vision
In July 1997, we entered into an agreement with CIBA Vision, granting it
exclusive worldwide distribution rights for Vitravene(TM). Under the terms of
the agreement, we will receive $20 million in pre-
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commercial fees and milestones. As of December 31, 1998, we have received a
total of $12.5 million of the pre-commercial fees and milestones. While CIBA
Vision will market and sell Vitravene(TM) worldwide, we will manufacture and
sell Vitravene(TM) to CIBA Vision, at a price that will allow us to share the
commercial value of the product with CIBA Vision. The FDA approved Vitravene(TM)
for commercial marketing in August 1998. CIBA Vision also has the option to
acquire the exclusive license to market and distribute our second generation
antisense compound to treat CMV retinitis, ISIS 13312, which is currently in
preclinical development. See "Products Under Development -- Cytomegalovirus
(CMV) Retinitis."
Zeneca Pharmaceuticals
In December 1998, we established a new antisense collaboration with Zeneca
Pharmaceuticals to discover, develop and commercialize novel antisense drugs
targeting specific genes associated with cancer. In this collaboration, we will
create antisense candidates and work together with Zeneca to optimize them.
Zeneca will develop drugs arising out of the collaboration. Zeneca will pay us
technology access fees and provide research funding as well as milestone
payments and royalties for any drugs progressing into clinical development and
onto the market. The initial term of this collaboration is three years. In
December 1998, Zeneca paid $2 million in technology access fees. While the
initial focus of this collaboration is on a limited number of cancer targets, we
can, with Zeneca, also pursue additional targets in cancer and expand the
collaboration to targets in other therapeutic areas. The agreement also provides
that the collaboration can also be extended beyond its initial term.
Merck & Co.
In June 1998, we established a research collaboration with Merck & Co. to
discover small molecule drug candidates to treat patients infected with
Hepatitis C virus. Our chemists, working together with Merck scientists will
design, synthesize and evaluate novel compounds that Merck will screen in its
proprietary enzymatic assays for identifying Hepatitis C virus replication
inhibitors. Merck will commercialize drugs arising from the collaboration, and
we retain the right to use technology developed in the collaboration in our
antisense program. The three-year collaboration provides us with annual research
support plus a technology access fee and milestone payments and royalties upon
commercialization. In 1998, we received a total of $3.9 million from Merck under
the terms of this agreement.
Abbott Laboratories, Inc.
In December 1998, we entered into an Antisense Target Validation, or ATV,
collaboration with Abbott Laboratories, Inc. The collaboration will utilize our
ATV technology to enable Abbott to validate numerous gene targets, identify the
function of these genes and prioritize the targets. Abbott will pay us an
upfront fee, research fees, and milestone payments and royalties on net sales of
any Abbott non-antisense product arising from the collaboration. We will also
receive rights to develop drugs targeting Abbott proprietary genes for Abbott.
The initial term of this collaboration is two years. In 1998, we received an
initial payment of $250,000.
MANUFACTURING
In the past, production of chemically modified oligonucleotides, like those
used in our research and development programs, was generally expensive and
difficult, except in small quantities. As a result, we dedicated significant
resources to focus on ways to improve manufacturing capacity. Because all
oligonucleotide compounds are made of variants of the same nucleotide building
blocks and are produced using the same types of equipment, we found that the
same techniques used to efficiently manufacture one oligonucleotide drug product
proved helpful in improving the manufacturing processes for many other
oligonucleotide products. Through the development of several proprietary
chemical processes for scaling up manufacturing capabilities, we have been able
to greatly reduce the cost of producing oligonucleotide compounds. For example,
we have significantly reduced the cost of raw materials, while at the same time
greatly increasing our capacity to make the compounds. We have both internal
programs and outside collaborations with various industry vendors to allow for
even greater production.
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We have sufficient manufacturing capacity to meet both current and future
research and clinical needs both for ourselves and for our partners. We also
believe that we have, or will be able to develop or acquire, sufficient supply
capacity to meet our anticipated commercial needs. We also believe that with
reasonably anticipated benefits from increases in scale, we will be able to
manufacture antisense compounds at commercially competitive prices.
In March 1998, we established an antisense oligonucleotide manufacturing
collaboration with Zeneca Life Science Molecules, a leading supplier of chemical
and biological compounds to the pharmaceutical and biotechnology industries.
Access to an alternate manufacturing source will provide greater flexibility in
production scheduling and will reduce our risk of dependence on a single
manufacturing site for all of our clinical needs. Under the terms of the
five-year agreement, Zeneca LSM will supplement our primary manufacturing
facility in producing antisense oligonucleotides for use in clinical trials. The
agreement specifies that we will have Zeneca LSM manufacture a certain portion
of the drug supplies required for its clinical trials. We are not required to
make any capital investment to create this manufacturing capability.
GOVERNMENT REGULATION
Our manufacture and potential sale of therapeutics are subject to extensive
regulation by United States and foreign governmental authorities. In particular,
pharmaceutical products are subject to rigorous preclinical and clinical testing
and other approval requirements by the FDA in the United States under the
Federal Food, Drug and Cosmetic Act and by comparable agencies in most foreign
countries. Various federal, state and foreign statutes also govern or influence
the manufacture, safety, labeling, storage, record keeping and marketing of such
products. Pharmaceutical manufacturing facilities are also regulated by state,
local and other authorities. Obtaining approval from the FDA and other
regulatory authorities for a new therapeutic may take several years and involve
substantial expenditures. Moreover, ongoing compliance with these requirements
can require the expenditure of substantial resources. Difficulties or
unanticipated costs may be encountered by us or our licensees or marketing
partners in their respective efforts to secure necessary governmental approvals,
which could delay or preclude us or our licensees or marketing partners from
marketing their products. In conjunction with obtaining approval of
Vitravene(TM), we successfully passed the manufacturing pre-approval inspection
by the FDA. Approval of each new therapeutic will require a rigorous
manufacturing pre-approval inspection by regulatory authorities.
In addition to regulations enforced by the FDA, we are also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state and local
regulations. We believe that we are in compliance in all material respects with
applicable laws and regulations.
COMPETITION
For many of their applications, including CMV retinitis, antisense based
drugs will be competing with existing therapies for market share. In addition, a
number of companies are pursuing the development of oligonucleotide-based
technology and the development of pharmaceuticals utilizing such technology.
These companies include specialized pharmaceutical firms and large
pharmaceutical companies acting either independently or together with
biopharmaceutical companies. Many of our existing or potential competitors have
substantially greater financial, technical and human resources than we do and
may be better equiped to develop, manufacture and market products. In addition,
many of these companies have extensive experience in preclinical testing and
human clinical trials. These companies may develop and introduce products and
processes competitive with or superior to ours. Furthermore, academic
institutions, government agencies and other public and private organizations
conducting research may seek patent protection and may establish collaborative
arrangements for product and clinical development.
Vitravene(TM) and our other products under development address numerous
markets. Our competition has been and will continue to be determined in part by
the diseases for which our compounds are developed and ultimately approved by
regulatory authorities. For certain of our products, an important factor in
competition may be the timing of market introduction of competitive products.
Accordingly, the relative speed with which
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we can develop products, complete the clinical trials and approval processes and
supply commercial quantities of the products to the market is an important
competitive factor. We expect that competition among products approved for sale
will be based, among other things, on product efficacy, safety, reliability,
availability, price and patent position.
The development by others of new treatments for the diseases for which we
are developing compounds could render our compounds non-competitive or obsolete.
Furthermore, because of the fundamental differences between antisense and other
technologies, there may be applications for which the products of one technology
are superior to those of another. We are aware of several companies with
late-stage compounds in development for diseases we are pursuing.
Our competitive position also depends upon our ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales.
EMPLOYEES
As of February 26, 1999, we employed 346 individuals, of whom 143 hold
advanced degrees. A significant number of our management and professional
employees have had prior experience with pharmaceutical, biotechnology or
medical product companies. We believe that we have been highly successful in
attracting skilled and experienced scientific personnel; however, competition
for such personnel is intensifying. None of our employees is covered by
collective bargaining agreements, and management considers relations with its
employees to be good.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of March 15,
1999 are as follows:
STANLEY T. CROOKE, M.D., PH.D. . . . 53
Chairman of the Board, President and Chief Executive Officer
Dr. Crooke was a founder of the Company and has been its Chief Executive
Officer and a director since January 1989 and has served as President since
February 1999. He was elected Chairman of the Board in February 1991. Dr. Crooke
previously served as President of the Company from January 1989 to May 1994.
From 1980 until January 1989, Dr. Crooke was employed by SmithKline Beckman
Corporation, a pharmaceutical company, most recently as President of Research
and Development of SmithKline & French Laboratories. Dr. Crooke is a director of
Megabios Corp., SIBIA Neurosciences, Inc., and Idun Pharmaceuticals, Inc. all
biotechnology companies, and EPIX Medical, Inc., a developer of magnetic
resonance imaging contrast agents. He is also an adjunct professor of
pharmacology at the Baylor College of Medicine and the University of California,
San Diego.
B. LYNNE PARSHALL . . . 43
Executive Vice President, Chief Financial Officer and Secretary
Ms. Parshall has served as Executive Vice President since December 1995,
Chief Financial Officer of the Company since June 1994, and Secretary since
November 1991. From February 1993 to December 1995, she was a Senior Vice
President of the Company, and from November 1991 to February 1993, she was a
Vice President of the Company. Prior to joining Isis, Ms. Parshall practiced law
at Cooley Godward LLP, counsel to the Company, where she was a partner from 1986
to 1991. Ms. Parshall served as Vice President of Business Development of
Biotrack, Inc., a medical device company, during 1988 and 1989.
DEBBY JO BLANK, M.D. . . . 47
Executive Vice President
Dr. Blank joined Isis in March 1999 as Executive Vice President. Prior to
joining the Company, she held various senior management positions at Cypress
Bioscience, Inc., Advanced Technology Laboratories, Syntex Laboratories, Inc.,
The DuPont Merck Pharmaceutical Company, and E.I. DuPont & Company.
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C. FRANK BENNETT, PH.D. . . . 42
Vice President, Biology
Dr. Bennett has served as Vice President, Biology since June 1995. From
March 1993 to June 1995, he was Director, Molecular Pharmacology, and from May
1992 to March 1993, he was an Associate Director in the Molecular and Cellular
Biology department. Prior to joining Isis in 1989, Dr. Bennett was employed by
SmithKline and French Laboratories in various research positions.
DAVID J. ECKER, PH.D. . . . 44
Vice President & Managing Director, Ibis Therapeutics
Dr. Ecker was a founder of the Company and has served as Vice President &
Managing Director of Ibis Therapeutics, a division of Isis Pharmaceuticals since
June 1995. He served as Vice President, Biology from July 1993 to June 1995, as
Executive Director, Molecular and Cellular Biology from February 1993 to July
1993, and as Director, Molecular and Cellular Biology from February 1989 to
February 1993. From 1984 until February 1989, he was employed by SmithKline and
French Laboratories in a variety of research positions.
PATRICIA LOWENSTAM . . . 52
Vice President, Human Resources
Ms. Lowenstam has served as Vice President, Human Resources since January
1995. She joined Isis in August 1992 as Director, Human Resources and served in
that capacity until January 1995. Prior to joining Isis, she held senior
management positions in Human Resources with Quotron systems, Inc., Citicorp,
Zales Jewelers, and the May Company.
RISK FACTORS
Please consider the following risk factors carefully in addition to the
other information contained in this Report.
UNCERTAINTY ASSOCIATED WITH OUR CLINICAL TRIALS
We must conduct time-consuming, extensive and costly clinical trials, in
compliance with FDA regulations, to show the safety and efficacy of each of our
drug candidates, as well as its optimum dosage, before the FDA can approve a
drug candidate for sale.
To begin the process, preclinical studies are conducted, first in the
research laboratory and then in animals, to identify potential safety problems.
If the research and preclinical development support further development, we must
then submit an Investigational New Drug Application to the FDA to obtain
authorization for human clinical testing. However, our IND application may not
be granted by the FDA.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, which typically involves giving the
drug to healthy human subjects before giving it to patients, the drug candidate
is tested for safety and tolerance. Phase II typically involves studies in a
somewhat larger population of diseased patients to identify possible negative
effects and safety risks, to begin gathering preliminary efficacy data and to
investigate possible dose sizes and schedules. Phase III trials further evaluate
the drug's efficacy and further test for safety within an expanded patient
population. Once the clinical trials are completed, data from preclinical
testing and clinical trials are submitted to the FDA in a New Drug Application
in order to obtain approval to sell the drug.
While limited trials of our products have to date produced favorable
results, significant additional trials are required, and we may not be able to
demonstrate that our drug candidates will be safe or effective. We have only
introduced one commercial product, Vitravene(TM); however, we cannot guarantee
that any of our product candidates will obtain required government approvals or
that we can successfully commercialize any products. We expect to have ongoing
discussions with the FDA with respect to all of our drugs in clinical
development.
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GOVERNMENT REGULATION AND PRODUCT APPROVALS
Our drug candidates under development are subject to regulation by the
federal government, including the FDA, and by state and local governments. If
our products are marketed abroad, they will also need to comply with export
requirements and regulation by foreign governments. The applicable regulatory
approval process is lengthy and expensive and must be completed prior to the
commercialization of a product. We cannot guarantee that we will be able to
obtain necessary regulatory approvals on a timely basis, if at all, for any of
our products under development. Delays in receiving such approvals, failure to
receive such approvals at all or failure to comply with existing or future
regulatory requirements could have a material adverse effect on our business,
financial condition and results of operations.
Product development and approval to meet FDA regulatory requirements takes
a number of years, involves the expenditure of substantial resources and is
uncertain. Many products that initially appear promising ultimately do not reach
the market because they are not found to be safe or effective. In addition, the
current regulatory framework could change and additional regulations may arise
at any stage of product development that may affect approval, delay the
submission or review of an application or require additional expenditures.
WE CANNOT GUARANTEE MARKET ACCEPTANCE OF OUR PRODUCTS
We currently have one product, Vitravene(TM), a treatment for CMV retinitis
in AIDS patients, which has achieved limited market acceptance in a small
commercial market with significant competition. We delivered our first
commercial shipment of Vitravene(TM) in 1998, earning product revenue of
$560,000. We cannot guarantee that any of our products in development, if
approved for marketing, will achieve market acceptance. The degree of market
acceptance depends upon a number of factors, including:
- The receipt and scope of regulatory approvals,
- The establishment and demonstration in the medical and patient advocacy
community of the clinical efficacy and safety of our product candidates
and their potential advantages over competitive products, and
- Reimbursement policies of government and third-party payors.
In addition, we cannot guarantee that physicians, patients, patient advocates,
payors or the medical community in general will accept and utilize any products
that may be developed by us.
WE DEPEND ON OUR COLLABORATIVE PARTNERS
We currently have agreements with Novartis Pharma, Boehringer Ingelheim,
CIBA Vision, Merck & Co., Zeneca Pharmaceuticals, and Abbott Laboratories as
collaborative partners. These collaborative partners
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have agreed to pay for a portion of our research and development expenses. We
have entered into research, development or distribution agreements pursuant to
which the collaborative partners provide money in exchange for research services
, product rights or marketing rights related to the products or targets
involved. In addition, all of these agreements provide for us to receive
royalties or other revenues based on sales of products developed or marketed by
these collaborative partners.
If any collaborative partner fails to develop or sell any product in which
we have rights, our business may be negatively affected. While we believe that
our collaborative partners will have sufficient motivation to continue their
funding, development and commercialization activities, we cannot be sure that
any of these collaborations will be continued or result in successful products.
The failure of a collaborative partner to continue funding any particular
program could delay or stop the development or commercialization of any products
resulting from such program. Collaborative partners may be pursuing other
technologies or developing other drug candidates either on their own or in
collaboration with others, including our competitors, to develop treatments for
the same diseases targeted by our own collaborative programs. We also may wish
to rely on additional collaborative arrangements to develop and commercialize
our products in the future. However, we may not be able to negotiate acceptable
collaborative arrangements in the future, and, even if successfully negotiated,
the collaborative arrangements themselves may not be successful.
WE ARE IN THE EARLY STAGE OF DEVELOPMENT, AND OUR PRODUCTS ARE SUBJECT TO
TECHNOLOGICAL UNCERTAINTY
We are still at an early stage of development. Most of our resources are
dedicated to applying molecular biology and medicinal and developmental
chemistry to the discovery and development of drug candidates based upon
antisense technology, a novel drug discovery tool in designing drugs that work
at the genetic level to block the production of disease-causing proteins. Drug
discovery and development involves inherent risks including the risk that
genetic targets that are identified prove unsuccessful and the risk that
compounds that demonstrate attractive development characteristics in preclinical
studies have undesirable side-effects, including toxicity. Laboratory results
obtained in preclinical studies do not necessarily indicate the results that
will be obtained in later stages of preclinical development or in human clinical
testing. For example, we are attempting to develop products for diseases for
which no appropriate animal model that might predict efficacy currently exists.
As a result, drug candidates for these diseases must advance at least to Phase
II human clinical trials before we will have evidence of efficacy outside of the
laboratory. Drugs discovered by us may not effectively combat the targeted
disease and, even if they work, may not be commercially successful.
WE HAVE A HISTORY OF OPERATING LOSSES
Because of the nature of the business of drug discovery and development,
our expenses have exceeded our revenues since the Company was founded in January
1989. As of December 31, 1998, our accumulated losses were approximately $197
million. Most of the losses have resulted from costs incurred in connection with
our research and development programs and from general and administrative costs
associated with our growth and operations. These costs have exceeded our
revenues, most of which have come from collaborative arrangements, interest
income and research grants. Our current product revenues are derived solely from
sales of Vitravene(TM). This product has limited sales potential relative to
most pharmaceutical products. We expect to incur additional operating losses
over the next several years, and we expect losses to increase as our preclinical
testing and clinical trial efforts continue to expand. We cannot guarantee that
we will successfully develop, receive regulatory approval for, commercialize,
manufacture, market or sell any additional products, or achieve or sustain
future profitability.
WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE
Based on our current operating plan, we believe that our available cash and
existing sources of revenue and credit, together with the interest earned on
those funds, will be adequate to satisfy our capital needs until at least the
end of 2000. Our future capital requirements will depend on many factors, such
as the following:
- Continued scientific progress in its research, drug discovery and
development programs;
- The size of these programs and progress with preclinical and clinical
trials;
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- The time and costs involved in obtaining regulatory approvals;
- The market acceptance of Vitravene(TM);
- The costs involved in filing, prosecuting and enforcing patent claims;
- Competing technological and market developments, including the
introduction of new therapies that address our markets; and
- Changes in existing collaborative relationships and our ability to
establish and maintain additional collaborative arrangements.
Our need for additional funding will also depend upon the cost of
manufacturing products on a larger scale and our ability to establish and
maintain effective marketing and sales activities and arrangements. If we find
that we do not have enough money, additional funds may be raised including
through public or private financing. Additional financing may not be available,
or, if available, may not be on acceptable terms. If additional funds are raised
by issuing equity securities, the shares of existing stockholders will be
subject to further dilution and share prices may decline. If adequate funds are
not available, we may be required to cut back on one or more of our research,
drug discovery or development programs or obtain funds through arrangements with
collaborative partners or others. These arrangements may require us to give up
rights to certain of our technologies, product candidates or products.
WE HAVE LIMITED LARGE-SCALE MANUFACTURING EXPERIENCE
Our ability to operate profitably will depend in part on our ability to
manufacture our products, or to have another company manufacture our products,
at a cost low enough to enable us to charge a competitive price to buyers. To
establish additional commercial manufacturing capability on a large scale, we
must improve our manufacturing processes and reduce our product costs. The
manufacture of sufficient quantities of new drugs is typically a time-consuming
and complex process. Pharmaceutical products based on chemically modified
oligonucleotides have never been manufactured on a large commercial scale. There
are a limited number of suppliers for certain capital equipment and raw
materials that we use to manufacture our drugs, and some of these suppliers will
need to increase their scale of production to meet our projected needs for
commercial manufacturing. We may not be able to manufacture at a cost or in
quantities necessary to make commercially successful products.
In 1998 we entered into an antisense oligonucleotide manufacturing
collaboration with Zeneca LifeScience Molecules of Manchester, England pursuant
to which Zeneca LSM will supply a portion of our requirements of drugs for
clinical trials. As of the date of this report, we have not yet received any
supply of drugs under this arrangement, and we cannot guarantee that Zeneca LSM
will be able to meet our supply needs for clinical trials.
NEW DRUG CANDIDATES AND COMPETITION MAY HURT OUR BUSINESS
Our competitors are engaged in all areas of drug discovery in the United
States and other countries, are numerous, and include, among others, major
pharmaceutical companies, specialized biopharmaceutical firms, universities and
other research institutions. Our competitors may succeed in developing other new
therapeutic drug candidates that are more effective than any drug candidates
that we have been developing. These competitive developments could make our
technology and products obsolete or non-competitive before we have had enough
time to recover our research, development or commercialization expenses.
Many of our competitors have substantially greater financial, technical and
human resources than we do. In addition, many of these competitors have
significantly greater experience than we do in conducting preclinical testing
and human clinical trials of new pharmaceutical products and in obtaining FDA
and other regulatory approvals of products for use in health care. Accordingly,
our competitors may succeed in obtaining regulatory approval for products
earlier than we do. We will also compete with respect to manufacturing
efficiency and marketing capabilities, areas in which we have limited or no
experience.
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OUR PATENTS AND PROPRIETARY RIGHTS COULD AFFECT OUR ABILITY TO COMPETE
Our success depends to a significant degree upon our ability to develop
proprietary products. However, we cannot assure you that patents will be granted
on any of our patent applications in the United States or in other countries. We
also cannot assure you that the scope of any of our issued patents will be
sufficiently broad to offer meaningful protection. In addition, our issued
patents or patents licensed to us could be successfully challenged, invalidated
or circumvented so that our patent rights would not create an effective
competitive barrier.
INTELLECTUAL PROPERTY LITIGATION COULD HARM OUR BUSINESS
Litigation regarding patents and other intellectual property rights is
extensive in the biotechnology industry. We are aware that patents have been
applied for and in some cases issued to others claiming technologies which are
closely related to ours. As a result, and in part due to the ambiguities and
evolving nature of intellectual property law, we periodically receive notices
from others that they are seeking patent rights that could, if obtained,
negatively impact our business. However, to date, none of these notices have
resulted in a negative impact on our business.
In the event of an intellectual property dispute, we may be forced to
litigate. Such litigation could involve proceedings declared by the U.S. Patent
and Trademark Office or the International Trade Commission, as well as affected
third parties. Intellectual property litigation can be extremely expensive, and
such expense, as well as the consequences should we not prevail, could seriously
harm our business.
If a third party claimed an intellectual property right to technology we
use, we might be forced to discontinue an important product or product line,
alter our products and processes, pay license fees or cease certain activities.
Although we might, under these circumstances, attempt to obtain a license to
such intellectual property, we may not be able to do so on favorable terms, if
at all.
WE HAVE NO SALES AND MARKETING EXPERIENCE
We have no experience in sales, marketing or distribution of drug products.
We currently do not sell any products directly. Instead, we sell Vitravene(TM)
through our partner CIBA Vision which is responsible for all sales and marketing
of that product. To market any of our products directly, we must develop an
expert marketing and sales force capable of supporting product distribution. We
may not be able to build such a sales force at all, or at a reasonable cost, and
if we do, our direct sales and marketing efforts may not be successful. As with
any new product, our products may not achieve market acceptance in place of
existing treatments.
WE DEPEND ON OUR KEY EMPLOYEES
We are dependent on the principal members of our management and scientific
staff. We do not have employment agreements with any of our management or
scientific staff. The loss of our management and key scientific employees might
slow the achievement of important research and development goals. Recently, Dr.
Daniel Kisner, our President and Chief Operating Officer and director resigned
all positions to assume the position of Chief Executive Officer of Caliper
Technologies, a privately held company. Dr. Kisner's resignation
is not expected to have a material adverse effect on our business. It is also
critical to our success to recruit and retain qualified scientific personnel to
perform research and development work. Although we believe we will be successful
in attracting and keeping skilled and experienced scientific personnel, we may
not be able to do so on acceptable terms, because of stiff competition for
experienced scientists among many pharmaceutical and health care companies,
universities and non-profit research institutions.
OUR STOCK PRICE IS VOLATILE
The market price of our common stock, like that of the securities of many
other biopharmaceutical companies, has been and is likely to continue to be
highly volatile. During the last twelve months, the market price of our common
stock has ranged from $7 per share to $16 per share. The market price can be
affected by
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many factors, including, for example, fluctuation in our operating results,
announcements of technological innovations or new drug products being developed
by us or our competitors, governmental regulation, regulatory approval,
developments in patent or other proprietary rights, public concern regarding the
safety of our drugs and general market conditions.
ANTI-TAKEOVER PROVISIONS
Our certificate of incorporation provides for classified terms for the
members of the Board of Directors. Our certificate also includes a provision
that requires at least 66 2/3% of our voting stockholders to approve a merger or
certain other business transactions with, or proposed by, 15% or more of our
voting stockholders, except in cases where certain directors approve the
transaction or certain minimum price criteria and other procedural requirements
are met.
Our certificate of incorporation also requires that any action required or
permitted to be taken by our stockholders must be taken at a duly called annual
or special meeting of stockholders and may not be taken by written consent. In
addition, special meetings of our stockholders may be called only by the Board
of Directors, the Chairman of the Board or the President, or by any holder of
10% or more of the outstanding common stock. The classified board, stockholder
vote requirements and other charter provisions protect us in two ways. First,
these provisions may discourage certain types of transactions in which the
stockholders might otherwise receive a premium for their shares over then
current market prices, and may limit the ability of the stockholders to approve
transactions that they think may be in their best interests. Second, the Board
of Directors has the authority to fix the rights and preferences of and issue
shares of Preferred Stock, which may have the effect of delaying or preventing a
change in control of Isis without action by the stockholders.
ITEM 2. PROPERTIES
We occupy approximately 132,000 square feet of laboratory and office space
(including a 12,000 square foot GMP manufacturing suite) in five buildings
located on our "campus" in Carlsbad, California. Three of these buildings are
owned by Isis and, as of December 31, 1998, secure approximately $8.6
million in indebtedness of the Company. Two of the buildings are leased. We have
also leased 1,600 sq. ft. of office space in the United Kingdom to accommodate
employees supervising European clinical trials. We believe that our facilities
will be adequate to meet our needs through 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock (Nasdaq symbol "ISIP") is traded publicly through the
Nasdaq National Market. The following table presents quarterly information on
the price range of the common stock. This information indicates the high and low
sale prices reported by the Nasdaq National Market. These prices do not include
retail markups, markdowns or commissions.
HIGH LOW
------ ------
1997
First Quarter............................................ $19.88 $15.00
Second Quarter........................................... $17.38 $12.88
Third Quarter............................................ $18.63 $12.75
Fourth Quarter........................................... $18.38 $11.00
1998
First Quarter............................................ $16.06 $12.00
Second Quarter........................................... $16.25 $11.63
Third Quarter............................................ $16.00 $ 7.00
Fourth Quarter........................................... $13.31 $ 8.88
As of January 31, 1999, there were approximately 1,427 stockholders of
record of the common stock. We have never paid dividends and do not anticipate
paying any dividends in the foreseeable future. Under the terms of certain term
loans, we are restricted from paying cash dividends until the loans are fully
repaid. See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS
DATA:
Research and development
revenues.................. $ 38,611 $ 32,722 $ 22,663 $ 12,966 $ 10,088
Research and development
expenses.................. 62,200 55,940 45,653 33,175 26,468
Net loss.................... (42,983) (31,066) (26,521) (23,712) (18,181)
Basic and diluted net loss
per share................. (1.60) (1.17) (1.04) (1.10) (0.93)
Shares used in computing
basic and diluted net loss
per share................. 26,873 26,456 25,585 21,514 19,542
DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments............ $ 58,848 $ 86,786 $ 77,624 $ 77,407 $ 43,440
Working capital.......... 40,651 62,573 56,300 60,040 33,679
Total assets............. 96,074 117,881 101,305 99,569 66,643
Long-term debt and
capital lease
obligations, less
current portion........ 77,724 56,452 19,864 4,714 9,295
Accumulated deficit...... (197,116) (154,133) (123,067) (96,546) (72,834)
Stockholders' equity..... (4,186) 34,852 58,385 75,850 46,019
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Since its inception in January 1989, almost all of our resources have been
devoted to its research, drug discovery and drug development programs. We are
not yet profitable and expect to continue to have operating losses for the next
several years. Our revenue comes from collaborative research and development
agreements with pharmaceutical companies, research grants and interest income.
The revenue from the collaboration agreements increases the amount of research
and development activity that we are able to fund and offsets a portion of our
research and development costs. See Item 1, "Business -- Collaborative
Agreements." In 1998, we received approval from the U.S. Food and Drug
Administration ("FDA") to begin marketing our first product, Vitravene(TM), a
drug used to treat CMV retinitis.
RESULTS OF OPERATIONS
Years Ended December 31, 1998 and December 31, 1997
Our revenue from collaborative research and development agreements was
$38.6 million for the year ended December 31, 1998 compared with $32.7 million
in 1997, an increase of 18%. The receipt of $5 million from CpG
ImmunoPharmaceuticals, Inc. for a license to certain issued patents together
with $1.8 million from a research collaboration with Merck contributed to this
revenue increase. We delivered our first commercial shipment of Vitravene(TM) in
1998, earning product revenue of $0.6 million.
Research and development expenses rose 11% to $62.2 million in 1998 from
$55.9 million in 1997. The increase in research and development expenses
occurred because compounds in preclinical and clinical development are
continuing to advance into more expensive stages of development. We expect that
research and development expenses will continue to increase as compounds
continue to advance in clinical development.
Operating expenses in 1998 included $5.2 million for acquired patents. This
expense arises from the acquisition of the antisense patent estate from Gilead
Sciences, Inc., which was written-off in accordance with our accounting
policies. No similar expenses were incurred in 1997.
General and administrative expenses were $9.5 million for 1998 compared
with $8.1 million in 1997. This increase is primarily because of expanded
business development, investor relations activities and support of our
increasing research and development efforts. We expect that general and
administrative expenses will continue to increase in the future to support our
growing research and development activities.
Interest expense increased to $9.4 million in 1998 compared with $3.6
million in 1997. This increase in interest expense is due to borrowing $25
million in a private debt financing completed in the fourth quarter of 1997 with
an additional $15 million follow-on private debt financing in the second quarter
of 1998. Under the terms of these financing arrangements, payment of both
principal and interest is deferred for the first five years. Therefore, of the
$9.4 million interest expense in 1998, $6.1 million was accrued under the
long-term debt agreements and will not require current cash payment.
Our net loss for 1998 was $43.0 million, or $1.60 per share, compared to
$31.1 million, or $1.17 per share, for 1997. We expect that operating losses
will increase for several more years as research and development activities
grow. Operating losses may fluctuate from quarter to quarter because of
differences in the timing of revenue and expense recognition.
At December 31, 1998, our net operating loss carryforward for federal
income tax purposes was approximately $193.5 million. The net operating loss and
research credit carryforwards make up the majority of our deferred tax assets.
We will only be able to use the net operating loss and research credits, and
realize the benefit of these deferred tax assets, if we become profitable. We
have fully reserved all of our deferred tax assets as their realization is
uncertain. Our research credit carryforward for federal income tax purposes was
approximately $8.4 million. Our net operating loss and tax credit carryforwards
will be subject to an annual limitation regarding utilization against taxable
income in future periods, due to "change of ownership" provisions of the Tax
Reform Act of 1986. We believe that such limitation will not have a material
adverse impact on the benefits that may arise from the company's net operating
loss and tax credit carryforwards.
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However, there may or may not be additional limitations arising from any future
changes in ownership that may have a material adverse impact.
Isis believes that inflation and changing prices have not had a material
effect on our operations to date.
Years Ended December 31, 1997, and December 31, 1996
Our revenue from collaborative research and development agreements was
$32.7 in 1997 and $22.7 million in 1996, an increase of 44%. The receipt of a $5
million pre-commercial fee from CIBA Vision together with $4 million in
milestone payments from Novartis in addition to ongoing revenue from research
and development collaborations caused this revenue increase.
Research and development expenses amounted to $55.9 million in 1997 and
$45.7 million in 1996. This increase in research and development expenses
resulted from Isis' growing preclinical and clinical development activities.
General and administrative expenses were $8.1 million in 1997 compared with
$6.2 million in 1996. This increase was due to expanded business development and
investor relations activities and support of our increasing research and
development efforts.
Our net loss was $31.1 million, or $1.17 per share, in 1997 and $26.5
million, or $1.04 per share, in 1996.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations with revenue from contract research and
development, by selling equity securities and by issuing long-term debt. From
our inception through December 31, 1998, we have earned approximately $145
million in revenue from contract research and development. We have also raised
net proceeds of approximately $185 million from the sale of equity securities
since Isis was founded. We have borrowed approximately $60 million under
long-term debt arrangements to finance a portion of our operations.
As of December 31, 1998, we had cash, cash equivalents and short-term
investments of $58.8 million and working capital of $40.7 million. In
comparison, we had cash, cash equivalents and short-term investments of $86.8
million and working capital of $62.6 million as of December 31, 1997. This
decrease in cash and short-term investments resulted from the funding of
operating losses, investments in capital equipment and building improvements and
principal payments on debt and capital lease obligations. This decrease was
offset in part by the receipt of $15 million from a private debt financing and
$12.5 million in milestone payments and licensing fees from CIBA Vision and CpG
ImmunoPharmaceuticals, Inc.
The agreement with Boehringer Ingelheim provides us with a $40 million line
of credit. This line of credit is to be used to support the collaboration cell
adhesion programs. Restrictions on the availability of the line of credit are
based on the anticipated collaboration costs, the amount of funds available to
us, and our average stock price over specified periods. As of December 31, 1998
the line of credit was not available. As of December 31, 1998, the outstanding
balance under this line of credit was $22.6 million. See Note 3 to the Financial
Statements, "Long-term obligations and commitments."
In October 1997, we borrowed $25 million in a private transaction. The loan
must be repaid on November 1, 2007, and bears interest at 14% per annum. No
payments of either principal or interest are required during the first 5 years
of the loan. After the first 5 years, interest must be paid quarterly until the
end of the loan. No principal payments are required until November 1, 2007. In
conjunction with this transaction, we issued warrants to purchase 500,000 shares
of common stock at a price of $25 per share. On May 1, 1998, we completed a
follow-on $15 million private debt financing. This financing was a follow-on to
our $25 million private debt financing in October 1997 and bears the same terms
and conditions. In conjunction with this follow-on transaction, we issued
warrants to purchase 300,000 shares of common stock at a price of $25 per share.
The warrants issued in connection with both of these financings expire on
November 1, 2004. The warrants have been valued at combined total of $5.4
million. This amount has been credited to stockholders' equity. Because interest
is deferred during the first 5 years, the combined principal balance of both
borrowings will accrue to a total of $78 million on November 1, 2002. The debt
under these arrangements is carried on the
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balance sheet net of the unamortized amount allocated to the warrants and
including accrued interest. The combined carrying amount of these notes at
December 31, 1998 was $41,321,000. See Note 3 to the Financial Statements,
"Long-term obligations and commitments".
As of December 31, 1998, our long-term obligations totaled $81.3 million
compared to $58.7 million at December 31, 1997. This increase was due to the $15
million follow-on debt financing together with the accrual of interest on the
ten-year notes described above. Additional capital lease financing to fund
equipment acquisitions also contributed to the increase. We expect that capital
lease obligations will increase over time to fund capital equipment acquisitions
required for our growing business. We will continue to use lease lines as long
as the terms continue to remain commercially attractive. We believe that our
existing cash, cash equivalents and short-term investments, combined with
interest income and contract revenue will be sufficient to meet our anticipated
requirements at least until the end of 2000.
YEAR 2000 COMPUTER ISSUES
Until recently many computer programs were written to store only two digits
of date-related information. Thus the programs were unable to distinguish
between the year 1900 and the year 2000. As a result, many computer experts have
significant concerns regarding how those programs will function after December
31, 1999. This is frequently referred to as the "Year 2000 Problem." Because
Isis was founded in 1989, our computer systems and equipment are relatively new
and generally not subject to the date and time issues that create the Year 2000
problems.
A team of Isis employees is conducting our Year 2000 initiative. The team's
activities are designed to ensure that there is no adverse effect on our core
business operations and that transactions with customers, suppliers, corporate
partners and financial institutions are fully supported. Our Year 2000 plan
includes the following phases: inventorying critical business systems and
vendors, assessment of the probability of Year 2000 non-compliance, remediation
activities including repairing or replacing identified systems, testing, and
developing contingency plans.
An inventory of all computer equipment, operating systems and applications
including other equipment that uses embedded microprocessors has been completed.
Compliance assessment has been completed for all critical or important systems
and equipment. Remediation activities have been completed for all but five
systems or pieces of equipment. We estimate that all required remediation and
validation will be completed by the third quarter of 1999. Testing of our
critical and important systems and applications is ongoing and is scheduled to
be completed by the third quarter of 1999. Contingency planning will begin in
the second quarter of 1999. Based on the work completed to date, we believe that
with the completed remediation work, the Year 2000 issue will not pose
significant operational problems for our computer systems and equipment.
We have also requested information from our significant suppliers,
corporate partners and financial institutions to ensure that those parties are
addressing Year 2000 issues where their systems could impact our operations. We
are assessing the extent to which our operations are vulnerable should those
organizations fail to properly modify their computer systems. The failure of
systems maintained by our vendors, corporate partners or financial institutions
could affect our ability to process transactions, conduct research and
development projects, manufacture products, or engage in other normal business
activities. We have received responses from all but one of the critical or
important third parties and are in the process of evaluating those responses to
identify areas of exposure. We are also in the process of identifying alternate
sources for products or services in the event that any of our present primary or
secondary vendors are not successful in resolving their Year 2000 issues. We
will continue to monitor the progress of critical and important third parties
throughout 1999 to ascertain that they achieve their Year 2000 objectives.
Our most likely exposure to Year 2000 problems is related to our high
dependence on commercial utilities such as water and power. If the providers of
these utilities are not able to maintain service due to Year 2000 noncompliance
it could result in temporarily halting research and development activities until
the service is restored or until suitable alternate facilities in a different
geographic area could be obtained. It is not
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possible to precisely estimate the length of delays in research and development
projects in those circumstances, but it could range from three to six months.
While we believe our planning and preparations will be adequate to address
our internal Year 2000 concerns, we cannot guarantee that the systems of other
companies, on which our systems and operations rely, will be converted on a
timely basis and will not have a material effect on us. The total cost of the
Year 2000 risk assessment and remediation is funded through operating cash
flows, and we are expensing these costs as they are incurred. Based on
information obtained to date, the cost of identifying and remediating exposures
to the Year 2000 Problem is not expected to be material to our results of
operations or financial position. The estimated total cost of our Year 2000
assessment and remediation is not expected to exceed $500,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and supplementary data required by this item are
filed as exhibits hereto, are listed under Item 14(a)(1) and (2), and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the caption "Election of
Directors" contained in our definitive Proxy Statement (the "Proxy Statement")
which will be filed on or before April 12, 1999 with the Securities and Exchange
Commission in connection with the solicitation of proxies for our 1999 Annual
Meeting of stockholders to be held on May 21, 1999.
The required information concerning our Executive Officers is contained in
Item 1, Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" contained in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the captions "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions" contained in the Proxy Statement.
26
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements
The financial statements required by this item are submitted in a separate
section beginning on page 35 of this Report.
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... 35
Balance Sheets at December 31, 1998 and 1997................ 36
Statements of Operations for the years ended December 31,
1998, 1997 and 1996....................................... 37
Statements of Stockholders' Equity (deficit) for the years
ended December 31, 1998, 1997 and 1996.................... 38
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996....................................... 39
Notes to Financial Statements............................... 40
(a)(2) Index to Financial Statement Schedules
None required.
(a)(3) Index to Exhibits
See Index to Exhibits on pages 33 through 34.
The following management compensatory plans and arrangements are required
to be filed as exhibits to this Report pursuant to Item 14(c):
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.2 -- Registrant's 1989 Stock Option Plan, as amended (the
"Plan").(6)
10.3 -- Revised form of Incentive Stock Option Agreement under the
Plan.(1)
10.4 -- Revised form of Supplemental Stock Option Agreement under
the Plan.(1)
10.5 -- Form of Incentive Stock Option Agreement entered into
between Registrant and certain of its officers together with
related schedule.(2)
10.6 -- Form of Supplemental Stock Option Agreement entered into
between Registrant and certain of its officers together with
related schedule.(2)
10.7 -- Registrant's 1992 Non-employee Directors Stock Option Plan,
as amended.(1)
10.8 -- Revised form of Supplemental Stock Option Agreement under
Registrant's 1992 Non-employee Directors' Stock Option Plan,
as amended.(5)
10.9 -- Registrant's Employee Stock Purchase Plan.(3)
- ---------------
(1) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994 and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 33-42970) and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by reference.
27
30
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of the fiscal year ended December 31, 1998.
(c) Exhibits
The exhibits required by this Item are listed under Item 14(a)(3).
(d) Financial Statement Schedules
The financial statement schedules required by this Item are listed under
Item 14(a)(2).
28
31
SIGNATURES
Pursuant to the requirements of Section 14 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized on the
31st day of March, 1999.
ISIS PHARMACEUTICALS, INC.
By: /s/ STANLEY T. CROOKE, M.D.,
PH.D.
------------------------------------
Stanley T. Crooke, M.D., Ph.D.
Chairman of the Board, President
and Chief Executive Officer
(Principal executive officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoint Stanley T. Crooke and B. Lynne Parshall, or any of
them, his or her attorney-in-fact, each with the power of substitution, for him
or her in any and all capacities, to sign any amendments to this Report, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ STANLEY T. CROOKE, M.D., PH.D. Chairman of the Board, Chief March 31, 1999
- ----------------------------------------------------- Executive Officer and Director
Stanley T. Crooke, M.D., Ph.D. (Principal executive officer)
/s/ B. LYNNE PARSHALL Executive Vice President and March 31, 1999
- ----------------------------------------------------- Chief Financial Officer
B. Lynne Parshall (Principal financial and
accounting officer)
/s/ BURKHARD BLANK Director March 31, 1999
- -----------------------------------------------------
Burkhard Blank
/s/ CHRISTOPHER F. O. GABRIELI Director March 31, 1999
- -----------------------------------------------------
Christopher F. O. Gabrieli
/s/ ALAN C. MENDELSON Director March 31, 1999
- -----------------------------------------------------
Alan C. Mendelson
/s/ WILLIAM R. MILLER Director March 31, 1999
- -----------------------------------------------------
William R. Miller
29
32
SIGNATURES TITLE DATE
---------- ----- ----
/s/ MARK B. SKALETSKY Director March 31, 1999
- -----------------------------------------------------
Mark B. Skaletsky
/s/ LARRY SOLL Director March 31, 1999
- -----------------------------------------------------
Larry Soll
/s/ JOSEPH H. WENDER Director March 31, 1999
- -----------------------------------------------------
Joseph H. Wender
30
33
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 Bylaws.(1)
4.1 Reference is made to Exhibits 3.1, 3.2 and 10.19.
4.2 Ciba-Geigy Investor Rights Agreement between the Registrant
and Novartis AG, formerly Ciba-Geigy Limited ("Novartis"),
dated November 9, 1990.(1)
4.3 Voting Rights Agreement among the Registrant, Novartis and
Dr. Crooke, dated November 9, 1990.(1)
4.4 Specimen stock certificate.(1)
9.1 Reference is made to Exhibit 4.4.
10.1 Form of Indemnification Agreement entered into between the
Registrant and its Directors and officers with related
schedule.(1)
10.2 Registrant's 1989 Stock Option Plan, as amended.(10)
10.3 Revised form of Incentive Stock Option Agreement under the
Plan.(8)
10.4 Revised form of Supplemental Stock Option Agreement under
the Plan.(8)
10.5 Form of Incentive Stock Option Agreement entered into
between Registrant and certain of its officers together with
related schedule.(4)
10.6 Form of Supplemental Stock Option Agreement entered into
between Registrant and certain of its officers together with
related schedule.(4)
10.7 Registrant's 1992 Non-Employee Directors Stock Option Plan,
as amended.(8)
10.8 Revised form of Supplemental Stock Option Agreement under
Registrant's 1992 Non-Employee Directors' Stock Option
Plan.(9)
10.9 Registrant's Employee Stock Purchase Plan.(2)
10.10 Form of Employee Assignment of Patent Rights.(1)
10.11 Amended and Restated Research, Development and Licensing
Agreement by and between Isis Pharmaceuticals, Inc. and
Novartis AG dated February 13, 1996 (with certain
confidential information deleted).(7)
10.12 License Agreement between the Registrant and the PNA Group
dated as of January 29, 1992 (with certain confidential
information deleted).(3)
10.13 Stock Purchase Agreement between the Registrant and
Boehringer Ingelheim International GmbH, dated as of July
18, 1995 (with certain confidential information deleted).(5)
10.14 Collaborative Agreement between the Registrant and
Boehringer Ingelheim International GmbH, dated as of July
18, 1995 (with certain confidential information deleted).(6)
10.15 Agreement between Registrant and CIBA Vision Corporation
dated July 10, 1997 (with certain confidential information
deleted).(9)
10.16 Amendment No. 2 to the Agreement between the Company and
CIBA Vision Corporation, dated September 14, 1998 (with
certain confidential information deleted).(12)
10.17 Imperial Bank Note Secured by Deed of Trust dated March 24,
1997 in the amount of $6,000,000; together with the related
Deed of Trust and Assignment of Rents dated March 24,
1997.(9)
10.18 Imperial Bank Note Secured by Deed of Trust dated March 24,
1997 in the amount of $3,706,620; together with the related
Deed of Trust and Assignment of Rents dated March 24,
1997.(9)
31
34
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.19 Purchase Agreement for 14% Senior Subordinated Discount
Notes due November 1, 2007 and Warrants for Common Stock
dated October 24, 1997 (with certain confidential
information deleted).(10)
10.20 First Supplement to Purchase Agreement for 14% Senior
Subordinated Discount Notes due November 1, 2007 and
Warrants for Common Stock dated May 1, 1998 (with certain
confidential information deleted).(11)
10.21 Asset Purchase Agreement between Registrant and Gen-Probe
Incorporated dated December 19, 1997 (with certain
confidential information deleted).(10)
10.22 Research Collaboration and License Agreement between Merck &
Co., Inc. and Isis Pharmaceuticals, Inc. dated June 1, 1998
(with certain confidential information deleted).(11)
10.23 Research and Development Agreement between Isis
Pharmaceuticals, Inc. and Zeneca Limited, dated December 18,
1998 (with certain confidential information deleted).
10.24 Patent Rights Purchase Agreement between Isis
Pharmaceuticals, Inc. and Gilead Sciences, Inc., dated
December 18, 1998 (with certain confidential information
deleted).
23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney. Reference is made to page 29.
27.1 Financial Data Schedule.
- ---------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-39640) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 33-42970) and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1992 and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Report on Form 8-K dated July 18,
1995 and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995 and incorporated herein by reference.
(7) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.
(8) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 and incorporated herein by reference.
(9) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 and incorporated herein by reference.
(10) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by reference.
(11) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 and incorporated herein by reference.
(12) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 and incorporated herein by reference.
32
35
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Isis Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Isis Pharmaceuticals,
Inc. as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Isis Pharmaceuticals, Inc.
at December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
January 30, 1999
33
36
ISIS PHARMACEUTICALS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31,
---------------------
1998 1997
--------- --------
Current assets:
Cash and cash equivalents................................. $ 27,618 $ 38,102
Short-term investments.................................... 31,230 48,684
Contracts receivable...................................... 3,466 289
Prepaids and other current assets......................... 873 2,075
--------- --------
Total current assets.............................. 63,187 89,150
Property, plant and equipment, net........................ 21,542 18,785
Patent costs, net......................................... 9,113 7,485
Deposits and other assets................................. 2,232 2,461
--------- --------
$ 96,074 $117,881
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 2,977 $ 2,843
Accrued payroll and related expenses...................... 3,088 2,242
Accrued liabilities....................................... 2,714 4,347
Deferred contract revenues................................ 10,176 14,893
Current portion of long-term obligations.................. 3,581 2,252
--------- --------
Total current liabilities......................... 22,536 26,577
Long-term obligations, less current portion................. 77,724 56,452
Commitments (See Note 3)
Stockholders' equity (deficit):
Common stock, $.001 par value; 50,000,000 shares
authorized, 27,053,000 shares and 26,655,000 shares
issued and outstanding at December 31, 1998 and 1997,
respectively........................................... 27 27
Additional paid-in capital................................ 192,737 188,793
Accumulated other comprehensive income.................... 166 165
Accumulated deficit....................................... (197,116) (154,133)
--------- --------
Total stockholders' equity (deficit).............. (4,186) 34,852
--------- --------
$ 96,074 $117,881
========= ========
See accompanying notes.
34
37
ISIS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Revenues:
Research and development revenues under collaborative
agreements............................................ $ 38,611 $ 32,722 $ 22,663
Product revenues......................................... 560 -- --
-------- -------- --------
39,171 32,722 22,663
-------- -------- --------
Expenses:
Research and development................................. 62,200 55,940 45,653
Write-off of acquired patents............................ 5,238 -- --
General and administrative............................... 9,511 8,078 6,246
-------- -------- --------
Total operating expenses......................... 76,949 64,018 51,899
-------- -------- --------
Loss from operations..................................... (37,778) (31,296) (29,236)
Interest income.......................................... 4,150 3,815 3,921
Interest expense......................................... 9,355 3,585 1,206
-------- -------- --------
Net loss................................................... $(42,983) $(31,066) $(26,521)
======== ======== ========
Basic and diluted net loss per share....................... $ (1.60) $ (1.17) $ (1.04)
======== ======== ========
Shares used in computing basic and diluted net loss per
share.................................................... 26,873 26,456 25,585
======== ======== ========
See accompanying notes.
35
38
ISIS PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
--------------- PAID IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
DESCRIPTION SHARES AMOUNT CAPITAL INCOME DEFICIT EQUITY
----------- ------ ------ ---------- ------------- ----------- -------------
Balance at December 31, 1995..... 25,249 $25 $172,253 $118 $ (96,546) $ 75,850
Comprehensive Income............. -- -- -- --
Net loss......................... -- -- -- -- (26,521) (26,521)
Changes in unrealized gains and
(losses), net of income
taxes.......................... -- -- -- 60 -- 60
--------
Comprehensive Income............. (26,461)
--------
Options exercised and employee
stock purchase plan............ 543 1 3,164 -- -- 3,165
Issuances of common stock net of
repurchases and offering
costs.......................... 409 -- 5,822 -- -- 5,822
Compensation relating to the
granting of options............ -- -- 9 -- -- 9
------ --- -------- ---- --------- --------
Balance at December 31, 1996..... 26,201 26 181,248 178 (123,067) 58,385
------ --- -------- ---- --------- --------
Comprehensive Income............. -- -- -- --
Net loss......................... -- -- -- -- (31,066) (31,066)
- --
Change in unrealized gains and
(losses),net of income taxes... -- -- -- (13) -- (13)
--------
Comprehensive Income............. (31,079)
--------
Options exercised and employee
stock purchase plan............ 454 1 3,306 -- -- 3,307
Issuances of warrants to purchase
common stock................... -- -- 3,780 -- -- 3,780
Compensation relating to the
granting of options............ -- -- 459 -- -- 459
------ --- -------- ---- --------- --------
Balance at December 31, 1997..... 26,655 27 188,793 165 (154,133) 34,852
------ --- -------- ---- --------- --------
Comprehensive Income............. -- -- -- --
Net loss......................... -- -- -- -- (42,983) (42,983)
Change in unrealized gains and
(losses), net of income
taxes.......................... -- -- -- 1 -- 1
--------
Comprehensive Income............. (42,982)
--------
Options exercised and employee
stock purchase plan............ 398 -- 2,298 -- -- 2,298
Issuances of warrants to purchase
common stock................... -- -- 1,646 -- -- 1,646
------ --- -------- ---- --------- --------
Balance at December 31, 1998..... 27,053 $27 $192,737 $166 $(197,116) $ (4,186)
====== === ======== ==== ========= ========
See accompanying notes.
36
39
ISIS PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Operating activities:
Net loss................................................... $(42,983) $(31,066) $(26,521)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 4,258 3,178 2,633
Deferred interest on long term debt................... 6,112 654 --
Write-off of acquired patents......................... 5,238 -- --
Compensation related to grant of options.............. -- 459 9
Changes in operating assets and liabilities:
Contracts receivable.................................. (3,177) (289) --
Prepaids and other current assets..................... 1,202 (343) (94)
Accounts payable...................................... 134 481 1,365
Accrued payroll and related expenses.................. 846 753 240
Accrued liabilities................................... (1,633) 1,584 (75)
Deferred contract revenues............................ (4,717) 4,689 1,291
-------- -------- --------
Net cash used in operating activities............... (34,720) (19,900) (21,152)
-------- -------- --------
Investing activities:
Short-term investments................................... 17,454 (8,142) (9,598)
Unrealized gain on investments........................... 1 (13) 60
Property, plant and equipment............................ (4,434) (3,454) (862)
Patent costs............................................. (3,882) (1,455) (1,439)
Deposits and other assets................................ (30) (2,098) 568
-------- -------- --------
Net cash provided by (used in) investing
activities....................................... 9,109 (15,162) (11,271)
-------- -------- --------
Financing activities:
Net proceeds from issuance of equity..................... 3,944 7,087 8,987
Proceeds from long-term borrowing........................ 13,354 32,666 16,200
Principal payments on debt and capital lease
obligations........................................... (2,171) (3,671) (2,145)
-------- -------- --------
Net cash provided from financing activities......... 15,127 36,082 23,042
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (10,484) 1,020 (9,381)
Cash and cash equivalents at beginning of year............. 38,102 37,082 46,463
-------- -------- --------
Cash and cash equivalents at end of year................... $ 27,618 $ 38,102 $ 37,082
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid............................................ $ 3,191 $ 2,644 $ 1,150
Supplemental disclosures of non-cash investing and
financing activities:
Additions to debt and capital lease obligations for
acquisitions of property, plant and equipment......... $ 2,068 $ 2,953 $ 2,325
Additions to debt for patent acquisitions............. $ 3,238 $ -- $ --
See accompanying notes.
37
40
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and business activity -- Isis Pharmaceuticals was incorporated
in California on January 10, 1989. In conjunction with its initial public
offering, Isis was reorganized as a Delaware corporation, as Isis
Pharmaceuticals, Inc., in April 1991. Isis was organized principally to develop
human therapeutic drugs using antisense and combinatorial technology.
Basic net loss per share -- In 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings Per Share." Statement No. 128 replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Dilutive earnings per
share includes the dilutive effects of options, warrants and convertible
securities. Options and warrants to purchase common stock were not included in
the computation of diluted net loss per share because the effect would be
antidilutive. All net losses per share have been presented to conform to
Statement No. 128 requirements.
Contract revenues and expenses -- Contract revenues consist of
non-refundable research and development funding and are recorded as earned based
on the performance requirements of the collaborative research and development
contracts. Contract fees for which no further performance obligations exist are
recognized when the payments are received or when the collection is assured.
Payments received in excess of amounts earned are recorded as deferred contract
revenues. Research and development costs are expensed as incurred. For the years
ended December 31, 1998, 1997 and 1996, costs and expenses of approximately
$35,000,000, $31,000,000, and $29,000,000 respectively, were related to
collaborative research and development arrangements.
Revenue recognition -- Isis recognizes revenue from product sales at the
time of shipment. An estimate is made of the amount of the product that may be
returned and current period sales are reduced accordingly. License fees consist
of non-refundable fees from the sale of license rights to our proprietary
technologies. Revenue from these fees is recorded when no further performance
obligations exist.
Cash equivalents and short-term investments -- Cash equivalents and
short-term investments consist of highly liquid debt instruments. Isis considers
instruments with original maturities of less than 90 days to be cash
equivalents. Isis has recorded its cash equivalents and short-term investments
at fair market value as of December 31, 1998, and has classified all of its
investments as available-for-sale. This category includes all securities which
Isis does not have the positive intent and ability to hold to maturity. The
measurement basis for available-for-sale securities is fair market value.
Unrealized gains and losses, net of the related tax effect, are included in
accumulated other comprehensive income, a separate component of stockholders'
equity. See Note 2 -- Investments.
Property, plant and equipment -- Property, plant and equipment is stated at
cost and consists of the following (in thousands):
DECEMBER 31,
--------------------
1998 1997
-------- --------
Land........................................................ $ 1,163 $ 1,163
Buildings and improvements.................................. 16,084 13,607
Equipment................................................... 25,324 21,599
Furniture and fixtures...................................... 1,227 927
-------- --------
43,798 37,296
Less accumulated depreciation............................... (22,256) (18,511)
-------- --------
$ 21,542 $ 18,785
======== ========
38
41
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
Depreciation of property, plant and equipment is provided on the
straight-line method over estimated useful lives as follows:
Building.................................................... 31.5 years
Improvements................................................ 15 years
Equipment................................................... 2.5-5 years
Furniture and fixtures...................................... 5 years
Patent costs -- Isis capitalizes certain costs related to patent
applications, principally consisting of legal and filing fees. These costs are
regularly reviewed to determine that they include costs for patent applications
Isis is pursuing. Costs related to applications that are not being actively
pursued are evaluated under Accounting Principles Board Statement 17: Intangible
Assets and are adjusted to an appropriate amortization period, which generally
results in an immediate write-off. Accumulated patent costs are amortized on a
straight-line basis over their estimated economic lives of approximately 10
years, beginning with the date the patents are issued. The weighted average
remaining life of issued patents is 8.2 years. Accumulated amortization was
$493,000 at December 31, 1998 and $240,000 at December 31, 1997.
Long-lived assets -- Long-lived assets are reviewed for potential
impairment annually or when events and circumstances warrant an earlier review.
When an evaluation is required, we compare the estimated future undiscounted
cash flows associated with the asset to the asset's carrying amount to determine
if a write-down to market value or discounted cash flow value is required.
Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Comprehensive income -- Isis adopted Statement of Financial Accounting
Standards (FAS) 130, "Reporting Comprehensive Income", at December 31, 1998.
Under FAS 130, Isis is required to display comprehensive income and its
components as part of Isis' full set of financial statements. The measurement
and presentation of net income did not change. Comprehensive income is comprised
of net income and certain changes in equity that are excluded from net income.
Specifically, FAS 130 requires unrealized holding gains and losses on Isis'
available-for-sale securities, which were reported separately in stockholders'
equity, to be included in accumulated other comprehensive income. Comprehensive
income for the years ended December 31, 1998, 1997 and 1996 have been reflected
in the Consolidated Statement of Stockholders' Equity.
Reclassification -- Certain prior period amounts have been reclassified to
conform to current presentation.
2. INVESTMENTS
Isis invests its excess cash in U.S. Government securities and debt
instruments of financial institutions and corporations with strong credit
ratings. Isis has established guidelines relative to diversification and
maturities that maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
Isis has not experienced any losses on its short-term investments. As of
December 31, 1998, 79% of the debt securities held by Isis had a contractual
maturity of one year or less, and the remaining 21% of the portfolio was due
within 2 years.
39
42
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
The following is a summary of available-for-sale securities:
AVAILABLE-FOR-SALE SECURITIES
-----------------------------------
GROSS
UNREALIZED ESTIMATED
COST GAINS FAIR VALUE
------- ---------- ----------
(IN THOUSANDS)
DECEMBER 31, 1998
U.S. Treasury securities and obligations of
U.S. Government agencies.......................... $20,700 $ 86 $20,786
U.S. corporate debt securities...................... 10,364 80 10,444
------- ---- -------
Total debt securities..................... $31,064 $166 $31,230
======= ==== =======
DECEMBER 31, 1997
U.S. Treasury securities and obligations of
U.S. Government agencies.......................... $32,980 $105 $33,085
U.S. corporate debt securities...................... 15,539 60 15,599
------- ---- -------
Total debt securities..................... $48,519 $165 $48,684
======= ==== =======
3. LONG-TERM OBLIGATIONS AND COMMITMENTS
Isis obtained $25,060,000 in private debt financing during 1997 and an
additional $15,000,000 in 1998. The terms of the financing provide for a 10 year
maturity on the debt, interest of 14% per annum and deferred interest payments
for the first 5 years of the loan. After the first 5 years, interest must be
paid quarterly until the end of the loan, November 1, 2007. No principal
repayments are required until the end of the loan. Because interest is deferred
during the first 5 years, the principal balance will be $78 million on November
1, 2002. In conjunction with the debt financing, Isis issued warrants to the
lender to purchase shares of common stock, exercisable at $25 per share. Isis
issued warrants for 500,000 common shares in 1997 and 300,000 shares in 1998.
The fair value of the warrants was estimated using the Black-Scholes option
pricing model, with the following assumptions: expected life of 4.5 years,
expected dividend yield of zero percent and expected volatility of 60 percent.
The assumed risk free interest rate was 5.9%. The warrants were valued at
$3,780,000 and $1,646,000 respectively, and were credited to equity. The
allocation of value to the warrants creates an effective debt discount which is
amortized using the effective interest method. The effective interest rate of
this debt is approximately 16%, including the effect of the discount
amortization. The debt is carried on the balance sheet net of the unamortized
amount allocated to the warrants, and including accrued interest. The carrying
amount at December 31, 1998 was $41,321,000. The fair value of this debt at
December 31, 1998 approximated $45,000,000. The fair value of the long-term debt
is estimated using discounted cash flow analyses, based on current borrowing
rates for similar types of borrowing arrangements.
In 1997, Isis obtained 2 new term loans from a bank to refinance existing
notes secured by real property and to fund facilities expansion. Both notes are
secured by Isis' real property and bear interest at the prime interest rate plus
0.5%. The first note in the amount of $3,707,000 requires monthly principal
repayments of $12,433 plus interest with the remaining principal balance due in
April 2002. The balance of the note at December 31, 1998 was $3,451,000. The
second note in the amount of $6,000,000 requires monthly principal repayments of
$50,000 plus related interest with the remaining principal balance due in July
2002. The balance at December 31, 1998 was $5,150,000. As of December 31, 1998,
the carrying value of these variable rate long-term notes approximated fair
value.
In 1996 and 1997, Isis borrowed a total of $22,576,000 under a $40,000,000
line of credit made available under the terms of its collaborative agreement
with Boehringer Ingelheim International GmbH. The borrowed funds are being used
to fund research and development costs associated with the collaboration.
Borrowings
40
43
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
under the line of credit bear interest at the 7 year U.S. interbanking rate plus
2.0%, determined at the time each advance is made. Interest payments are due
twice each year with principal repayment due 7 years after the advance date. The
principal may be repaid in cash or stock, at Isis' option. If Isis elects to
repay the loan in shares of Isis common stock, repayment will be made at a share
price equal to 90% of the average market value over the 20 trading days
preceding the maturity date. The balance under this line of credit as of
December 31, 1998 was $22,576,000, which approximated fair value.
In December 1998, Isis purchased from Gilead Sciences, Inc. ("Gilead"), the
holdings of its antisense patent estate. This acquisition includes patents and
patent applications covering a broad proprietary suite of antisense chemistry
and antisense drug delivery systems. The purchase price was $6,000,000 payable
in four installments over the next three years. Isis made the initial $2,000,000
payment in December 1998. Isis has recorded the net present value of the future
payments, using a discount rate of 10%, as a long-term obligation on the balance
sheet. The balance of this obligation at December 31, 1998 was $3,238,000, which
approximated fair value.
Isis leases equipment and certain office and lab space under non-cancelable
operating and capital leases with terms through February 2007. Annual future
minimum payments under operating leases and other long-term obligations as of
December 31, 1998 are as follows (in thousands):
OPERATING CAPITAL CONTRACT LONG-TERM
LEASES LEASES OBLIGATIONS DEBT
--------- ------- ----------- ---------
1999.................................... $1,150 $ 2,426 $1,000 $ 3,388
2000.................................... 859 1,797 1,000 3,321
2001.................................... 856 1,610 2,000 3,253
2002.................................... 797 645 8,574
2003.................................... 778 9 28,955
Thereafter.............................. 2,238 1 128,156
------ ------- ------ ---------
Total minimum payments........ $6,678 $ 6,488 $4,000 $ 175,647
====== ======= ====== =========
Less amount representing interest....... (919) (762) (103,149)
------- ------ ---------
Present value of future minimum
payments.............................. 5,569 3,238 72,498
Less current portion.................... (1,923) (909) (749)
------- ------ ---------
Total......................... $ 3,646 $2,329 $ 71,749
======= ====== =========
Rent expense for the years ended December 31, 1998, 1997, and 1996 was
$1,328,000, $1,030,000 and $520,000, respectively. Cost of equipment under
capital leases at December 31, 1998 and 1997 was $17,227,000 and $14,133,000,
respectively. Accumulated depreciation of equipment under capital leases at
December 31, 1998 and 1997 was $13,266,000 and $11,177,000, respectively.
4. STOCKHOLDERS' EQUITY
Stock Option Plans and Other Employee Option Grants -- In June 1989, Isis
adopted a stock option plan which provides for the issuance of incentive and
non-qualified stock options for the purchase of up to 10,200,000 shares of
common stock to its employees and certain other individuals. In addition to the
options issued under the terms of the 1989 plan, non-qualified options to
purchase 319,000 shares of common stock have been granted to certain employees.
The plan also includes provisions for the issuance of stock pursuant to
restricted stock purchases and bonuses. Typically options expire 10 years from
the date of grant. Options granted after December 31, 1995 vest over a 4 year
period, with 25% exercisable at the end of 1 year from the date of the grant and
the balance vesting ratably thereafter. Options granted before January 1, 1996
generally
41
44
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
vest over a 5 year period. At December 31, 1998, a total of 4,347,000 shares
were exercisable, and 1,903,000 were available for future grant.
In July 1992, Isis adopted the 1992 Non-Employee Directors' Stock Option
Plan which provides for the issuance of non-qualified stock options for the
purchase of up to 300,000 shares of common stock to its non-employee directors.
Options under this plan expire 10 years from the date of grant. Options granted
after December 31, 1995 become exercisable in 4 equal annual installments
beginning 1 year after the date of grant. Options granted before January 1, 1996
vest over a 5 year period. At December 31, 1998, 139,000 shares issued under
this plan were exercisable and 58,000 shares were available for future grant.
The following table summarizes stock option activity for the years ended
December 31, 1998 and 1997 (in thousands, except per share data):
NUMBER OF WEIGHTED AVG.
SHARES PRICE PER SHARE PRICE/SHARE
--------- ---------------- -------------
Outstanding at December 31, 1995.......... 5,446 $ .14 to $19.75
Granted................................... 1,337 11.38 to 20.00
Exercised................................. (468) .14 to 17.88
Terminated................................ (222) 4.00 to 18.63
------
Outstanding at December 31, 1996.......... 6,093 .14 to 20.00 $ 8.48
Granted................................... 1,071 13.19 to 19.88
Exercised................................. (395) .14 to 16.00
Terminated................................ (327) 3.75 to 18.25
------
Outstanding at December 31, 1997.......... 6,442 .14 to 20.00 9.80
Granted................................... 1,168 7.06 to 15.44
Exercised................................. (320) .14 to 14.50
Terminated................................ (304) 3.75 to 20.00
------
Outstanding at December 31, 1998.......... 6,986 .14 to 19.88 10.27
======
The following table summarizes information concerning currently outstanding
and exercisable options (in thousands, except contractual life and exercise
price data):
OPTIONS OUTSTANDING
-------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE AS OF 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/98 EXERCISE PRICE
- -------------- -------------- ---------------- -------------- -------------- --------------
$ 0.14 - $ 4.00.. 900 4.51 $ 3.32 649 $ 3.09
$ 4.13 - $ 6.38.. 825 4.71 $ 5.68 772 $ 5.70
$ 6.46 - $ 7.75.. 896 4.90 $ 6.88 864 $ 6.87
$ 7.88 - $11.88.. 1,052 5.68 $ 9.91 769 $ 9.66
$12.00 - $12.31.. 851 8.64 $12.29 88 $12.22
$12.31 - $13.13.. 891 7.02 $13.02 621 $13.03
$13.18 - $16.19.. 831 7.82 $14.54 333 $14.61
$16.25 - $19.88.. 740 7.69 $17.99 390 $17.94
----- -----
$ 0.14 - $19.88.. 6,986 6.46 $10.27 4,486 $ 9.10
===== =====
Employee Stock Purchase Plan -- In 1991, the Board of Directors adopted the
Employee Stock Purchase Plan and reserved 500,000 shares of common stock for
issuance thereunder. The plan permits full-time employees to purchase common
stock through payroll deductions (which cannot exceed 10% of each employee's
compensation) at the lower of 85% of fair market value at the beginning of the
offer or the end of
42
45
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
each six-month purchase period. During 1998, 78,000 shares were issued to
employees at prices ranging from $10.47 to $10.73 per share. In 1997, 58,000
shares were issued at prices ranging from $10.73 to $15.30 per share. At
December 31, 1998, 141,000 shares were available for purchase under this plan.
Stock-Based Employee Compensation -- Isis has adopted the disclosure-only
provision of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation expense has been
recognized for the stock option plans. Had compensation expense been determined
consistent with Statement No. 123, Isis' net loss and basic net loss per share
would have been changed to the following pro forma amounts (in thousands, except
per share amounts):
1998 1997 1996
-------- -------- --------
Net loss -- as reported............................ $(42,983) $(31,066) $(26,521)
Net loss -- pro forma.............................. (49,761) (38,004) (32,200)
Basic net loss per share -- as reported............ $ (1.60) $ (1.17) $ (1.04)
Basic net loss per share -- pro forma.............. (1.85) (1.44) (1.26)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for 1996, 1997 and 1998: expected life of 1 year from vesting date
for regular employees, 2 years from vesting date for Directors and Vice
Presidents, and 4 years from vesting date for Executive Officers; expected
dividend yield of zero percent and expected volatility of 60 percent. The
risk-free interest rate was based on the Treasury Bill rate at the end of each
year during 1996, 1997 and 1998. The weighted average risk free interest rates
for 1996, 1997 and 1998 were 6.1%, 5.7%, and 4.6%, respectively. All options
granted during the year were valued using the same risk-free rate for the
year. The weighted average fair value of options granted was $7.20 for 1996,
$8.50 for 1997 and $5.98 for 1998.
Warrants -- In 1993, Isis issued Class A warrants in connection with a
strategic alliance with PerSeptive Biosystems, Inc. As of December 31, 1998,
448,001 of the warrants remain outstanding at an exercise price of $7.75 per
share. The warrants expire March 15, 1999.
In 1997 and 1998, Isis issued 500,000 and 300,000 warrants, respectively,
in conjunction with a private debt financing agreement. As of December 31, 1998,
all of the warrants remain outstanding at an exercise price of $25 per share.
The warrants expire November 1, 2004. See Note 3.
As of December 31, 1998, total common shares reserved for future issuance
was 10,429,000.
43
46
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
5. INCOME TAXES
Significant components of Isis' deferred tax assets as of December 31, 1998
and 1997 are shown below. Valuation allowances of $90,931,000 and $71,400,000
have been recognized for 1998 and 1997, respectively, to offset the net deferred
tax assets as realization of such assets is uncertain.
1998 1997
------------ ------------
Deferred tax assets:
Capitalized research expense.............................. $ 8,320,000 $ 7,741,000
Net operating loss carryforwards.......................... 69,661,000 57,959,000
Research and development credits.......................... 10,849,000 7,258,000
Other, net................................................ 5,314,000 889,000
------------ ------------
Total deferred tax assets................................. 94,144,000 73,847,000
Deferred tax liabilities:
Patent expense............................................ (3,213,000) (2,447,000)
------------ ------------
Total deferred tax liabilities............................ (3,213,000) (2,447,000)
Total net deferred tax assets............................. 90,931,000 71,400,000
Valuation allowance for deferred tax assets............... (90,931,000) (71,400,000)
------------ ------------
Net deferred tax assets................................... $ 0 $ 0
============ ============
At December 31, 1998, approximately $3,627,000 of the valuation allowance
for deferred tax assets relates to stock option deductions which, when
recognized, will be allocated directly to additional paid-in capital.
At December 31, 1998, Isis had federal and California tax net operating
loss carryforwards of approximately $193,526,000 and $33,507,000, respectively.
Isis also had federal and California research credit carryforwards of
approximately $8,402,000 and $3,765,000, respectively. The difference between
the tax loss carryforwards for federal and California purposes was attributable
to the capitalization of research and development expenses for California tax
purposes and a required 50% limitation in the utilization of California loss
carryforwards. The federal tax loss carryforward and the research credit
carryforwards will begin expiring in 2004 unless previously utilized.
Approximately $3,100,000 of the California tax loss carryforward expired during
1998 and the related deferred tax asset and tax loss carryforward amounts have
been reduced accordingly. The remaining California tax loss carryforward will
begin expiring in 1999, unless utilized.
Annual use of Isis' net operating loss and credit carryforwards will be
limited under the Internal Revenue Code as a result of cumulative changes in
ownership of more than 50% during the periods ended December 31, 1989 and 1991.
However, Isis believes that such limitations will not have a material impact
upon the utilization of the carryforwards.
6. RESEARCH AND DEVELOPMENT COLLABORATIVE ARRANGEMENTS AND LICENSING AGREEMENTS
In 1990, Isis entered into a collaborative agreement with Novartis to
discover and investigate oligonucleotide compounds active against 4 specific
targets. In 1996, Isis and Novartis signed a definitive agreement broadening the
companies' antisense research and development collaboration to include the
development of ISIS 3521 and ISIS 5132, anticancer compounds that were
discovered through the research collaboration. The broadened collaboration also
includes research to discover additional therapeutic compounds. Under the terms
of the expanded collaboration, Novartis is funding the development of both ISIS
3521 and ISIS 5132. Isis receives certain milestone payments from Novartis as
these compounds and subsequent compounds arising out of the expanded research
program progress through development. Novartis will market these compounds
worldwide and will pay Isis a royalty based on sales. Included in the statement
of operations for
44
47
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
the years ended December 31, 1998, 1997 and 1996 are contract revenues arising
from this collaboration totaling $15,641,000, $21,106,000 and $14,003,000,
respectively. As of December 31, 1998, Novartis owned approximately 9% of Isis'
outstanding common stock.
In July 1997, Isis and CIBA Vision Corporation entered into an agreement
granting CIBA Vision exclusive worldwide distribution rights for Vitravene(TM)
(fomivirsen). Under the terms of the agreement, Isis will manufacture and sell
Vitravene(TM) to CIBA Vision at a price that will allow Isis and CIBA Vision to
share the commercial value of the product. CIBA Vision will market and sell
Vitravene(TM) worldwide and will be responsible for regulatory approvals outside
of the United States and Europe. Additionally, CIBA Vision received the option
to acquire the exclusive license to market and distribute a second generation
antisense compound to treat CMV retinitis (ISIS 13312) which Isis is currently
developing. At the inception of the agreement, CIBA Vision paid Isis a $5
million non-refundable pre-commercial fee to partially reimburse us for the
costs incurred in discovering and developing Vitravene(TM) to that point. That
payment was recognized as revenue in 1997 and included in the statement of
operations as contract revenue. In August 1998, the FDA approved Vitravene(TM)
for marketing, and in the fourth quarter of the year CIBA Vision began selling
Vitravene(TM) commercially. Isis delivered its first commercial shipment of
Vitravene(TM) to CIBA Vision in the fourth quarter of 1998 and recorded $560,000
in net product revenues. For the years ended December 31, 1998 and December 31,
1997, Isis also earned contract revenue of $7,500,000 and $5,000,000,
respectively, under the CIBA Vision agreement.
In July 1995, Isis and Boehringer Ingelheim International GmbH signed
definitive agreements and completed the formation of a major collaboration in
cell adhesion drug design, discovery, development and commercialization.
Boehringer Ingelheim purchased 2,000,000 shares of common stock for $28,500,000
in cash plus certain license rights. Of the $28,500,000, $21,300,000 was
accounted for as equity and $7,200,000 was accounted for as deferred revenue,
representing Boehringer Ingelheim's advance payment of research and development
costs under the collaboration. In December 1996, coinciding with the achievement
of a milestone, Boehringer Ingelheim purchased 409,000 shares for $10,000,000.
Of that total, $6,000,000 was accounted for as equity and $4,000,000 as deferred
revenue. The agreement also provides that Boehringer Ingelheim is entitled to
designate 1 person for election to Isis' Board of Directors. As of December 31,
1998 Boehringer Ingelheim owned approximately 9% of Isis' outstanding common
stock. Boehringer Ingelheim and Isis are providing equal funding for the
combined research and development program and will share equally in the profits
from all products of the collaboration. Boehringer Ingelheim has also provided
Isis with a $40,000,000 line of credit, available under certain circumstances to
be used in support of the combined programs. As of December 31, 1998, the
outstanding balance under this line of credit was $22,576,000. The statement of
operations for the years ended December 31, 1998, 1997 and 1996 reflects
contract revenues of $6,544,000, $5,603,000 and $4,024,000, respectively, from
this collaboration.
In June 1998, Isis entered into a research collaboration with Merck & Co.
to discover small molecule drug candidates to treat patients infected with
Hepatitis C virus ("HCV"). Isis and Merck will design, synthesize, and evaluate
novel compounds that Merck will screen in its proprietary assays for identifying
HCV replication inhibitors. Merck will commercialize drugs arising from the
collaboration, and Isis retains the right to use technology developed in the
collaboration in our antisense program. The three year collaboration provides us
with annual research support plus technology access fees, and milestone payments
and royalties upon commercialization. In 1998, Isis received a total of
$3,875,000 from Merck under the terms of this agreement.
In August 1998, Isis granted an exclusive license to our patents covering
immune stimulation by phosphorothioate oligonucleotides to CpG
ImmunoPharmaceuticals, Inc. The agreement grants exclusive worldwide rights to
the methods and applications covered by issued U.S. Patents No. 5,663,153; No.
5,723,335; and related patent applications, not including claims for antisense
therapeutics. Under the terms of
45
48
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
the agreement, Isis received $5 million in 1998 and a 5% equity position in CpG
ImmunoPharmaceuticals, Inc. Isis will also receive a portion of any sublicensing
revenue relating to the technology. In 1998, Isis recorded revenue for the $5
million licensing fee, as there are no further performance obligations. Isis did
not record revenue for the value of the 5% equity position, since realization of
this asset is uncertain.
In November 1998, Isis sublicensed to Pantheco A/S, a Danish biotechnology
company, our Peptide Nucleic Acid technology for the creation of anti-infective
drugs. As the exclusive licensee, Isis will retain the rights for all other
areas of human therapeutics. As part of this transaction, Isis received a 24.9%
equity position in Pantheco A/S. Isis did not record any revenue related to this
transaction, since realization of the value of the equity interest in Pantheco
is uncertain.
In December 1998, Isis purchased from Gilead Sciences, Inc. the holdings of
its antisense patent estate. This acquisition includes patents and patent
applications covering a broad proprietary suite of antisense chemistry and
antisense drug delivery systems. The purchase price was $6,000,000 payable in
four installments over the next three years. Isis made the initial $2,000,000
payment in December 1998. Isis has recorded the net present value of the future
payments as a long-term obligation on the balance sheet. The balance of this
obligation at December 31, 1998 was $3,238,000. The cost of these acquired
patents was written -off in 1998 in accordance with our accounting policies.
In December 1998, Isis entered into a collaborative research agreement with
Zeneca Pharmaceuticals to discover, develop and commercialize novel
antisense-based cancer drugs. Under the terms of this collaboration, Isis will
create and, with Zeneca, screen antisense-based candidates for certain cancer
targets. Isis will receive from Zeneca a technology access fee, annual research
funding, milestone payments for any drugs progressing into clinical development
and royalties on the sales of any marketed drug arising out of the
collaboration. The initial term of the research collaboration is three years. In
December 1998, Zeneca paid $2,000,000 in technology access fees which was
accounted for as deferred revenue.
Also in December 1998, Isis entered into a research collaboration with
Abbott Laboratories, Inc. to prioritize drug development targets using Isis'
Antisense Target Validation Technology. The collaboration will enable Abbott to
validate numerous gene targets, identify the function of these genes and
prioritize the targets. Isis will receive from Abbott an upfront fee, quarterly
research fees, milestone payments and royalties on net sales of any Abbott
non-antisense product arising from the collaboration. Isis will receive rights
to Abbott genes to develop antisense drugs. The initial term of the research
collaboration is two years. In December 1998, Isis received an initial payment
of $250,000 which was accounted for as deferred revenue.
7. EARNINGS PER SHARE
In July 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share." The Company has adopted the provisions of the new
standard. In accordance with the statement, prior periods have not been restated
as the effect of the change is not material.
46
49
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
The following table sets forth the computation of basic and diluted
earnings per share:
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Numerator:
Numerator for basic net loss per share -- net
loss.......................................... $(42,983) $(31,066) $(26,521)
Numerator for diluted net loss per share -- net
loss.......................................... $(42,983) $(31,066) $(26,521)
Denominator:
Denominator for basic net loss per
share -- weighted average shares.............. 26,873 26,456 25,585
Denominator for diluted net loss per
share -- weighted average shares.............. 26,873 26,456 25,585
Basic net loss per share........................... $ (1.60) $ (1.17) $ (1.04)
======== ======== ========
Diluted net loss per share......................... $ (1.60) $ (1.17) $ (1.04)
======== ======== ========
Options and warrants to purchase common stock were not included in the
computation of diluted net loss per share because the effect would be
antidilutive. For additional disclosures regarding outstanding stock options and
warrants, see Note 4 -- Stockholders' equity.
47
1
EXHIBIT 10.23
CONFIDENTIAL TREATEMENT REQUESTED
UNDER 17 C.F.R. SECTIONS 200.80(b)(4), 200.83
AND 240.24b-2. * INDICATES OMITTED
MATERIAL THAT IS THE SUBJECT OF A
CONFIDENTIAL TREATEMENT REQUEST THAT IS
FILED SEPARATELY WITH THE COMMISSION.
RESEARCH AND DEVELOPMENT AGREEMENT
THIS RESEARCH AND DEVELOPMENT AGREEMENT (the "Agreement") is made as of
the 18th day of December, 1998 by and between Isis Pharmaceuticals, Inc.
("ISIS"), a Delaware Corporation having a principal place of business at 2292
Faraday Avenue, Carlsbad, California 92008, and Zeneca Limited., 15 Stanhope
Gate, London W1Y6LN, United Kingdom ("ZENECA").
BACKGROUND
ISIS is engaged in the research and development of therapeutic
pharmaceutical products known as antisense oligonucleotides, and ISIS has
accumulated considerable knowledge in the field of molecular biology, including
processes and techniques relating to the design, investigation and research
(including the synthesis) of oligonucleotides and oligonucleotide analogues.
ZENECA has expertise in the research, development, distribution and
exploitation of prophylactic and therapeutic treatments for human use.
ZENECA and ISIS wish to establish a collaborative relationship to work
jointly with one another with the aim to identify antisense compounds which
inhibit the in vivo synthesis of certain biological molecules primarily involved
in various disease processes, initially focusing on cancer in humans for ZENECA
development and commercialization of products containing such antisense
compounds initially focusing on specific targets.
THE PARTIES AGREE AS FOLLOWS:
ARTICLE 1
DEFINITIONS
Capitalized terms used in this Agreement but not otherwise defined will
have the meaning set forth in Exhibit A.
ARTICLE 2
RESEARCH PROGRAM; ANNUAL RESEARCH SUPPORT
2.1 Goal of Research Collaboration.
(a) The goal of the Research Collaboration is, through the combined
efforts of ISIS and ZENECA scientists and using ISIS and ZENECA
technology, to discover Compounds having the potential to be
commercialized as drugs for
* CONFIDENTIAL TREATMENT REQUESTED
1
2
human therapeutic use. The Research Collaboration will be conducted
by ISIS and ZENECA and will be managed by the Joint Research
Committee.
(b) Research relating to a Target includes the elaboration of necessary
cellular, biochemical and molecular-biological approaches (i.e., the
development of the knowledge not already available to the two
parties, the development and setting up of relevant assays) towards
the inhibition of the expression of the protein target molecules by
Antisense Technology as well as the conception, design, synthesis
and development of therapeutic entities, including the
characterization of their biophysical and pharmacokinetic
properties. Subject to Section 3.1 the research relating to a Target
will explore all reasonable therapeutic applications of a Compound.
(c) The Research Collaboration will include access to all ISIS
Technology for purposes of developing Compounds within the terms of
article 7 except as described below. The Research Collaboration does
not include research relating to or access by ZENECA to ISIS
technology or Know-How relating to [ * ]. When and if the Parties
decide to include such technology and research in the Research
Collaboration, they will negotiate in good faith additional
technology access fees to reflect ISIS investment in the technology
and an appropriate increase in the Research Payments to fund
additional research relating thereto.
(d) ZENECA and ISIS will work together exclusively on the use of
Antisense Technology to discover, develop or commercialize antisense
inhibitors for any Target for which ZENECA has an Active Target
Program. ISIS will not license or assign to a Third Party any ISIS
Target Patents relating to a particular target for so long as ZENECA
has an Active Target Program for that Target.
2.2 Management of the Research Program.
(a) The Research Collaboration will be managed by a Joint Research
Committee composed of 4 members: 2 members to be designated by each
party. The initial composition of the Joint Research Committee is
set forth in Exhibit C. Each party will be entitled to designate
from time-to-time a successor to the member previously designated by
it unless the other party has a reasonable objection to such
successor.
(b) The Joint Research Committee will hold meetings as necessary but at
least twice per year, at times and locations to be mutually agreed
upon. The minutes of the meetings will be recorded and marked
"confidential" and will be subject to the secrecy obligations and
restrictions on use contained in Paragraphs 12.2 and 12.3.
* CONFIDENTIAL TREATMENT REQUESTED
2
3
(c) The Joint Research Committee will review and evaluate the work on
the Research Collaboration. Its functions will be to decide:
(i) on Targets to be included within the Research
Collaboration;
(ii) on Research Target Profiles for any Target (including any
subsequent modifications of such Research Target Profile);
(iii) on therapeutic indications to be pursued for Compounds
inhibiting a Target;
(iv) the territorial patenting strategy for Compounds and the
"freedom to operate" position by patent due diligence on
new Targets or Compounds;
(v) assignment of financial resources and personnel to specific
Targets; and/or emphasis among Targets;
(vi) approval of Target-specific Research Plans;
(vii) determination of whether a Compound fulfills the Research
Target Profile;
(viii) approval of Excess Research Costs;
(ix) when necessary, on taking appropriate action to adopt
alternative approaches or to make recommendations on
redirecting or restructuring the Research Plan set out in
Exhibit B; and
(x) determine the detailed manufacturing specifications for
research Compounds
(d) The Joint Research Committee will act by unanimous decision.
Disputes will be resolved pursuant to Paragraph 13.11 hereof.
2.3 Information and Reports.
ISIS will promptly make available and disclose to ZENECA all information
regarding the design, synthesis and screening of lead antisense
oligonucleotides for the Targets generated by ISIS in carrying out the
Research Collaboration. All discoveries or inventions made by ISIS in
undertaking the Research Collaboration will be promptly disclosed to
ZENECA. ISIS will keep ZENECA promptly informed of all patenting
activities undertaken by ISIS, including without limitation, the
opportunity to comment on the specifications filed after any first
provisional or priority patent filing on any invention and patent
prosecution in PCT, USA, Europe and Japan. ISIS and ZENECA will exchange
at a minimum, monthly verbal or written reports, presenting a meaningful
summary of the work done under this Agreement. In addition, at ZENECA's
request, ISIS will provide written reports of any studies performed by
ISIS required to support regulatory submissions to be made by ZENECA,
its Affiliates or Sublicensee and will allow ZENECA, its Affiliates or
Sublicensees to use the data included in such reports to support such
submissions.
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2.4 Technology Access Fee; Research Payments.
(a) ZENECA will pay to ISIS [ * ] million in technology access fees
payable as follows:
(i) [ * ]
(ii) [ * ]
(iii) [ * ]
(b) As payment for the research to be conducted by ISIS in the Research
Collaboration, ZENECA will pay to ISIS [ * ] during the Research
Term, in four equal quarterly installments of [ * ] (the "Research
Payments"). [ * ]
(c) Within 12 months of the Effective Date, Zeneca may either add or
substitute [ * ] as an Initial Target in the Research Collaboration
pursuant to Paragraph 2.7 hereof. If [ * ] is added as a Target,
[ * ]. The Joint Research Committee will determine the length of the
[ * ] project and related research payments.
(d) The Research Payments will be applied exclusively to cover only work
of the [ * ] employed in carrying out work under this Research
Collaboration [ * ]. Any studies or work agreed by ZENECA to be
conducted outside ISIS, or within ISIS but outside the scope of the
Research Plan described in Exhibit B (including, without limitation
any ISIS Development Expenses), and any compound to be supplied
[ * ], as described above in any calendar year will be paid for by
ZENECA separately, with such costs called "Excess Research Costs."
Excess Research Costs will be invoiced by ISIS to ZENECA with
payment due within [ * ] of receipt of invoice. Excess Research
Costs for [ * ] will be billed at [ * ] (including an appropriate
allocation of the costs of process development, analytical
development and scale up for such manufacture). [ * ]
2.5 The Research Term.
(a) The Research Term will be [ * ] years beginning with the Effective
Date and will be cancelable by ZENECA for any reason [ * ]
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(b) The Research Term may be extended by mutual consent at any time
prior to the end of the [ * ] year for [ * ] additional extensions
of [ * ] as specified by ZENECA at the time of the extension, based
on the program of work agreed to by the Joint Research Committee on
the terms contained herein, [ * ]. The scope of the Research
Payments for each subsequent year will be mutually agreed to by the
Joint Research Committee in the light of the agreed Research
Collaboration program needs. Notwithstanding the foregoing, if the
program of work is earlier completed or if the program appears
unlikely to be successful, the Parties can, upon mutual agreement,
terminate any extension of the Research Term sooner.
2.6 Proposal of Compounds for Development.
(a) During the course of the Research Collaboration, the Joint Research
Committee will propose to ZENECA Compounds, which the Joint Research
Committee determines meet the Research Target Profile for selection
as Development Candidates. ZENECA will have [ * ] days after
receiving the Joint Research Committee's proposal to accept or
reject any such Compound.
(b) Within [ * ] days of [ * ], ZENECA will pay to ISIS an [ * ] and
ZENECA will have the exclusive right to develop and commercialize
such Development Candidate and subsequent Development Candidates
inhibiting the same Target as provided herein.
2.7 Rejected Compounds.
(a) Compounds which the Joint Research Committee determines meet
Research Target Profile but which are not accepted by ZENECA for
development as Development Candidates will continue to be owned in
their entirety by ISIS. [ * ]
(b) [ * ]
(c) [ * ]
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2.8 Expansion of the Research Collaboration; Substitution or Addition of
Targets.
(a) ZENECA may, upon mutual agreement with ISIS, at any time during the
first [ * ] months of the Research Collaboration Term, substitute or
add [ * ] as a Target. [ * ] may be (i) substituted for one of the
other Initial Targets or for any subsequently added Cancer-Related
Target for no additional technology access fee and, assuming that
the mutually agreed research plan for [ * ] is similar to that for
the Target being substituted, for no additional Research Payments or
(ii) added as a Target by initiation of a research program and an
increase in the Research Payments which will be agreed by the Joint
Research Committee, subject to the Inflation Rate beginning on the
second anniversary of the Effective Date. The substitution or
addition may occur (i) with [ * ] months prior notice for a
substitution or [ * ] months prior notice for an addition; and (ii)
upon agreement by ZENECA, if required, that the Research
Collaboration Term will extend for a period to be determined by the
Joint Research Committee to include the term of the Surviving
research program following such substitution or addition.
(b) ZENECA may, upon mutual agreement with ISIS at any time during the
Research Collaboration Term add additional Cancer-Related Target(s)
and subsequently substitute or add such Cancer-Related Target(s) to
the Research Collaboration. The substitution or addition to the
Research Collaboration may occur (i) with at least [ * ] months
notice for a substitution or addition; (ii) upon agreement by ZENECA
that the Research Collaboration Term will continue for at least
[ * ] months following the substitution or addition. If a
substitution is made, assuming that the mutually agreed upon
research plan for the new Target is similar to that for the Target
being substituted, there will be no increase in Research Payments
when such substitution is made. Addition of Cancer-Related Targets
will require the payment of additional technology access fees [ * ].
In addition, if the Target is [ * ], the Parties will agree on
additional upfront funding [ * ]; [ * ], [ * ]. If ZENECA designates
a desire to [ * ]
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(c) ZENECA may, upon mutual agreement with ISIS at any time during the
Research Collaboration Term add additional Non-Cancer-Related
Target(s), and subsequently substitute or add such
Non-Cancer-Related Target(s) to the Research Collaboration. The
substitution or addition to the Research Collaboration may occur (i)
with at least [ * ] months notice for a substitution or [ * ] months
notice for an addition; (ii) upon agreement by ZENECA that the
Research Collaboration Term will continue for at least [ * ] months
following the substitution or addition. If a substitution is made,
assuming that the mutually agreed upon research plan for the new
Target is similar to that for the Target being substituted, there
will be no increase in Research Payments when such substitution is
made. Addition of non-cancer-related Targets will require the
payment of additional technology access fees [ * ]. If ZENECA
designates a desire to add [ * ].
(d) ISIS and ZENECA will negotiate in good faith any additional terms
for the substitution or addition of Targets beyond the Initial
Targets. ISIS will have no obligation to substitute or add a Target
for one that is subject to active discussions, negotiations or an
agreement with a Third Party. ISIS will notify ZENECA of the
initiation of discussions with a Third Party regarding Apoptosis
Targets unless it is precluded from doing so by confidentiality
restrictions.
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(e) For purposes of this paragraph 2.7 "substitution" will mean the
termination of a research program relating to one Target and the
initiation of a similar research program for the substituted Target.
The Target for which the research program is terminated will
thereafter be deemed to be an Abandoned Target and the new Target
will become a Target for purposes of this Agreement.
2.9 Termination of Research Program for a Target.
(a) ZENECA may at any time after [ * ] discontinue research relating to
any specific Target [ * ]. The Joint Research Committee will
determine the reallocation of the funding for a discontinued Target
among the other Targets. For each Abandoned Target, ISIS will be
free to continue research on Compounds to inhibit such Target and to
use, make, have made and sell the resulting products for such
Abandoned Target in accordance with Paragraph 2.7.
(b) Discontinuation of research in a particular Target will not affect
the continuation of the Research Collaboration in accordance with
its terms.
ARTICLE 3
ZENECA DEVELOPMENT AND COMMERCIALIZATION
3.1 ZENECA Diligence Obligation.
(a) ZENECA will use commercially reasonable efforts to develop a
Development Candidate as expeditiously as possible consistent with
ZENECA's own practices for drugs of similar commercial potential and
for all indications for which ZENECA reasonably determines the
Development Candidate is likely to be commercially attractive. If
ZENECA determines that it will not develop a Development Candidate
for such commercially attractive indication outside of the initial
therapeutic focus of the Target as determined by the Joint Research
Committee, taking into account ZENECA's overall development plan for
the Development Candidate for all indications, ZENECA will
reasonably consider development and commercialization of the
Development Candidate by ISIS or a Third Party in any indication
ZENECA is not pursuing. Such consideration by ZENECA will be
intended to maximize the commercial value of the Development
Candidate to ZENECA and ISIS without jeopardizing the development or
commercialization of the Development Candidate by ZENECA in the
indication ZENECA is pursuing. Determination by ZENECA not to permit
such commercialization on the grounds that such development could
jeopardize the development or commercialization of the Development
Candidate shall be deemed to be reasonable.
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(b) ZENECA will use commercially reasonable efforts to commercialize and
sell Collaboration Product in each of the Major Countries for all
commercially attractive indications as determined by ZENECA in
Article 3.1(a) as expeditiously as is reasonable consistent with
sound scientific and business judgment and ZENECA's practices with
drugs of similar commercial potential. ISIS will provide ZENECA with
assistance reasonably requested by ZENECA which will be billed to
ZENECA as ISIS Development Cost [ * ].
(c) If ZENECA fails in its obligations to develop or commercialize a
Development Candidate or Collaboration Product under subparagraph
(a) or (b) above, [ * ].
3.2 ISIS Diligence Obligation.
ISIS agrees to commit the resources set forth in Paragraph 2.4(c) to
exert the efforts necessary and reasonable and consistent with its
normal business practices to execute and substantially perform its
obligations under the Research Plan, to maintain and utilize the
scientific staff, laboratories, offices and other facilities consistent
with such undertaking and to reasonably cooperate with ZENECA in the
conduct of the Research Collaboration.
3.3 Discontinuation by ZENECA of Development or Commercialization.
ZENECA may discontinue development of any Development Candidate or
commercialization of any Collaboration Product by giving written notice
to ISIS. Upon such discontinuation, all rights to such Development
Candidate will revert to ISIS and be considered an Abandoned Compound.
Failure of ZENECA to develop a Development Candidate or commercialize a
Collaborative Product pursuant to Paragraph 3.1 will be deemed to
constitute discontinuation of
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development or commercialization and the Development Candidate or
Collaboration Product will become an Abandoned Compound with or without
notice to ISIS hereunder. [ * ].
3.4 ISIS Right to Develop and Commercialize Abandoned Compounds.
(a) [ * ].
(b) Following the occurrence of any event described in 3.4(a) above and
at ISIS' request, ZENECA will provide in so far it is legally able
to do so, and on a non-exclusive basis to ISIS all rights, licenses
or other permissions obtained including, without limitation all
clinical and preclinical data, regulatory submissions obtained by
ZENECA together with, access to ZENECA technology utilized by ZENECA
in the development of such Development Candidate both of which exist
at the date a Development Candidate becomes an Abandoned Compound
and are necessary or useful to continue the development and/or
commercialization of such Abandoned Compound, [ * ]:
[ * ]
Royalties will be paid to ZENECA hereunder on the same basis and
terms as royalties are paid to ISIS by ZENECA hereunder.
[ * ].
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3.5 ZENECA Right to Reconsider Abandoned Compounds.
(a) If ISIS pursues the development and/or commercialization of an
Abandoned Compound, ZENECA will have a right of first negotiation to
reacquire such Abandoned Compound on the earlier of: (i) if ISIS
determines that it desires to license such Abandoned Compound to a
Third Party (a commercial distribution arrangement will explicitly
not be considered a license for these purposes) or (ii) prior to
initiation of Pivotal Quality Clinical Study for such Abandoned
Compound if ISIS has not licensed rights to a Third Party at that
time. If ZENECA desires to be considered a commercial distributor
for an Abandoned Product, ISIS will reasonably consider such
request.
(b) At the time ZENECA has the right to reacquire an Abandoned Compound,
ISIS will provide ZENECA with access to all material data relating
to such Abandoned Compound. ZENECA will have [ * ] following receipt
of such information to initiate good faith negotiations with ISIS.
Should the Parties fail to reach a mutually agreeable set of terms,
ISIS will be free to license the Abandoned Compound to a Third Party
on terms no more favorable to such Third Party than those last
offered by ZENECA, or to continue on its own to develop and
commercialize the Abandoned Compound.
3.6 Shared Compounds.
ZENECA may, at its option, offer to ISIS the opportunity to participate
in the joint development and commercialization of a Development
Candidate, on a [ * ].
3.7 Progress Reports.
Beginning on January 30 in the calendar year in which, in the case of
ZENECA the first Development Candidate is accepted by ZENECA and in the
case of ISIS, an Abandoned Compound is taken into development by ISIS
or, if the period following such acceptance to January 30 is less than 6
months, then on the following January 30, each party will submit to the
other on each January 30 an annual written progress report summarizing
its activities related to product development and clinical evaluation of
Development Candidates and Abandoned Compounds as appropriate and the
efforts to secure governmental approval to market the Collaboration
Products.
3.8 Compulsory Licensing.
If a Third Party seeks a compulsory license for a Collaboration Product
in accordance with appropriate provisions of the laws of any country and
ISIS and ZENECA agree that the Third Party is legally entitled to such
license or the Third
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Party is awarded such license by a decision of the appropriate
governmental authority to make such decisions, the granting of such
license will not constitute a breach of ISIS' obligations ZENECA will
have right to reduce the royalty on sales in such country to an amount
no greater than the amount payable by the said Third Party as
consideration for the compulsory license.
ARTICLE 4
PAYMENTS FOR DEVELOPMENT CANDIDATES
4.1 Milestone Payments.
(a) Subject to Subparagraph (b) and (d) below, in addition to the other
payments required to be made by ZENECA hereunder, ZENECA will pay to
ISIS the following amounts with respect to each Development
Candidate to reach each milestone:
[ * ]
(b) [ * ].
(c) [ * ].
(d) [ * ].
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4.2 Royalty.
(a) In consideration of the license rights set forth in Article 7
hereof, ZENECA will pay a royalty to ISIS on each Collaboration
Product equal to:
[ * ].
(b) The royalties payable hereunder [ * ].
4.3 Term of Royalty Obligations.
[ * ]. ZENECA will notify ISIS promptly upon introduction of each
Collaboration Product in each country. Upon termination of the royalty
payment obligation, ZENECA will have, in perpetuity, a fully paid
license under the ISIS Technology to discover, develop, make, have made,
use, sell, have sold Collaboration Product without further accounting to
ISIS.
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4.4 Payments by ZENECA.
Royalties owed by ZENECA to ISIS pursuant to this Article 4 will be paid
no later than 45 days after the end of the calendar quarter during which
such royalties accrued.
4.5 Currency Conversion.
Royalties will be calculated and paid in United States dollars. For the
purpose of computing the Net Sales Revenue made in a currency other than
United States dollars, ZENECA will convert such currency from local
currency to pounds sterling on a consistent monthly basis using a 5 day
average of exchange rates published by Reuters and then convert such
pounds sterling to United States dollars monthly using the average of
the exchange rate from pounds sterling to United States dollars
published by Reuters for the same 5 days provided, however, that with
respect to Net Sales Revenue from sales made in a currency other than
United States dollars by ZENECA's Affiliates a quarterly exchange rate
shall be used for both the conversion from local currency to pound
sterling and from pound sterling to United States dollars that is the
average of the foregoing exchange rates for each of the three months in
the quarter. The foregoing conversion method is in accordance with
ZENECA's current accounting policies. In the event ZENECA's policies for
currency conversion change in the future, the parties will meet and
mutually agree upon a new conversion method.
4.6 Taxation of Payments.
ZENECA will withhold taxes from the royalty or other payments as
required by the internal tax law of the U.K. In the case of such
withholding being applicable, ISIS may apply for the reduction of rate
of withholding tax under the U.K./U.S. Income Tax Treaty with the
assistance of ZENECA and, provided the claim is accepted and ZENECA is
duly authorized by the Inland Revenue, ZENECA will apply the reduced
rate accordingly. If applicable laws required that taxes be withheld,
ZENECA will deduct those taxes from the remittable payments, make timely
payment of the taxes to the proper taxing authority, and send a
confirmation of such payment in a form approved by the UK Inland Revenue
to ISIS within 60 days following that payment.
4.7 Interest.
All payments due hereunder from ZENECA that are not paid to ISIS when
due and payable as specified in the Agreement will bear interest at an
annual rate [ * ], or at such lower rate of interest as will then be the
maximum rate permitted by applicable law.
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ARTICLE 5
MANUFACTURING AND SUPPLY
5.1 Research Supply.
ISIS agrees to supply all of ZENECA's requirements of Development
Candidates for its research program under the Research Collaboration in
the amounts and in accordance with the specifications set out in Exhibit
F.
5.2 Clinical Supply.
ISIS will, if ZENECA requests, supply all of ZENECA's requirements of
Development Candidates required for clinical trials [ * ]. ISIS will
supply clinical material on the same basis as research material billed
as Excess Research Costs pursuant to mutually agreed upon
specifications. ZENECA will provide ISIS with 18-month rolling forecast
and a final purchase order [ * ]. Timing of deliveries will be scheduled
consistent with ISIS' other facility requirements and ZENECA's
reasonable needs for clinical supply stocking. The Parties will
negotiate in good faith the terms of a clinical supply agreement
containing these and other customary terms. If ISIS is not able to
supply Development Candidates or if ZENECA determines to obtain supply
from a Third Party, then ISIS will, at ZENECA's request, promptly
transfer all necessary technology and technical assistance [ * ].
5.3 Commercial Supply.
(a) ZENECA will be free to obtain commercial supply of Collaboration
Products from the manufacturer of its choice. If ZENECA desires ISIS
to provide commercial supply of Collaboration Products and if ISIS
has the capacity and desire to do so, the parties will negotiate in
good faith the terms of a commercial supply agreement to be
concluded before the initiation of the first Pivotal Quality
Clinical Trial.
(b) If ISIS is not able to provide commercial supply or ZENECA
determines to manufacture Collaboration Products itself or through
an Affiliate or have Collaboration Products manufactured by a Third
Party then ISIS will, at ZENECA's request, promptly transfer all
necessary technology and technical assistance and grant a [ * ]
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[ * ].
5.4 Manufacturing Information.
As reasonably requested by ZENECA, ISIS will provide ZENECA all
information in ISIS control relating to Development Candidates and
Collaboration Products being developed by ZENECA including without
limitation information regarding process, in process control methods,
final product characterization/analysis methods, scale, cost and
alternative manufacturing sites.
ARTICLE 6
BOOKS AND RECORDS
6.1 Recordkeeping; Audit.
(a) Each party will keep accurate accounts and records in sufficient
detail to properly determine the royalties payable to the other
under this Agreement for at least 3 years following the end of the
calendar quarter to which they pertain.
(b) Each party will make available such accounts and records for
inspection during such 3 year period by a certified public
accountant retained by the other for such purpose, solely for the
purpose of verifying the royalty payments hereunder. Such
inspections may be made no more than once in each calendar year, at
reasonable times mutually agreed upon by the parties after at least
15 days written notice to the other.
(c) If an audit concludes that additional royalties were owed during the
period audited, the party in default will pay the additional
royalties within 45 days of the date the other party delivers to it
the accounting firm's written report. The fees charged by such
accounting firm will be paid by the party initiating the inspection
unless the additional royalties owed by the party in default exceed
5% of the royalties paid for the period subject to the audit, in
which case that party will pay the fees of the accounting firm.
(d) Each party will include in each sublicense granted by it pursuant to
this Agreement a provision requiring the Sublicensee to make reports
to the other party, to keep and maintain records of sales made
pursuant to such sublicense and to grant access to such records by
the other's independent accountant to the same extent required of
the Licensor under this agreement.
(e) Each party will treat all financial information subject to review
under this Paragraph 6.1 or under any sublicense agreement in
accordance with the confidentiality provisions of this Agreement.
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(f) ISIS will maintain complete and accurate records which are relevant
to its expenditure of research manpower provided under this
Agreement pursuant to the Research Plan. With reasonable notice,
said records will be open during reasonable business hours for a
period of from [ * ] for examination at ZENECA's expense by an
independent certified public accountant appointed by ZENECA and
reasonably acceptable to ISIS. Such examination will be for the sole
purpose of verifying for ZENECA the cost of the research conducted
and whether or not funds received by ISIS from ZENECA were used for
conducting the research.
ARTICLE 7
LICENSE GRANTS
7.1 License for Collaboration Products.
In consideration of the payments made under Paragraphs 2.6, 4.1 and 4.2:
(a) ISIS hereby grants to ZENECA and its Affiliates during the term of
the Collaboration a co-exclusive (with ISIS), worldwide,
non-transferable royalty free license under the [ * ] subject to the
terms of this Agreement, solely to the extent necessary or
appropriate to carry out ZENECA's responsibilities under this
Agreement.
(b) Upon payment by ZENECA of the milestone payment due on [ * ], ISIS
will grant to ZENECA (i) a worldwide exclusive, sublicensable
license under the portions of the ISIS Technology necessary to make,
have made, use and sell such Collaboration Product and the right to
sue any Third Party for any act of infringement of any such portion
of the ISIS Technology in the event that the Third Party infringes
an ISIS Target Patent under this 7.1(b), (ii) a worldwide,
exclusive, sublicensable license to the ISIS Target Patents relating
to the Target of the Collaboration Product to make, have made, use
and sell such Collaboration Product and to sue any Third Party for
any act of infringement within the scope of the claims of such ISIS
Target Patent. [ * ].
(c) Nothing contained herein will be deemed to grant a license to any
technology not owned or controlled by ISIS or to any technology of
which ISIS is a licensee but for which ISIS is prohibited from
granting sublicenses all which technology existing at the date of
this Agreement is identified in Exhibit G.
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(d) For any technology acquired by ISIS from a Third Party before the
Effective Date (which is described in Exhibit G) or after the
Effective Date which is necessary or useful to make, use or sell a
Collaboration Product, before such technology is included in any
license granted pursuant to Paragraph 7.1(a), ZENECA and ISIS will
negotiate a mutually agreeable set of terms for the inclusion of
such technology, which terms will consider the cost to ISIS to
acquire and develop such technology as well as any milestone or
royalty payments ISIS may owe to the licensor with respect to such
technology. [ * ].
(e) ISIS will not take any action after the Effective Date that would
encumber its technology in any way that would impair its ability to
grant the licenses contemplated hereunder.
(f) ZENECA agrees that the rights and licenses granted hereunder do not
provide to ZENECA the right to use ISIS Technology for any purpose
except as expressly provided in this Paragraph 7.1.
ARTICLE 8
TERM AND TERMINATION
8.1 Term.
This Agreement will be in effect beginning the Effective Date and,
unless otherwise terminated by operation of law or by acts of the
Parties in accordance with the terms of this Agreement, will remain in
effect until the last to expire of any royalty obligation under
Paragraph 4.2. [ * ].
8.2 Termination by Either Party.
(a) Termination for Breach.
In the event of either Party being in default of any material
obligation contained in this Agreement and failing to cure or obtain
the cure of such breach within [ * ] after receipt of written notice
thereof from the non-defaulting party ([ * ] in the case of any
payment required to be made hereunder); provided, however, that if
the defaulting party is unable to cure a breach for causes beyond
its reasonable control, then such sixty-
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day period will be extended for a period of time reasonable under
the circumstances as long as the defaulting party is continuing to
pursue such a cure in good faith; provided, further that in the
event of a good faith dispute about payment amounts, the party
allegedly owing the money may deposit any contested amount (but not
the uncontested portion, which must be paid) in an interest bearing
escrow account pending resolution of such contest, with the
prevailing party receiving both principal and interest upon
resolution.
(b) Notwithstanding the foregoing, in the event of an uncured material
breach by one party the non-breaching party may choose not to
terminate this Agreement and to continue it in full force with all
of the rights and obligations of the Parties continuing in place and
may rely in stead on a damage remedy to compensate for the effects
of the breach.
8.3 Termination for Bankruptcy.
The institution by or against either party of proceedings to be
adjudicated as bankrupt or insolvent or to be reorganized or
released under any bankruptcy or equivalent statute applicable to
that party, the appointment of a receiver, liquidator or trustee, or
the making of an assignment for the benefit of creditors; provided,
however, that if any such proceeding is instituted without the
consent or acquiescence of that party against whom such order is
made, this Agreement may not be terminated if such party causes such
proceedings to be dismissed within 60 days from the date the
proceeding was instituted.
8.4 Termination By ZENECA Without Cause.
After the Research Collaboration Term as defined in Paragraph 2.5,
ZENECA may terminate this Agreement by written notice to ISIS.
8.5 Effects of Termination.
Upon termination of this Agreement by ISIS or ZENECA pursuant to
Paragraph 8.2 or 8.3, all rights and licenses granted by ISIS to ZENECA
will terminate and the right to develop Development Candidates and to
commercialize Collaboration Products will revert to ISIS.
ARTICLE 9
INVENTIONS AND PATENTS
9.1 Inventions.
ISIS will retain title to inventions, whether or not patentable, made
solely by employees of or consultants to ISIS, and to patents thereon.
ZENECA will retain
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title to inventions, whether or not patentable, made solely by employees
of or consultants to ZENECA and to patents thereon. ISIS will hold title
to all inventions, whether or not patentable, made jointly by employees
of or consultants to ISIS and ZENECA and to patents thereon.
9.2 Patents.
ISIS will be responsible to diligently file, prosecute and maintain in
force and defend in those countries in the world determined by the JRC
all patent applications and patents for ISIS Target Patents. [ * ]. If
ISIS declines to apply for or decides to abandon any ISIS Target Patent
and relinquish its rights thereunder in any particular country, it will
promptly notify ZENECA in writing and ZENECA will have the right to
assume responsibility for maintaining such patent application or patent,
at its own expense and in its own name. ISIS agrees to cooperate with
ZENECA so as to enable ZENECA to undertake such maintenance without loss
of patent rights. ZENECA will have complete responsibility for such
continued maintenance and may, in its sole discretion, allow any such
patent application or patent to lapse at any time.
9.3 Patent Marking.
ZENECA, its Affiliates and Sublicensees will mark all Collaboration
Products made, used or sold under the terms of this Agreement, or their
containers, in accordance with the applicable patent marking laws, as
required.
9.4 Defense of Patent Infringement Suits.
(a) Notwithstanding the foregoing, [ * ].
(b) In the event that [ * ]
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[ * ].
(c) In the event that [ * ].
(d) If a Third Party asserts that the manufacture, use or sale of any
Collaboration Product infringes a patent owned or controlled by a
Third Party, ZENECA will be solely responsible for defending and
settling in its sole discretion against any such assertions. ISIS
will provide all reasonable assistance requested by ZENECA to defend
or settle such action. ISIS will have the right at its own expense
to participate in such suit at its own expense.
(e) The Parties acknowledge that, under certain licenses listed on
Exhibits G-1 and G-3 and other licenses that Isis may acquire in the
future and which ISIS shall notify ZENECA of in writing, royalties
might owe to parties from whom ISIS has acquired nonsublicensable
licenses if ISIS is not the manufacturer of a Collaboration Product
and no royalty reduction will be made by reason of these royalties.
9.5 Suits for Third-Party Infringement.
(a) Each party will advise the other promptly upon its becoming aware of
any third party infringement of an ISIS Target Patent. ISIS agrees,
within reasonable business judgement and at its own discretion, to
promptly take such action as is required to restrain such
infringement at its own cost. ZENECA will cooperate fully with ISIS
at ISIS' expense in ISIS' attempt to restrain such infringers.
ZENECA may be represented by counsel of its own selection at its own
expense at any suit or proceeding brought by ISIS to restrain such
infringement. ISIS will bear the expense of any suit or suits and
will obtain all benefits of the recoveries from such suit or suits,
whether by judgment, award, decree or settlement up to an amount
equal to [ * ]
* CONFIDENTIAL TREATMENT REQUESTED
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[ * ] and the remainder will be allocated among ISIS and ZENECA in a
manner reasonably calculated to correspond to the relative
distribution of profits on the Collaboration Product(s) to which
such recovery pertains between ISIS and ZENECA.
(b) If, within 14 days of becoming aware of a third party infringement
under 9.5(a), ISIS fails to institute an infringement suit that
ZENECA feels is reasonably required, ZENECA will have the right, at
its own discretion, to institute an action for infringement. ZENECA
will bear the expense of any such suit or suits and will obtain all
of the benefits of the recoveries from such suit or suits, whether
by judgement, award, decree or settlement up to an amount equal to [
* ] and the remainder will be allocated among ISIS and ZENECA in a
manner reasonably calculated to correspond to the relative
distribution of profits on the Collaboration Product(s) to which
such recovery pertains between ISIS and ZENECA. Should ZENECA bring
any such suit, ISIS will cooperate in all reasonable ways with
ZENECA in any such suit or suits at ISIS' expense. ISIS may be
represented by counsel of its own selection at its own expense.
(c) If the parties agree to mutually share expenses and to pursue an
infringement suit together, they will (i) share in any and all
benefits in the recovery from such suit, whether by judgment, award,
decree or settlement in the manner mutually agreed among them, and
(ii) agree on the lead plaintiff, selection of counsel and other
litigation strategy matters.
ARTICLE 10
WARRANTIES AND DISCLAIMERS
10.1 Representations and Warranties.
(a) Each party warrants to the other party that it is free to enter into
this Agreement and carry out its obligations hereunder, and that its
execution and delivery of this Agreement and performance of its
obligations hereunder will not violate, be in conflict with, or
constitute a default (or an event which, with notice or lapse of
time or both, would constitute a default) under any agreement to
which it is party or by which it is bound.
(b) Each party warrants to the other that, to the best of its knowledge,
its use (or use by the other party under this Agreement) of its
existing technology does not infringe any issued patent of any Third
Party of which it is aware, and it has not received any
communication alleging that it has infringed or acted in conflict
with, or by conducting its business as proposed, would infringe or
act in conflict with the right of any Third Party.
* CONFIDENTIAL TREATMENT REQUESTED
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(c) Neither Party has granted, nor during the term of the Agreement will
grant, any right to any Third Party relating to its respective
technology which would conflict with the rights granted to the other
Party in this Agreement.
(d) [ * ].
10.2 Disclaimer.
ALL ITEMS, INFORMATION AND MATERIALS PROVIDED TO ZENECA BY ISIS
HEREUNDER ARE TO BE USED BY ZENECA FOR INVESTIGATIONAL PURPOSES ONLY.
NEITHER PARTY MAKES ANY WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR
OTHERWISE, OF ANY KIND, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
ARTICLE 11
INDEMNITY AND INSURANCE
11.1 Indemnity.
(a) Each Party (the "Indemnifying Party") will indemnify, defend and
hold the other Party (the "Indemnified Party") harmless from and
against any and all liabilities, claims, damages, costs, expenses or
money judgments incurred by or rendered against the Indemnified
Party and its Affiliates and sublicensees arising out of any
injuries to person and/or damage to property resulting from (a)
negligent acts of the Indemnifying Party performed in carrying out
its obligations hereunder, including failure by the Indemnifying
Party to provide the Indemnified Party with any information of the
Indemnifying Party's which, if timely received would have avoided
injury, death or damage, provided such failure to provide such
information is due to negligence on the part of the Indemnifying
Party, and (b) personal injury to the Indemnified Party's employees
or agents or damage to the Indemnified Party's property resulting
from acts performed by, under the direction of, or at the request of
the Indemnifying Party in carrying out activities contemplated by
this Agreement.
(b) In addition to its obligations in Paragraph 11.1(a) hereof, ZENECA
will indemnify and hold ISIS harmless from and against any and all
liabilities, claims, damages, costs, expenses or money judgments
which result from the manufacture (other than manufacture by ISIS),
use, promotion and sale of Development Candidates or Collaboration
Products under this Agreement.
* CONFIDENTIAL TREATMENT REQUESTED
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(c) The Indemnifying Party's obligations hereunder as to any claim are
subject to (i) its being given prompt notice thereof; (ii) the sole
right to control the defense and settlement; and (iii) the lack of
negligence or willful misconduct leading to the claim by the
Indemnified Party.
11.2 Insurance.
Each Party will obtain and maintain, in all places in which
Collaboration Products are developed, used or sold, product liability
insurance in the amounts and with the deductibles customarily maintained
by that party and which are consistent with its obligations with respect
to the products sold. Each Party will provide to the other information
concerning the existence of such insurance upon request from time to
time.
ARTICLE 12
TRADENAMES, TRADEMARKS, CONFIDENTIALITY AND PUBLICATIONS
12.1 Tradenames and Trademarks.
Nothing contained in this Agreement will be construed as conferring any
right of one Party to use in any manner any tradename or trademark of
the other Party or any of its Affiliates without such other party's
prior written consent and approval as to form.
12.2 Confidentiality.
ZENECA and ISIS agree for themselves, and for their Affiliates and
Sublicensees, and on behalf of their respective officers, employees and
agents, that for the greater of five years following the expiration or
termination of this Agreement or fifteen years from the Effective Date,
each will treat as confidential, using the maximum degree of care that
it uses for its own proprietary information, and that it will not use
(except as permitted under this Agreement) for its own benefit or the
benefit of any third party, any of the Confidential Information
furnished to it by the other party unless the furnishing party otherwise
agrees in writing or unless the party receiving the Confidential
Information is required to disclose such Confidential Information to a
court of law or to appropriate governmental agencies to enable the
recipient to secure governmental approval of a Collaboration Product. In
each such case, the recipient will notify the disclosing party of the
requirement and work together with the disclosing party to obtain the
maximum amount of confidentiality provided by such court of law or
governmental agency.
12.3 Shared Confidential Information.
In the course of performance of this Agreement, the Parties may jointly
develop, invent or discover information, which will be considered to be
the "Shared
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Confidential Information" of both Parties. Each Party agrees that it
will take the same steps to protect the confidentiality of the Shared
Confidential Information as it takes to protect its own proprietary and
confidential information.
Each Party will protect and keep confidential and will not publish or
otherwise disclose to any Third party, except as contemplated by this
agreement or with the other Party's written consent, the Shared
Confidential Information for the same period which covers the
Confidential Information. Each Party may, however, use any Shared
Information for any purpose provided that such use will not be deemed a
license or grant of any additional right or license other than or in
addition to the rights and licenses granted in this Agreement.
This Paragraph 12.2 and 12.3 supersedes any confidential disclosure
agreement between the Parties as to the subject matter hereof. Any
confidential information under such agreement will be treated as
Confidential Information hereunder.
12.4 Publications.
ISIS and ZENECA agree to discuss the timely publication in respected
scientific journals of articles prepared by their respective researchers
relating to such researchers' work on Development Candidates or
Collaboration Products with a view toward resolving the competing
interests of confidentiality and desired scientific credit through
publication. The manuscript of each proposed publication will first be
submitted to both parties and if either Party advises within 30 days of
receipt of the manuscript that publication of particular information
would materially diminish the commercial value of a Development
Candidates or Collaboration Products, publication of such information
will be delayed for such time as the parties agree, in order to permit
the preparation of patent applications or other documents to protect the
commercial interests of the parties. The Parties acknowledge that
publication delay may be beneficial to ensure that patent filings
contain appropriate support and, as a result, the Party whose invention
is involved will inform the other of the time reasonably required to
ensure an optimal patent coverage strategy and both parties agree to
abide by that decision. Notwithstanding the foregoing, there will be no
publication of any Confidential Information or Shared Confidential
Information reasonably valuable to ISIS or ZENECA without the agreement
of both ISIS or ZENECA.
ARTICLE 13
MISCELLANEOUS
13.1 Bankruptcy.
All rights and licenses granted under or pursuant to this Agreement by
ISIS to ZENECA are, and will otherwise be deemed to be, for purposes of
Section 365(n) of Title 11, U.S. Code (the "Bankruptcy Code"), licenses
of rights to "intellectual property" as defined under section 101(60) of
the Bankruptcy Code. The Parties
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agree that ZENECA, as a licensee of such rights under this Agreement,
will retain and may fully exercise all of its rights and elections under
the Bankruptcy Code. ISIS agrees during the term of this Agreement to
create and maintain current copies or, if not amenable to copying,
detailed descriptions or other appropriate embodiments, of all such
intellectual property. The Parties further agree that, in the event of
the commencement of a bankruptcy proceeding by or against ISIS under the
Bankruptcy Code, ZENECA will be entitled to a complete duplicate of (or
complete access to, as appropriate) any such intellectual property and
all embodiments of such intellectual property, and same, if not already
in its possession will be promptly delivered to ZENECA (a) upon any such
commencement of a bankruptcy proceeding upon written request therefore
by ZENECA, unless ISIS elects to continue to perform all of its
obligations under this Agreement or (b) if not delivered under (a)
above, upon the rejection of this Agreement by or on behalf of ISIS upon
written request therefore by ZENECA.
13.2 Waiver.
No waiver by either party hereof of any breach or default of any of the
covenants or agreements herein set forth will be deemed a waiver as to
any subsequent or similar breach or default.
13.3 Assignment.
This Agreement will be binding upon and inure to the benefit of the
parties hereto and their successors and assigns; provided, however, that
neither party will assign any of its rights and obligations hereunder to
a non-Affiliate without the consent of the other party which consent
will not be withheld unreasonably except as incident to the merger,
consolidation, reorganization, or acquisition of stock or assets
affecting substantially all of the assets or actual voting control of
the assigning party with regard to the business unit to which this
Agreement relates.
13.4 Notices.
Any notice or other communication required or permitted to be given to
either party hereto will be in writing and will be deemed to have been
properly given and to be effective on the date of delivery if delivered
in person or by telex or facsimile or 2 business days after mailing by
expedited delivery or 5 days after mailing by registered or certified
mail, postage paid, to the other party at the following address:
In the case of ISIS: Isis Pharmaceuticals, Inc.
2292 Faraday Avenue
Carlsbad, CA 92008
Attention: CEO (Fax: 760-931-0265)
With copy to: B. Lynne Parshall
(Fax: 760-431-9448)
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In the case of ZENECA [ * ]
Either party may change its address or fax number for communications by
a notice to the other party in accordance with this Paragraph 13.4.
13.5 Governing Law.
This Agreement will be interpreted and construed in accordance with the
substantive laws of the State of Delaware. ZENECA and ISIS hereby submit
to the jurisdiction and venue and procedural rules of the United States
District Courts for the State of Delaware for any action hereunder that
is permitted consistent with Paragraph 13.11. ZENECA and ISIS agree that
service of process may be effected against each of them by certified or
registered mail with respect to legal actions commenced in any such
jurisdiction by the other, its successors or assigns.
13.6 Amendment.
No amendment or modification hereof will be valid or binding upon the
parties unless made in writing and signed by both parties.
13.7 Force Majeure and Hardship.
(a) Any delays in performance by any party under this Agreement will not
be considered a breach of this Agreement if and to the extent caused
by occurrences beyond the reasonable control of the party affected,
including but not limited to acts of God, embargoes, governmental
restrictions, strikes or other concerted acts of workers, fire,
flood, explosion, riots, wars, civil disorder, rebellion or
sabotage. The party suffering such occurrence will immediately
notify the other party and the time for performance of any
obligation hereunder, except the due diligence obligations set forth
in Paragraph 3.1, will be extended by the actual time of delay
caused by the occurrence.
(b) If for reasons unforeseen at the Effective Date the performance of
this Agreement becomes an undue burden for either party the parties
will in good faith negotiate for an appropriate amendment hereof
with a view to alleviating or eliminating said burden.
* CONFIDENTIAL TREATMENT REQUESTED
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13.8 Independent Contractors.
Nothing contained in this Agreement will be construed to create an
agency, partnership or employer and employee relationship between ISIS
and ZENECA. At no time will one party make commitments or incur any
charges or expenses for or in the name of the other party except as
specifically provided herein.
13.9 Severability.
If any term, condition or provision of this Agreement is held to be
unenforceable for any reason, it will, if possible, be interpreted
rather than voided, in order to achieve the intent of the parties to
this Agreement to the extent possible. In any event, all other terms,
conditions and provisions of this Agreement will remain valid and
enforceable to the full extent.
13.10 Entire Agreement.
This Agreement when they are executed embody the entire understanding of
the parties with respect to the subject matter of this Agreement and
will supersede all previous communications, representations or
understandings, either oral or written, between the parties relating to
the subject matter hereof.
13.11 Dispute Resolution.
Any dispute or claim arising out of or in connection with the Agreement
will be resolved as follows: (i) for a period of 30 days after a dispute
arises the CEO of ISIS and the Research and Development Director of
ZENECA Pharmaceuticals business will negotiate in good faith in an
effort to resolve the dispute and (ii) if the dispute has not been
resolved at the close of such 30 day period, the matter will be finally
settled by binding arbitration under the Rules of Arbitration of the
American Arbitration Association, by their arbitrators appointed in
accordance with said rules; provided that if the parties cannot agree on
who is to serve as the arbitrator, each party will appoint one nominee
and those nominees will in turn jointly appoint the third arbitrator.
Arbitration will take place in Delaware. The costs of the arbitration,
including administrative and arbitrators' fees, will be shared equally
by the parties; provided, that each party will bear the costs of its own
attorneys' fees and expert witness fees. Judgment on an award rendered
by an arbitrator or arbitrators may be entered in any court having
jurisdiction thereof. Notwithstanding the foregoing, the parties may
apply to any court of competent jurisdiction for preliminary or interim
equitable relief without breach of this arbitration provision.
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13.12 Government Approvals.
The Parties agree to make all filings with governmental agencies as
shall be required by law in connection with this Agreement and the
activities contemplated hereunder.
IN WITNESS WHEREOF, the Parties have executed this Agreement, in duplicate
originals, by their respective officers hereunto duly authorized, as of the day
and year hereinabove written.
Isis Pharmaceuticals, Inc.
BY _________________________________________
B. Lynne Parshall
Title: Executive Vice President
Zeneca Limited
By _________________________________________
C.R.W. Petty
Title: Legal Director, Authorized Signatory
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EXHIBIT A
DEFINITIONS
1.1 "ABANDONED COMPOUND" means a Development Candidate which ZENECA
subsequently ceases to develop or commercialize pursuant to Paragraph
3.1(b) or 3.3.
1.2 "ABANDONED TARGET" means (i) any Target for which another Target is
substituted pursuant to Paragraph 2.8; (ii) any Target following
termination of the research program for such Target; and (iii) all Targets
upon termination of the Research Collaboration.
1.3 "ACTIVE TARGET PROGRAM" means (i) an ongoing research program as part of
the Research Collaboration on the Target; (ii) an active clinical
development program for a Development Candidate inhibiting such Target; or
(iii) a marketing and commercialization program for a Collaboration
Product inhibiting such Target.
1.4 "AFFILIATE" means, as to ISIS, any corporation, company, partnership,
joint venture or firm which controls, is controlled by, or is under common
control with, ISIS; and, as to ZENECA, any enterprise which, directly or
indirectly, is controlled by ZENECA alone or together with partners of
ZENECA or partners of ZENECA alone, as long as such control exists. For
the purpose of the preceding sentence, the word "control" means the
ownership of at least 50% of the outstanding voting stock of such
enterprise or, a comparable equity interest in any other type of entity.
1.5 "ANTISENSE TECHNOLOGY" means the selective inhibition of protein synthesis
at the nucleic acid level. This inhibition is caused by the binding of an
oligonucleotide or an analog thereof (termed "oligonucleotide") to the
complementary sequence. In particular, an oligonucleotide will
specifically bind to the sequence of the selected messenger or viral RNA
by base-pairing and will hence bring about a selective inhibition of gene
expression.
1.6 [ * ].
1.7 "CANCER-RELATED TARGETS" means Targets added to the Research Collaboration
pursuant to Paragraph 2.8 whose primary therapeutic use is the treatment
of cancer.
1.8 "COLLABORATION PRODUCT(S)" means a Development Candidate which ZENECA
commercialize itself or through its Affiliate or Sublicensees.
* CONFIDENTIAL TREATMENT REQUESTED
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1.9 "COMPOUNDS" means any oligonucleotide or analogs designed using Antisense
Technology for use as a human therapeutic to inhibit a Target as part of
the Research Collaboration.
1.10 "CONFIDENTIAL INFORMATION" means any confidential information including,
without limitation, information which is disclosed by one party to the
other relating to any technology research project, development project or
plan, manufacturing process, technology or plan, marketing or commercial
plan, financial or personnel matter relating to either Party, its present
or future products whether within or outside the Collaboration, whether in
oral, written, graphic or electronic form. Confidential Information will
not include information which:
(a) is or will have been known to the receiving party prior to the
disclosure by the other party as evidenced by written record or
other proof; or
(b) is or will have been public knowledge through no fault of the
receiving party; or
(c) has been received from a Third Party who did not acquire it directly
or indirectly from the disclosing party; or
(d) is independently developed by the receiving party without the use of
or reference to information disclosed by the other party.
The material financial terms of this Agreement constitute Confidential
Information.
1.11 "DEVELOPMENT CANDIDATE" means a Compound and formulation which meets the
Research Target Profile and is accepted for development by ZENECA.
Chemical modifications to a Development Candidate or materially different
formulations that have a significant effect on the commercial desirability
of the Development Candidate will be considered separate Development
Candidates.
1.12 "EFFECTIVE DATE" means December 18, 1998.
1.13 "EXCESS RESEARCH COSTS" means the costs of the Research Collaboration in
addition to Research Payments described in subparagraph 2.4(b). [ * ].
Excess Research Costs for outside expenditures will be billed at cost.
Excess Research Costs for ISIS performance outside the tasks outlined in
the Research Plan will be billed at ISIS' Personnel Fully Burdened Rate.
1.14 "FDA" means the United Stated Food and Drug Administration or an
equivalent agency in a Major Country.
* CONFIDENTIAL TREATMENT REQUESTED
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1.15 "FIRST COMMERCIAL SALE" means the first transfer for value of title to a
Collaboration Product by ZENECA, its Affiliates or Sublicensees to a
non-Affiliate for consideration in any arm's length transaction or the
first use (excluding the supply of clinical trial materials) of a
Collaboration Product by ZENECA, its Affiliates or Sublicensees in a
country following Governmental Approval in such country, whichever occurs
first. For the purpose of this definition all transfer of title to
reasonable quantities of any free samples of Collaboration Product or to
clinical trial material shall not constitute a First Commercial Sale.
1.16 [ * ].
1.17 "IND" means the regulatory filing required to initiate Phase I Clinical
Trials in the US or any other country. If Phase I Clinical Trials are
initiated without a requirement for regulatory filing or approval an IND
will be deemed to have been filed on initiation of Phase I Clinical
Trials.
1.18 "INFLATION FACTOR" will mean an annual adjustment based upon changes in
the Consumer Price Index for Urban Wage Earnings and Clerical Worker -
U.S. City Average, for the prior 12 months, rounded up to the nearest
$5,000 per FTE.
1.19 [ * ].
1.20 "ISIS DEVELOPMENT EXPENSES" means costs incurred by ISIS to conduct, at
ZENECA's request, additional work on a Compound after it has been
designated a Development Candidate and will include ISIS labor, billed at
the ISIS Personnel Fully-Burdened Rate (which will include overhead items
such as operating leases, rents, equipment, supplies and related
departmental and company overhead) plus outside expenses including the
cost of raw materials for compound supply, clinical grants, laboratory
work, CRO, outside data management charges, charges for outside
pharmacokinetic, toxicological and other testing, and an appropriate
allocation of all manufacturing functions which directly benefit a
Development Candidate including process development and analytical
research and development.
1.21 "ISIS KNOW-HOW" means all proprietary inventions, technology, trade
secrets, clinical and preclinical results (collectively, "inventions")
discovered or developed by ISIS prior to the Effective Date which are
necessary or useful to make, use or sell Collaboration Products and which
are not covered by ISIS Patents. ISIS Know-How will also include any
inventions which are not covered by ISIS Patents which are necessary or
useful to make, use or sell Collaboration Products, discovered or
developed by ISIS after the Effective Date or acquired by ISIS from
* CONFIDENTIAL TREATMENT REQUESTED
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Third Parties before or after the Effective Date provided that ISIS is
free to license such inventions to ZENECA, and, provided further, that if
ISIS developed or acquired such inventions for or from a Third Party, ISIS
and ZENECA have mutually agreed on the terms upon which ISIS will provide
such inventions to ZENECA, as provided for in Paragraph 7.1(c).
1.22 "ISIS PATENTS" means any and all patents, both foreign and domestic, which
relate to inventions made by ISIS on or prior to the Effective Date which
are necessary or useful to make, use or sell Collaboration Products
including without limitation ISIS Target Patents. ISIS Patents will also
include any patents relating to inventions made by ISIS after the
Effective Date or licensed to ISIS before or after the Effective Date
which are necessary or useful to make, use or sell Collaboration Products,
provided that ISIS is free to license such patents to ZENECA and, provided
further, that if ISIS developed or acquired such inventions for or from a
Third Party, ISIS and ZENECA have mutually agreed on the terms upon which
ISIS will provide such patents to ZENECA as provided in Paragraph 7.1(c).
[ * ]. "Patents" as used herein will include, without limitation, all
substitutions, extensions, reissues, renewals, divisions, continuations,
continuations-in-part, inventors' certificates and all foreign
counterparts of the aforementioned. Attached hereto as Exhibit G is a list
of all ISIS' licenses as of the Effective Date that may be relevant to the
Research Collaboration including the technology covered and the royalty
rate.
1.23 "ISIS PERSONNEL FULLY-BURDENED RATE" means [ * ].
1.24 "ISIS TARGET PATENTS" means claims of ISIS Patents arising out of
inventions made by ISIS during the Research Collaboration which cover
specific antisense compounds directly inhibiting a particular Target.
1.25 "ISIS TECHNOLOGY" means ISIS Patents, ISIS Target Patents and ISIS
Know-How.
1.26 "JOINT RESEARCH COMMITTEE" means the Committee defined in Paragraph 2.2.
1.27 "MAJOR COUNTRY" means the United States, Japan, the Federal Republic of
Germany, France, the United Kingdom or other European Community country if
chosen by ZENECA to be rapporteur country for the Hi-Tech product
registration procedure within the European Community.
1.28 "NDA" means a New Drug Application filed with FDA after completion of
clinical trials to obtain marketing approval for a commercial product in
the United States or equivalent application for regulatory approval in
other countries.
* CONFIDENTIAL TREATMENT REQUESTED
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1.29 "NET SALES REVENUE" means the total invoiced amount of all sales of
Collaboration Product by ZENECA its Affiliates or Sublicensees less:
i) Prompt payment or other trade or other quantity discounts,
rebates or retroactive price reductions actually allowed and
taken in such amounts as are customary in the trade;
ii) Commissions paid or allowed to distributors and agents who are
independent Third Parties other than such parties who are
performing detailing functions;
iii) Amounts repaid or credited by reason of timely failure or
rejection or recalls (whether voluntary or mandatory);
iv) Customs, duties and taxes (other than franchise or income taxes
on the income of ZENECA) actually paid or withheld;
v) Allowances [ * ] in any period including any allowances for bad
debt, provided that upon the extinguishment of any such
allowance, the extinguishment will be determined to be a receipt;
and
vi) Transportation and delivery charges [ * ] in any period,
including insurance premiums.
Net Sales Revenue shall exclude:
i. The transfer of reasonable and customary quantities of free
samples of Collaboration Product, clinical trial materials and
sales to an Affiliate or a Sublicensee, other than for subsequent
resale.
ii. Sales or transfers of Collaboration Product among ZENECA and its
Affiliate unless the receiving party is the consumer or user of
the Collaboration Product.
iii. Use by ZENECA, its Affiliates or Sublicensees of Collaboration
Product for any use connected with the securing of regulatory
approval or validating of a manufacturing process or the
obtaining of other necessary marketing approvals for
Collaboration Product.
If ZENECA, its Affiliates or Sublicensees intend to use a Collaboration
Product rather than resell it, the sales price for such Product will be
calculated based on the average of the sales of Collaboration Product to
Third Parties during the period in which such Collaboration Product is
transferred to such Affiliate or Sublicensee and included in Net Sales
Revenue as if sold to a Third Party at such price during such period.
Net Sales Revenue will be calculated in U.S. dollars in accordance with
Paragraph 4.5.
* CONFIDENTIAL TREATMENT REQUESTED
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1.30 "NON-CANCER-RELATED TARGETS" means Targets added to the Research
Collaboration pursuant to Paragraph 2.8(c) whose primary therapeutic use
is the treatment of a disease or diseases other than cancer.
1.31 "PARTY" means ISIS or ZENECA, or ISIS and ZENECA.
1.32 "PHASE II CLINICAL TRIALS" means the initial clinical testing of a
Compound in humans who are patients with a disease for which the Compound
is being tested with the intention of gaining a preliminary assessment of
the safety, efficacy and dosing regimen of a Compound in treating such
disease.
1.33 "PIVOTAL QUALITY CLINICAL TRIAL" will mean a human clinical trial of a
Compound designed to be of a size and statistical power to support an NDA
Filing alone or in combination with other studies. If it is unclear
whether or not a study design will be sufficient to support an NDA Filing
(other than by virtue of the uncertainty of efficacy data from that trial)
the study will be deemed to be a Pivotal Quality Trial on the initiation
of activities to support an NDA Filing. Initiation of a Phase III clinical
study will be deemed to be initiation of a Pivotal Quality Study.
1.34 "RESEARCH COLLABORATION" means the collaboration between ISIS and ZENECA
to discover antisense drugs as defined in this Agreement.
1.35 "RESEARCH PAYMENTS" mean the regular payments described in Paragraph
2.4(b) as increased and pursuant to Paragraph 2.4(c) and 2.8, but will not
include the Excess Research Costs.
1.36 "RESEARCH TARGET PROFILE" means the scientific criteria specified by the
Joint Research Committee to be fulfilled for a Compound to be met prior to
designation of the Compound as a Development Candidate and prior to the
initiation of IND-enabling toxicology, pharmacology and pharmacokinetic
studies, including the methods for testing Compounds to determine whether
the Profile is met. [ * ].
1.37 "SHARED COMPOUND" means a Development Candidate which ZENECA proposes and
ISIS accepts to develop and commercialize on a shared basis pursuant to
Paragraph 3.5.
1.38 "SUBLICENSEE" means any Third Party (including a distributor) who is given
the right to market and sell a Collaboration Product. A Third Party who is
given only the right to sell a Collaboration Product (such as a
wholesaler) will not be considered a Sublicensee. It is recognized and
agreed that distributors appointed by ZENECA whose sole function is to
purchase and resell Collaboration Product are not sublicensees for the
purpose of this definition.
* CONFIDENTIAL TREATMENT REQUESTED
6
36
1.39 "TARGETS" means specific individual molecular targets either initially or
from time-to-time, collectively the Initial Targets, Cancer-Related
Targets, and Non-Cancer-Related Targets. When an Active Target Program for
a Target terminates, that Target will cease to be a Target and will
thereafter become an Abandoned Target. Targets will include the Initial
Targets plus any other Targets added or substituted pursuant to Paragraph
2.8 hereof, with any Abandoned Target when abandoned. Research relating to
the Targets includes the elaboration of necessary cellular, biochemical
and molecular-biological approaches (i.e., the development of the
knowledge not already available to the two partners, the development and
setting up of relevant assays) towards the inhibition of the expression of
the proteinic target molecules by Antisense Technology as well as the
conception, design, synthesis and development of therapeutic entities,
including the characterization of their biophysical and pharmacokinetic
properties.
1.40 [ * ].
1.41 "THIRD PARTY" means any party other than ISIS and its Affiliates or ZENECA
and its Affiliates and Sublicensees.
1.42 "THIRD PARTY SUPPLIER" means any person or entity other than a party to
this Agreement, its Affiliates, and/or its respective employees from whom
ZENECA purchases commercial quantities of Bulk Drug Substance.
1.43 "ZENECA FIELD OF USE" means [ * ].
* CONFIDENTIAL TREATMENT REQUESTED
7
37
EXHIBIT B
COLLABORATION RESEARCH PLAN
[ * ]
ENTIRE EXHIBIT REDACTED.
* CONFIDENTIAL TREATMENT REQUESTED
8
38
EXHIBIT C
JOINT RESEARCH COMMITTEE COMPOSITION
[ * ]
ENTIRE EXHIBIT REDACTED.
* CONFIDENTIAL TREATMENT REQUESTED
9
39
EXHIBIT D
RESEARCH TARGET PROFILE FOR THE INITIAL TARGETS
[ * ]
ENTIRE EXHIBIT REDACTED.
* CONFIDENTIAL TREATMENT REQUESTED
1
40
EXHIBIT E
TECHNICAL MILESTONE CRITERIA
[ * ]
ENTIRE EXHIBIT REDACTED.
* CONFIDENTIAL TREATMENT REQUESTED
1
41
EXHIBIT F
MANUFACTURING SPECIFICATIONS
[ * ]
ENTIRE EXHIBIT REDACTED.
* CONFIDENTIAL TREATMENT REQUESTED
1
42
EXHIBIT G-1
ISIS LICENSES
[ * ]
ENTIRE EXHIBIT REDACTED.
* CONFIDENTIAL TREATMENT REQUESTED
1
43
EXHIBIT G-2
ISIS LICENSES
[ * ]
ENTIRE EXHIBIT REDACTED.
* CONFIDENTIAL TREATMENT REQUESTED
2
44
EXHIBIT G-3
ISIS LICENSES
[ * ]
ENTIRE EXHIBIT REDACTED.
* CONFIDENTIAL TREATMENT REQUESTED
3
45
EXHIBIT H
GMO TERM SHEET
ISIS REVISED PROPOSAL FOR NON-EXCLUSIVE LICENSE
November 12, 1998
[ * ]
ENTIRE EXHIBIT REDACTED.
* CONFIDENTIAL TREATMENT REQUESTED
1
1
EXHIBIT 10.24
CONFIDENTIAL TREATEMENT REQUESTED
UNDER 17 C.F.R. SECTIONS 200.80(b)(4), 200.83
AND 240.24b-2. *INDICATES OMITTED
MATERIAL THAT IS THE SUBJECT OF A
CONFIDENTIAL TREATEMENT REQUEST THAT IS
FILED SEPARATELY WITH THE COMMISSION.
PATENT RIGHTS PURCHASE AGREEMENT
This Patent Rights Purchase Agreement (this "Agreement") is made
and entered into as of December 18, 1998 (the "Effective Date") between Isis
Pharmaceuticals, Inc. ("Isis"), and Gilead Sciences, Inc. ("Gilead").
1. Definitions.
1.1 "Cationic Lipid" means those compounds described in
United States Patent Nos. 5,777,153 and 5,705,693; United States Patent
Application Serial No. 08/672,206; and European Patent Application No.
97931462.2, to the extent such compounds are not Codeblocker Compounds.
1.2 "Codeblocker Compound" means an oligonucleotide that
binds directly to DNA or RNA within a cell on a selective basis determined by
the nucleotide sequence of the target DNA or RNA and exerts its biological
activity predominantly through binding to DNA or RNA to inhibit the
transcription or replication of the target DNA or RNA or binding to RNA to
inhibit the translation, processing, packaging or regulatory activity of the
target RNA. A Codeblocker Compound may also have a mechanism of action or
biological activity other than one conferred through direct binding to RNA or
DNA provided that (i) the compound originally was designed to bind a target DNA
or RNA and (ii) the final compound or any compounds used to derive the final
compound were not identified using selective purification and polymerase
amplification in any fashion. An oligonucleotide, is any oligomer or polymer
made up [*.] An oligonucleotide includes RNA or DNA fragments, and may be
composed of naturally occurring or non-naturally occurring bases, sugars or
intersugar linkages. An oligonucleotide may have the bases, sugars or intersugar
linkages partially or completely absent. Oligonucleotides may be made such that
adjacent nucleoside or nucleoside fragments are linked together by phosphate
groups or modified or non-naturally occurring internucleoside linkages to form
the internucleoside backbone of the oligomer, whether or not such linkages
retain a phosphorous atom in the linkage.
1.3 "Oligonucleotide Delivery System" means any carrier,
targeting entity, excipient, formulation, device, prodrug, covalent or
noncovalent conjugate, encapsulating vesicle, microcapsule, micro- or
nanosphere, emulsion, or microemulsion, lipid, liposome, virosome, or artificial
vial envelope which was developed by Gilead on or prior to the Effective Date,
and which (i) enhances the cellular penetration or circulating half-life of a
Codeblocker Compound, (ii) selectively delivers a Codeblocker compound to the
intended target tissue, cell or subcellular compartment, (iii) provides
sustained release of a Codeblocker Compound from a depot formulation, or (iv)
otherwise favorably alters the absorption, distribution, metabolism or excretion
of a Codeblocker Compound so as to enhance its pharmacological activity of
clinical value. "Oligonucleotide Delivery System" includes cationic lipids.
*CONFIDENTIAL TREATMENT REQUESTED
-1-
2
1.4 "Patent Rights" means the patents and patent
applications listed in Exhibit A attached hereto.
2. Assignments and Licenses.
2.1 Gilead hereby sells and assigns to Isis all of
Gilead's right, title and interest in Patent Rights, subject to the rights of
Glaxo Wellcome Inc. ("Glaxo") under the Collaborative Research Agreement between
Glaxo and Gilead dated March 25, 1996 (the "Glaxo Agreement"), provided however,
that the assignment of U.S. Patent Number 5,256,775 shall be subject to the
condition precedent that Gilead settle the interference involving this patent on
conditions of Gilead's choosing (including conceding priority). Gilead hereby
grants Isis an exclusive, royalty-free, worldwide, assignable license (with the
right to grant sublicenses) to U.S. Patent Number 5,256,775 beginning on the
Effective Date and continuing until such time that Gilead settles the
interference and the assignment to Isis becomes effective.
2.2 Gilead hereby assigns and delegates to Isis (and Isis
accepts and agrees to perform) all of Gilead's rights and obligations under the
License Agreement between Glen Research Corporation ("Glen Research") and Gilead
dated January 1, 1994 and amended on November 19, 1996. A copy of the written
consent to such assignment and delegation signed by Glen Research is attached
hereto as Exhibit B. In the event that Isis, by reason of this Agreement, is
required to indemnify Glen Research under Section 8.1 (b) of the Glen Research
License Agreement, Gilead will indemnify Isis up to a maximum amount equal to
one hundred percent (100%) of total royalties received by Gilead from Glen
Research; thereafter, Gilead will not have any indemnity obligations to Isis
related to such Agreement. Gilead will continue to honor its obligations to Glen
Research for activities preceding the Effective Date of this Agreement.
2.3 Subject to the rights of Glen Research above, Isis
hereby grants to Gilead an exclusive, perpetual, irrevocable, royalty-free,
worldwide, assignable license (with the right to grant sublicenses) to directly
or indirectly make, have made, use, import, export or sell compounds and other
subject matter falling within the scope of Patent Rights which are [ * ].
2.4 Gilead hereby grants to Isis a nonexclusive,
perpetual, royalty-free, worldwide, assignable license (with the right to grant
sublicenses) to compounds and other subject matter which are within the scope of
Patent Rights, solely for use as intermediates in the manufacture of Codeblocker
Compounds or oligomers [ * ].
2.5 Isis hereby grants to Gilead a non-exclusive,
non-sublicensable, non-assignable, perpetual, irrevocable, royalty-free,
worldwide license under Patent Rights to make and use Codeblocker Compounds and
Oligonucleotide Delivery Systems for internal research purposes, but not for any
commercial purpose.
2.6 Isis will not have any obligations to Gilead relating
to Codeblocker Compounds or this Agreement to the extent arising prior to the
Effective Date.
*CONFIDENTIAL TREATMENT REQUESTED
-2-
3
2.7 Each party hereby agrees to execute such documents and
to take such other actions as shall be necessary or appropriate to effectuate
the assignments and licenses set forth in this Section 2.
3. Representations and Warranties by Gilead.
Gilead makes the following representations and warranties to Isis, each of which
will survive the Effective Date:
3.1 To the best of Gilead's knowledge, the Patent Rights
include all of the patents and patent applications owned or controlled by Gilead
on or prior to the Effective Date that cover Codeblocker Compounds and
Oligonucleotide Delivery Systems, their manufacture or use. There are no other
US or unpublished foreign filings owned or controlled by Gilead filed prior to
the Effective Date which claim Codeblocker Compounds or Oligonucleotide Delivery
Systems other than as set forth in Exhibit A, nor does Gilead have any present
intention to make such filings. If Gilead becomes aware of any patents or patent
applications that (i) are owned or controlled by Gilead, (ii) claim inventions
made prior to the Effective Date, (iii) cover Codeblocker Compounds or
Oligonucleotide Delivery Systems, and (iv) are not included in Exhibit A, Gilead
will promptly notify Isis in writing and execute appropriate documents to
transfer such patents and patent applications to Isis.
3.2 Gilead represents and Isis acknowledges that (i) the
Glaxo Agreement remains in effect and Gilead and Glaxo have ongoing rights and
obligations thereunder, modified to the extent specifically set forth in this
Agreement and (ii) this Agreement is not an assignment of Gilead's rights or
obligations under the Glaxo Agreement and that Isis assumes no rights or
obligations to Glaxo under this Agreement. Gilead represents that the Research
Term and all rights, obligations and funding relating thereto under the Glaxo
Agreement have been terminated. Gilead will not enter into any future amendments
to the Glaxo Agreement which in any way affect the rights of Isis hereunder.
3.3 The Glaxo Agreement and the license to Glen Research
referenced in Section 2.2 above are the only licenses and Gilead is not aware of
any other third party rights of any kind affecting the Patent Rights. Except
with respect to U.S. Patent Number 5,256,775, which is subject to an
interference proceeding, the Patent Rights are not the subject of any pending
interference, cancellation or other protest proceeding not otherwise known to
Isis, or otherwise subject to rights or obligations to any third party other
than Glaxo and Glen Research. The complete terms and conditions of such rights
and obligations relating to Glaxo and Glen Research have been disclosed to Isis.
3.4 There are no Collaboration Compounds (as defined in
Section 1.7 of the Glaxo Agreement) and none were developed during the Research
Term under the Glaxo Agreement. Gilead does not owe any royalties to Glaxo or
any third party under the Glaxo Agreement nor does Gilead have any known or
pending claims against Glaxo arising out of the Glaxo Agreement. To the best of
Gilead's knowledge, (i) Glaxo does not owe any royalties to Gilead or any third
party under the Glaxo Agreement, (ii) nor does Glaxo have any known or pending
claims against Gilead arising out of the Glaxo Agreement.
-3-
4
4. Technology Transfer.
4.1 Gilead and Isis will cooperate in the filing and
execution of any and all documents necessary to effectuate the assignment to
Isis of the Patent Rights, including the filing of assignments or other transfer
of title covenants with the U.S. Patent and Trademark Office and foreign patent
offices as applicable to the Patent Rights. Within thirty (30) days from the
Effective Date, Gilead will notify all attorneys handling the prosecution of the
Patent Rights to contact the Isis Patent Department to provide an immediate
status update on the Patent Rights and to prepare the documents necessary to
transfer the Patent Rights to Isis. The cost of recording assignments of the
Patent Rights will be borne by Isis. Within forty-five (45) days from the
Effective Date, Gilead and its counsel will use their reasonable best efforts to
transfer all files and supporting documents relating to the Patent Rights to
Isis, including but not limited to, all initial invention disclosure documents,
all documents sent to the U.S. Patent and Trademark Office regarding inventions
and claims, all draft patent applications, all filing or prosecution documents
submitted to the patent offices, and all file wrappers. Conception notebooks and
all other documents in the possession or under the control of Gilead or its
counsel relating to conception and/or reduction to practice, such as scientist
notebooks shall be obtained in accord with Gilead's ordinary document retention
and made available to Isis upon Isis' reasonable request. All documents to be
provided to Isis hereunder are to be sent by expedited delivery service.
4.2 Gilead will make appropriate scientific staff
available to Isis for a scientific tutorial on the subject matter of this
Agreement, such tutorial not to exceed more than [ * ] time from Gilead's staff
and not to obligate Gilead to disclose any third party confidential information.
5. Patent Maintenance and Prosecution Responsibilities.
5.1 On and after the Effective Date, Isis will take
responsibility for any action or proceeding involving Patent Rights. The cost of
recording the assignment of Patent Rights shall be borne solely by Isis. If Isis
elects not to take such responsibility involving Patent Right(s) in a particular
country then Isis will timely notify Gilead and Glaxo 30 days before the time
future action is due, and thereafter Gilead or Glaxo shall undertake such
responsibility. If Gilead or Glaxo elects to do so, Isis will grant any
necessary authority to Gilead. Gilead will determine whether Gilead or Glaxo
shall take such responsibility at their expense. Isis assumes no obligation to
Glaxo as a result of its agreement with Gilead in this Section 5.1.
5.2 Notice of Infringement. Isis shall promptly notify
Gilead in writing of any infringement of any assigned Patent Right(s) of which
it becomes aware.
5.3 Enforcement of Patents. Except as otherwise set forth
in this Section, Isis may, but shall not be required to, prosecute any alleged
infringement or threatened infringement of any assigned Patent Right(s) of which
it is aware or which is brought to its attention. Isis shall act in its own name
and at its own expense.
*CONFIDENTIAL TREATMENT REQUESTED
-4-
5
If Isis has failed to prosecute under the first sentence
of this paragraph with respect to alleged or threatened infringement relating to
any Patent Right(s) (i) two months after it has been notified in writing of such
alleged infringement, or (ii) one month before the time limit, if any, set forth
in the appropriate laws and regulations for the filing of such actions,
whichever comes first, Gilead (or at its election Glaxo) may, but shall not be
required to, prosecute any such alleged infringement or threatened infringement
of a Patent within the Patent Rights. In any such event, Gilead or Glaxo shall
be free to act in its own name and at its own expense. Notwithstanding the
foregoing and as between the parties, Gilead shall have the sole and exclusive
right of enforcement with respect to any alleged or threatened infringement of
any right within the scope of the license granted in Section 2.3 of this
Agreement. Isis shall cooperate fully with Gilead or Glaxo in any action by
Gilead or Glaxo, respectively, under this paragraph, including if required in
order to bring such an action, the furnishing of a power of attorney.
6. Indemnity and Warranty.
6.1 Indemnity by Isis. Isis will indemnify, save, defend
and hold Gilead and its agents, directors and employees harmless from and
against any and all suits, claims, actions, demands, liabilities, expenses
and/or loss, including reasonable legal expense and attorneys fees, resulting
from activities under this agreement by Isis.
6.2 Indemnity by Gilead. Gilead will indemnify, save,
defend and hold Isis and its agents, directors and employees harmless from and
against any and all suits, claims, actions, demands, liabilities, expenses
and/or loss, including reasonable legal expense and attorney fees, resulting
from (i) Gilead's, Gilead's sublicensee's or Gilead's assignee's activities
under the licenses provided for in Sections 2.3 and 2.5; (ii) Gilead's
contractual obligations to third parties including Glaxo and Glen Research,
except to the extent resulting from Isis' activities under this Agreement; or
(iii) Gilead's exercise of the Patent Rights prior to the Effective Date.
6.3 Warranty. Gilead warrants that it has sufficient right
and title to enter into and to perform its obligations under this Agreement.
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE PARTIES DISCLAIM ALL
WARRANTIES OF ANY NATURE, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION
WARRANTIES OF VALIDITY, MERCHANTABILITY, NONINFRINGEMENT, AND FITNESS FOR A
PARTICULAR PURPOSE.
7. Confidentiality. Confidential Information under the terms of
this Agreement is all information relating to the Patent Rights sold, assigned
or licensed to Isis under Section 2.1 and the Technology Transfer to Isis by
Gilead under Section 4.1. Gilead agrees to treat the Confidential Information as
confidential and to protect and maintain the confidentiality thereof. Gilead
will use at least the same standard of care as it uses to protect its own
Confidential Information to ensure that its employees, agents, and consultants
do not disclose or make any unauthorized use of such Confidential Information.
Gilead will promptly notify Isis upon discovery of any unauthorized use or
disclosure of the Confidential Information. Confidential Information will not
include any information which is generally available to the
-5-
6
public, is otherwise part of the public domain other than through any act or
omission of Gilead in breach of this Agreement, or which is required to be
disclosed by law or contract entered into prior to this Agreement (provided that
Isis shall have notice thereof in advance so that it can act to protect its
interests should it decide to do so).
8. Consideration. Isis shall pay Gilead the following
noncontingent, non-refundable cash payments as consideration for the assignments
provided for in this Agreement: $2,000,000 on the Effective Date, $1,000,000 on
the first anniversary of the Effective Date, $1,000,000 on the second
anniversary of the Effective Date, and $2,000,000 on the third anniversary of
the Effective Date, for total payments of $6,000,000. In the event that Isis
defaults on any of these payments, after thirty (30) days notice and an
opportunity to cure, then ownership of all Patent Rights will automatically
revert to Gilead and Isis will take all actions reasonably requested by Gilead
for such purposes, including, without limitation, signing and delivering any
applicable assignments and other documents. Isis shall be entitled to no damages
exceeding the consideration set forth in this Section 8 for any uncured claim
against Gilead respecting Gilead's performance or representations hereunder.
9. Notices. Notices under this Agreement shall be sufficient only
if personally delivered, delivered by a major commercial rapid delivery courier
service, facsimile or mailed by certified or registered mail, return receipt
requested, to a party at its addresses set forth as follows:
If to Isis: Isis Pharmaceuticals, Inc.
2292 Faraday Avenue
Carlsbad, CA 92008
Attn: Executive Vice President, CFO
Facsimile: (760) 431-9448
If to Gilead: Gilead Sciences, Inc.
333 Lakeside Drive
Foster City, CA 94404
Attn: Vice President, Intellectual Property
Facsimile: (650) 577-6622
If to Glaxo: Glaxo Wellcome, Inc.
Five Moore Drive
Research Triangle Park, NC 27709
Attn: Company Secretary
Facsimile: (919) 483-0265
10. Miscellaneous. If any provision of this Agreement shall be
adjudged by any court of competent jurisdiction to be unenforceable or invalid,
that provision shall be limited or eliminated to the minimum extent necessary to
continue to effect the intent of the parties, and this Agreement shall otherwise
remain in full force and effect and enforceable. Any waivers or amendments shall
be effective only if made in writing and signed by a representative of the
respective parties authorized to bind the parties. This Agreement shall be
governed by the laws of the State of Delaware, excluding conflicts-of-law
principles. This Agreement is the complete
-6-
7
and exclusive statement of the mutual understanding of the parties and
supersedes and cancels all previous written and oral agreements and
communications relating to the subject matter of this Agreement, excluding the
Confidential Disclosure Agreement between the parties dated July 29, 1998.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first indicated above.
ISIS PHARMACEUTICALS, INC. GILEAD SCIENCES, INC.
By:__________________________________ By:_____________________________________
Printed:_____________________________ Printed:________________________________
Title:_______________________________ Title:__________________________________
Address: 2292 Faraday Avenue Address: 333 Lakeside Drive
Carlsbad, CA 92008 Foster City, CA 94404
-7-
8
EXHIBIT A
[ * ]
Exhibit A redacted in its entirety
*CONFIDENTIAL TREATMENT REQUESTED
-1-
1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Amendment No. 2 to Form S-3 No. 333-71911) of Isis Pharmaceuticals, Inc. and in
the related Prospectus of our report dated January 30, 1999, with respect to the
financial statements of Isis Pharmaceuticals, Inc. included in this Annual
Report (Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
San Diego, California
March 31, 1999
5
YEAR
DEC-31-1998
JAN-01-1998
DEC-31-1998
27,618
31,230
3,466
0
0
63,187
21,542
0
96,074
22,536
77,724
0
0
27
(4,213)
96,074
560
43,321
0
0
76,949
0
9,355
(42,983)
0
(42,983)
0
0
0
(42,983)
(1.60)
(1.60)
