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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 1999
REGISTRATION NO. 333-71911
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ISIS PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0336973
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2292 FARADAY AVENUE
CARLSBAD, CALIFORNIA 92008
(760) 931-9200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
B. LYNNE PARSHALL, ESQ.
EXECUTIVE VICE PRESIDENT
ISIS PHARMACEUTICALS, INC.
2292 FARADAY AVENUE
CARLSBAD, CALIFORNIA 92008
(760) 931-9200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
D. BRADLEY PECK, ESQ.
SCOTT R. CUTLER, ESQ.
COOLEY GODWARD LLP
4365 EXECUTIVE DRIVE, SUITE 1100
SAN DIEGO, CA 92121
(619) 550-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD TO YOU UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 10, 1999
PROSPECTUS
4,000,000 Shares
ISIS PHARMACEUTICALS, INC.
Common Stock
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This prospectus will allow us to issue common stock over time. This means:
- we may issue the shares offered in this prospectus from time to time;
- we will provide a prospectus supplement each time we issue common
stock;
- the prospectus supplement will inform you about the specific terms of
that offering and also may add, update or change information contained
in this document; and
- you should read this document and any prospectus supplement carefully
before you invest.
Isis' common stock is traded on the Nasdaq National Market under the symbol
"ISIP". On April 30, 1999, the last reported sale price for our common stock on
the Nasdaq National Market was $10.4375 per share.
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 1999
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TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 3
The Company................................................. 3
The Offering................................................ 4
Risk Factors................................................ 5
Where You Can Get More Information.......................... 10
Use of Proceeds............................................. 11
Dilution.................................................... 12
Selected Financial Data..................................... 13
Management Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
Plan of Distribution........................................ 18
Legal Matters............................................... 18
Experts..................................................... 19
Index to Financial Statements............................... F-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and consolidated financial statements appearing elsewhere
or incorporated by reference in this prospectus.
THE COMPANY
Isis was incorporated in California in January 1989 and in April 1991
changed its state of incorporation to Delaware. Our executive offices are
located at 2292 Faraday Avenue, Carlsbad, California 92008, and our telephone
number is (760) 931-9200. Isis' world wide web address is http://www.isip.com.
Information contained in our world wide web site should not be considered to be
part of this prospectus.
In February 1999, Dr. Daniel Kisner, President, Chief Operating Officer and
a director of Isis, resigned all positions to assume the position of Chief
Executive Officer of Caliper Technologies, a privately held company. Dr. Debby
Jo Blank joined Isis as Executive Vice President overseeing corporate
development, business development, strategic planning and marketing, human
resources and operations, and investor relations. B. Lynne Parshall, Executive
Vice President and Chief Financial Officer assumed responsibility for Isis'
manufacturing and regulatory affairs activities in addition to her previous
responsibilities.
Isis Pharmaceuticals is a trademark of Isis. Vitravene(TM) is a trademark
of CIBA Vision Corporation. All other brand names or trademarks appearing in
this prospectus are the property of their respective holders.
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THE OFFERING
Common stock offered in this
prospectus...................... 4,000,000 shares
Common stock outstanding after
the offering.................... 32,240,000 shares(1)
Use of proceeds................. For research, drug discovery and development
activities, including preclinical and
clinical studies, production of compounds
for such studies and capital expenditures,
and other general corporate purposes. See
"Use of Proceeds."
Nasdaq National Market symbol... ISIP
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(1) Based on shares outstanding as of April 28, 1999. Does not include 7,862,157
shares of common stock issuable upon exercise of outstanding options or
1,015,000 shares of common stock issuable upon exercise of outstanding
warrants as of April 28, 1999.
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RISK FACTORS
Please consider the following risk factors carefully in addition to the
other information contained in this prospectus and in any other documents
incorporated by reference into this prospectus from our other SEC filings.
OUR BUSINESS WILL SUFFER IF WE FAIL TO OBTAIN REGULATORY APPROVAL FOR OUR
PRODUCTS.
We must conduct time-consuming, extensive and costly clinical trials, in
compliance with U.S. Food and Drug Administration regulations, to show the
safety and efficacy of each of our drug candidates, as well as its optimum
dosage, before the FDA can approve a drug candidate for sale. We cannot
guarantee that we will be able to obtain necessary regulatory approvals on a
timely basis, if at all, for any of our products under development. Delays in
receiving these approvals, failure by us or our partners to receive these
approvals at all or failure to comply with existing or future regulatory
requirements could have a material adverse effect on our business, financial
condition and results of operations.
While limited trials of our products have to date produced favorable
results, significant additional trials may be required, and we may not be able
to demonstrate that our drug candidates are safe or effective. We have only
introduced one commercial product, Vitravene. We cannot guarantee that any of
our other product candidates will obtain required government approvals or that
we can successfully commercialize any products. We expect to have ongoing
discussions with the FDA and foreign regulatory agencies with respect to all of
our drugs in clinical development.
OUR BUSINESS WILL SUFFER IF OUR PRODUCTS ARE NOT USED BY DOCTORS TO TREAT
PATIENTS.
We cannot guarantee that any of our products in development, if approved
for marketing, will be used by doctors to treat patients. We currently have one
product, Vitravene, a treatment for CMV retinitis in AIDS patients, which
addresses a small commercial market with significant competition. We delivered
our first commercial shipment of Vitravene to our partner CIBA Vision in 1998,
earning product revenue of $560,000.
The degree of market acceptance for any of our products depends upon a
number of factors, including:
- the receipt and scope of regulatory approvals,
- the establishment and demonstration in the medical and patient community
of the clinical efficacy and safety of our product candidates and their
potential advantages over competitive products, and
- reimbursement policies of government and third-party payors.
In addition, we cannot guarantee that physicians, patients, patient
advocates, payors or the medical community in general will accept and use any
products that we may develop.
OUR BUSINESS WILL SUFFER IF ANY OF OUR COLLABORATIVE PARTNERS FAIL TO DEVELOP,
FUND OR SELL ANY OF OUR PRODUCTS UNDER DEVELOPMENT.
If any collaborative partner fails to develop or sell any product in which
we have rights, our business may be negatively affected. While we believe that
our collaborative
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partners will have sufficient motivation to continue their funding, development
and commercialization activities, we cannot be sure that any of these
collaborations will be continued or result in commercialized products. The
failure of a corporate partner to continue funding any particular program could
delay or stop the development or commercialization of any products resulting
from such program.
Collaborative partners may be pursuing other technologies or developing
other drug candidates either on their own or in collaboration with others,
including our competitors, to develop treatments for the same diseases targeted
by our own collaborative programs.
We also may wish to rely on additional collaborative arrangements to
develop and commercialize our products in the future. However, we may not be
able to negotiate acceptable collaborative arrangements in the future, and, even
if successfully negotiated, the collaborative arrangements themselves may not be
successful.
OUR BUSINESS COULD SUFFER IF THE RESULTS OF FURTHER CLINICAL TESTING INDICATE
THAT ANY OF OUR PRODUCTS UNDER DEVELOPMENT ARE NOT SUITABLE FOR COMMERCIAL USE.
Drug discovery and development involves inherent risks, including the risk
that molecular targets prove unsuccessful and the risk that compounds that
demonstrate attractive activity in preclinical studies do not demonstrate
similar activity in human beings or have undesirable side effects. Most of our
resources are dedicated to applying molecular biology and medicinal chemistry to
the discovery and development of drug candidates based upon antisense
technology, a novel drug discovery tool in designing drugs that work at the
genetic level to block the production of disease-causing proteins.
WE HAVE INCURRED LOSSES AND OUR BUSINESS WILL SUFFER IF WE FAIL TO ACHIEVE
PROFITABILITY IN THE FUTURE.
Because of the nature of the business of drug discovery and development,
our expenses have exceeded our revenues since Isis was founded in January 1989.
As of December 31, 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. This product has limited sales potential relative to most
pharmaceutical products. We expect to incur additional operating losses over the
next several years and we expect losses to increase as our preclinical testing
and clinical trial efforts continue to expand. We cannot guarantee that we will
successfully develop, receive regulatory approval for, commercialize,
manufacture, market or sell any additional products, or achieve or sustain
future profitability.
OUR BUSINESS WILL SUFFER IF WE FAIL TO OBTAIN TIMELY FUNDING.
Based on our current operating plan, we believe that our available cash and
existing sources of revenue and credit, together with the proceeds of this
offering and interest earned thereon, will be adequate to satisfy our capital
needs until at least the end of 2000.
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We expect that we will need substantial additional funding in the future. Our
future capital requirements will depend on many factors, such as the following:
- continued scientific progress in our research, drug discovery and
development programs;
- the size of these programs and progress with preclinical and clinical
trials;
- the time and costs involved in obtaining regulatory approvals;
- the market acceptance of Vitravene;
- the costs involved in filing, prosecuting and enforcing patent claims;
- competing technological and market developments, including the
introduction of new therapies that address our markets; and
- changes in existing collaborative relationships and our ability to
establish and maintain additional collaborative arrangements.
If we are unable to raise the total amount of proceeds covered by this
prospectus, we will need to raise additional funds to finance our research and
development and other operating activities. 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.
OUR BUSINESS WILL SUFFER IF WE CANNOT MANUFACTURE OUR PRODUCTS OR HAVE A THIRD
PARTY MANUFACTURE OUR PRODUCTS AT LOW COSTS SO AS TO ENABLE US TO CHARGE
COMPETITIVE PRICES TO BUYERS.
To establish additional commercial manufacturing capability on a large
scale, we must improve our manufacturing processes and reduce our product costs.
The manufacture of sufficient quantities of new drugs is typically a
time-consuming and complex process. Pharmaceutical products based on chemically
modified oligonucleotides have never been manufactured on a large commercial
scale. There are a limited number of suppliers for certain capital equipment and
raw materials that we use to manufacture our drugs, and some of these suppliers
will need to increase their scale of production to meet our projected needs for
commercial manufacturing. We may not be able to manufacture at a cost or in
quantities necessary to make commercially successful products.
In 1998, we entered into an antisense oligonucleotide manufacturing
collaboration with Zeneca Life Science 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 prospectus, we have not received any
supply of drugs under this arrangement, and we cannot guarantee that Zeneca LSM
will prove to be an acceptable alternative supplier.
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OUR BUSINESS WILL SUFFER IF WE FAIL TO COMPETE EFFECTIVELY WITH OUR COMPETITORS.
Our competitors are engaged in all areas of drug discovery in the United
States and other countries, are numerous, and include, among others, major
pharmaceutical and chemical companies, specialized biopharmaceutical firms,
universities and other research institutions. Our competitors may succeed in
developing other new therapeutic drug candidates that are more effective than
any drug candidates that we have been developing. These competitive developments
could make our technology and products obsolete or non-competitive before we
have had enough time to recover our research, development or commercialization
expenses.
Many of our competitors have substantially greater financial, technical and
human resources than we do. In addition, many of these competitors have
significantly greater experience than we do in conducting preclinical testing
and human clinical trials of new pharmaceutical products and in obtaining FDA
and other regulatory approvals of products for use in health care. Accordingly,
our competitors may succeed in obtaining regulatory approval for products
earlier than we do. We will also compete with respect to manufacturing
efficiency and marketing capabilities, areas in which we have limited or no
experience.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO PROTECT OUR PATENTS OR OUR
PROPRIETARY RIGHTS.
Our success depends to a significant degree upon our ability to develop
proprietary products. However, we cannot assure you that patents will be granted
on any of our patent applications in the United States or in other countries. We
also cannot assure you that the scope of any of our issued patents will be
sufficiently broad to offer meaningful protection. In addition, our issued
patents or patents licensed to us could 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.
We have not experienced any patent or other intellectual property
litigation. However, we cannot guarantee that we will not have to defend our
intellectual property rights in the future. In the event of an intellectual
property dispute, we may be forced to litigate or otherwise defend our
intellectual property assets. Such disputes could involve litigation or
proceedings declared by the U.S. Patent and Trademark Office or the
International Trade Commission. Intellectual property litigation can be
extremely expensive, and such expense, as well as the consequences should we not
prevail, could seriously harm our business.
If a third party claimed an intellectual property right to technology we
use, we might be forced to discontinue an important product or product line,
alter our products and processes, pay license fees or cease certain activities.
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.
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THE LOSS OF KEY PERSONNEL, OR THE INABILITY TO ATTRACT AND RETAIN HIGHLY SKILLED
PERSONNEL, COULD ADVERSELY AFFECT OUR BUSINESS.
We are dependent on the principal members of our management and scientific
staff. We do not have employment agreements with any of our management. The loss
of our management and key scientific employees might slow the achievement of
important research and development goals. 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 MAY CONTINUE TO BE HIGHLY VOLATILE.
The market price of our common stock, like that of the securities of many
other biopharmaceutical companies, has been and is likely to continue to be
highly volatile. During the last twelve months, the market price of our common
stock has ranged from $7 to $16. The market price can be affected by many
factors, including, for example, fluctuation in our operating results,
announcements of technological innovations or new drug products being developed
by us or our competitors, governmental regulation, regulatory approval,
developments in patent or other proprietary rights, public concern regarding the
safety of our drugs and general market conditions.
PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW MAY PREVENT
STOCKHOLDERS FROM RECEIVING A PREMIUM FOR THEIR SHARES.
Our certificate of incorporation provides for classified terms for the
members of the board of directors. Our certificate also includes a provision
that requires at least 66 2/3% of our voting stockholders to approve a merger or
certain other business transactions with, or proposed by, 15% or more of our
voting stockholders, except in cases where certain directors approve the
transaction or certain minimum price criteria and other procedural requirements
are met.
Our certificate of incorporation also requires that any action required or
permitted to be taken by our stockholders must be taken at a duly called annual
or special meeting of stockholders and may not be taken by written consent. In
addition, special meetings of our stockholders may be called only by the board
of directors, the chairman of the board or the president, or by any holder of
10% or more of our 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.
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WHERE YOU CAN GET MORE INFORMATION
We are a reporting company and file annual, quarterly and current reports,
proxy statements and other information with the SEC. You may read and copy these
reports, proxy statements and other information at the SEC's public reference
rooms in Washington, D.C., New York, NY and Chicago, IL. You can request copies
of these documents by writing to the SEC and paying a fee for the copying cost.
Please call the SEC at 1-800-SEC-0330 for more information about the operation
of the public reference rooms. Our SEC filings are also available at the SEC's
Web site at "http://www.sec.gov". In addition, you can read and copy our SEC
filings at the office of the National Association of Securities Dealers, Inc. at
1735 K Street, Washington, D.C. 20006.
The SEC allows us to "incorporate by reference" information that we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below and any future filings we will make with
the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934:
- Annual Report on Form 10-K for the year ended December 31, 1998;
- Proxy Statement for the 1999 Annual Meeting of Stockholders;
- Current Report on Form 8-K dated as of April 20, 1999; and
- Isis' registration statement on Form 8-A filed on April 2, 1991, which
includes a description of our common stock.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address or telephone number:
Isis Pharmaceuticals, Inc.
Attn: Vice President of Finance
2292 Faraday Avenue
Carlsbad, CA 92008
Telephone Number (760) 931-9200
This prospectus is part of a larger registration statement we filed with
the SEC. You should rely only on the information incorporated by reference or
provided in this prospectus. We have not authorized anyone else to provide you
with different information. We are not making an offer of these securities in
any state where the offer is not permitted. You should not assume that the
information in this prospectus is accurate as of any date other than the date on
the front of the document.
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USE OF PROCEEDS
We cannot guarantee that we will receive any proceeds in connection with
this offering.
Companies in the biopharmaceutical industry generally expend significant
capital resources in product research and development. We anticipate that we
will be required to raise substantial additional capital over a period of
several years in order to finance our research and development programs.
Additional capital may be raised through additional public or private
financings, as well as collaborative relationships, borrowings and other
available sources.
We intend to use the net proceeds of this offering, if any, for our
research, drug discovery and development programs and for other general
corporate purposes. Expenses to be funded with the offering proceeds include
costs of preclinical and clinical studies, the production of compounds for such
studies and capital expenditures. We have not identified precisely the amounts
we plan to spend on each research, drug discovery and development program or the
timing of such expenditures. Isis, however, currently plans that the proceeds,
if any, will be used for product development, including clinical trials,
preclinical studies, manufacturing scale-up and facilities and equipment
acquisition. The remaining proceeds, if any, will be used to expand selected
research activities and for general and administrative purposes. The amounts
actually expended for each purpose may vary significantly depending upon
numerous factors, including the amount and timing of the proceeds from this
offering, progress of our research, drug discovery and development programs, the
results of preclinical and clinical studies, the timing of regulatory approvals,
technological advances, determinations as to commercial potential of our
compounds and the status of competitive products. In addition, expenditures will
also depend upon the establishment of collaborative research arrangements with
other companies, the availability of other financing and other factors.
Other methods of financing our operations, including the acquisition of
tenant improvements and capital equipment, such as mortgage or lease financing,
may be used by us if available on attractive terms. In the past, Isis has made a
practice of using lease financing for equipment purchases and intends to
continue to do so in the future to the extent the terms of such financing remain
commercially attractive. To the extent such financing is used, proceeds of this
offering will be reallocated to working capital.
Based upon our current operating plan, we believe that our available cash
and existing sources of revenue and credit, together with the proceeds of this
offering and interest earned thereon, will be adequate to satisfy our capital
needs until at least the end of 2000.
Proceeds of this offering, if any, may also be used to acquire companies or
products that complement the business of Isis. We are not planning or
negotiating any such transactions as of the date of this prospectus.
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DILUTION
The net tangible deficit of Isis at December 31, 1998 was $14,296,000 or
approximately $0.53 per share of common stock. Net tangible deficit per share
represents the amount of our tangible assets less total liabilities, divided by
27,053,000 shares of common stock.
Net tangible book value dilution per share represents the difference
between the amount per share paid by purchasers of shares of common stock in the
offering made hereby and the pro forma net tangible book value per share of
common stock immediately after completion of the offering. After giving effect
to the sale of 4,000,000 shares of common stock in this offering at an assumed
offering price of $10.44 per share and the application of the estimated net
proceeds therefrom (after deducting estimated offering expenses) the pro forma
net tangible book value of Isis as of December 31, 1998 would have been
$27,364,000 or $0.88 per share, an immediate increase in net tangible book value
of $1.41 per share to existing stockholders and an immediate dilution in net
tangible book value of $9.62 per share to purchasers of common stock in the
offering, as illustrated in the following table:
Assumed public offering price per share..................... $10.44
Net tangible book value per share at December 31, 1998...... $(.53)
Increase per share attributable to new investors............ $1.41
-----
Pro forma net tangible book value per share after
offering.................................................. $ .88
------
Net tangible book value dilution per share to new
investors................................................. $ 9.62
------
To the extent that outstanding options and warrants are exercised, there
will be further dilution to new investors.
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SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to Isis'
statements of operation for the years ended December 31, 1996, 1997, and 1998,
and with respect to the balance sheet data at December 31, 1996, 1997, and 1998,
are derived from the audited financial statements of Isis Pharmaceuticals, Inc.
The data should be read in conjunction with the financial statements, related
notes and other financial information incorporated by reference herein.
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Research and development revenues........ $ 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
======== ======== ========
DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.................................. $ 58,848 $ 86,786 $ 77,624
Working capital................................ 40,651 62,573 56,300
Total assets......................... 96,074 117,881 101,305
Long-term obligations, less current portion.... 77,724 56,452 19,864
Accumulated deficit............................ (197,116) (154,133) (123,067)
Total stockholders' equity
(deficit)......................... (4,186) 34,852 58,385
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to historical information contained in this prospectus, this
prospectus contains forward-looking statements regarding our business and
products and their projected prospects and qualities, and our relationships with
our corporate partners. Such statements are subject to risks and uncertainties,
particularly those inherent in the process of discovering, developing and
commercializing safe and effective drugs, and the endeavor of building a
business around such potential products. Actual results could differ materially
from those projected in this prospectus. As a result, the reader is cautioned
not to place undue reliance on these forward-looking statements. Factors that
could cause or contribute to these differences include, but are not limited to,
those discussed in the section of this prospectus entitled "Risk Factors" and
are described in additional detail in Isis' Annual Report on Form 10-K for the
year-ended December 31, 1998 which is on file with the U.S. Securities and
Exchange Commission, a copy of which is available from us.
Since our inception in January 1989, almost all of our resources have been
devoted to our research, drug discovery and drug development programs. We are
not yet profitable and expect to continue to have operating losses for the next
several years. Isis' 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, Isis received approval from the FDA to begin marketing our
first product, Vitravene, 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. Isis delivered its first commercial shipment of Vitravene 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 1998 acquisition of the antisense patent estate from
Gilead Sciences, Inc. The acquired patents and patent applications cover a broad
array of proprietary antisense chemistry and drug delivery systems. We purchased
Gilead's patent estate to consolidate and supplement our dominant proprietary
position in antisense technology. The cost of these acquired patents was written
off in accordance with our accounting policies as described in Note 1. 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
14
16
and 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 a 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 this limitation will not have a material
adverse impact on the benefits that may arise from our net operating loss and
tax credit carryforwards. However, there may or may not be additional
limitations arising from any future changes in ownership that may have a
material adverse impact on us.
We believe 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 our 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.
15
17
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 we were 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 International GmbH provides us with
a $40 million line of credit. This line of credit is available 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. We expect that the line of credit will be available again in mid-
1999. 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, Isis 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 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
16
18
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, short-term
investments, combined with interest income and contract revenue and the proceeds
of this offering and interest earned thereon will be sufficient to meet our
capital needs until at least 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 most of 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
17
19
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 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.
\ PLAN OF DISTRIBUTION
We may offer the common stock:
- directly to purchasers;
- to or through underwriters;
- through dealers, agents or institutional investors; or
- through a combination of such methods.
Regardless of the method used to sell the common stock, we will provide a
prospectus supplement that will disclose:
- the identity of any underwriters, dealers, agents or investors who
purchase the common stock;
- the material terms of the distribution, including the number of shares
sold and the consideration paid;
- the amount of any compensation, discounts or commissions to be received
by the underwriters, dealers or agents;
- the terms of any identification provisions, including indemnification
from liabilities under the federal securities laws; and
- the nature of any transaction by an underwriter, dealer or agent during
the offering that is intended to stabilize or maintain the market price
of the common stock.
LEGAL MATTERS
The validity of the issuance of the common stock offered in this prospectus
will be passed upon for Isis by Grantland E. Bryce, Vice President and General
Counsel of Isis. Mr. Bryce does not beneficially own any shares of common stock
as of the date of this prospectus.
18
20
EXPERTS
The financial statements of Isis Pharmaceuticals, Inc., appearing in Isis
Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December
31, 1998, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report. We incorporate by reference their report as a part of
this prospectus. Such financial statements are incorporated into this prospectus
in reliance upon the reports of Ernst & Young LLP given upon the authority of
Ernst & Young LLP as experts in accounting and auditing.
19
21
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.............................. F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
F-1
22
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 Isis' 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
F-2
23
ISIS PHARMACEUTICALS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------
1998 1997
--------- --------
ASSETS
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.
F-3
24
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.
F-4
25
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.
F-5
26
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 from (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.
F-6
27
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.
F-7
28
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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
======== ========
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 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 -- Impairment of long-lived assets is reviewed 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
F-8
29
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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.
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,
F-9
30
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 percent. 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 percent, 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 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 an interest rate of 10%, as a
F-10
31
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 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
F-11
32
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 AVERAGE
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
----------------------------------------- ----------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF REMAINING EXERCISE AS OF EXERCISE
EXERCISE PRICE 12/31/98 CONTRACTUAL LIFE PRICE 12/31/98 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
F-12
33
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
thereunder. The plan permits full-time employees to purchase common stock
through payroll deductions (which cannot exceed 10% of each employee's
compensation) at the lower of 85% of fair market value at the beginning of the
offer or the end of each six-month purchase period. During 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.
F-13
34
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.
F-14
35
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 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
8% 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
(fomivirsen). Under the terms of the agreement, Isis will manufacture and sell
Vitravene 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 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 is currently in
development by Isis. At the inception of the agreement, CIBA Vision paid us a $5
million non-refundable pre-commercial fee to partially reimburse us for the
costs incurred in discovering and developing Vitravene 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 for
marketing, and in the fourth quarter of the year CIBA Vision began selling
Vitravene commercially. Isis delivered its first commercial shipment of
Vitravene to CIBA Vision in the third quarter of 1998 and recorded $560,000 in
net product revenues. Under the CIBA Vision agreement, Isis earned contract
revenue of $7,500,000 in 1998 and $5,000,000 (which represents the
pre-commercial fee described above) in 1997.
In July 1995, Isis and Boehringer Ingelheim International GmbH signed
definitive agreements and completed the formation of a major collaboration in
cell adhesion drug design, discovery, development and commercialization.
Boehringer Ingelheim purchased 2,000,000 shares of common stock for $28,500,000
in cash plus certain license rights. Of the $28,500,000, $21,300,000 was
accounted for as equity and $7,200,000 was accounted for as deferred revenue,
representing Boehringer Ingelheim's advance payment of research and 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
F-15
36
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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
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, we granted an exclusive license to our patents covering
immune stimulation by phosphorothioate oligonucleotides to CpG
ImmunoPharmaceuticals, Inc. The agreement grants exclusive worldwide rights to
the methods and applications covered by issued U.S. Patents No. 5,663,153; No.
5,723,335; and related patent applications, not including claims for antisense
therapeutics. Under the terms of the agreement, we received $5 million in 1998
and a 5% equity position in CpG ImmunoPharmaceuticals, Inc. We will also receive
a portion of any sublicensing revenue relating to the technology. In 1998, we
recorded revenue for the $5 million licensing fee, as there are no further
performance obligations. We did not record revenue for the value of the 5%
equity position, since realization of this asset uncertain.
In November 1998, we 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, we will retain the rights for all other areas
of human therapeutics. As part of this transaction, we received a 24.9% equity
position in Pantheco A/S. We did not record any revenue related to this
transaction, since realization of the value of our equity interest in Pantheco
is uncertain.
In December 1998, we 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. We acquired these patents and patent
applications to consolidate and supplement our dominant proprietary position in
antisense technology. 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-
F-16
37
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 as described in Note 1.
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. ("Abbott") 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." Isis 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.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
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.
F-17
38
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses payable by Isis in connection
with the sale of the 4,000,000 shares of common stock being registered. All the
amounts shown are estimates except for the registration fee.
SEC registration fee................................. $ 14,734
Legal fees and expenses.............................. $ 40,000
Accounting fees and expenses......................... $ 10,000
Nasdaq fees for newly issued shares.................. $ 17,500
Miscellaneous........................................ $ 17,766
--------
Total.............................................. $100,000
========
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the Delaware General Corporation Law, Isis has broad
powers to indemnify its directors and officers against liabilities they may
incur in such capacities, including liabilities under the Securities Act of
1933.
Isis' certificate of incorporation and by-laws include provisions to (i)
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty to the extent permitted by Section
102(b)(7) of the General Corporation Law of Delaware and (ii) require Isis to
indemnify its directors and officers to the fullest extent permitted by Section
145 of the Delaware Law, including circumstances in which indemnification is
otherwise discretionary. Pursuant to Section 145 of the Delaware Law, a
corporation generally has the power to indemnify its present and former
directors, officers, employees and agents against expenses incurred by them in
connection with any suit to which they are, or are threatened to be made, a
party by reason of their serving in such positions so long as they acted in good
faith and in a manner they reasonably believed to be in, or not opposed to, the
best interest of the corporation, and with respect to any criminal action, they
had no reasonable cause to believe their conduct was unlawful. Isis believes
that these provisions are necessary to attract and retain qualified persons as
directors and officers. These provisions do not eliminate the directors' duty of
care, and, in appropriate circumstances, equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware law.
In addition, each director will continue to be subject to liability for breach
of the directors' duty of loyalty to Isis, for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
acts or omissions that the director believes to be contrary to the best
interests of Isis or its stockholders, for any transaction from which the
director derived an improper personal benefit, for acts or omissions involving a
reckless disregard for the directors' duty to Isis or its stockholders when the
director was aware or should have been aware of a risk of serious injury to Isis
or its stockholders, for acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to Isis or
its stockholders, for improper transactions between the director and Isis and
for improper distributions to stockholders and loans to directors and officers.
The provision also does not affect a director's responsibilities under any other
law, such as the federal securities law or state or federal environmental laws.
II-1
39
The Registrant has entered into indemnity agreements with each of its
directors and executive officers that require Isis to indemnify such persons
against expenses, judgments, fines, settlements and other amounts incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or an executive officer
of Isis or any of its affiliated enterprises, provided such person acted in good
faith and in a manner such persons reasonably believed to be in, or not opposed
to, the best interests of Isis and, with respect to any criminal proceeding, has
no reasonable cause to believe his conduct was unlawful. The indemnification
agreements also set forth procedures that will apply in the event of a claim for
indemnification thereunder.
At present, there is no pending litigation or proceeding involving a
Director or officer of Isis as to which indemnification is being sought, nor is
Isis aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
Isis has an insurance policy covering the officers and directors of Isis
with respect to certain liabilities, including liabilities arising under the
Securities Act or otherwise.
ITEM 16. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
4.1 Amended and Restated Certificate of Incorporation.(1)
4.2 By-laws.(1)
4.3 Certificate of Designation of the Series A Convertible
Preferred Stock
5.1 Opinion of Grantland E. Bryce.*
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Grantland E. Bryce. Reference is made to
Exhibit 5.1.
24.1 Power of Attorney. Reference is made to page II-5.
27.1 Financial Data Schedule.*
99.1 Form of Confidentiality Agreement.
- -------------------------
(1) Filed as an exhibit to the Registration Statement on Form S-1 (No. 33-39649)
or amendments thereto and incorporated herein by reference.
* Previously Filed
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 15 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
II-2
40
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
pursuant to this registration statement, a post-effective amendment to this
registration statement to include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) of Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant undertakes that; (1) for purpose of determining
any liability under the Securities Act of 1933, the information omitted from the
form of prospectus filed as part of the registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the registration statement as of the time it was declared
effective; and (2) for the purpose of determining any liability under the
Securities act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
41
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 3 to
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the city of Carlsbad, County of San Diego, State of
California, on the 10th day of May, 1999.
ISIS PHARMACEUTICALS, INC.
By: /s/ STANLEY T. CROOKE
-----------------------------------
Stanley T. Crooke, M.D., Ph.D.
Chairman of the Board
and Chief Executive Officer
(Principal executive officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints STANLEY T. CROOKE and B. LYNNE PARSHALL,
and each of them, as his or her true and lawful attorney-in-fact and agents,
with full power of substitution and resubstitution, for the undersigned and in
his or her name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to the Registration Statement
and to file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange commission, granting unto said
attorneys-in-fact and agents, and each of them, full power of authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, each acting alone, or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to Registration Statement has been signed below by the following persons
in the capacities indicated and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ STANLEY T. CROOKE Chairman of the Board and May 10, 1999
- ------------------------------------------------ Chief Executive Officer
Stanley T. Crooke, M.D., Ph.D. (Principal executive
officer)
* Executive Vice President May 10, 1999
- ------------------------------------------------ and Chief Financial
B. Lynne Parshall Officer (Principal
financial and accounting
officer)
II-4
42
SIGNATURES TITLE DATE
---------- ----- ----
* Director May 10, 1999
- ------------------------------------------------
Alan C. Mendelson
* Director May 10, 1999
- ------------------------------------------------
Christopher F.O. Gabrieli
* Director May 10, 1999
- ------------------------------------------------
William R. Miller
* Director May 10, 1999
- ------------------------------------------------
Mark B. Skaletsky
* Director May 10, 1999
- ------------------------------------------------
Larry Soll, Ph.D.
* Director May 10, 1999
- ------------------------------------------------
Joseph H. Wender
Director May 10, 1999
- ------------------------------------------------
Burkhard Blank
By: /s/ STANLEY T. CROOKE
-------------------------------------------
Stanley T. Crooke, M.D., Ph.D.
Attorney In Fact
II-5
43
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- ----------
4.1 Amended and Restated Certificate of Incorporation(1).......
4.2 By-laws(1).................................................
4.3 Certificate of Designation of the Series A Convertible
Preferred Stock............................................
5.1 Opinion of Grantland E. Bryce*.............................
23.1 Consent of Ernst & Young LLP...............................
23.2 Consent of Grantland E. Bryce. Reference is made to Exhibit
5.1........................................................
24.1 Power of Attorney. Reference is made to page II-5..........
27.1 Financial Data Schedule*...................................
99.1 Form of Confidentiality Agreement.
- -------------------------
(1) Filed as an exhibit to the Registration Statement on Form S-1 (No. 33-39649)
or amendments thereto and incorporated herein by reference.
* Previously Filed.
1
EXHIBIT 4.3
CERTIFICATE OF DESIGNATION
OF THE
SERIES A CONVERTIBLE PREFERRED STOCK
(PAR VALUE $.001 PER SHARE)
OF
ISIS PHARMACEUTICALS, INC.
PURSUANT TO SECTION 151 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
ISIS PHARMACEUTICALS, INC., a company organized and existing under the
General Corporation Law of the State of Delaware (the "Company"), in accordance
with the provisions of Section 103 thereof, and pursuant to Section 151 thereof,
DOES HEREBY CERTIFY:
That the Restated Certificate of Incorporation of the Company (the
"Restated Certificate") authorizes the creation of up to 15,000,000 shares of
the Company's preferred stock, par value $.001 per share (such preferred stock,
together with all other preferred stock of the Company the creation of which is
in the future authorized by the Restated Certificate, referred to herein as the
"Preferred Stock"); and
That pursuant to the authority conferred upon the Board of Directors
(the "Board") by the Restated Certificate, the Board on February 26, 1999,
approved the creation, issuance and the voting powers of shares of Preferred
Stock to be issued in one series and adopted the following resolution creating a
series of 120,150 shares of Preferred Stock designated as set forth below:
RESOLVED, that pursuant to the authority expressly granted to and vested
in the Board by provisions of the Restated Certificate of the Company and the
General Corporation Law of the State of Delaware, the issuance of a series of
Preferred Stock, which shall consist of 120,150 shares of the 15,000,000 shares
of Preferred Stock which the Company now has authority to issue, be, and the
same hereby is, authorized, and the Board hereby fixes the powers, designations,
preferences and relative participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, of the shares of such
series (in addition to the powers, designations, preferences and relative
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof, set forth in the Restated Certificate which
may be applicable to the Preferred Stock) authorized by this resolution as
follows:
SECTION 1. DESIGNATION OF SERIES A PREFERRED STOCK. The designation of such
series of Preferred Stock authorized by this resolution shall be Series A
Convertible Preferred Stock (the "Series A Preferred"). The Series A Preferred
is issuable solely in whole shares that shall entitle the holder thereof to
participate in the distributions and to have the benefit of all other rights of
holders of Series A Preferred, as set forth herein and in the Restated
Certificate.
2
SECTION 2. DIVIDEND RIGHTS OF SERIES A PREFERRED.
(a) When and if the Board shall declare a dividend or distribution
payable with respect to the then-outstanding shares of Common Stock of the
Company, other than any such dividend or distribution payable in shares of
Common Stock or other securities of the Company (which is provided for in
Sections 4(f) and (g)), the holders of the Series A Preferred shall be entitled
to the amount of dividends per share that would be payable on the largest number
of whole shares of Common Stock into which a holder's aggregate shares of Series
A Preferred could then be converted pursuant to Section 4(a) hereof without
regard to the provisions of Section 5 (such number to be determined as of the
record date for the determination of holders of Common Stock entitled to receive
such dividend, and, if the record date is prior to March 31, 2002, for purposes
of determining the number of shares of Common Stock into which the Series A
Preferred could then be converted, the Series A Conversion Price will be
calculated in accordance with Section 4(c)(i) for the 60 trading days ending two
business days prior to the record date).
(b) In addition to Section 2(a) above, the Series A Preferred shall
be entitled to a mandatory dividend equal to 5.0% per year of $100 per share
(the "Series A Original Issue Price") (as adjusted for any combinations,
consolidations, stock distributions, stock dividends or other recapitalizations
with respect to such shares) plus accrued dividends thereon, compounded on a
semi-annual basis. Such dividend shall be payable solely by the issuance of
additional shares of Common Stock upon conversion of the Series A Preferred into
Common Stock pursuant to Section 4 hereof; provided that, in the event the
Company exercises the Redemption Right (as defined in Section 5(c)), such
dividend shall be payable in cash upon such redemption in accordance with
Section 5. The dividend to be paid to a holder under this Section 2(b) upon a
conversion of the Series A Preferred shall be equal to that number of shares
Common Stock determined by dividing the total dividend accrued with respect such
holder's Series A Preferred by the Series A Conversion Price, determined in
accordance with Section 4(c) hereof, then in effect. No dividends shall be
payable under this Section 2(b) in the event the Exchange Right is exercised
pursuant to Section 6.
SECTION 3. SENIORITY; LIQUIDATION PREFERENCE.
(a) The Series A Preferred shall rank senior to or pari passu with
any future class or series of Preferred Stock issued by the Company and senior
to the Company's Common Stock.
(b) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, other than a Significant Transaction
(as defined below) (collectively, a "Liquidation"), the holders of Series A
Preferred then outstanding shall be entitled to be paid, pro rata, out of the
assets of the Company legally available for distribution to its stockholders,
whether from capital, surplus or earnings, before any payment shall be made in
respect of any other class or series of stock ranking junior to the Series A
Preferred, an amount equal to the Series A Original Issue Price per share (as
adjusted for any combinations, consolidations, stock distributions, stock
dividends or other recapitalizations with respect to such shares) (the "Series A
Liquidation Preference"). If, upon a Liquidation, the assets of the Company
available for distribution to its stockholders shall be insufficient to pay the
holders of the Series A Preferred the full Series A Liquidation Preference to
which they shall be entitled as set forth
2.
3
above, then the entire assets of the Company legally available for distribution
shall be distributed pro rata among the holders of the Series A Preferred in
proportion to the Series A Liquidation Preference each such holder would
otherwise be entitled to receive. After setting apart or paying in full the
Series A Liquidation Preference due the holders of the Series A Preferred, the
holders of the Series A Preferred will not be entitled to any further
participation in any distribution of the assets of the Company, and the entire
remaining assets of the Company legally available for distribution, if any,
shall be distributed among the holders of Common Stock in proportion to the
shares of Common Stock then held by them.
SECTION 4. CONVERSION PRIVILEGES.
(a) RIGHTS OF CONVERSION. Subject to the other provisions of this
Certificate of Designation, each share of Series A Preferred shall be
convertible, without payment of any additional consideration by the holder
thereof and at the option of such holder, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing the Series A
Original Issue Price, plus accrued but unpaid cash dividends under Section 2(a)
and accrued dividends under Section 2(b), by the Series A Conversion Price (as
defined below) in effect at the time of conversion, at any time and from time to
time after March 31, 2002, at the office of the Company or any transfer agent
for such stock.
(b) AUTOMATIC CONVERSION.
(i) In the event that a Significant Transaction (as defined
below) occurs, then, in such event, without giving effect to any Series A
Liquidation Preference, the Series A Preferred shall automatically, and without
the requirement of further action by the Company or the holders, be converted
into such number of fully paid and nonassessable shares of Common Stock
determined by dividing the Series A Original Issue Price, plus accrued but
unpaid dividends under Section 2(a) and accrued dividends under Section 2(b), by
the Series A Conversion Price then in effect. For purposes of this Certificate
of Designation, "Significant Transaction" shall mean (A) a reorganization,
merger or consolidation in which immediately after (by virtue of securities
issued as consideration for such transaction) the former shareholders of the
Company do not hold at least 50% of the voting power of the surviving or
acquiring entity, (B) an acquisition of all outstanding capital stock of the
Company, (C) a liquidation of the Company or a winding down of its business, or
(D) a sale or other transfer of all or substantially all of the Company's
assets, but shall not include (1) a commencement of any bankruptcy or insolvency
proceedings, whether voluntary or involuntary, (2) a filing for reorganization
or relief under bankruptcy law, (3) a consent to the appointment of a receiver,
liquidator or trustee for the Company or its assets, (4) a making of a general
assignment by the Company for the benefit of its creditors or (5) any other
similar corporate action.
(ii) Subject to the provisions of Section 5, upon April 20,
2005, the Series A Preferred shall automatically, and without the requirement of
further action by the Company or the holders, be converted into such number of
fully paid and nonassessable shares of Common Stock determined by dividing the
Series A Original Issue Price, plus accrued but unpaid dividends under Section
2(a) and accrued dividends under Section 2(b), by the Series A Conversion Price
then in effect. Any shares of Series A Preferred that are not automatically
converted into shares of the Company's Common Stock as a result of the
provisions of Section 5
3.
4
shall remain issued and outstanding unless converted pursuant to the provisions
of Section 4(a) or redeemed pursuant to the provisions of Section 5.
(c) SERIES A CONVERSION PRICE. The price at which shares of Common
Stock shall be deliverable upon conversion of Series A Preferred (the "Series A
Conversion Price") (i) for purposes of Sections 4(a) and 4(b)(ii) shall be equal
to 125% of the average closing price of the Company's Common Stock on the Nasdaq
National Market (or any other national securities exchange on which the Common
Stock is then traded) per share for the 60 trading days ending two business days
prior to March 31, 2002, subject to adjustment as set forth below, and (ii) for
purposes of Section 4(b)(i) shall be equal to (A) if prior to March 31, 2002,
120% of the average closing price of the Company's Common Stock on the Nasdaq
National Market (or any other national securities exchange on which the Common
Stock is then traded) per share for the 60 trading days ending two business days
prior to the date of first public announcement of the Significant Transaction,
or (B) if on or after March 31, 2002, 125% of the average closing price of the
Company's Common Stock on the Nasdaq National Market (or any other national
securities exchange on which the Common Stock is then traded) per share for the
60 trading days ending two business days prior to the date of first public
announcement of the Significant Transaction.
(c) MECHANICS OF CONVERSION. Before any holder of Series A Preferred
shall be entitled to convert the same into shares of Common Stock, such holder
shall surrender the certificate or certificates thereof, duly endorsed, at the
office of the Company or of any transfer agent for such stock, and shall give
written notice to the Company at such office that such holder elects to convert
the same and shall state therein the name or names in which such holder wishes
the certificate or certificates for shares of Common Stock to be issued. The
Company shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series A Preferred or its nominee or nominees, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid, together with cash in lieu of any
fractional shares. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of surrender of the shares of Series
A Preferred to be converted. The person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on such
date.
(e) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Company
shall at any time or from time to time after the date that the first share of
Series A Preferred is issued (the "Original Issue Date") effect a subdivision of
the outstanding Common Stock without a corresponding subdivision of the Series A
Preferred, the Series A Conversion Price in effect immediately before that
subdivision shall be proportionately decreased. Conversely, if the Company shall
at any time or from time to time after the Original Issue Date combine the
outstanding shares of Common Stock into a smaller number of shares without a
corresponding combination of the Series A Preferred, the Series A Conversion
Price in effect immediately before the combination shall be proportionately
increased. Any adjustment under this Section 4(e) shall become effective at the
close of business on the date the subdivision or combination becomes effective.
4.
5
(f) ADJUSTMENT FOR COMMON STOCK DIVIDENDS AND DISTRIBUTIONS. If the
Company at any time or from time to time after the Original Issue Date makes, or
fixes a record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in additional shares of Common
Stock, in each such event the Series A Conversion Price that is then in effect
shall be decreased as of the time of such issuance or, in the event such record
date is fixed, as of the close of business on such record date, by multiplying
the Series A Conversion Price then in effect by a fraction (i) the numerator of
which is the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date, and (ii) the denominator of which is the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date plus the number of shares
of Common Stock issuable in payment of such dividend or distribution; provided,
however, that if such record date is fixed and such dividend is not fully paid
or if such distribution is not fully made on the date fixed therefor, the Series
A Conversion Price shall be recomputed accordingly as of the close of business
on such record date and thereafter the Series A Conversion Price shall be
adjusted pursuant to this Section 4(f) to reflect the actual payment of such
dividend or distribution.
(g) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If the
Company at any time or from time to time after the Original Issue Date makes, or
fixes a record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities of the Company
other than shares of Common Stock, in each such event provision shall be made so
that the holders of the Series A Preferred shall receive upon conversion
thereof, in addition to the number of shares of Common Stock receivable
thereupon, the amount of other securities of the Company which they would have
received had their Series A Preferred been converted into Common Stock on the
date of such event and had they thereafter, during the period from the date of
such event to and including the conversion date, retained such securities
receivable by them as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 4 with respect to
the rights of the holders of the Series A Preferred or with respect to such
other securities by their terms.
(h) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If
at any time or from time to time after the Original Issue Date, the Common Stock
issuable upon the conversion of the Series A Preferred is changed into the same
or a different number of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Section 4), in
any such event each holder of Series A Preferred shall have the right thereafter
to convert such stock into the kind and amount of stock and other securities and
property receivable upon such recapitalization, reclassification or other change
by holders of the maximum number of shares of Common Stock into which such
shares of Series A Preferred could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further adjustment
as provided herein or with respect to such other securities or property by the
terms thereof.
(i) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. If
at any time or from time to time after the Original Issue Date, there is a
capital reorganization of the Common Stock (other than a Signification
Transaction or a subdivision or combination of shares or stock
5.
6
dividend or a reorganization, merger, consolidation or sale of assets provided
for elsewhere in this Section 4), as a part of such capital reorganization,
provision shall be made so that the holders of the Series A Preferred shall
thereafter be entitled to receive upon conversion of the Series A Preferred the
number of shares of stock or other securities or property of the Company to
which a holder of the number of shares of Common Stock deliverable upon
conversion would have been entitled on such capital reorganization, subject to
adjustment in respect of such stock or securities by the terms thereof. In any
such case, appropriate adjustment shall be made in the application of the
provisions of this Section 4 with respect to the rights of the holders of Series
A Preferred after the capital reorganization to the end that the provisions of
this Section 4 (including adjustment of the Series A Conversion Price then in
effect and the number of shares issuable upon conversion of the Series A
Preferred) shall be applicable after that event and be as nearly equivalent as
practicable.
(j) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the number of shares of Common Stock issuable upon
conversion of a share of Series A Preferred pursuant to this Section 4, the
Company at its expense shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to each holder of
Series A Preferred a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based. The Company shall, upon the written request at any time of any holder of
Series A Preferred, furnish or cause to be furnished to such holder a like
certificate prepared by the Company setting forth (i) such adjustments and
readjustments, (ii) the Series A Conversion Price at the time in effect, and
(iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of the Series A
Preferred.
(k) NOTICES OF RECORD DATE. In the event of any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, any security or right convertible
into or entitling the holder thereof to receive additional shares of Common
Stock, or any right to subscribe for, purchase or otherwise acquire any shares
of stock of any class or any other securities or property, or to receive any
other right, the Company shall mail to each holder of Series A Preferred at
least 10 days prior to the date specified therein, a notice specifying the date
on which any such record is to be taken for the purpose of such dividend,
distribution, security or right, and the amount and character of such dividend,
distribution, security or right.
(l) ISSUE TAXES. The holders of Series A Preferred shall pay any and
all issue, transfer and other taxes that may be payable in respect of any issue
or delivery of shares of Common Stock on conversion of shares of Series A
Preferred pursuant hereto.
(m) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred, such number of its shares of Common Stock
as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion
6.
7
of all then outstanding shares of the Series A Preferred, the Company will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose, including, without limitation,
engaging in best efforts to obtain the requisite stockholder approval of any
necessary amendment to the Restated Certificate. All shares of Common Stock
which are issuable upon such conversion shall, when issued, be duly and legally
issued, fully paid and nonassessable and free of all taxes, liens and charges.
(n) FRACTIONAL SHARES. No fractional share shall be issued upon the
conversion of any share or shares of Series A Preferred. All shares of Common
Stock (including fractions thereof) issuable upon conversion of more than one
share of Series A Preferred by a holder thereof shall be aggregated for purposes
of determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion would
result in the issuance of a fraction of a share of Common Stock, the Company
shall, in lieu of issuing any fractional share, pay the holder otherwise
entitled to such fraction a sum in cash equal to the closing price of the
Company's Common Stock on the Nasdaq National Market (or any other national
securities exchange on which the Common Stock is then traded) on the day
immediately preceding the conversion.
(o) NOTICES. Any notice required by the provisions of this Section 4
shall be in writing and shall be deemed effectively given: (i) upon personal
delivery to the party to be notified, (ii) when telephonically confirmed if sent
by telex or facsimile, (iii) five days after having been sent by registered or
certified mail, return receipt requested, postage prepaid, or (iv) one day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. All notices shall be addressed
to each holder of record at the address of such holder appearing on the books of
the Company.
SECTION 5. LIMITATION ON ISSUANCE OF SHARES UPON CONVERSION; REDEMPTION.
(a) The following definitions shall apply to this Certificate of
Designation:
(i) "Maximum Share Amount" shall mean the number of shares
of the Company's Common Stock equal to 19.99% of the Company's Common Stock then
outstanding;
(ii) "Excess Shares" shall mean Common Stock of the Company
which, upon issuance, results in the beneficial ownership (as defined in Rule
13(d)-3 of the Securities Exchange Act of 1934) by a holder of shares of Common
Stock in excess of the Maximum Share Amount;
(iii) "Exchange Rules" shall mean the rules or regulations of
Nasdaq or any other principal securities market upon which the Common Stock of
the Company is or becomes traded.
(b) Except as provided in Section 5(c) hereof, the Company shall not
be obligated to issue upon conversion of the Series A Preferred, in the
aggregate, Excess Shares if such issuance in excess of the Maximum Shares Amount
would constitute a breach a breach or violation of the Company's obligations
under the Exchange Rules.
7.
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(c) To the extent the Company will be required, or it appears likely
to the Board of Directors of the Company that the Company will be required, to
issue any Excess Shares, the Company shall promptly use its best efforts to
obtain stockholder approval in accordance with Delaware law, the applicable
rules of the Securities and Exchange Commission and the Exchange Rules. In the
event the Company does not obtain stockholder approval, the Company shall have
the right, at its option (the "Redemption Right"), to redeem, out of funds
legally available therefor, all or any part of the Excess Shares at a redemption
price, payable in cash, equal to the Series A Original Issue Price per share
together with accrued and unpaid dividends on any such shares that are redeemed
(the "Redemption Price"). The Company may exercise the Redemption Right by
providing notice by mail, first class postage prepaid, to each holder of Series
A Preferred of record (at the close of business on the business day preceding
the day on which notice is given) of the Series A Preferred to be redeemed, at
the address last shown on the records of the Company for such holder, notifying
such holder of the redemption to be effected, specifying the number of shares to
be redeemed from such holder, the date that the redemption is to occur (the
"Redemption Date"), the place at which payment may be obtained and calling upon
such holder to surrender to the Company, in the manner and at the place
designated, such holder's certificate or certificates representing the shares to
be redeemed (the "Redemption Notice"). On or after the Redemption Date, each
holder of Series A Preferred to be redeemed shall surrender to the Company the
certificate or certificates representing such shares in the manner and at the
place designated in the Redemption Notice, and thereupon the Redemption Price of
such shares shall be payable to the order of the person whose name appears on
such certificate or certificates as the owner thereof and each surrendered
certificate shall be cancelled. In the event less than all of the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares. From and after the Redemption Date,
unless there shall have been a default in payment of the Redemption Price, all
rights of the holders of shares of Series A Preferred designated for redemption
in the Redemption Notice as holders of Series A Preferred (except the right to
receive the Redemption Price without interest upon surrender of their
certificate or certificates and except as provided in Section 6(c)) shall cease
with respect to such shares, and such shares shall not thereafter be transferred
on the books of the Company or be deemed to be outstanding for any purpose
whatsoever.
SECTION 6. EXCHANGE RIGHT.
(a) At any time beginning on the date hereof and ending on June 30,
2002, provided that no shares of Series A Preferred representing the shares
initially issued and sold by the Company to Elan International Services, Ltd., a
Bermuda corporation ("EIS") and its affiliates, together with those issued or
issuable in respect of dividends provided for in Section 1 above, have been
converted as provided in Section 4(a) or (b)(ii) above, the holders of the
Series A Preferred (by act of the holders of a majority of the Series A
Preferred) shall have the right to exchange their shares of Series A Preferred
(the "Exchange Right") with the Company for common shares of Orasense Ltd., a
Bermuda corporation ("Newco"), held by the Company, representing 30.1% of the
aggregate issued and outstanding capital stock of Newco, so that, after giving
effect to the exercise of the Exchange Right, such holders will own 50.0% of
such issued and outstanding capital stock of Newco.
(b) In order to exercise the Exchange Right, the holders shall
provide written notice thereof to the Company, setting forth (i) the fact that
such holders intend to exercise the
8.
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Exchange Right, and (ii) the proposed date for such exercise (the "Exercise
Date"), which shall be between 10 and 30 days after the date of such notice.
Such notice shall be irrevocable. On the Exercise Date, (y) the holders shall
tender their shares of Series A Preferred to the Company for cancellation, and
(z) the Company shall cause to be delivered to EIS, acting on behalf of such
holders, such shares of Newco. The holders and the Company shall take all other
necessary or appropriate actions in connection with or to effect such closing.
(c) If any shares of Series A Preferred are converted into shares of
Common Stock pursuant to Section 4(a) or (b)(ii), the Exchange Right shall be
terminated and be of no further force and effect with respect to such shares or
with respect to those shares of Series A Preferred issued as dividends pursuant
to Section 2(b). If all or any shares of the Series A Preferred are converted to
shares of Common Stock upon the occurrence of a Significant Transaction, the
Exchange Right shall be preserved for its full term as provided in Section 6(a),
except that, to exercise the Exchange Right, EIS shall be obligated to tender
the consideration received by EIS upon the automatic conversion of the Series A
Preferred in connection with such Significant Transaction. If the Company
exercises the Redemption Right with respect to any shares of Series A Preferred,
the Exchange Right shall be preserved for its full six-year term, except that,
to exercise the Exchange Right, EIS shall be obligated to tender the
consideration received by EIS upon the redemption of any Excess Shares in
connection with the Company's exercise of its Redemption Right.
SECTION 7. VOTING RIGHTS. Holders of Series A Preferred shall not be entitled to
vote together with holders of Common Stock, including with respect to the
election of directors of the Company, or as a separate class, except as
otherwise provided by the General Corporation Law of the State of Delaware
("DGCL") and in this Section 8. To the extent that, under the DGCL, the vote of
the holders of the Series A Preferred, voting separately as a class or series as
applicable, is required to authorize a given action of the Company, the
affirmative vote or consent of the holders of at least a majority of the shares
of the Series A Preferred represented at a duly held meeting at which a quorum
is present or by written consent of a majority of the shares of Series A
Preferred (except as otherwise may be required under the DGCL) shall constitute
the approval of such action by the class. Holders of the Series A Preferred
shall be entitled to notice of all shareholder meetings or written consents (and
copies of proxy materials and other information sent to shareholders) with
respect to which they would be entitled as of right under the DGCL which notice
would be provided pursuant to the Company's Bylaws and the DGCL.
SECTION 8. PROTECTIVE PROVISIONS. So long as any shares of Series A Preferred
are outstanding, the Company shall not, without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of at least a
majority of the then outstanding shares of Series A Preferred, voting as a
separate class, amend its Certificate of Incorporation so as to adversely affect
the rights, preferences or privileges of the Series A Preferred or any holder
thereof, including, without limitation, by creating any series of Preferred
Stock (or issuing shares under any such series) that is senior in right payment
upon liquidation, in respect of dividends or otherwise to the Series A
Preferred, or change the rights of the holders of the Series A Preferred in any
other respect; provided, however, that the creation of any series of Preferred
Stock (or issuance of shares under any such series) that is pari passu in right
payment upon liquidation, in respect of dividends or otherwise with the Series A
Preferred shall not be deemed to adversely
9.
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affect the rights, preferences or privileges of the Series A Preferred or any
holder thereof or change the rights of the holders of the Series A Preferred in
any other respect.
SECTION 9. STATUS OF CONVERTED, REDEEMED OR EXCHANGED STOCK. In the event any
shares of Series A Preferred shall be converted pursuant to Section 4 hereof,
redeemed pursuant to Section 5 hereof or exchanged pursuant to Section 6 hereof,
the shares so converted, redeemed or exchanged shall be cancelled and shall not
be reissuable by the Company.
10.
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IN WITNESS WHEREOF, Isis Pharmaceuticals, Inc. has caused this
Certificate of Designation to be signed by its Chief Executive Officer and
attested by its Secretary this 19th day of April, 1999.
ISIS PHARMACEUTICALS, INC.
By:
-------------------------------------
Stanley T. Crooke, M.D., Ph.D.
Chief Executive Officer
Attest:
- -----------------------------------
B. Lynne Parshall
Secretary
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EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 30, 1999, in Amendment No. 3 to the Registration
Statement (Form S-3 No. 333-71911) and related Prospectus of Isis
Pharmaceuticals, Inc. for the Registration of 4,000,000 shares of its common
stock.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
San Diego, California
May 10, 1999
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EXHIBIT 99.1
ISIS PHARMACEUTICALS, INC.
EMPLOYEE CONFIDENTIAL INFORMATION AND INVENTIONS AGREEMENT
In consideration of my employment or continued employment by Isis
Pharmaceuticals, Inc., (the "Company"), and the compensation now and hereafter
paid to me, I hereby agree as follows:
1. RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times during
the term of my employment and thereafter, I will hold in strictest confidence
and will not disclose, use, lecture upon or publish any of the Company's
Confidential Information (defined below), except as such disclosure, use or
publication may be required by the Company in connection with my work for the
Company, or unless an officer of the Company expressly authorizes such in
writing. I will not make any permitted disclosure, use or publication unless
such disclosure, use or publication is in strict compliance with the Company's
publication and presentation clearance policy. I will not export, directly or
indirectly, any Company products, any direct product thereof, or any related
technical data in violation of the United States Department of Commerce's Export
Administration Regulations.
The term "Confidential Information" will mean trade secrets,
confidential knowledge, data or any other proprietary information of the
Company. By way of illustration but not limitation, "Confidential Information"
includes (a) inventions, mask works, trade secrets, ideas, processes, formulas,
source and object codes, data, programs, other works of authorship, know-how,
improvements, discoveries, developments, designs and techniques (hereinafter
collectively referred to as "Inventions"); and (b) information regarding plans
for research, development, new products, marketing and selling, business plans,
budgets and unpublished financial statements, licenses, prices and costs,
suppliers and customers; as well as information regarding the skills and
compensation of other employees of the Company.
2. THIRD PARTY INFORMATION. I understand, in addition, that the Company
has received and in the future will receive from third parties confidential or
proprietary information ("Third Party Information") subject to a duty on the
Company's part to maintain the confidentiality of such information and to use it
only for certain limited purposes. During the term of my employment and
thereafter, I will hold Third Party Information in the strictest confidence and
will not disclose (except as required to be disclosed in connection with my work
for the Company) Third Party Information unless expressly authorized by an
officer of the Company in writing. I will not make any permitted disclosures
unless such disclosure is in strict compliance with the Company's publication
and presentation clearance policy.
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3. ASSIGNMENT OF INVENTIONS
3.1 ASSIGNMENT
(a) I hereby assign to the Company all my right, title
and interest throughout the world in and to any and all Inventions (and all
patent rights, copyrights, and all other rights in connection therewith,
hereinafter referred to as "Proprietary Rights") whether or not patentable or
registrable under patent, copyright, trademark or similar statutes (together
with the goodwill associated therewith), made or conceived or reduced to
practice or learned by me, either alone or jointly with others, during the
period of my employment with the Company or within 1 year after termination of
my employment, which relate to any Company Invention or to any work performed by
me while I was employed by the Company. Inventions assigned to the Company by
this Paragraph 3 are hereinafter referred to as "Company Inventions." I agree,
upon request, to execute, verify and deliver assignments of such Proprietary
Rights to the Company or its designee.
(b) If I am employed by the Company in the State of
California, I recognize that this Agreement does not require assignment of any
invention which qualifies fully for protection under Section 2870 of the
California Labor Code (hereinafter "Section 2870"), which provides as follows:
(i) Any provision in an employment agreement
which provides that an employee will assign, or offer to assign, any of his or
her rights in an invention to his or her employer will not apply to an invention
that the employee developed entirely on his or her own time without using the
employer's equipment, supplies, facilities, or trade secret information except
for those inventions that either:
(1) Relate at the time of conception or
reduction to practice of the invention to the employer's business, or actual or
demonstrably anticipated research or development of the employer.
(2) Result from any work performed by
the employee for the employer.
(ii) To the extent a provision in an employment
agreement purports to require an employee to assign an invention otherwise
excluded from being required to be assigned under subdivision (i), the provision
is against the public policy of this state and is unenforceable.
3.2 GOVERNMENT. I also agree to assign all my right, title and
interest in and to any and all Company Inventions to the United States of
America, if such is required to be assigned by a contract between the Company
and United States of America or any of its agencies.
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3.3 WORKS FOR HIRE. I acknowledge that all original works of
authorship which are made by me (solely or jointly with others) within the scope
of my employment as well as those works made by me within 1 year after
termination of my employment which relate to any work made by me while I was
employed by the Company and which are protectable by copyright are "works made
for hire," as that term is defined in the United States Copyright Act (17
U.S.C., Section 101).
4. ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in every
proper way to obtain and from time to time enforce United States and foreign
Proprietary Rights relating to Company Inventions in any and all countries. My
obligation to assist the Company with respect to Proprietary Rights relating to
such Company Inventions in any and all countries will continue beyond the
termination of my employment, but the Company will compensate me at a reasonable
rate after my termination for the time actually spent by me if the Company
requests such assistance.
I hereby waive and transfer to the Company, any and all claims, of any
nature whatsoever, which I now or may hereafter have, for infringement of any
Proprietary Rights assigned hereunder to the Company.
5. OBLIGATION TO KEEP COMPANY INFORMED. During the period of my
employment, I will promptly disclose all Company Inventions to the Company fully
and in writing and will hold such Company Inventions in trust for the sole right
and benefit of the Company. In addition, after termination of my employment, I
will disclose all patent applications filed by me within a year after
termination of employment which relate to any Company Invention or to any work
performed by me while I was employed by Company.
6. PRIOR INVENTIONS. Inventions, if any, patented or unpatented, which I
made prior to the commencement of my employment with the Company are excluded
from the scope of this Agreement. To preclude any possible uncertainty, I have
set forth in Exhibit A attached hereto a complete list of all Inventions that I
have, alone or jointly with others, conceived, developed or reduced to practice
or caused to be conceived, developed or reduced to practice prior to the
commencement of my employment with the Company, that I consider to be my
property or the property of third parties and that I wish to have excluded from
the scope of this Agreement. If disclosure of any such Invention on Exhibit A
would cause me to violate any prior confidentiality agreement, I understand that
I am not to list such Inventions in Exhibit A but am to inform the Company that
all such Inventions have not been listed for that reason.
7. ADDITIONAL ACTIVITIES.
(a) I agree that during the period of my employment by the Company I
will not, without the Company's express written consent, engage in any
employment or business
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activity other than for the Company. Additionally, during the period of my
employment by the Company and for 1 year after the date of termination of my
employment with the Company I will not induce any employee of the Company to
leave the employ of the Company.
(b) I acknowledge that the Company has developed, through an extensive
acquisition process, valuable information regarding actual or prospective
partners, licensors, licensees, clients, customers and accounts of the Company
("Trade Secret Information"). I further acknowledge that my use of such Trade
Secret Information after the termination of my employment would cause the
Company irreparable harm. Therefore, I agree that I will not use Trade Secret
Information to solicit the business relationship or patronage of any of the
actual or prospective partners, licensors, licensees, clients, customers or
accounts of the Company.
8. NO IMPROPER USE OF MATERIALS. During my employment by the Company I
will not improperly use or disclose any confidential information or trade
secrets, if any, of any former employer or any other person to whom I have an
obligation of confidentiality, and I will not bring onto the premises of the
Company any unpublished documents or any property belonging to any former
employer or any other person to whom I have an obligation of confidentiality
unless consented to in writing by that former employer or person.
9. NO CONFLICTING OBLIGATION. I represent that my performance (a) of all
the terms of this Agreement and (b) as an employee of the Company, does not and
will not breach any agreement to keep in confidence information acquired by me
in confidence or in trust prior to my employment by the Company. I have not
entered into, and I will not enter into, any agreement that conflicts with this
Agreement.
10. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company,
I will deliver to the Company any and all laboratory notebooks, conception
notebooks, drawings, notes, memoranda, specifications, devices, formulas,
molecules, cells, storage media, including software and documents, including any
computer printouts, together with all copies thereof, and any other material
containing or disclosing any Company Inventions, Third Party Information or
Confidential Information of the Company. I further agree that any property
situated on the Company's premises and owned by the Company including disks and
other storage media, filing cabinets or other work areas, is subject to
inspection by Company personnel at any time with or without notice. Prior to
leaving, I will cooperate with the Company in completing and signing the
Company's termination statement for technical and management personnel.
11. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and
unique and because I may have access to and become acquainted with the
Confidential Information of the Company, the Company will have the right to
enforce this
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Agreement and any of its provisions by injunction, specific performance or other
equitable relief, without bond, without prejudice to any other rights and
remedies that the Company may have for a breach of this Agreement.
12. NOTICES. Any notices required or permitted hereunder will be given
to me at the address specified below or at such other address as I will specify
in writing. Such notice will be deemed given upon personal delivery to the
appropriate address, or by facsimile transmission (receipt verified and with
confirmation copy following by another permitted method), telexed, sent by
express courier service, or, if sent by certified or registered mail, three days
after the date of mailing.
13. GENERAL PROVISIONS
13.1 GOVERNING LAW. This Agreement will be governed by and
construed according to the laws of the State of California.
13.2 ENTIRE AGREEMENT. This Agreement is the final, complete and
exclusive agreement of the parties with respect to the subject matter hereof and
supersedes and merges all prior discussions between us. No modification or
amendment to this Agreement, nor any waiver of any rights under this Agreement,
will be effective unless in writing signed by both parties. Any subsequent
change or changes in my duties, salary or compensation will not affect the
validity or scope of this Agreement. As used in this Agreement, the period of my
employment includes any time during which I may be retained by the Company as a
consultant.
13.3 SEVERABILITY. If any of the provisions in this Agreement
are deemed unenforceable by law, then the remaining provisions will continue in
full force and effect.
13.4 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon
my heirs, executors, administrators and other legal representatives and will be
for the benefit of the Company, its successors, and its assigns.
13.5 SURVIVAL. The provisions of this Agreement will survive the
termination of my employment and the assignment of this Agreement by the Company
to any successor in interest or other assignee.
13.6 EMPLOYMENT. I agree and understand that nothing in this
Agreement will confer any right with respect to continuation of employment by
the Company, nor will it interfere in any way with my right or the Company's
right to terminate my employment at any time, with or without cause.
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13.7 WAIVER. No waiver by the Company of any breach of this
Agreement will be a waiver of any preceding or succeeding breach. No waiver by
the Company of any right under this Agreement will be construed as a waiver of
any other right. The Company will not be required to give notice to enforce
strict adherence to all terms of this Agreement.
This Agreement will be effective as of the first day of my employment
with the Company, namely: _________________, 19____.
I UNDERSTAND THAT THIS AGREEMENT AFFECTS MY RIGHTS TO INVENTIONS I MAKE
DURING MY EMPLOYMENT, AND RESTRICTS MY RIGHT TO DISCLOSE OR USE THE COMPANY'S
CONFIDENTIAL INFORMATION DURING OR SUBSEQUENT TO MY EMPLOYMENT.
I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE
COMPLETELY FILLED OUT EXHIBIT A TO THIS AGREEMENT.
Dated:
-------------------- --------- ----------------------------------------
Signature
----------------------------------------
Name of Employee
Address
----------------------------------------
----------------------------------------
----------------------------------------
ACCEPTED AND AGREED TO:
Isis Pharmaceuticals, Inc.
By:
---------------------------------
Signature
---------------------------------
Printed Name
---------------------------------
Title
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EXHIBIT A
ISIS PHARMACEUTICALS, INC.
2292 FARADAY AVENUE
CARLSBAD, CALIFORNIA 92008
1. The following is a complete list of all inventions or improvements
relevant to the subject matter of my employment by Isis Pharmaceuticals, Inc.
(the "Company") that have been made or conceived or first reduced to practice by
me alone or jointly with others prior to my engagement by the Company:
[ ] No inventions or improvements. [ ] See below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ ] Due to confidentiality agreements with prior employer, I cannot
disclose certain inventions that would otherwise be included on the
above-described list.
[ ] Additional sheets attached.
2. I propose to bring to my employment the following devices, materials
and documents of a former employer or other person to whom I have an obligation
of confidentiality that are not generally available to the public, which
materials and documents may be used in my employment pursuant to the express
written authorization of my former employer or such other person (a copy of
which is attached hereto):
[ ] No material [ ] See below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ ] Additional sheets attached.
Dated:
-------------------- ---------
------------------------------
Employee
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