View:
Download DOC
Download PDF
Download XLS

QuickLinks -- Click here to rapidly navigate through this document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission file number 0-19125

Isis Pharmaceuticals, Inc.
(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)		   33-0336973
(IRS Employer Identification No.)

1896 Rutherford Road, Carlsbad, CA 92008
(Address of principal executive offices, including zip code)

760-931-9200
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
 Common Stock, $.001 Par Value

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12(b)-2 of the Securities Exchange Act of 1934). Yes ý    No o

        The approximate aggregate market value of the voting common stock held by non-affiliates of the registrant, based upon the last sale price of the common stock reported on the National Association of Securities Dealers Automated Quotation National Market System was $286,390,779 as of June 30, 2004.*

        The number of shares of voting common stock outstanding as of March 3, 2005 was 57,527,898.

DOCUMENTS INCORPORATED BY REFERENCE
(To the extent indicated herein)

        Portions of the registrant's definitive Proxy Statement to be filed on or about April 11, 2005 with the Securities and Exchange Commission in connection with Registrant's annual meeting of stockholders to be held on May 26, 2005 are incorporated by reference into Part III of this Report. The Exhibit Index (Item No. 15) located on pages 66 to 70 incorporates several documents by reference as indicated therein.

*
Excludes 7,230,336 shares of common stock held by directors and officers and by stockholders whose beneficial ownership is known by the Registrant to exceed 10% of the common stock outstanding at June 30, 2004. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant.


FORWARD-LOOKING STATEMENTS

        This report on Form 10-K and the information incorporated herein by reference contain forward-looking statements regarding our business, the financial position of Isis Pharmaceuticals, Inc. and the therapeutic and commercial potential of our technologies and products in development. Any statement describing our goals, expectations, intentions or beliefs is a forward-looking statement and should be considered an at-risk statement, including those statements that are described as Isis' clinical goals. Such statements are subject to certain risks and uncertainties, particularly those inherent in the process of discovering, developing and commercializing drugs that are safe and effective for use as human therapeutics, in developing and commercializing technology and systems used to identify infectious agents, and in the endeavor of building a business around such products and services. Our forward-looking statements also involve assumptions that, if they never materialize or prove correct, could cause our results to differ materially from those expressed or implied by such forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report on Form 10-K, including those identified in the section of Item 1 entitled "Risk Factors." Although our forward-looking statements reflect the good faith judgment of our management, these statements are based only on facts and factors currently known by us. As a result, you are cautioned not to rely on these forward-looking statements.


TRADEMARKS

2


PART I

Item 1. Business

        We are a biopharmaceutical company exploiting proprietary RNA-based drug discovery technologies to identify and commercialize novel drugs to treat important diseases. RNA, or ribonucleic acid, is a molecule that provides to a cell the information the cell needs to produce proteins, including those proteins implicated in disease. Interference with RNA can keep the body from producing proteins that are involved in disease. We are the leader in exploiting RNA as a target for drugs, and have a strong proprietary position in RNA-based drug discovery technologies. With our primary technology, antisense, we create inhibitors, or oligonucleotides, designed to hybridize, with a high degree of specificity to their RNA target and modulate the production of specific proteins associated with disease. We also use our antisense technology internally and in collaborations with pharmaceutical companies to rapidly and efficiently identify and prioritize attractive gene targets for drug discovery. Within our Ibis division, we are expanding on our RNA expertise by creating a system that can rapidly and accurately identify a broad range of infectious organisms with a single test. Our ongoing development of this technology and a system related to this technology has been funded primarily by agencies within the United States government.

        We successfully commercialized our first antisense drug, Vitravene. Vitravene demonstrates our ability to meet Food and Drug Administration, or FDA, and European regulatory requirements, and to commercially manufacture antisense drugs. We and our partners currently have 10 antisense products in preclinical and clinical development, the majority of which are in Phase I or Phase II human clinical trials. Our products in development address numerous therapeutic areas with major market potential, including inflammatory, metabolic and cardiovascular diseases, and cancer. We are expanding the therapeutic opportunities for antisense drugs by developing a variety of formulations to enhance patient convenience and compliance. In addition, our pipeline has matured to consist primarily of drugs based on our proprietary second-generation chemistry. Our second-generation antisense drugs offer a number of advantages over prior chemistries. Specifically, these drugs offer the potential for improved safety, increased potency and a longer half-life, which correlates with durability of therapeutic response and the potential for less frequent dosing. Physicians may be able to dose our second-generation drugs as infrequently as once every two weeks to once a month. We are also making progress on developing oral formulations of our second-generation antisense drugs. Our oral formulations may increase the commercial value of our antisense drugs.

        Within our Ibis division we have invented technology that has the potential to revolutionize the identification of infectious diseases. This technology is called Triangulation Identification for Genetic Evaluation of Risks, or TIGER. We have applied the TIGER technology to develop a system to identify from a sample a broad range of infectious organisms, including organisms that are newly-emerging, genetically altered and unculturable. We have successfully demonstrated proof-of-principle of the TIGER system with the identification of a variety of bacteria and viruses in both environmental and human clinical samples. During 2004, we advanced the development of our TIGER system to include application development for epidemiological surveillance and biological products screening. These applications represent the first of many we plan to develop to enhance the TIGER system's commercial value and opportunity in the government, research, medical and diagnostic markets.

        To date, we have earned $40.1 million in revenue from several government agencies, including up to $37.5 million for the development of TIGER and $2.6 million to discover small molecule drugs, under contracts valued at up to $66.3 million. These agencies include the Defense Advanced Research Projects Agency, or DARPA, the National Institute of Allergy and Infectious Diseases, or NIAID, part of the National Institutes of Health, or NIH, the Centers for Disease Control, or CDC, the Federal

3


Bureau of Investigation, or FBI, and the United States Army Medical Research Institute of Infectious Diseases, or USAMRIID.

        We have a broad patent portfolio covering our products and technologies. We have rights to more than 1,500 issued patents, which we believe represents the largest antisense and RNA-oriented patent estate in the pharmaceutical industry. Our intellectual property is a strategic asset that we are exploiting to generate near term revenue and that we expect will also provide us with revenue in the future. The principal purpose of our intellectual property portfolio is to protect our products and those of our partners. Our intellectual property portfolio also enables us to expand our pipeline by granting to other companies limited access to antisense technology through licenses we grant them. Licensing partnerships may include traditionally structured antisense drug discovery and development collaborations with large pharmaceutical companies like Lilly and Amgen.

        Antisense technology allows us to repeatedly produce more drug candidates than we can afford to develop on our own. As a result, we have extended our licensing partnerships to include our satellite company strategy in which we provide our expertise and intellectual property position in RNA-based therapeutics to industry partners that are interested in developing RNA-based therapeutics. Because these companies work closely together with us, with the common goals of advancing the technology and/or pipeline, we sometimes refer to these companies as satellite companies. These partnerships allow us to benefit from our partners' expertise and highly focused research efforts, while our partners benefit from our experience in RNA-based drug discovery and development and access to our intellectual property. In return for providing companies with access to our technology, we receive an ownership interest in the resulting products and/or in the companies. Through these relationships we are expanding the reach and potential of antisense therapeutics and participating in the success of multiple companies and products. This provides us with the opportunity to create a much broader antisense pipeline than we could afford to develop on our own, while minimizing our financial obligations. We have implemented this integral component of our strategy through our partnerships with Alnylam Pharmaceuticals, Inc., or Alnylam; Antisense Therapeutics, Ltd., or ATL; Ercole Biotech Inc., or Ercole; OncoGenex Technologies, Inc., or OncoGenex; Santaris Pharma A/S, or Santaris; and Sarissa, Inc., or Sarissa.

        In addition, we have an active intellectual property licensing program in which we license aspects of our intellectual property to companies like Hybridon, Inc., or Hybridon; Integrated DNA Technologies, Inc., or IDT; Roche Molecular Systems, or Roche: atugen A/S, or atugen; and Dharmacon, Inc., or Dharmacon. Through this program, we also license our non-antisense patents as we did with Eyetech Pharmaceuticals, Inc., or Eyetech. In December 2001, we licensed several chemistry patents to Eyetech for the development of Macugen, a drug for the treatment of wet age-related macular degeneration, or AMD, that Eyetech is co-developing and commercializing with Pfizer, Inc., or Pfizer. In 2004, we earned $4.0 million in milestone payments from Eyetech associated with their filing of a New Drug Application, or NDA, for Macugen with the FDA and Eyetech's receipt of marketing clearance for the drug. In January 2005, we sold a portion of our royalty rights in Macugen to Drug Royalty USA., Inc., or DRC, in exchange for aggregate payments of $24 million over the next three years. To date, we have generated nearly $70.0 million from our intellectual property licensing program that helps support our internal drug discovery and clinical development programs.

        We incorporated in California in 1989, and in 1991 we reincorporated as a Delaware corporation. Our principal offices are in Carlsbad, California. In November 2003, we established Isis Pharmaceuticals Singapore Pte Ltd, our wholly-owned subsidiary in Singapore. As part of our strategic decision to reorganize and refocus our resources to advance our most promising second-generation drugs and to continue the development of antisense technology, we decided to close our research and development laboratory in Singapore during the first quarter of 2005.

4


Drug Discovery and Development

        Proteins are essential, working molecules in a cell. Almost all human diseases result from inappropriate protein production or improper protein activity. Scientists use traditional drug discovery methods to design drugs to interact with the proteins in the body that are supporting or causing a disease. Antisense technology is different from traditional drug discovery because it specifically targets disease-causing proteins before the body produces them. We design our antisense drugs, or antisense inhibitors, to act earlier in the disease process than traditional drugs and to interrupt the production of disease causing proteins without disrupting proteins responsible for the body's normal functioning.

        Genes contain the information necessary to produce proteins. A gene is made up of bases, or nucleotides: Adenine, Thymine, Guanine, and Cytosine, commonly known as A, T, G and C, which are linked together to form a two-stranded structure that resembles a twisted ladder, known as deoxyribonucleic acid, or DNA. The nucleotides on one side of the ladder bind weakly to complementary nucleotides on the other strand according to specific rules; for example, A pairs with T and G pairs with C, creating the ladder's rungs. This highly specific nucleotide pairing is called hybridization. The sequence or order of these nucleotides establishes the cell's recipes for making proteins.

        When a cell transcribes information from DNA into messenger RNA, or mRNA, the two complementary strands of the DNA partly uncoil. One strand acts as a template and information stored in the DNA strand is copied into a complementary mRNA. mRNA then carries the information to cellular structures called ribosomes, the cell's factories for manufacturing proteins. The ribosome reads the encoded information, the mRNA's nucleotide sequence, and in so doing, strings together amino acids to form a specific protein. This process is called translation. Antisense technology interrupts the cell's protein production process by preventing the RNA instructions from reaching the ribosome, thus inhibiting the production of the protein. The mRNA sequence of nucleotides that carries the information for protein production is called the "sense" strand. The complementary nucleotide chain that binds specifically to the sense strand is called the "antisense" strand.

        We use the information contained in mRNA to design chemical structures, called antisense oligonucleotides or antisense drugs, which resemble DNA and RNA and are the complement of mRNA. These potent antisense drugs inhibit the production of disease-causing proteins. Antisense drugs can selectively inhibit one protein among a closely related group of proteins because antisense drugs interact with a specific RNA and not with the RNAs of other members of the group. It is easier to differentiate between closely related proteins at the RNA sequence level than by binding to the protein itself, as traditional drugs do. As a result, we can design antisense drugs that selectively inhibit the disease-causing member of the group without interfering with those members of the group necessary for normal bodily functions. This unique specificity means that antisense drugs may be less toxic than traditional drugs, because we can design them to minimize the impact on unintended targets.

        Further, the design of antisense compounds is less complex, more rapid and more efficient than traditional drug design directed at protein targets. Traditional drug design requires companies to identify a small molecule that will interact with protein structures to affect the disease-causing process. Since predicting which small molecules will do this has proven to be difficult, traditional drug discovery involves testing hundreds of thousands of small molecules for their ability to interfere with protein function. As a result, traditional drug discovery is a labor intensive, low probability endeavor. In contrast, we design our antisense compounds to bind to mRNA structures through well understood processes. We can design prototype antisense drugs as soon as we identify the sequence for the mRNA receptor. With the completion of the human genome sequencing project, we now know the sequence for all potential mRNA receptors in the human body.

5


        We are the leader in the discovery and development of this exciting new class of therapeutic compounds. Our proprietary technology to discover and characterize novel antisense inhibitors has enabled our scientists to modify the properties of our antisense drug candidates for optimal use with particular targets and thus, to produce a broad proprietary portfolio of compounds applicable to many disease targets. Further, over the past decade, our scientists have made great advances in chemistries, which we call our second-generation antisense drugs. Second-generation drugs may have increased potency, stability, oral bioavailability and an improved side effect profile. We have also made significant progress in developing new formulations of antisense drugs, like oral, subcutaneous, intravitreal, aerosol, enema and topical cream that further expand the potential for antisense technology.

        Further, we use antisense technology to generate information about the function of genes and to determine the value of genes as drug discovery targets. This information forms the basis of the first step of our antisense drug discovery program. We use this information to direct our own antisense drug discovery research, and that of our antisense drug discovery partners. We have created inhibitors to thousands of genes, validated many targets and dissected numerous disease pathways.

        Prior to the development of TIGER, our Ibis division focused on discovering novel small molecule antimicrobial drugs. DARPA principally funded this project until 2002, when USAMRIID elected to be the transition partner for a DARPA-sponsored research program to discover small molecule antimicrobial drugs for biological warfare defense. As part of the transition we entered into a three-year, $2.4 million contract with USAMRIID to advance this work. As of December 31, 2004, we had received $2.1 million from the United States government for this program. We expect to allocate limited resources to advance this technology once we complete our work under the USAMRIID contract in the first quarter of 2005. Our goal is to secure a partner for this program.

Ibis Division

        Within our Ibis division we have invented technology that has the potential to revolutionize the identification of infectious diseases. This technology is called Triangulation Identification for Genetic Evaluation of Risks, or TIGER. We have applied the TIGER technology to develop a system to identify from a sample a broad range of infectious organisms, including organisms that are newly-emerging, genetically altered and unculturable. We have successfully demonstrated proof-of-principle of the TIGER system with the identification of a variety of bacteria and viruses in both environmental and human clinical samples. During 2004, we advanced the development of our TIGER system to include application development for epidemiological surveillance and biological products screening. These applications represent the first of many we plan to develop to enhance the TIGER system's commercial value and opportunity in the government, research, medical and diagnostic markets.

        TIGER is the product of core technology development and small molecule drug discovery research conducted within our Ibis division. In its early years, Ibis focused on discovering novel small molecule antimicrobial drugs. Ibis' central focus now is to develop and commercialize our TIGER technology.

        The advancement of TIGER application development has brought us closer to realizing the commercial potential of this unique and proprietary technology. To continue this progress, we recently hired Michael Treble to head our Ibis division. Mr. Treble's knowledge and expertise in product development and in commercializing research instruments and diagnostic products will complement the expertise and innovation of David J. Ecker, Ph.D., the scientific leader of TIGER technology development.

        To develop the TIGER technology and applications, our Ibis division has received contracts from a number of government agencies, including DARPA, the NIAID, part of the NIH, the CDC and the FBI. Each of these agencies represents a significant source of funding for our TIGER program. To

6


date, we have earned $40.1 million in revenue under our government contracts and grants. Also, we have approval to invoice our government partners an additional $8.6 million under our existing contracts and grants. We may receive continued approval to invoice our government partners under these contracts based upon a variety of factors, including the accomplishment of program objectives and the exercise of additional contract options by the contracting agencies. In addition, these agencies may terminate these contracts and grants at their convenience at any time, even if we have fully performed our obligations. Consequently, we may never receive the full amount of the potential value of these awards. Our Ibis division has received contracts and grants from numerous government agencies valued at up to $63.2 million.

        During 2004 and 2003, revenue generated from agencies of the United States Government totaled 28% and 20%, respectively, of our total revenue. Refer to Note 7, "Segment Information and Concentration of Business Risk, " starting on page F-30 of this report on Form 10-K for additional information about our Ibis division.

Approved Product and Products In Development

        We successfully developed the first antisense drug to reach the market, Vitravene, for CMV retinitis, which is available through our partner, Novartis Opthalmics AG.

        We have designed our drugs in development to treat a variety of health conditions, including inflammatory, metabolic, and cardiovascular diseases, and cancer, and we and our partners are studying them in intravenous, subcutaneous, topical cream, enema and oral formulations. Intravenous and subcutaneous formulations are commonly grouped together and referred to as parenteral forms of administration. The following table lists our approved product and each of our and our partners' products under development, its target, disease indication and development status, as well as our commercial rights.

Isis Drugs in Development

Product(1)
   Target
   Potential Disease
Indication(s)
   Development Status(2)
   Commercial Rights
Vitravene (I)   CMV   CMV Retinitis   Launched in the U.S. and Europe (3)   Isis/Novartis Ophthalmics AG(3)
Alicaforsen (ISIS 2302) (E)   ICAM-1   Ulcerative Colitis   Phase II   Isis
ISIS 113715 (P)*   PTP-1b   Diabetes   Phase II   Isis
ISIS 301012 (P)*   apoB-100   High Cholesterol   Phase I   Isis
ISIS 301012 (O)*   apoB-100   High Cholesterol   Preclinical   Isis
ISIS 345794 (P)*   STAT-3   Cancer   Preclinical   Isis

7

Partner Drugs in Development

Product(1)
   Target
   Potential Disease
Indication(s)
   Development Status(2)
   Commercial Rights
ATL 1102 (ISIS 107248)(P)*   VLA-4   Multiple Sclerosis   Phase II   ATL
OGX-011 (ISIS 112989) (P)*   Clusterin   Cancer   Phase I/II   OncoGenex / Isis
ATL 1101 (T)*   IGF-1R   Psoriasis   Phase I   ATL
LY2181308 (P) *   Survivin   Cancer   Phase I   Lilly
LY2275796 (P) *   eIF-4E   Cancer   Preclinical   Lilly
*
Drugs based on proprietary second-generation chemistry

(1)
I = Intravitreal; P = Parenteral; T = Topical; O = Oral; E = Enema

(2)
A compound in the preclinical phase of development is one in which we or our partners have made a decision to initiate toxicology and pharmacokinetic studies in animals to support the initiation of human clinical studies.

(3)
Novartis Ophthalmics AG has the exclusive worldwide rights to distribute Vitravene, which it distributes on a limited basis.

        The following section provides more detailed descriptions of our approved product and those products in clinical development and the disease indications they target. We also have a significant research program. Our goal for 2005-2006 is to advance at least two new drug candidates from our cardiovascular, metabolic or inflammatory disease research programs into research development.

Cytomegalovirus, or CMV Retinitis

        Individuals with suppressed immune systems, such as those with AIDS resulting from the HIV virus, are susceptible to opportunistic infections caused by CMV. Among patients with AIDS, CMV retinitis is the primary cause of blindness. Currently approved drugs for CMV retinitis are ganciclovir, foscarnet, cidofovir and fomivirsen (Vitravene).

        Vitravene, or fomivirsen—In August 1998, the FDA approved Vitravene to treat CMV retinitis in AIDS patients. Vitravene is an antisense compound that we discovered and developed. Novartis Ophthalmics AG, the eye health unit of life sciences leader Novartis AG, and our worldwide distribution partner for this drug, launched Vitravene in November 1998. New anti-HIV drugs, particularly protease inhibitors and combination treatment regimens, have prolonged survival in HIV-infected individuals. This has resulted in a decline in mortality from AIDS, accompanied by a decline in the incidence of many opportunistic infections, including CMV retinitis. As a result, Novartis AG currently offers Vitravene on a limited basis.

Inflammatory Diseases

        Our research and development efforts in the therapeutic area of inflammatory diseases focus on identifying and developing antisense inhibitors to proteins such as intercellular adhesion molecule 1, or ICAM-1 and another adhesion molecule called CD49d, which is a subunit of Very Late Antigen-4, or VLA-4. Researchers believe that these proteins are involved in inflammatory diseases.

        Alicaforsen (ISIS 2302—The most advanced compound in our inflammatory disease program selectively inhibits ICAM-1 gene expression. Over-expression of ICAM-1 occurs in a wide variety of inflammatory disorders, including inflammatory bowel disease. According to the Crohn's and Colitis Foundation of America, up to one million people have inflammatory bowel disease, with diagnoses

8


evenly split between Crohn's disease and ulcerative colitis, or UC. According to the European Federation of Crohn's and UC Associations, inflammatory bowel disease affects a similar number of people in Europe.

        ATL 1102—ATL 1102, formerly called ISIS 107248, is a second-generation antisense inhibitor of CD49d, which is a subunit of Very Late Antigen-4, or VLA-4. Studies in animal models have demonstrated that inhibition of VLA-4 has a positive effect on a number of inflammatory diseases, including multiple sclerosis. In December 2001, we licensed ATL 1102 to ATL. Under our agreement with ATL, we completed the required preclinical studies for ATL 1102 and manufactured the drug for human clinical trials at ATL's expense. ATL is responsible for the clinical development and the commercialization of the drug. In June 2004, ATL announced the results of a Phase I clinical trial of ATL 1102, in which the drug was well-tolerated. In December 2004, ATL initiated a Phase IIa clinical trial of ATL 1102 in patients with multiple sclerosis. In March 2005, ATL announced that, although it and the trial investigators are confident that the current ATL 1102 Phase II trial is safe, in light of the recently announced safety issues associated with one other VLA-4 inhibitor that works through a different mechanism, ATL decided to halt the current trial and convene an advisory group to consider the potential development path for ATL 1102 which may include restarting a Phase II trial program in multiple sclerosis and exploring ATL 1102 as an inhaled asthma treatment. We plan to support ATL's development efforts to determine the potential of ATL 1102 as an effective treatment for multiple sclerosis and asthma.

9


        ATL 1101—ATL 1101 is an antisense compound targeting Insulin-like Growth Factor-I Receptor, or IGF-1R. Researchers believe that IGF-1R plays a pivotal role in the regulation of cell growth in psoriasis. Their research has demonstrated that antisense molecules delivered by intra-dermal injection successfully inhibit production of IGF-1R and normalize the skin architecture in human psoriasis skin samples grafted onto mice. We plan to support ATL's program to explore the activity of ATL 1101 in patients with psoriasis, which includes completing the ongoing study ATL is conducting. According to the National Psoriasis Foundation, more than 4.5 million people in the United States have psoriasis, which is a non-contagious disorder of the skin. Abnormal growth or overproduction of skin cells characterizes psoriasis.

Metabolic Diseases

        We are pursuing the discovery and development of antisense drugs for metabolic diseases such as diabetes and obesity. These chronic diseases affect millions of people and there continues to be a significant need for new therapies for these patients. We believe that our second-generation antisense drugs will have properties that will make them attractive therapies for metabolic diseases. According to the American Diabetes Association, diabetes affects more than 18 million people, with type 2 diabetes constituting about 90 percent of those cases.

        ISIS 113715—ISIS 113715 is our second-generation antisense inhibitor of the PTP-1b gene for the treatment of type 2 diabetes. An antisense inhibitor of PTP-1b represents a new approach to the treatment of diabetes. For years, pharmaceutical companies interested in treating diabetes have actively pursued phosphatases, such as PTP-1b, as targets in their traditional small molecule drug discovery efforts. However, due to structural similarities among closely related phosphatases, it is often difficult to identify small molecule drugs with sufficient specificity to be safe. Antisense allows us to design very specific inhibitors to PTP-1b that do not inhibit other phosphatases.

        In May 2003, we initiated a Phase I clinical trial to assess the safety and pharmacokinetic profile of several doses of ISIS 113715 by parenteral administration in 20 healthy volunteers. In September 2003, we reported the results from this Phase I study, in which ISIS 113715 increased insulin sensitivity in normal volunteers. Further, subjects treated with ISIS 113715 did not experience hypoglycemia or excessively low blood sugar, which is an adverse effect observed with many currently available treatments for type 2 diabetes. Based on the results of this Phase I study, we initiated a Phase II clinical trial to further evaluate the drug's ability to regulate blood sugar levels in patients with type 2 diabetes.

        Our goals for 2005-2006 for our ISIS 113715 clinical development program for type 2 diabetes are to:

        Our development plans for 2005-2006 to meet these goals are to:

10

Cardiovascular Diseases

        We are pursuing the discovery and development of antisense drugs for cardiovascular diseases such as high cholesterol. According to the American Heart Association, cardiovascular disease is the leading cause of death in the United States. Researchers have shown a strong correlation between high cholesterol levels and subsequent cardiovascular diseases. Statistics from the American Heart Association show more than 100 million American adults have high cholesterol levels.

        ISIS 301012—ISIS 301012 is a second-generation compound that targets apoB-100, a molecule that has been of great interest to the industry, yet has long been considered "undruggable" by traditional small molecule approaches. ApoB-100 is a protein that plays a pivotal role in the production of low-density lipoprotein, or LDL, the "bad" cholesterol. In preclinical studies, ISIS 301012 reduced total cholesterol, very low-density lipoproteins, or VLDL, LDL, and triglyceride levels, all of which are keys to managing heart disease. We initiated a Phase I study in late 2003 in volunteers with borderline elevated cholesterol. The goal of this initial study was to measure the safety and pharmacokinetic profile of ISIS 301012, and its ability to reduce several components of cholesterol. In 2004, we announced preliminary data from this trial, which demonstrated ISIS 301012 produced dose-dependent, rapid and prolonged reductions of its target, apoB-100, in LDL, in VLDL, and in total cholesterol levels in volunteers with borderline elevated cholesterol. We have also demonstrated that an oral formulation of ISIS 301012 reduces cholesterol in animals.

        For 2005-2006, our goals for ISIS 301012 clinical development programs for lowering high cholesterol, both the subcutaneous injection and oral formulations, are to:

        Our development plans for 2005-2006 to meet these goals are to:


Cancer

        We, together with our partners, are pursuing the development of antisense drugs for the treatment of a variety of cancers. In clinical trials, we and our partners have observed evidence of activity of our anti-cancer drugs. In addition, patients tolerated our compounds well, with none of the serious side effects, such as bone marrow or immune system suppression, gastrointestinal distress or hair loss, associated with standard cancer chemotherapies.

11


        OGX-011—OGX-011, formerly called ISIS 112989, is a second-generation antisense inhibitor of clusterin, which we are co-developing and commercializing with OncoGenex, a Canadian oncology-focused research and development company. We have designed OGX-011 to inhibit the secretory protein clusterin, which acts as a cell-survival protein that is over-expressed in response to tumor killing strategies, like chemotherapy, hormone ablation and radiation therapy. Based on analysis of human tumor tissue, clusterin is over-expressed in several cancers, including prostate, breast, renal, bladder, non-small cell lung and ovarian. By inhibiting clusterin, clinicians may be able to enhance the effects of drug therapies in the treatment of these cancers.

        In a Phase I trial evaluating OGX-011 in combination with hormone ablation therapy prior to surgical removal of the prostate, OGX-011 was well-tolerated, achieved excellent drug concentration in its target tissue, the prostate, and produced up to a 91 percent dose-dependent reduction of its target, clusterin. In preclinical animal studies, scientists from both OncoGenex and Isis, in collaboration with the Prostate Center at Vancouver General Hospital, demonstrated that OGX-011 improved the potency of traditional chemotherapies more than ten-fold in prostate cancer, without compromising safety. These studies also demonstrated that OGX-011, when combined with other cancer treatments in preclinical model systems, may significantly improve tumor reduction and delay disease progression in prostate, lung, bladder and renal cancer. These findings support the continued development of OGX-011 in combination with standard chemotherapy and other agents. We plan to support OncoGenex's expansion of OGX-011 development into additional cancer therapeutic areas through the completion of this second Phase I trial evaluating OGX-011 in combination with TAXOTERE in solid tumors, and with the initiation of Phase II clinical trials in patients with lung, breast and prostate cancers in 2005.

        LY2181308—We licensed our preclinical anti-cancer candidate, LY2181308, formerly ISIS 23722, to Lilly in 2002, as part of the expansion of our Lilly antisense drug discovery research collaboration into cancer for which we earned $1.1 million. Under the two-year agreement, we and Lilly collaborated to discover antisense drugs to inhibit specific gene targets associated with cancer. The cancer collaboration built on the broad, strategic alliance the companies forged in August 2001, to among other things, discover antisense drugs in the areas of inflammatory and metabolic diseases. The compound targets survivin, which plays a role in cancer cell death, or apoptosis. Survivin is one of the most highly overexpressed proteins in cancers. Our researchers and collaborators have shown that inhibiting expression of survivin by LY2181308 inhibits the growth of cancer cells. Since normal cells in the body do not express survivin, we expect that this drug will have fewer side effects than traditional chemotherapy.

        In 2003, we earned a $1.5 million milestone from Lilly in the development of LY2181308. LY2181308 is the first compound from this partnership to advance to clinical trials. In November 2004, Lilly initiated Phase I clinical trials of LY218308 in cancer patients, for which we earned a second $1.5 million milestone.

        LY2275796—LY2275796 is the second anti-cancer drug candidate we have licensed to Lilly and is currently in preclinical studies. During 2004, we earned a $750,000 license fee for this second-generation antisense drug which targets eukaryotic initiation factor-4E, or eIF-4E, a protein involved in tumor progression, angiogenesis and metastases, including breast, head and neck, prostate, lung, bladder, colon, thyroid and non-Hodgkin's lymphomas. Based on scientific literature, there is a strong indication that eIF-4E may act as a critical "switch" in cancer progression.

        During 2005 - 2006, we plan to support Lilly's ongoing anti-cancer antisense research and development programs through the progression of the above Phase I trial of LY2181308 in patients with cancer and the continued preclinical development of LY2275796 for cancer. Further, we plan to support Lilly's oncology franchise by providing new antisense drug candidates for licensing consideration by Lilly.

12


        ISIS 345794—ISIS 345794 is the latest compound to emerge from our cancer research program and is in preclinical development for cancer. Signal Transducer and Activator of Transcription 3, or STAT-3 is a protein that regulates cell division and growth and prevents cell death. In preclinical studies, we have demonstrated that antisense inhibition of STAT-3 significantly delayed tumor growth and increased the rate of cancer cell death in multiple cell and animal models of cancer. Based on these findings, we selected ISIS 345794 for clinical development.

Recently Discontinued Products

        ISIS 104838 produced positive disease responses in patients with rheumatoid arthritis, according to results of two Phase II studies. While we are encouraged by the performance of this drug, in light of the strong competition in this market and the significant investment required to bring the first oral anti-TNF product to market, we elected to discontinue development of this drug. In addition, we have discontinued development of ISIS 14803, a first-generation drug for the treatment of hepatitis C.

        In October 2004, we reported the results of a second Phase III clinical trial of Affinitak in combination with Gemzar and cisplatin in patients with non small cell lung cancer, or NSCLC. Findings from this trial, which was sponsored by Lilly, were similar to the results of the initial Isis-sponsored Phase III study of Affinitak for NSCLC, in which Affinitak failed to demonstrate improved survival sufficient enough to support an NDA filing. As a result of these trials, we will not invest further in the development of Affinitak.

Research Programs

        We combine our core technology programs in medicinal chemistry, RNA biochemistry, and molecular and cellular biology with molecular target-focused drug discovery efforts to design drug candidates. The goal of our target-based research programs is to identify antisense and small molecule drug candidates to treat diseases for which there are substantial markets and for which there is a need for better drugs. In addition, our research programs focus on identifying next-generation compounds to serve as backup compounds to our current products in development and to our development candidates.

        Our core technology programs can support multiple target-based antisense research programs without significantly increasing costs. Through these programs, we can efficiently explore numerous disease targets and identify lead compounds to advance into preclinical development. We are currently pursuing antisense drug discovery programs focused on various cardiovascular, metabolic and inflammatory disease targets, and cancer.

        We are pursuing three early-stage antisense mechanisms, including RNA interference, or RNAi, micro-RNA, and alternative splicing, through research collaborations and partnerships like those we have with Ercole and Alnylam.

        RNAi is an antisense mechanism that involves using a small interfering RNA, or siRNA, as a method to target an mRNA sequence. With siRNA, the cell recruits a protein group called RISC to prevent the production of a disease-causing protein. We have a strong intellectual property position in RNAi methodology and are pursuing opportunities to license these patents to companies specializing in RNA interference as a therapeutic method.

        Micro-RNAs are an emerging class of drug targets and a new area for drug discovery. Micro-RNAs are small RNA molecules that appear to have critical functions in controlling the process of gene expression. Micro-RNAs can serve as drug targets or as drugs themselves. Researchers estimate that there are approximately 250-300 known micro-RNA molecules in humans.

        Modulation of alternative splicing seeks to control the process by which a single gene can lead to several proteins. To be converted into proteins, genes must be initially copied into a pre-mRNA. Pre-mRNA often contains extra sequence information that must be removed prior to translation into the protein. This process is called splicing. Using antisense technology, we have been able to control how these stretches of RNA are spliced back together. This provides another way to control the production of a disease causing protein.

13

        Prior to the development of TIGER, our Ibis division focused on discovering novel small molecule antibacterial drugs. We expect to allocate limited resources to advance this technology once we complete our work under the USAMRIID contract in the first quarter of 2005. Our goal is to secure a partner for this program.

Collaborative Arrangements and Licensing Agreements

        Our strategy is to use alliances with other companies and equity-based financing to increase our financial resources, reduce risk, and retain an appropriate level of ownership of products currently in development. Through alliances with major pharmaceutical companies and biotechnology companies, we can obtain funding, expand existing programs and gain additional expertise in developing and marketing products.

        Antisense technology allows us to repeatedly produce more drug candidates than we can afford to develop on our own. As a result, we have extended our licensing partnerships to include our satellite company strategy in which we provide our expertise and intellectual property position in RNA-based therapeutics to industry partners that are interested in developing RNA-based therapeutics. Because these companies work closely together with us, with the common goals of advancing the technology and/or pipeline, we sometimes refer to these companies as satellite companies. These partnerships allow us to benefit from our partners' expertise and highly focused research efforts, while our partners benefit from our experience in RNA-based drug discovery and development and access to our intellectual property. In return for providing companies with access to our technology, we receive an ownership interest in the resulting products and/or in the companies. Through these relationships we are expanding the reach and potential of antisense therapeutics and participating in the success of multiple companies and products. This provides us with the opportunity to create a much broader antisense pipeline than we could afford to develop on our own, while minimizing our financial obligations. We have implemented this integral component of our strategy through our partnerships with Alnylam, ATL, Ercole, OncoGenex, Santaris, and Sarissa.

2004 and Recent Collaboration and Licensing Highlights

        We are focused on establishing new partnerships and on advancing and building upon existing relationships. We currently have agreements with more than a dozen partners. These span the three key areas of our business: antisense drug discovery and development, our Ibis division, and our intellectual property estate. The following is a list of our collaboration and licensing highlights for 2004 and early 2005.

14

Eli Lilly and Company

        In August 2001, we entered into a broad strategic relationship with Lilly, including four key components:

15


        To date, Lilly has paid or committed to pay us $292.9 million in funding through 2005, including the $100.0 million loan, the $75.0 million equity investment, the $25.0 million in Affinitak up-front license fees, reimbursement for Affinitak development costs and research collaboration license fees and milestones. Of this $292.9 million we had collected $287.9 million as of December 31, 2004. Assuming the success of multiple products from our collaboration with Lilly, we have the opportunity to earn additional future milestones and royalties from Lilly that could be substantial to us.

        As part of our relationship with Lilly, in 2003, we upgraded and expanded our manufacturing facility, including the addition of a new state-of-the-art manufacturing suite. Lilly provided us with $21.2 million in funding to build the new suite. We can use this facility to manufacture drugs for ourselves and our partners.

        Our relationship with Lilly has historically provided several revenue sources, including research funding related to their $100.0 million research loan to us, development milestones similar to the milestones for LY2181308 and LY2275796, and revenue related to Affinitak. During 2004, 2003 and 2002, we generated revenue from our relationship with Lilly totaling $15.7 million, $30.9 million and $45.4 million, respectively, which comprised 37%, 62%, and 57%, respectively, of our total revenue during those same periods. Our current collaboration with Lilly expires in August 2005. Consequently, we anticipate our revenue from Lilly will decrease in 2005.

16


Antisense Drug Discovery Collaborations

        In November 2003, we received a grant of up to $8.0 million over three years from the Singapore Economic Development Board, or EDB, which was intended to fund, in part, the broadening of two of our RNA-based drug discovery and development programs: micro-RNA drug discovery and antisense drug discovery targeting the coronavirus associated with SARS. In connection with this grant, we established Isis Pharmaceuticals Singapore Pte Ltd, a wholly-owned subsidiary of Isis Pharmaceuticals, Inc. As part of our strategic decision to reorganize and refocus our resources to advance our most promising second-generation drugs and to continue the development of antisense technology, we decided to close our research and development laboratory in Singapore during the first quarter of 2005 and terminate our agreement with the EDB. To date, we have received $1.5 million in cash payments under our EDB grant and do not anticipate receiving any additional payments under the grant.

        In June 2003, we initiated a collaboration with ITRI to identify antisense candidates targeting the coronavirus associated with SARS. We conducted the research in exchange for an upfront payment of $1.0 million, milestone payments, and the potential for future funding. In December 2003, we achieved two milestones in our antisense drug discovery partnership with ITRI, for which we received a total of $1.0 million. The milestones related to the identification of second-generation antisense drugs that inhibit SARS virus replication and the successful completion of preclinical studies evaluating aerosol and parenteral delivery of antisense drugs as specified under the agreement. This collaboration has ended in accordance with its terms.

        In December 2001, we entered into a three-year collaboration with Amgen to discover new antisense drugs. In December 2004, this collaboration with Amgen ended in accordance with its terms.

Satellite Company Collaborations

        In February 2005, we licensed an anti-cancer antisense drug to Sarissa, Inc., a biotechnology company emerging from the University of Western Ontario. The drug is an antisense inhibitor of thymidylate synthase, or TS, a well-known drug target that protects cancer cells from the effects of several chemotherapy treatments. In preclinical studies, antisense inhibition of TS suppressed human tumor cell growth and overcame tumor cell resistance to marketed TS-targeted drugs.

        Under the terms of the agreement, Sarissa paid us a $1.0 million upfront fee in exchange for the exclusive, worldwide license to the TS antisense drug. Sarissa paid the upfront fee with a debt instrument, which will convert into Sarissa stock upon Sarissa's successful completion of a venture capital financing. Sarissa will also pay us milestone payments totaling up to $5.5 million for key clinical and regulatory achievements and royalties on any product sales. Sarissa will be solely responsible for preclinical and clinical development of the drug.

        In March 2004, we entered into a strategic alliance with Alnylam to develop and commercialize RNAi therapeutics. Under the terms of the agreement, we exclusively licensed to Alnylam our patent estate relating to antisense motifs and mechanisms and oligonucleotide chemistry for double-stranded RNAi therapeutics in exchange for a $5.0 million technology access fee, participation in fees for

17

Alnylam's partnering programs, as well as future milestone and royalty payments from Alnylam. For each of these drugs, the potential milestone payments total $3.4 million and are payable upon the occurrence of specified development and regulatory events. We retained rights to a limited number of RNAi therapeutic targets and all rights to single-stranded RNAi therapeutics. In addition, Alnylam and we will share the proceeds of any licenses Alnylam grants under its previously announced InterfeRx program that include sublicenses to our patents. We agreed to provide Alnylam with access to our resources for development and commercialization of RNAi therapeutics, including process development, bioanalytic methods, quality control and manufacturing. We also made a $10.0 million equity investment in Alnylam.

        In turn, Alnylam nonexclusively licensed us its patent estate relating to antisense motifs and mechanisms and oligonucleotide chemistry to research, develop and commercialize single-stranded RNAi therapeutics and to research double-stranded RNAi compounds. We also received a license to develop and commercialize double-stranded RNAi drugs targeting a limited number of therapeutic targets on either an exclusive or co-exclusive basis depending on the target. If we develop or commercialize an RNAi-based drug using Alnylam's technology, we will pay Alnylam milestones and royalties. For each of these drugs, the potential milestone payments total $3.4 million and are payable upon the occurrence of specified development and regulatory events. As of December 31, 2004, we did not have an RNAi-based drug in clinical development. As part of the collaboration, each party granted the other party a nonexclusive cross license to its respective patent estate relating to antisense motifs and mechanisms and oligonucleotide chemistry for microRNA therapeutics.

        Our Alnylam alliance provides us with an opportunity to realize substantial value from our pioneering work in antisense mechanisms and oligonucleotide chemistry and is an example of our strategy to participate in all areas of RNA-based drug discovery. For example, in the second quarter of 2004, we earned a $500,000 license fee from Alnylam related to Alnylam's alliance with Merck.

        In September 2004, we recorded a non-cash loss on investment of $5.0 million related to the impairment of our equity investment in Alnylam. The loss on investment reflected a decrease in the market value of Alnylam's stock in 2004, which Isis believes was primarily a result of financial market conditions related to biotechnology companies.

        In October 2004, we and Alnylam expanded our strong intellectual property positions in RNA-based drug discovery by licensing core intellectual property regarding all therapeutic uses of microRNA from the Max Planck Society.

        During 2004, we generated revenue from our relationship with Alnylam totaling $5.5 million, or 13%, of our total revenue.

        In May 2003, we and Ercole initiated a multi-year collaboration to discover antisense drugs that regulate alternative RNA splicing. As part of the collaboration, we cross-licensed our respective splicing-related intellectual property. We are combining our alternative splicing expertise with Ercole to discover antisense drugs that regulate alternative RNA splicing. As part of this collaboration, we granted Ercole a license to our Bcl-x molecule and certain of our chemistry patents. In addition, we took an equity ownership position in Ercole, with the initial funding in the form of convertible debt, which the companies anticipate will convert into securities that Ercole issues in its next venture capital financing. We also have the option to make an additional equity investment in Ercole. Pursuant to the terms of a Note and Warrant Purchase Agreement, during 2003 and early 2004, we made cash payments to Ercole of $500,000 and $250,000, respectively, in exchange for a convertible promissory note. We expensed the payments when made. The Note is secured by all of Ercole's assets, including intellectual property and licenses. The Note will convert into securities that Ercole issues in a qualified financing, as defined by the agreement.

18

        In December 2001, we licensed ATL 1102, formerly ISIS 107248, to ATL, an Australian company publicly traded on the Australian Stock Exchange. We were responsible for completing the required preclinical studies for ATL 1102 and for manufacturing the drug for human clinical trials at ATL's expense. ATL agreed to undertake the future clinical development and commercialization of the drug. In June 2004, ATL announced the results of a Phase I clinical trial of ATL 1102, in which ATL 1102 was well-tolerated. In December 2004, ATL initiated a Phase IIa clinical trial of ATL 1102 in patients with multiple sclerosis. In March 2005, ATL announced that, although it and the trial investigators are confident that the current ATL 1102 Phase II trial is safe, in light of the recently announced safety issues associated with one other VLA-4 inhibitor that works through a different mechanism, ATL decided to halt the current trial and convene an advisory group to consider the potential development path for ATL 1102, which may include restarting a Phase II trial program for multiple sclerosis and exploring ATL 1102 as an inhaled asthma treatment.

        ATL is also developing ATL 1101, an antisense compound targeting IGF-1R for the treatment of psoriasis. ATL recently initiated a Phase I study in patients with psoriasis.

        In addition, we are participating with ATL in a five-year antisense drug discovery and development collaboration. ATL pays us for access to our antisense expertise and for research and manufacturing services we may provide them during the collaboration. Additionally, ATL is obligated to pay us royalties on any antisense drugs discovered and developed within the partnership. We currently own approximately 11% of ATL's equity and hold options for additional shares. If all of ATL's outstanding options, including ours, were exercised, our ownership in ATL would be approximately 14%.

        In November 2001, we established a drug development collaboration with OncoGenex Technologies Inc., a Canadian oncology-focused research and development company, to co-develop and commercialize OGX-011, formerly ISIS 112989, an anti-cancer antisense drug candidate. We share in the costs of developing OGX-011. In exchange, we share in any revenue generated by OncoGenex for OGX-011. OGX-011 combines OncoGenex's proprietary antisense position in inhibitors to the target clusterin, with our proprietary second-generation antisense chemistry. We conducted preclinical toxicology and pharmacokinetic studies of OGX-011 during 2002. We also manufactured OGX-011 for preclinical and Phase I/II studies. OncoGenex has responsibility to perform Phase I clinical trials to assess the safety of OGX-011 in combination with hormone ablation therapy in men with localized prostate cancer and to perform Phase I/II clinical trials in combination with standard chemotherapy in patients with solid tumors known to express clusterin, including non-small cell lung, prostate, breast, renal, and ovarian cancers. In a Phase I trial evaluating OGX-011 in combination with hormone ablation therapy prior to surgical removal of the prostate, OGX-011 was well-tolerated, achieved excellent drug concentration in its target tissue, the prostate, and produced up to a 91 percent dose-dependent reduction of its target, clusterin. In April 2003, OncoGenex and we initiated a second Phase I/II trial to evaluate OGX-011 in combination with TAXOTERE in various solid tumors. OGX-011 was our first second-generation antisense anti-cancer drug in clinical trials. We plan to support OncoGenex's expansion of OGX-011 development into additional cancer therapeutic areas through the completion of this second Phase I trial evaluating OGX-011 in combination with TAXOTERE in solid tumors, and with the initiation of Phase II clinical trials in patients with lung, breast and prostate cancers.

        In September 2003, we and OncoGenex expanded our antisense drug development partnership to include the development of the second-generation antisense anti-cancer drug candidate, OGX-225. OncoGenex has responsibility for the preclinical and clinical development of the drug. OncoGenex issued us OncoGenex securities as payment for an upfront fee. In addition, OncoGenex agreed to

19


provide to us milestone payments totaling up to $3.5 million for key clinical and regulatory achievements and to pay us royalties on product sales. As of December 31, 2004, OncoGenex had not triggered any of these milestone payments related to OGX-225.

        In January 2005, we broadened our antisense drug development partnership with Oncogenex to allow for the development of two additional second-generation antisense anti-cancer drug candidates. Under the terms of the agreement, OncoGenex will be responsible for the preclinical and clinical development of the drug. OncoGenex agreed to pay us an upfront fee, milestone payments for key clinical and regulatory achievements, and royalties on future product sales.

        As of December 31, 2004, our ownership interest in OncoGenex was less than 10%.

        In November 1998 and September 2000, we entered into license agreements with Santaris, formerly Pantheco. We amended the agreements in May 2003. Under the terms of the amended and restated license agreement, we licensed our novel antisense chemistry, Peptide Nucleic Acid, or PNA, to Santaris on a limited exclusive basis to develop products. The license restricts Santaris to a limited number of molecular targets that are subject to our approval. Santaris has agreed to pay us royalties on any products developed under the license.

        As part of our original license agreements with Pantheco, we received shares of Pantheco common stock. In May 2003, Pantheco and Cureon A/S merged to form Santaris. Prior to the merger, we purchased additional shares of Pantheco for $55,000 as a result of antidilution provisions related to Pantheco's stock. After the merger and as of December 31, 2004, our ownership interest in Santaris was less than 10%.

Antisense Commercialization

        In 1997, we entered into an agreement with Novartis Ophthalmics AG, formerly CIBA Vision Corporation, granting them exclusive worldwide distribution rights for Vitravene, an antisense compound that we discovered and developed. The terms of the agreement provided for us to receive $20.0 million in pre-commercial fees and milestones. As of December 31, 2001, we had received the full $20.0 million of these pre-commercial fees and milestones. In August 1998, the FDA approved Vitravene to treat CMV retinitis in AIDS patients. Novartis Opthalmics AG launched Vitravene in November 1998. Due to the low incidence of CMV retinitis among patients with AIDS, Novartis AG currently offers Vitravene on a limited basis.

Ibis Collaborations

        To develop the TIGER technology and applications, our Ibis division has received contracts from a number of government agencies, including DARPA, the NIAID, part of the NIH, the CDC and the FBI. Each of these agencies represents a significant source of funding for our TIGER program. To date, we have earned $40.1 million in revenue under our government contracts and grants. Also, we have approval to invoice our government partners an additional $8.6 million under our existing contracts and grants. We may receive continued approval to invoice our government partners under these contracts based upon a variety of factors, including the accomplishment of program objectives and the exercise of additional contract options by the contracting agencies. In addition, these agencies may terminate these contracts and grants at their convenience at any time, even if we have fully performed our obligations. Consequently, we may never receive the full amount of the potential value of these awards. Our Ibis division has received contracts and grants from numerous government agencies valued at up to $63.2 million.

20


        In 2004, we received three new government contracts valued at up to $10.0 million for the continued development of our TIGER system. A key highlight of these new contracts was funding from the NIAID to develop a TIGER application aimed at ensuring vaccine safety. Currently, there are few tests available that can specifically address safety issues unique to cell substrates used in vaccine manufacturing, such as the identification of unknown or novel microbes that have the potential to contaminate vaccine cell lines and substrates. Successful development of an application to simultaneously identify a broad array of infectious agents in vaccine cell substrates would create a new commercial prospect for our TIGER system.

        We receive funding from DARPA through a subcontract with SAIC, on a multi-year project for the ongoing development of TIGER. This project combines our expertise in microbial genome sequence analysis and advanced mass spectrometry technology with SAIC's advanced signal processing capabilities. In March 2004, we entered into a two-year contract with SAIC that provides for up to $19.5 million in funding by DARPA. During 2004 and 2003, revenue from SAIC comprised 18% and 16%, respectively, of our total revenue.

        In September 2003, we received a three-year grant for up to $6.0 million from the CDC to develop and apply our TIGER technology to the surveillance of human infectious disease in the United States. Using the grant from the CDC, we expect to develop and provide TIGER technology for CDC projects focused on emerging human infectious disease.

Intellectual Property Licensing Agreements

In-Licensing Arrangements

        In May 2001, we entered into an agreement with Hybridon under which we acquired an exclusive license to all of Hybridon's antisense chemistry and delivery patents and technology. Hybridon retained the right to practice its licensed antisense patent technologies and to sublicense it to collaborators under certain circumstances. In addition, Hybridon received a non-exclusive license to our suite of RNase H patents. In exchange for the license to Hybridon's antisense patents, we paid $15.0 million in cash and agreed to pay Hybridon $19.5 million in our common stock before May 2003. In return for access to our patents, Hybridon agreed to pay us $6.0 million in Hybridon common stock before May 2004. In September 2001 and October 2001, we issued to Hybridon 357,143 shares of our common stock valued at $5.0 million and 500,000 shares of our common stock valued at $10.0 million, respectively. In May 2002, Hybridon issued to us 1,005,499 shares of its common stock valued at $1.3 million and paid us $700,000 in cash. In August 2002, Hybridon and we cancelled the remaining reciprocal financial obligations related to this agreement. The cancellation of the obligations resulted in a decrease to our carrying value for the license in the amount of $500,000.

21

        In March 2001, we amended a non-exclusive Patent License Agreement, which we entered into with Molecular Biosystems, Inc. in September 1992. The amendment provided us with a fully paid-up license to certain patents and patent applications in exchange for a one-time payment to Molecular Biosystems of $1.0 million. Molecular Biosystems has since been acquired by Alliance Pharmaceuticals, Inc.

        In March 1999, we further solidified our intellectual property leadership position in antisense technology by licensing certain antisense patents from IDT, a leading supplier of antisense inhibitors for research. The patents we licensed from IDT are useful in functional genomics and in making certain antisense drugs. In December 2001, we expanded this license agreement to allow us to exclusively sublicense this intellectual property for functional genomics purposes. Under the license, we have paid IDT $4.2 million through December 31, 2004 and expect to pay IDT an aggregate of $700,000 in 2005 for the license.

        In addition, in December 2001 we established a long-term research-scale antisense inhibitor supply agreement with IDT. In this supply agreement IDT agreed to manufacture research-scale antisense inhibitors and research reagents to our specifications. We paid IDT $5.0 million toward our future purchase of antisense inhibitors. During the fourth quarter of 2004, we recorded a non-cash charge of $4.2 million to write off the unused portion as part of our restructuring activities.

Out-Licensing Arrangements; Royalty Factoring Agreements

        In October 2000, we licensed some of our novel chemistry patents to Roche, a business unit of Roche Diagnostics, for use in the production of Roche's diagnostic products. The royalty-bearing license grants Roche non-exclusive worldwide access to some of our proprietary chemistries, in exchange for initial and ongoing payments from Roche to us.

        In December 2001, we licensed to Eyetech, a publicly-held company, certain of our patents necessary for Eyetech to develop, make and commercialize Macugen, a non-antisense compound intended for use in the treatment of ophthalmic diseases. Eyetech paid us a $2.0 million upfront fee and agreed to pay us milestone and royalty payments in exchange for non-exclusive, worldwide rights to the intellectual property licensed from us. In December 2002, Eyetech entered into an agreement with Pfizer to develop and commercialize Macugen.

        During 2004, we earned from Eyetech $4.0 million in milestones associated with the filing of an NDA and FDA approval for Macugen for the treatment of wet age-related macular degeneration. Our license with Eyetech also may generate additional milestone payments aggregating up to $2.8 million based on achieving specified regulatory milestones with respect to the use of Macugen for each additional therapeutic indication.

        In December 2004, we sold a portion of our royalty rights in Macugen to Drug Royalty USA, Inc., or DRC, in exchange for aggregate payments of $24 million over the next three years. Under the terms of the agreement, we and DRC will share the royalty rights on Macugen through 2009. After 2009, we retain all royalties for Macugen under our Eyetech agreement. Under the agreement, through 2009 DRC will receive royalties on the first $500 million of annual sales of Macugen. We and DRC will each

22

receive 50 percent of royalties on annual sales between $500 million and $1 billion. We retain 90 percent of all royalties on annual sales in excess of $1.0 billion and 100 percent of all royalties after 2009. We have retained all milestones payable to Isis by Eyetech under the license agreement.

        As part of the sale, we agreed to pay DRC liquidated damages if any one of a defined set of defaults occurs. The amount of liquidated damages will be calculated such that DRC will receive a ten per cent per annum return, compounded quarterly on the total of all purchase price payments made by DRC to us through the default date minus the total of any royalties received by DRC through the default date. In addition, DRC may withhold any installment of the purchase price if immediately prior to such payment, we fail to meet a minimum liquidity requirement equal to the then outstanding balance on our loan with Silicon Valley Bank; plus the potential amount of liquidated damages, assuming that DRC has paid the impending purchase price installment; plus our cash burn over the most recent three months.

        As collateral for our obligations under the sale agreement, we granted DRC a first priority security interest in the patents licensed by us to Eyetech under the license agreement and in the license agreement itself.

        In May 2004, we entered into a patent license agreement with Dharmacon, a wholly owned subsidiary of Fisher Scientific International, Inc. In order to sell chemically modified RNA for research purposes, Dharmacon licensed from us certain chemistry and method-of-use patents in return for an upfront licensing fee and royalties on reagent sales. Through this agreement, we are able to provide access to our technology to a wide array of academic labs, research institutes and companies practicing this technology while participating financially in Dharmacon's success.

Manufacturing

        In the past, except for small quantities, it was generally expensive and difficult to produce chemically modified oligonucleotides, like the antisense drugs we use in our research and development programs. As a result, we have dedicated significant resources to develop ways to improve manufacturing capacity. Since we can use variants of the same nucleotide building blocks and the same type of equipment to produce our oligonucleotide compounds, we found that the same techniques we used to efficiently manufacture one oligonucleotide drug could help improve the manufacturing processes for many other oligonucleotide drugs. By developing several proprietary chemical processes to scale up our manufacturing capabilities, we have greatly reduced the cost of producing oligonucleotide compounds. For example, we have significantly reduced the cost of raw materials through improved yield efficiency, while at the same time increasing our capacity to make the compounds. Through both our internal research and development programs and collaborations with outside vendors we may achieve even greater efficiency and further cost reductions. For example, in November 2004, we and Nitto Denko Corporation announced that we have jointly developed a new high performance solid support for the manufacture of oligonucleotides. The new solid support has the potential to decrease manufacturing costs because it is less expensive than currently used solid supports and it has the potential to increase yield, thereby further reducing costs.

        As part of our relationship with Lilly, in 2002 we upgraded and expanded our manufacturing facility, including the addition of a new state-of-the-art manufacturing suite. Lilly provided us with $21.2 million in funding to build the new suite. We can use this facility to manufacture drugs for ourselves and our partners.

        We have contractual obligations to manufacture clinical trial materials and/or commercial supply for ATL, Lilly, Novartis and OncoGenex. We believe we have sufficient manufacturing capacity to meet our current and future obligations under existing agreements with our partners for commercial,

23


research and clinical needs as well as meet our current internal research and clinical needs. We believe that we have, or will be able to develop or acquire, sufficient supply capacity to meet our anticipated needs. We also believe that with reasonably anticipated benefits from increases in scale and improvements in chemistry, we will be able to manufacture antisense compounds at commercially competitive prices.

Patents and Proprietary Rights

        Our success will depend, in part, on our ability to obtain patent protection for our products in the United States and other countries. We file applications, as appropriate, for patents covering our products and processes. As of March 3, 2005, we owned or had exclusively licensed more than 1,500 issued patents worldwide. Patents issued to us, applied for by us or exclusively licensed to us cover the following types of inventions, processes and products:

Government Regulation

        Extensive regulation by United States and foreign governmental authorities governs our manufacture and potential sale of therapeutics. In particular, pharmaceutical products are subject to rigorous preclinical and clinical testing and other approval requirements by the FDA in the United States under the Federal Food, Drug and Cosmetic Act and by comparable agencies in most foreign

24


countries. Various federal, state and foreign statutes also govern or influence the manufacture, safety, labeling, storage, record keeping and marketing of such products. State, local, and other authorities also regulate pharmaceutical manufacturing facilities.

        In conjunction with obtaining approval of Vitravene, we successfully passed the manufacturing pre-approval inspection by the FDA and European regulatory authorities. Approval of each new drug will require a rigorous manufacturing pre-approval inspection by regulatory authorities.

        In addition to regulations enforced by the FDA, we are also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state and local regulations.

        We fund our Ibis division primarily through contracts or subcontracts with agencies of the United States Government. As a result, we must comply with various government regulations, including the Federal Acquisition Regulations, or FARs, and agency regulations supplemental to the FARs; the Truth in Negotiations Act, which requires certification and disclosure of all cost and pricing data in connection with certain contract negotiations; and laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the export of certain products and technical data.

Competition

        For many of their applications, our drugs will compete with existing therapies for market share. In addition, there are a number of companies pursuing the development of oligonucleotide-based technology and the development of pharmaceuticals utilizing this technology. These companies include specialized pharmaceutical firms and large pharmaceutical companies acting either independently or together with biopharmaceutical companies.

        Vitravene and our other products under development address numerous markets. The diseases targeted by our drugs for which we may receive regulatory approval will determine our competition. For certain of our products, an important factor in competition may be the timing of market introduction of competitive products. Accordingly, the relative speed with which we can develop products, complete the clinical trials and approval processes and supply commercial quantities of the products to the market is an important competitive factor. We expect to compete among products approved for sale based on a variety of factors, including, among other things, product efficacy, safety, reliability, availability, price and patent position.

        A number of factors have affected the market for Vitravene, our antisense drug for CMV retinitis. Anti-HIV drugs that were introduced prior to Vitravene's approval, have prolonged survival in HIV-infected individuals. This has resulted in a decline in mortality from AIDS, accompanied by a decline in the incidence of many opportunistic infections, including CMV retinitis.

Employees

        As of March 3, 2005 we employed approximately 303 individuals, of whom 141 held advanced degrees. These numbers exclude employees impacted by our January 2005 reduction in force, some of who were still employed by us as transition employees or under our salary continuation program. A significant number of our management and professional employees have had prior experience with pharmaceutical, biotechnology or medical product companies. Collective bargaining agreements do not cover any of our employees, and management considers relations with its employees to be good.

25

Executive Officers of Isis

        The following sets forth certain information regarding our executive officers as of March 3, 2005:

Name
   Age
   Position
Stanley T. Crooke, M.D., Ph.D.   59   Chairman of the Board, President and Chief Executive Officer
B. Lynne Parshall, J.D.   49   Director, Executive Vice President, Chief Financial Officer and Secretary
C. Frank Bennett, Ph.D.   48   Vice President, Antisense Research
Richard K. Brown, Ph.D.   52   Vice President, Business Development
David J. Ecker, Ph.D.   50   Vice President and Scientific Head of Ibis Division
Arthur A. Levin, Ph.D.   51   Vice President, Development
Patricia Lowenstam   58   Vice President, Human Resources and Operations
John McNeil   40   Vice President, Ibis Product Development
Michael J. Treble   58   Vice President and Head of Ibis Division

STANLEY T. CROOKE, M.D., Ph.D.
 Chairman of the Board, President and Chief Executive Officer

        Dr. Crooke was a founder of Isis and has been its Chief Executive Officer and a director since January 1989. He served as our President from January 1989 to May 1994, and was elected Chairman of the Board in February 1991. SmithKline Beckman Corporation, a pharmaceutical company, employed Dr. Crooke from 1980 until January of 1989, where his titles included President of Research and Development of SmithKline and French Laboratories. He serves as a director of Antisense Therapeutics Ltd., a biopharmaceutical company, Axon Instruments, Inc., a developer and manufacturer of novel high-technology devices and software for drug discovery, and EPIX Medical, Inc., a developer of magnetic resonance imaging contrast agents, Northern Arizona University Arts and Sciences Advisory Council, Flagstaff, Arizona, and BIOCOM, San Diego, California. Dr. Crooke is also an adjunct professor of pharmacology at San Diego State University.

B. LYNNE PARSHALL, J.D.
 Director, Executive Vice President, Chief Financial Officer, and Secretary

        Ms. Parshall has served as a director of Isis since September 2000. She has served as our Executive Vice President since December 1995, our Chief Financial Officer since June 1994, and our Secretary since November 1991. From February 1993 to December 1995, she was a Senior Vice President of Isis, and from November 1991 to February 1993, she was a Vice President of Isis. Prior to joining Isis, Ms. Parshall practiced law at Cooley Godward LLP, counsel to Isis, where she was a partner from 1986 to 1991. Ms. Parshall is on the Board of Trustees of the Bishops' School. Ms. Parshall is also a member of American, California and San Diego bar associations.

C. FRANK BENNETT, Ph.D.
 Vice President, Antisense Research

        Dr. Bennett has served as our Vice President, Antisense Research since June 1995. From March 1993 to June 1995, he was Director, Molecular Pharmacology, and from May 1992 to March 1993, he was an Associate Director in our Molecular and Cellular Biology department. Prior to

26


joining Isis in 1989, Dr. Bennett was employed by SmithKline and French Laboratories in various research positions.

RICHARD K. BROWN, Ph.D.
 Vice President, Business Development

        Dr. Brown joined Isis in June 2001 as President of the GeneTrove program and has been our Vice President, Business Development since January 2003. Prior to joining Isis, Dr. Brown was President of Irori, a company that develops, manufactures and markets combinatorial chemistry and medicinal chemistry products to the pharmaceutical industry. He joined Irori in 1996 and served as President from 1998 to June 2001.

DAVID J. ECKER, Ph.D.
 Vice President and Scientific Head, Ibis Division

        Dr. Ecker was a founder of Isis and has served as a Vice President since June 1995. In 2001 he assumed the role of Scientific Head of our Ibis Division. He served as our Vice President, Biology from July 1993 to June 1995, as our Executive Director, Molecular and Cellular Biology from February 1993 to July 1993, and as our Director, Molecular and Cellular Biology from February 1989 to February 1993. From 1984 until February 1989, he was employed by SmithKline and French Laboratories in a variety of research positions.

ARTHUR A. LEVIN, Ph.D.
 Vice President, Development

        Dr. Levin has served as our Vice President, Development since 1995. Prior to joining Isis, Dr. Levin worked at Hoffmann-La Roche Inc. where he was Research Leader in their Investigative Toxicology Department managing the Nuclear Receptor Research Group. During his tenure at Hoffman-LaRoche, Dr. Levin also established and supervised laboratories dedicated to the research of mechanisms of toxicity, biochemical toxicology and toxicokinetics.

PATRICIA LOWENSTAM
 Vice President, Human Resources and Operations

        Ms. Lowenstam has served as our Vice President, Human Resources and Operations since January 1995. She joined Isis in August 1992 as our Director, Human Resources and served in that capacity until January 1995. Prior to joining Isis, she held senior management positions in Human Resources with Quotron Systems, Inc., Citicorp, Zale Corporation, and the May Company.

JOHN MCNEIL
 Vice President, Ibis Product Development

        Mr. McNeil has served as our Vice President, Ibis Product Development since January 2005. Prior to that, he was our Vice President, Informatics since October 1999. Mr. McNeil joined Isis in October 1997 as our Director, Informatics. Prior to joining Isis, Mr. McNeil was President of John McNeil & Co., Inc., and held various positions at SAIC in San Diego from 1989 to 1997, including Manager of the Laboratory Sensors and Automation division.

MICHAEL J. TREBLE
 Vice President and Head, Ibis Division

        Mr. Treble joined Isis in December 2004 as Head of our Ibis Division and a Vice President of the Company. Prior to joining Isis, Mr. Treble was President and Chief Executive Officer from 2000 to 2003 of Nimblegen System, Inc., which develops DNA microarray and chemistry technologies. From 1995 to

27


2000, Mr. Treble was the Executive Vice President, Chief Operating Officer and Director of Third Wave Technologies, Inc. which provides research and molecular diagnostic products to the healthcare industry. Mr. Treble was also the Chairman, Chief Executive Officer and founder of Genetic Models, Inc. from 1991 until it was sold to Charles River Laboratories in July 2001.

RISK FACTORS

        Investing in our securities involves a high degree of risk. In addition to the other information in this report on Form 10-K, you should carefully consider the risks described below before purchasing our securities. If any of the following risks actually occur, our business could be materially harmed, and our financial condition and results of operations could be materially and adversely affected. As a result, the trading price of our securities could decline, and you might lose all or part of your investment.

We have incurred losses, and our business will suffer if we fail to achieve profitability in the future.

        Because drug discovery and development require substantial lead-time and money prior to commercialization, our expenses have exceeded our revenue since we were founded in January 1989. As of December 31, 2004, we had accumulated losses of approximately $698.4 million and a stockholders' deficit of approximately $72.1 million. Most of the losses resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. Most of our revenue has come from collaborative arrangements, with additional revenue from interest income and research grants and the sale or licensing of patents. We currently have only one product, Vitravene, approved for commercial use. This product has limited sales potential. We expect to incur additional operating losses over the next several years, and these losses may increase if we cannot increase or sustain revenue. We may not successfully develop any additional products or services, or achieve or sustain future profitability.

If we or our partners fail to obtain regulatory approval for our products, we will not be able to sell them.

        We and our partners must conduct time-consuming, extensive and costly clinical trials to show the safety and efficacy of each of our drug candidates before a drug candidate can be approved for sale. We must conduct these trials in compliance with United States Food and Drug Administration regulations and with comparable regulations in other countries. If the FDA or another regulatory agency believes that we or our partners have not sufficiently demonstrated the safety or efficacy of our drug candidates, it will not approve them or will require additional studies, which can be time consuming and expensive and which will delay commercialization of a drug candidate. We and our partners may not be able to obtain necessary regulatory approvals on a timely basis, if at all, for any of our drug candidates. Failure to receive these approvals or delays in these approvals could prevent or delay commercial introduction of a product and, as a result, could negatively impact our ability to generate revenue from product sales. In addition, following approval of a drug candidate, we and our partners must comply with comprehensive government regulations regarding how we manufacture, market and distribute products. If we fail to comply with these regulations, regulators could force us to withdraw a drug candidate from the market or impose other penalties or requirements that also could have a negative impact on our financial results.

        We have only introduced one commercial product, Vitravene. We cannot guarantee that any of our other drug candidates will be safe and effective, will be approved for commercialization or that our partners or we can successfully commercialize these drug candidates.

28


If the results of clinical testing indicate that any of our drugs under development are not suitable for commercial use, or if additional testing is required to demonstrate suitability, we may need to abandon one or more of our drug development programs.

        Drug discovery and development has inherent risks, including the risk that molecular targets prove not to be important in a particular disease, the risk that compounds that demonstrate attractive activity in preclinical studies do not demonstrate similar activity in human beings, the risk that a compound is not safe or effective for use in humans, and the risk that successful results in early human clinical trials may not be indicative of results in late-stage clinical trials. Antisense technology in particular is relatively new and unproven. We are applying most of our resources to create safe and effective drugs for human use. Any of the risks described above could prevent us from meeting this goal. In the past, we have invested in clinical studies of drug candidates that have not met the primary clinical end points in their initial Phase III studies.

        In March 2003, we reported the results of a Phase III clinical trial of Affinitak in patients with late stage non-small cell lung cancer and in October 2004, we reported the results of a second similar Phase III clinical trial. In each case, Affinitak failed to demonstrate improved survival sufficient enough to support an NDA filing. In December 2004, we reported the results of our Phase III clinical trials of alicaforsen in patients with active Crohn's disease, in which alicaforsen did not demonstrate statistically significant induction of clinical remissions compared to placebo. Similar results could occur with the trials for our other drugs. If any of our drugs in clinical studies do not show sufficient efficacy in patients with the targeted indication, it could negatively impact our development and commercialization goals for this and other drugs and our stock price could decline.

If the market does not accept our products, we are not likely to generate revenues or become profitable.

        Our success will depend upon the medical community, patients and third-party payors accepting our products as medically useful, cost-effective and safe. We cannot guarantee that, if approved for commercialization, doctors will use our products to treat patients. We currently have one commercially available product, Vitravene, a treatment for cytomegalovirus, or CMV, retinitis in AIDS patients, which addresses a small market. Our partners and we may not successfully commercialize additional products.

        The degree of market acceptance for any of our products depends upon a number of factors, including:

        Based on the profile of our drug candidates, physicians, patients, patient advocates, payors or the medical community in general may not accept and use any products that we may develop.

29


If any of our collaborative partners fail to fund our collaborative programs or develop or sell any of our products under development, or if we cannot obtain additional partners, we may have to delay or stop progress on our product development programs.

        To date, corporate partnering has played a key role in our strategy to fund our development programs and to add key development resources. We plan to continue to rely on additional collaborative arrangements to develop and commercialize our products. However, we may not be able to negotiate additional attractive collaborative arrangements, and, even if negotiated, the collaborative arrangements may not be successful.

        We have entered into collaborative arrangements with third parties to develop many of our product candidates. We enter into these collaborations in order to:

        If any of our partners fails to develop or sell any drug in which we have retained a financial interest, our business may suffer. These collaborations may not continue or result in commercialized drugs. Our collaborators can terminate their relationships with us under certain circumstances, some of which are outside of our control. For example, in November 2004 based on the outcome of both Phase III trials, Eli Lilly discontinued its investment in Affinitak.

        Other drug candidates in our development pipeline are being developed and/or funded by corporate partners, including Antisense Therapeutics Limited, OncoGenex Technologies Inc. and Lilly. We have received significant financial support from United States Government-funded grants and contracts for our Ibis division and the development of our TIGER system. The United States Government can unilaterally terminate these contracts and grants at its convenience at any time, even if we have fully performed our obligations. If any of these pharmaceutical company or government partners stopped funding and/or developing these products, our business could suffer and we may not have the resources available to develop these products on our own.

        Certain of our partners are 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. Competition may negatively impact a partner's focus on and commitment to our drug candidate and, as a result, could delay or otherwise negatively affect the commercialization of a drug candidate.

        In addition, the disappointing results of the two Affinitak trials, our Phase III clinical trials of alicaforsen in patients with active Crohn's disease or any future clinical trial failures could impair our ability to attract new collaborative partners. If we cannot continue to secure additional collaborative partners, our revenues could decrease and the development of our drug candidates could suffer.

We may not successfully develop or derive revenues from our business based on our TIGER system to identify infectious organisms.

        Our TIGER system is subject to the risks inherent in developing tools based on innovative technologies. Our product is at an early stage of development and requires additional research and development prior to marketing. If our potential customers fail to purchase our TIGER system due to competition or other factors, or if we fail to develop applications that lead to market acceptance, we

30


could lose our investment in this technology and our TIGER business could fail to meet our business and financial objectives.

If we fail to obtain timely funding, we may need to curtail or abandon some of our programs.

        All of our product candidates are still undergoing clinical trials or are in the early stages of research and development. All of our products under development will require significant additional research, development, preclinical and/or clinical testing, regulatory approval and a commitment of significant additional resources prior to their commercialization. Based on our current operating plan with reasonable assumptions for new sources of revenue and cash, we believe our resources will be sufficient to meet our anticipated requirements through at least mid 2007. If we do not meet our goals to commercialize our products, or to license our drugs and proprietary technologies, we will need additional funding in the future. Our future capital requirements will depend on many factors, such as the following:

        If we need additional funds, we may need to raise them through public or private financing. Additional financing may not be available at all or on acceptable terms. If we raise additional funds by issuing equity securities, the shares of existing stockholders will be diluted and their price, as well as the price of our other securities, may decline. If adequate funds are not available, we may have to cut back on one or more of our research, drug discovery or development programs. For example, in January 2005 we decided to terminate the development of two lower priority drugs, ISIS 14803 and ISIS 104838. Alternatively, we may obtain funds through arrangements with collaborative partners or others, which could require us to give up rights to certain of our technologies, product candidates or products.

If we cannot manufacture our products or contract with a third party to manufacture our products at costs that allow us to charge competitive prices to buyers, we will not be able to market products profitably.

        If we successfully commercialize any of our drug candidates, we may be required to establish large-scale commercial manufacturing capabilities. In addition, as our drug development pipeline increases and matures, we will have a greater need for clinical trial and commercial manufacturing capacity. We have limited experience manufacturing pharmaceutical products of the chemical class represented by our drug candidates, called oligonucleotides, on a commercial scale for the systemic administration of a drug. There are a small 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. Further, we must continue to improve our manufacturing processes to allow us to reduce our product costs. We may not be able to manufacture at a cost or in quantities necessary to make commercially successful products.

31


        Also, manufacturers, including us, must adhere to the FDA's current Good Manufacturing Practices regulations which the FDA enforces through its facilities inspection program. We and our contract manufacturers may not be able to comply or maintain compliance with Good Manufacturing Practices regulations. Non-compliance could significantly delay our receipt of marketing approval for potential products or result in FDA enforcement action after approval that could limit the commercial success of our potential product.

If we fail to compete effectively, our products will not contribute significant revenues.

        Our competitors are engaged in all areas of drug discovery throughout the world, are numerous, and include, among others, major pharmaceutical companies and specialized biopharmaceutical firms. Other companies are engaged in developing antisense technology or unique methods of identifying infectious organisms. Our competitors may succeed in developing drug candidates or technologies that are more effective than any drug candidates or technologies that we are developing. These competitive developments could make our products obsolete or non-competitive.

        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 marketing and sales capabilities, areas in which we have limited or no experience.

If we cannot protect our patents or our proprietary rights, others may compete more directly against us.

        Our success depends to a significant degree upon our ability to continue to develop and secure intellectual property rights to proprietary products and services. However, we may not receive issued patents on any of our pending patent applications in the United States or in other countries. In addition, the scope of any of our issued patents may not be sufficiently broad to provide us with a competitive advantage. Furthermore, our issued patents or patents licensed to us may be successfully challenged, invalidated or circumvented so that our patent rights would not create an effective competitive barrier or revenue source.

Intellectual property litigation could be expensive and prevent us from pursuing our programs.

        It is possible that in the future we may have to defend our intellectual property rights. In the event of an intellectual property dispute, we may be forced to litigate to defend our rights or assert them against others. Disputes could involve arbitration, litigation or proceedings declared by the United States Patent and Trademark Office or the International Trade Commission or foreign patent authorities. Intellectual property litigation can be extremely expensive, and this expense, as well as the consequences should we not prevail, could seriously harm our business.

        If a third party claims that our products or technology infringe their patents or other intellectual property rights, we may have to discontinue an important product or product line, alter our products and processes, pay license fees or cease certain activities. We may not be able to obtain a license to such intellectual property on favorable terms, if at all. There are many patents issued or applied for in the biotechnology industry, and we may not be aware of patents or applications held by others that relate to our business. This is especially true since patent applications in the United States are filed confidentially. Moreover, the validity and breadth of biotechnology patents involve complex legal and factual questions for which important legal issues remain unresolved.

32

If we do not progress in our programs as anticipated, the price of our securities could decrease.

        For planning purposes, we estimate the timing of a variety of clinical, regulatory and other milestones, like when a certain product candidate will enter the clinic, when we will complete a clinical trial, or when we will file an application for marketing approval. We base our estimates on present facts and a variety of assumptions. Many of the underlying assumptions are outside of our control. If we do not achieve milestones when we expect to, investors could be disappointed and the price of our securities would likely decrease.

The loss of key personnel, or the inability to attract and retain highly skilled personnel, could make it more difficult to run our business and reduce our likelihood of success.

        We are dependent on the principal members of our management and scientific staff. We do not have employment agreements with any of our executive officers. The loss of our management and key scientific employees might slow the achievement of important research and development goals. It is also critical to our success that we recruit and retain qualified scientific personnel to perform research and development work. We may not be able to attract and retain skilled and experienced scientific personnel on acceptable terms because of intense competition for experienced scientists among many pharmaceutical and health care companies, universities and non-profit research institutions. Failure to succeed in clinical trials may make it more challenging to recruit and retain qualified scientific personnel.

We depend on third parties in the conduct of our clinical trials for our product candidates and any failure of those parties to fulfill their obligations could adversely affect our development and commercialization plans.

        We depend on independent clinical investigators, contract research organizations and other third party service providers in the conduct of our clinical trials for our product candidates and expect to continue to do so in the future. We rely heavily on these parties for successful execution of our clinical trials, but do not control many aspects of their activities. For example, the investigators are not our employees. However, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Third parties may not complete activities on schedule, or may not conduct our clinical trials in accordance with regulatory requirements or our stated protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our product candidates.

If the price of our securities continues to be highly volatile, this could make it harder for you to liquidate your investment and could increase your risk of suffering a loss.

        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. These fluctuations in our common stock price may significantly affect the trading price of our securities. During the 12 months preceding December 31, 2004, the market price of our common stock has ranged from $4.22 to $9.90 per share. On March 11, 2005 the closing price of our common stock on the Nasdaq National Market was $3.95 per share. Many factors can affect the market price of our securities, including, for example, fluctuations in our operating results, announcements of collaborations, clinical trial results, 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.

33


Provisions in our certificate of incorporation, other agreements and Delaware law may prevent stockholders from receiving a premium for their shares.

        Our certificate of incorporation provides for classified terms for the members of our board of directors. Our certificate also includes a provision that requires at least 66% of our voting stockholders to approve a merger or certain other business transactions with, or proposed by, any holder of 15% or more of our voting stock, except in cases where certain directors approve the transaction or certain minimum price criteria and other procedural requirements are met.

        Our certificate of incorporation also requires that any action required or permitted to be taken by our stockholders must be taken at a duly called annual or special meeting of stockholders and may not be taken by written consent. In addition, only our board of directors, chairman of the board or chief executive officer can call special meetings of our stockholders. We also have implemented a stockholders' rights plan, also called a poison pill, which could make it uneconomical for a third party to acquire our company on a hostile basis. These provisions, as well as Delaware law and other of our agreements, may discourage certain types of transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices, and may limit the ability of our stockholders to approve transactions that they think may be in their best interests. In addition, our board of directors has the authority to fix the rights and preferences of and issue shares of preferred stock, which may have the effect of delaying or preventing a change in control of our company without action by our stockholders.

If registration rights that we have previously granted are exercised, then the price of our securities may be negatively affected.

        We have granted registration rights in connection with the issuance of our securities to Eli Lilly and Company. These registration rights cover approximately 2.5 million shares of our common stock which may become outstanding upon the conversion of outstanding convertible securities. If these securities are converted and the holder exercises its registration rights, it will bring additional shares of our common stock into the market, which may have an adverse effect on the price of our securities.

Our business is subject to changing regulations for corporate governance and public disclosure that has increased both our costs and the risk of noncompliance.

        Each year we are required to evaluate our internal controls systems in order to allow management to report on, and our Registered Independent Public Accounting Firm to attest to, our internal controls as required by Section 404 of the Sarbanes-Oxley Act. As a result, we will incur additional expenses and will suffer a diversion of management's time. In addition, if we cannot continue to comply with the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission, the Public Company Accounting Oversight Board, or PCAOB, or the NASDAQ Stock Exchange. Any such action could adversely affect our financial results and the market price of our common stock.


Item 2. Properties.

        As of March 3, 2005, we occupied approximately 218,000 square feet of laboratory and office space, including 6,888 square feet of manufacturing area built to meet Good Manufacturing Practices and 18,800 square feet, which our Ibis division occupies. We are primarily located in six buildings in Carlsbad, California. We own three of these buildings and, as of December 31, 2004, these buildings secured approximately $6.1 million of our debt. We lease three of the buildings under lease agreements, of which two leases will expire in 2007 and one will expire in 2010. In February 2003, we completed an expansion of our manufacturing facility to upgrade our existing manufacturing suite and add a second state of the art manufacturing suite.

34



Item 3. Legal Proceedings.

        Ajinomoto Co., Inc. v. Isis Pharmaceuticals, Inc.    On or about January 27, 2005, Ajinomoto Co., Inc., or Ajinomoto filed a Demand for Arbitration against us with the American Arbitration Association in San Diego, California. The Demand relates to a February 17, 1994 license agreement between Ajinomoto and us, which purports to license certain intellectual property, including United States Patent No. 5,013,830, or the 830 patent, in exchange for initial payments, royalties and certain milestone payments relating to the development of products covered by the license. Ajinomoto alleges that several products developed by us are covered by the "830 patent, and thus by the license. Ajinomoto seeks a determination of products covered by the license, along with an accounting of any sums due as a result. Ajinomoto also seeks a determination that the license is still in force. We have not yet filed an answer, and a hearing has not yet been set. We believe that Ajinomoto's claims are without merit, and we intend to vigorously defend our position in arbitration.


Item 4. Submission of Matters to a Vote of Security Holders.

        Not applicable.


PART II

Item 5. Market For Registrant's Common Equity and Related Stockholder Matters and Issuer Repurchases of Equity Securities

        Our common stock is traded publicly through the Nasdaq National Market under the symbol "ISIS." The following table presents quarterly information on the price range of our common stock. This information indicates the high and low sale prices reported by the Nasdaq National Market. These prices do not include retail markups, markdowns or commissions.

 
   HIGH
   LOW
2004            
  First Quarter   $ 9.59   $ 6.66
  Second Quarter   $ 9.90   $ 5.54
  Third Quarter   $ 6.67   $ 4.22
  Fourth Quarter   $ 6.63   $ 4.25

2003
 
 
 
 
 
 
  First Quarter   $ 7.55   $ 2.50
  Second Quarter   $ 6.85   $ 3.50
  Third Quarter   $ 8.05   $ 4.55
  Fourth Quarter   $ 7.07   $ 5.20

        As of March 3, 2005, there were approximately 1,067 stockholders of record of our common stock. We have never paid dividends and do not anticipate paying any dividends in the foreseeable future.

Recent Sales of Unregistered Securities

        Not applicable.

Purchases of Equity Securities by Us and Affiliated Persons

        Not applicable.

35


Available Information

        We make available, free of charge, on our web site, www.isispharm.com, our reports on 10-K, 10-Q, 8-K and amendments thereto, as soon as reasonably practical after we file such materials with the Securities and Exchange Commission. Any information that is included on or linked to our Internet site is not a part of this report or any registration statement that incorporates this report by reference.


Item 6. Selected Consolidated Financial Data (in thousands, except per share amounts):

 
   Years Ended December 31,
  
 
   2004
   2003
   2002
   2001
   2000
  
Consolidated Statement of Operations Data:                                
Revenue (includes amounts for R&D, licensing and royalties)   $ 42,624   $ 49,990   $ 80,179   $ 53,273   $ 37,255  
Research and development expenses   $ 118,474   $ 116,963   $ 124,074   $ 83,741   $ 57,014  
Net loss applicable to common stock(1)   $ (142,864 ) $ (95,690 ) $ (73,302 ) $ (75,131 ) $ (54,699 )
Basic and diluted net loss per share   $ (2.52 ) $ (1.73 ) $ (1.35 ) $ (1.70 ) $ (1.48 )
Shares used in computing basic and diluted net loss per share     56,642     55,463     54,480     44,109     37,023  
 
   Years Ended December 31,
  
 
   2004
   2003
   2002
   2001
   2000
  
Consolidated Balance Sheet:                                
Cash, cash equivalents and short-term investments   $ 103,883   $ 215,504   $ 289,353   $ 312,018   $ 127,262  
Working capital   $ 82,193   $ 194,004   $ 244,230   $ 280,569   $ 118,568  
Total assets   $ 208,425   $ 334,942   $ 438,683   $ 417,061   $ 183,256  
Long-term debt and capital lease obligations, less current portion   $ 236,611   $ 213,397   $ 192,893   $ 125,710   $ 102,254  
Accumulated deficit   $ (698,447 ) $ (555,583 ) $ (459,893 ) $ (386,591 ) $ (311,460 )
Stockholders equity (deficit)   $ (72,133 ) $ 67,178   $ 155,477   $ 223,099   $ 66,366  
(1)
Our net loss applicable to common stock includes charges related to restructuring activities of $32.4 million, $1.8 million, $1.4 million, and $1.6 million in 2004, 2003, 2002, and 2000, respectively. During 2001, we did not incur any charges related to restructuring activities.

36


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        Since our inception in 1989, we have pioneered the science of antisense for the development of a new class of drugs. We have designed antisense drugs to treat a wide variety of diseases. Due to their gene selectivity, antisense drugs have the potential to be highly effective and less toxic than traditional drugs. We have made significant progress in understanding the capabilities of antisense drugs in treating disease. We have developed new chemistries and novel formulations to enhance the potency and utility of antisense drugs, and we have successfully turned our expertise into one marketed product and 10 antisense drugs, which we and our partners are advancing in pre-clinical and clinical development, the majority of which are in Phase I or Phase II human clinical trials. Our products in development address numerous therapeutic areas with major market potential, including inflammatory, metabolic, cardiovascular diseases, and cancer. We and our partners are studying these drugs in intravenous, subcutaneous, topical cream, enema, aerosol, and oral formulations, and we are advancing antisense drugs using second-generation chemistry. We achieved marketing clearance for the world's first antisense drug, Vitravene (fomivirsen) in 1998.

        To date, we have earned $40.1 million in revenue from several government agencies, including up to $37.5 million for the development of TIGER and $2.6 million to discover small molecule drugs, under contracts valued at up to $66.3 million. These agencies include the Defense Advanced Research Projects Agency, or DARPA, the National Institute of Allergy and Infectious Diseases, or NIAID, part of the National Institutes of Health, or NIH, the Centers for Disease Control, or CDC, the Federal Bureau of Investigation, or FBI, and the United States Army Medical Research Institute of Infectious Diseases, or USAMRIID. During 2004 and 2003, revenue generated from agencies of the U.S. Government accounted for 28% and 20%, respectively, of our total revenue.

        We have a broad patent portfolio covering our technologies. We own or exclusively license more than 1,500 issued patents, which we believe represents the largest antisense and RNA-oriented patent estate in the pharmaceutical industry. Our intellectual property is a strategic asset that we are exploiting to generate near-term revenue and that we expect will also provide us with revenue in the future. To date, we have generated nearly $70.0 million from our intellectual property licensing program that helps support our internal drug discovery and clinical development programs.

        We are pursuing early-stage antisense research programs, including RNA interference, or RNAi, micro-RNA, and alternative splicing through research collaborations and partnerships, like our strategic alliances with Alnylam and Ercole.

        We focus our business on two principal segments:

37

        In December 2004, we made a strategic decision to reorganize and refocus our resources to advance our most promising second-generation drugs and to continue the development of antisense technology. We announced this decision in January 2005. In the fourth quarter of 2004 we recorded a $32.4 million charge for restructuring activities resulting from this decision, which consisted of non-cash write-downs of tangible and intangible assets that are non-essential to our current focus, including excess or idle equipment, inventories, patent costs, and certain prepaid expenses.

        We expect to incur additional charges relating to our restructuring activities during the first quarter of 2005, including those associated with employee termination costs, termination of certain contractual obligations, the consolidation of our United States facilities, and the closure of our research and development laboratory in Singapore.

Critical Accounting Policies

        We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable, based upon the information available to us. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact our quarterly or annual results of operations and financial condition. We discuss the development, selection and disclosure of such estimates with our audit committee each quarter. There are specific risks associated with these critical accounting policies that we describe in the following paragraphs. For all of these policies, we caution that future events rarely develop exactly as expected, and that best estimates routinely require adjustment. The significant accounting policies, which we believe are the most critical to aid in fully understanding and evaluating our reported financial results, require the following:

38


Descriptions of these critical accounting policies follow.

        We follow the provisions as set forth by current accounting rules, which primarily include Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial Statements," SAB 104, "Revenue Recognition," and Financial Accounting Standards Board Emerging Issue Task Force No. 00-21, or EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."

        We generally recognize revenue when we have satisfied all contractual obligations and we are reasonably assured of collecting the resulting receivable. We are often entitled to bill our customers and receive payment from our customers in advance of recognizing the revenue under current accounting rules. In those instances where we have billed our customers or received payment from our customers in advance of recognizing revenue, we include the amounts in deferred revenue on the balance sheet.

        We often enter into collaborations where we receive non-refundable up-front payments for prior or future expenditures. We recognize revenue related to up-front payments ratably over the period of the contractual arrangements as we satisfy our performance obligations. Occasionally, we are required to estimate the period of a contractual arrangement or our performance obligations when the agreements we enter into do not clearly define such information. Should different estimates prevail, revenue recognized could be materially different. We have made estimates of our continuing obligations on several agreements, including our collaborations with ATL, Chiron, Lilly and OncoGenex.

        As part of our Lilly alliance, in 2001 Lilly provided us a $100.0 million interest free loan to fund the research collaboration. We take quarterly drawdowns against this loan and discount the amounts to their net present value by imputing interest on the amount at 20%, which represented market conditions in place at the time we entered into the loan. As of December 31, 2004, we had drawn down $95.0 million on this loan. We are accreting the loan up to its face value over its term by recording interest expense. The difference between the cash received and the present value of the loan represents value Lilly gave to us to help fund the research collaboration. We account for this difference as deferred revenue and recognize it as revenue over the period of contractual performance.

        Our collaborations often include contractual milestones. When we achieve these milestones, we are entitled to payment, as defined by the underlying agreements. We generally recognize revenue related to milestones upon completion of the milestone's performance requirement, as long as we are reasonably assured of collecting the resulting receivable and we are not obligated to future performance related to the achievement of the milestone. We recognized revenue during 2004 related to milestones achieved under our agreements with Eyetech, Lilly and Singapore EDB.

39


        We generally recognize revenue related to the sale of our inventory as we ship or deliver drugs to our partners. To date, in two instances, we completed the manufacturing of drugs, but our partners asked us to deliver the drug on a later date. Under these circumstances, we ensured that our obligation was complete under the terms of the manufacturing agreement in place and title had transferred to the customer before we recognized the related revenue.

        We often enter into agreements to license our proprietary patent rights on an exclusive or non-exclusive basis in exchange for license and/or royalty fees. We generally recognize as revenue immediately those licensing and royalty fees for which we have no future performance obligations and are reasonably assured of collecting the resulting receivable.

        We often enter into revenue arrangements that contain multiple deliverables. In these cases, we recognize revenue from each element of the arrangement as long as we are able to determine a separate value for each element, we have completed our obligation to deliver or perform on that element and we are reasonably assured of collecting the resulting receivable.

        We account for our investments in marketable securities in accordance with current accounting rules as set forth by SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." We carry these investments at fair market value based upon market prices quoted on the last day of the fiscal quarter. We record unrealized gains and losses as a separate component of stockholders' equity, and include gross realized gains and losses in investment income.

        In addition to our investments in marketable securities, we also have equity investments in privately-and publicly-held biotechnology companies. We hold ownership interests of less than 20% in each of the respective entities. In determining if and when a decrease in market value below our cost in our equity positions is other-than-temporary, we examine historical trends in the stock price, the financial condition of the issuer, near term prospects of the issuer, and our current need for cash. When we determine that a decline in value is other-than-temporary, we recognize an impairment loss in the period in which the other-than-temporary decline occurs. During the first quarter of 2003, we recorded a non-cash loss on investments of $2.4 million related to the impairment of our equity investments in ATL and Hybridon. We recorded these charges based on declines in market value of the equity investments, as compared to their initial valuations. During the third quarter of 2004, we recorded a non-cash loss on investments of $5.1 million principally related to the impairment of our equity investment in Alnylam. The loss on investment reflected a decrease in the market value of Alnylam's stock in 2004, which we believe was primarily a result of financial market conditions related to biotechnology companies

        We assess the value of our long-lived assets, which include property and equipment, patent costs, and licenses acquired from third parties, under the provisions set forth by SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or SFAS 144. We evaluate our long-lived assets for impairment on at least a quarterly basis. During this process, we review our property and equipment listings, pending domestic and international patent applications, domestic and international issued patents, and licenses we have acquired from other parties. To determine if any impairment is present, we consider the following, among other factors:

40

        In December 2004, we made a strategic decision to reorganize and refocus our resources to advance our most promising second-generation drugs and to continue the development of antisense technology. As a result, during the fourth quarter of 2004 we recorded charges of approximately $11.5 million related to the write-down of tangible and intangible assets, including equipment and patent costs that are non-essential to our current focus.

        We include in inventory material costs and related manufacturing costs for drugs that we manufacture for our partners under contractual terms and that we use primarily in our clinical development activities and drug products. We expense these costs when we deliver our drugs to partners, or as we use these drugs in our own clinical trials. We reflect our inventory on the balance sheet at the lower of cost or market value under the first-in, first-out method. We review inventory periodically and reduce our carrying value of items considered to be slow moving or obsolete to their estimated net realizable value. We consider several factors in estimating the net realizable value, including shelf lives of raw materials, alternative uses for our drugs and clinical trial materials and historical write-offs. In the second quarter of 2003, we reduced the carrying value of our raw materials related to Affinitak to zero. During the fourth quarter of 2004, we recorded a charge of approximately $21.0 million for the write-down of inventory to its estimated net realizable value related to our strategic decision to reorganize and refocus our resources to advance our most promising second-generation drugs and to continue development of antisense technology.

        We maintain accrued liabilities related to unbilled costs for ongoing preclinical studies and clinical trials. These costs primarily relate to third-party clinical management costs, laboratory costs and analysis, toxicology studies and investigator grants, among other costs. We have multiple drugs in concurrent preclinical studies and clinical trials at several clinical sites throughout the world. We expect that at any given time we will have liabilities outstanding for our preclinical and clinical development costs related to products or services for which our service providers have not yet billed us. In order to ensure that we have adequately provided for ongoing preclinical and clinical development costs during the period in which we incur such costs, we maintain an accrual to cover these costs. We update our estimate for this accrual on at least a quarterly basis. The assessment of these costs is a subjective process that requires judgment. The ultimate settlement of these costs may differ materially from the amounts we have accrued in our consolidated financial statements.

        As disclosed in Note 5 of Notes to the Consolidated Financial Statements, we record a valuation allowance to offset our net deferred tax assets because we are uncertain that we will realize these net tax assets. When and if circumstances warrant, we will assess the likelihood that our net deferred tax assets will more likely than not be recovered from future taxable income and record an appropriate reversal to the valuation allowance. Because we have had net operating losses since inception, we have

41

established a 100% valuation allowance for our net deferred tax asset. As of December 31, 2004, our deferred tax assets and related valuation allowance totaled approximately $283.7 million.

        We provide segment financial information and results for our Drug Discovery and Development segment and our Ibis division based on the segregation of revenues and expenses used for management's assessment of operating performance and operating decisions. Expenses shared by the segments require the use of judgments and estimates in determining the allocation of expenses to the two segments. Different assumptions or allocation methods could result in materially different results by segment.

        We provide proforma net income and loss per share amounts in accordance with the disclosure only provision of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," or SFAS No. 123. The stock-based compensation expense used in these proforma amounts is based on the fair value of the option at the grant date, which uses the fair value pricing method described in SFAS No. 123. This method requires us to use several assumptions to estimate the fair value, including the expected life of the option and the expected stock price volatility over the term of the expected life. Should any of these assumptions change or differ from the actual life or actual stock price volatility, our pro forma results could differ substantially.

        Effective in 2005, pursuant to the provisions of SFAS No. 123(R), "Share-Based Payment," we will be required to recognize as a charge to our statement of operations the fair value of all share-based payments to employees, including stock option grants. We can not currently predict the impact that this new accounting treatment will have on our statement of operations because it will depend on levels of share-based payments we grant in the future. However, accounting for share-based payments to employees using the fair value method will have no impact on our overall financial position.

Results of Operations

Years Ended December 31, 2004 and December 31, 2003

Revenue

        Total revenue for the year ended December 31, 2004 was $42.6 million, compared to $50.0 million for the same period in 2003. The decrease in revenue of $7.4 million primarily reflects the completion of our Phase III clinical trial of Affinitak in 2003, with an associated reduction in revenue for 2004, offset in part by increased revenue from our alliances and licenses, particularly with government agencies relating to our TIGER program, Alnylam, Eyetech, and Lilly. Our revenue may fluctuate from period to period based on the nature and timing of license fees and milestones earned, and other deliverables under agreements with our partners. For example, our fourth quarter 2004 revenue increased over the same period in 2003 primarily as a result of the $3.0 million milestone from Eyetech associated with Macugen's marketing clearance from the FDA. Our ability to maintain revenue at current levels will depend on our ability to obtain new revenue sources and expand existing revenue sources in 2005.

42


        The following table sets forth information on our revenue by segment (in thousands):

 
   Year Ended
December 31,
2004
   Year Ended
December 31,
2003
Drug Discovery and Development:            
  Research and development revenue   $ 21,684   $ 40,605
  Licensing and royalty revenue     10,007     523
   
 
    $ 31,691   $ 41,128
   
 
Ibis Division:            
  Research and development revenue   $ 10,933   $ 8,862
  Licensing and royalty revenue     —     —
   
 
    $ 10,933   $ 8,862
   
 
Total revenue:            
  Research and development revenue   $ 32,617   $ 49,467
  Licensing and royalty revenue     10,007     523
   
 
    $ 42,624   $ 49,990
   
 

        Our revenue under the category research and development revenue under collaborative agreements for the year ended December 31, 2004, was $32.6 million, compared to $49.5 million for 2003. The decrease of $16.9 million reflects the completion of our Phase III clinical trial of Affinitak in 2003 and an associated reduction in revenue for 2004, offset in part by increased revenue from our TIGER program, our strategic alliance with Alnylam and our research collaboration with Lilly, which included $1.5 million in revenue earned from Lilly in 2004 for the initiation of a Phase I clinical trial of LY2181308 and $750,000 in revenue earned from Lilly in 2004 for the license of LY2275796, a second generation antisense anti-cancer drug candidate for clinical development.

        Our Ibis division generates revenue from grants and contracts from United States government agencies, including DARPA, CDC, FBI, and NIAID, a part of the NIH. During 2004, we received grants and contracts for up to $29.5 million in funding from various governmental agencies to further the development of our TIGER program. Our Ibis division generated revenue of $2.0 million and $10.9 million for the quarter and year ended December 31, 2004, respectively, including revenue related to equipment purchased on behalf of the respective government agencies. Also, we have approval to invoice our government partners an additional $8.6 million under our existing contracts and grants. We may receive continued approval to invoice our government partners under these contracts based upon a variety of factors, including the accomplishment of program objectives and the exercise of additional contract options by the contracting agencies. In addition, these agencies may terminate these contracts and grants at their convenience at any time, even if we have fully performed our obligations. Consequently, we may never receive the full amount of the potential value of these awards. Our Ibis division has received contracts and grants from numerous government agencies valued at up to $63.2 million. We receive our DARPA funding through a subcontract with San Diego-based SAIC. This collaboration accounted for approximately 18% and 16% of our total revenue in 2004 and 2003, respectively.

        Our revenue from licensing activities and royalties was $10.0 million for the year ended December 31, 2004, compared with $523,000 in 2003. The increase of $9.5 million primarily reflects $5.5 million we earned under our strategic alliance with Alnylam, and $4.0 million in milestones earned

43

from Eyetech associated with Eyetech's filing of an NDA with the FDA for Macugen and the marketing clearance of Macugen by the FDA. In January 2005, we sold a portion of our royalty rights in Macugen to DRC, in exchange for aggregate payments of $24.0 million over the next three years.

Operating Expenses

        Total operating expenses were $160.5 million and $129.0 million for the years ended December 31, 2004 and 2003, respectively. The increase of $31.5 million was primarily due to non-cash charges of $32.4 million for restructuring activities related to our strategic decision to reorganize and refocus our resources to advance our most promising second-generation drugs and to develop our antisense technology. The 2003 operating expenses included a charge for restructuring activities of $1.8 million. The increase in 2004 was partially offset by the completion of our development activities for Affinitak, and changes to non-cash compensation due to variable accounting for stock options and in research and development and general and administrative expenses as we describe in the following paragraphs.

        Total operating expenses for the year ended December 31, 2004 included a non-cash compensation benefit of approximately $6,000 due to variable accounting for stock options, compared to a non-cash compensation expense of $913,000 for 2003. Variable accounting for stock options can result in significant increases and decreases in non-cash compensation related to stock options as a result of the variability in the company's stock price.

        In order to analyze and compare our results of operations to other similar companies, we believe that it is important to exclude compensation related to stock options from operating expenses because it is based on the variability of our stock price rather than operations, and to exclude restructuring activities because the costs are directly related to isolated events.

        For the year ended December 31, 2004, our reported total research and development expenses were $118.5 million, compared to $117.0 million in 2003. Our research and development expenses consist of costs for antisense drug discovery, antisense drug development, our Ibis division and related R&D Support costs. The increase of $1.5 million in 2004, compared to 2003, was primarily due to increased spending to support our TIGER program, start-up costs related to our Singapore laboratory, increased spending to support the completion of a large Phase II clinical program for alicaforsen enema in patients with ulcerative colitis, and increased spending to support our highest priority second-generation drug candidates, ISIS 113715 and ISIS 301012. These increases were partially offset by the absence of expenses in 2004 related to Affinitak, which we stopped investing in during 2003, and the completion of our development activities for alicaforsen for Crohn's disease, ISIS 14803 and ISIS 104838. We expect total research and development spending will decrease in 2005 as a result of the completion of our development activities for alicaforsen for Crohn's disease, our decision to discontinue development of ISIS 14803 and ISIS 104838, our strategic reorganization and associated reduction in workforce, consolidation of facilities, and closure of our Singapore location.

        For the year ended December 31, 2004, our research and development expenses by segment were as follows (in thousands):

 
   Year Ended
December 31,
2004
Drug Discovery and Development   $ 105,168
Ibis Division     13,306
   
  Total research and development expenses   $ 118,474
   

44

        Identifying what a gene does, called gene functionalization, and then determining whether a specific gene is a good target for drug discovery, called target validation, are the first steps in our drug discovery process. We use antisense technology to generate information about the function of genes and to determine the value of genes as drug discovery targets. We use this information to direct our own antisense drug discovery research, and that of our antisense drug discovery partners. We have created inhibitors to thousands of genes, validated many targets and dissected numerous disease pathways. Additionally, we have created libraries of antisense inhibitors to identify novel gene function. Our advances in these areas have enhanced our own antisense drug discovery efforts and our patent portfolio through custom target validation collaborations and intellectual property licenses while generating near-term revenue for us. Antisense drug discovery is also the function within Isis that is responsible for advancing antisense core technology. Through the efforts of our scientists in the antisense drug discovery group, we have produced second-generation antisense drugs that have been shown to have increased potency, increased stability, an improved side effect profile and the potential for oral administration. With more than a decade focused on learning the capabilities of antisense technology and how these compounds behave in the body, our scientists have learned the organs and tissues in humans to which antisense therapy is effectively directed. Using this knowledge, we have strategically focused our research programs on those sites in the body that accept antisense readily, like the liver, kidney, fat tissue and bone marrow. These targets expand the current therapeutic scope of antisense research into new disease categories, including obesity and cardiovascular disease. The work of our scientists has given us the opportunity to enter into important drug discovery relationships with industry leaders like Lilly and Amgen.

        As we have advanced our antisense technology to a point where we and our partners now have extensive clinical and preclinical development pipelines that are full of product opportunities, we have far more drug assets than we can afford to develop on our own. As a result, we have significantly reduced our antisense drug discovery activities so that we can focus on our drugs in development, and we would expect to see our expenses for antisense drug discovery decrease in 2005. We anticipate that our existing relationships and collaborations, as well as prospective new partners, will continue to help fund our research programs, as well as contribute to the advancement of the science by funding core antisense technology research.

        Antisense drug discovery costs included in research and development expenses for the year ended December 31, 2004 totaled $38.4 million compared to $37.3 million for 2003. The increase of $1.1 million in 2004 over 2003 was principally the result of start-up costs related to our Singapore laboratory.

        Our development activities reflect our efforts to advance our drugs through the various stages of preclinical, or animal studies, and human clinical trials. The development plans for our drugs are subject to numerous uncertainties like obtaining regulatory approval, market availability and successfully obtaining funding, which affects our research and development expenditures and capital resources. Prior to starting clinical trials, we test our potential products in numerous preclinical studies to identify disease indications for which they may be candidates. Once we have established that a preclinical drug candidate has met certain clinical requirements and we have filed an Investigational New Drug Application, or IND, with the FDA, we may initiate clinical trials in the United States for that drug. It may take several years to complete clinical trials, with the length varying substantially according to the complexity, novelty and intended use of the product candidate. The following timelines represent our estimate of typical completion times for clinical trials we generally conduct: Phase I—one year, Phase II—one to two years, and Phase III—two to four years. However, a number of factors including the required minimum number of patients, the ability to enroll suitable patients, the dosing

45

regimens and the requisite follow-up periods, the clinical endpoints and inputs from our corporate partner, tend to vary from product to product and can impact the timing and magnitude of what we spend on each product in a particular period. These factors are outside our control and often result in dramatic fluctuations in the costs associated with each product on a period to period basis. As a result, we are unable to estimate the costs to complete our projects.

        We may conduct multiple clinical trials on a drug candidate, including multiple clinical trials for the various indications we may be studying. Furthermore, as we obtain results from trials we may elect to discontinue clinical trials for certain drug candidates in certain indications in order to focus our resources on more promising drug candidates or indications. For example, we recently decided not to initiate additional studies of ISIS 14803 and ISIS 104838. Generally, Phase III clinical trials are the longest, largest and most expensive component of the drug development process. Further, products in Phase III trials represent the most near term possibility of commercial success. In addition, because Phase III trials typically involve a well-defined protocol and require dedicated resources, it is easier for us to separately capture costs associated with these projects. Our Phase I and Phase II programs are really research programs that fuel our Phase III pipeline. When our products are in Phase I or Phase II clinical trials, they are in a dynamic state where we continually adjust the development strategy for each product. Although we may characterize a product as "in Phase I" or "in Phase II," it does not mean that we are conducting a single, well-defined study with dedicated resources. Instead, we allocate our internal resources on a shared basis across numerous products based on each product's particular needs at that time. This means we are constantly shifting resources among products. Therefore, what we spend on each product during a particular period is usually a function of what is required to keep the products progressing in clinical development, not what products we think are most important. For example, the number of people required to start a new study is large, the number of people required to keep a study going is modest and the number of people required to finish a study is large. However, such fluctuations are not indicative of a shift in our emphasis from one product to another and cannot be used to accurately predict future costs for each product. And, because we always have numerous products in preclinical and early stage clinical research, the fluctuations in expenses from product-to-product, in large part, offset one another. If we partner a drug, it may affect the size of a trial, its timing, its total cost and the timing of the related cost. For example, during 2003, Lilly reimbursed us for our costs to develop Affinitak. Our partners are developing, with our support, five of our 10 drug candidates, which substantially reduces our development costs.

        The following table sets forth research and development expenses for our major antisense drug development projects for the years ended (in thousands):

 
   December 31,
 
   2004
   2003
Affinitak   $ —   $ 5,072
Alicaforsen for Crohn's disease     5,523     6,519
Other antisense development products     30,202     29,323
Development overhead costs     6,704     4,234
   
 
  Total antisense drug development   $ 42,429   $ 45,148
   
 

        Antisense drug development costs included in research and development expenses totaled $42.4 million and $45.1 million for the years ended December 31, 2004 and 2003, respectively. The decrease of $2.7 million was primarily due to the completion in 2003 of our Phase III trial of Affinitak and the completion in 2004 of our development activities for alicaforsen for Crohn's disease, offset in part by increased clinical development expenses for other products in development. We expect our drug development expenses to fluctuate based on the timing and size of our clinical trials, and anticipate

46


that such expenses will decrease in 2005 as compared to 2004 as the result of our strategic reorganization and associated reduction in workforce.

        There were no expenditures related to Affinitak in 2004. Expenditures related to Affinitak in 2003 were $5.1 million. The decrease was primarily due to a reduction in costs associated with the development of Affinitak following the disappointing results from the first Phase III trial of Affinitak and the decision not to file an NDA in 2003. In October 2004, we and Lilly reported the results of a second Phase III clinical trial of Affinitak in combination with Gemzar and cisplatin in patients with NSCLC. Findings from this trial, which was sponsored by Lilly, were similar to the results of the first Isis-sponsored Phase III study of Affinitak for NSCLC. As a result of these data, we will not invest further in the development of Affinitak.

        Development expenditures related to alicaforsen for Crohn's disease totaled $5.5 million and $6.5 million for the years ended December 31, 2004 and 2003, respectively. The decrease of $1.0 million was primarily due to the completion of our Phase III trials in December 2004.

        We incurred expenses related to our other products in development of $30.2 million and $29.3 million for the years ended December 31, 2004 and 2003, respectively. The increase of $900,000 was primarily the result of an increase in development activity related to Phase I and Phase II trials for our ulcerative colitis, diabetes, cancer and cardiovascular drugs, as well as expenses related to other products in the early stages of development.

        Research and development expenditures in our Ibis division include costs for scientists, pass-through equipment costs, laboratory supplies, chemicals and highly specialized information technology consultants to advance the research and development of our TIGER program.

        Our Ibis division's research and development expenditures for the year ended December 31, 2004 totaled $10.0 million, compared to $9.3 million for 2003. The increase of $700,000 was the result of our performance under our contracts with DARPA, the FBI, the NIAID, a part of the NIH, and the CDC, in support of our ongoing development of our TIGER program. We include in our Ibis division expenses all contract-related costs we incur on behalf of government agencies in connection with the performance of our obligations under the respective contracts, including costs for equipment to which the government retains title. We began reporting our Ibis division as a separate operating segment in 2004. Accordingly, we allocate a portion of R&D Support and general and administrative costs to this segment. In 2004, we allocated approximately $4.2 million of costs related to R&D Support and General and Administrative to Ibis. Prior to 2004, we did not allocate R&D Support or general and administrative costs to our separate operating segments. We believe that it would be impractical to obtain comparative information for prior periods, and that such comparisons between any period in 2004 and the comparable periods in prior years for R&D support costs and general and administrative expenses by segment would be meaningless; therefore, we do not discuss these comparisons below. We expect our costs for our Ibis division to increase as we continue to expand this business.

        In our research and development expenses, we include support costs such as rent, repair and maintenance for buildings and equipment, utilities, depreciation of laboratory equipment and facilities, amortization of our intellectual property, information technology costs, procurement costs and waste disposal costs. We call these costs R&D Support costs. Generally these costs represent approximately 17% to 23% of our total annual research and development expense.

47

        The following table sets forth information on R&D Support costs for the years ended (in thousands):

 
   December 31,
 
   2004
   2003
Personnel costs   $ 10,450   $ 9,844
Occupancy     6,409     6,734
Depreciation and amortization     6,946     5,710
Insurance     1,179     1,132
Other     2,694     1,760
   
 
  Total R&D support costs   $ 27,678   $ 25,180
   
 

        R&D Support costs for the year ended December 31, 2004 totaled $27.7 million, compared to $25.2 million for 2003. The increase of $2.5 million was primarily due to increased personnel, facilities and equipment depreciation and patent amortization costs, which are all costs that support the entire research and development organization. We allocated $3.3 million of our 2004 R&D Support costs to our Ibis division as a result of reporting Ibis as a separate segment beginning in 2004. Prior to 2004, we did not allocate R&D Support costs to our separate operating segments. We believe that it would be impractical to obtain comparative information for prior periods, and that such comparisons between any period in 2004 and the comparable periods in prior years for R&D Support costs by segment would be meaningless; therefore, we do not discuss these comparisons. We expect R&D Support costs to decrease in 2005 as a result of our strategic reorganization and reduction in workforce announced in January 2005.

        For the year ended December 31, 2004, our R&D Support costs by segment were as follows (in thousands):

 
   Year Ended
December 31,
2004
Drug Discovery and Development   $ 24,374
Ibis Division     3,304
   
  Total R&D support costs   $ 27,678
   

        General and administrative expenses include corporate costs required to support our company, our employees and our stockholders. These costs include personnel and outside costs in the areas of business development, legal, human resources, investor relations and finance. Additionally, we include in general and administrative expenses such costs as rent, repair and maintenance of buildings and equipment, depreciation, utilities, information technology and procurement costs that we need to support the corporate functions listed above.

        General and administrative expenses for the year ended December 31, 2004 totaled $9.6 million compared to $9.3 million for 2003. The increase of $300,000 as compared to 2003 was primarily related to our Sarbanes-Oxley Act Section 404 implementation activities. We allocated $924,000 million of our 2004 general and administrative costs to our Ibis division as a result of reporting Ibis as a separate segment beginning in 2004. Prior to 2004, we did not allocate general and administrative costs to our separate operating segments. We believe that it would be impractical to obtain comparative information for prior periods, and that such comparisons between any period in 2004 and the comparable periods in prior years for general and administrative costs by segment would be meaningless; therefore, we do not

48


discuss these comparisons. We expect general and administrative expenses to decrease in 2005 as a result of our strategic reorganization and reduction in workforce announced in January 2005.

        For the year ended December 31, 2004, our general and administrative expenses by segment were as follows (in thousands):

 
   Year Ended
December 31,
2004
Drug Discovery and Development   $ 8,658
Ibis Division     924
   
  Total general and administrative expenses   $ 9,582
   

        Compensation benefit for the year ended December 31, 2004 was $6,000, compared to compensation expense of $913,000 for the year ended December 31, 2003. The changes in compensation expense (benefit) were primarily related to the effects of using variable accounting to account for stock options associated with the employee stock option exchange program initiated in April 2003. We accounted for options affected by the employee stock option exchange program as variable stock options in accordance with Accounting Principles Board, or APB, Opinion No. 25 and Financial Accounting Standards Board Interpretation, or FIN, No. 44. APB 25 and FIN 44 require us to account for these exchanged options as variable stock options. Variable stock options can result in significant increases and decreases in compensation expense, as a result of the variability of our stock price. We also recorded nominal expense in 2003 related to stock options granted in prior years to consultants, and we accounted for these options in accordance with Emerging Issues Task Force Abstract No. 96-18, or EITF 96-18.

        During the fourth quarter of 2004, we recorded a $32.4 million charge for restructuring activities resulting from our strategic decision to reorganize and refocus our resources to advance our most promising second-generation drugs and to continue our development of antisense technology. The 2004 charge for restructuring activities consists of non-cash write-downs of tangible and intangible assets that are non-essential to our current focus, including excess or idle equipment, inventories, patent costs, and certain prepaid expenses. The 2003 operating expenses included a $1.8 million charge for restructuring activities. We expect to incur additional charges relating to restructuring activities during the first quarter of 2005, including those associated with employee termination costs, the consolidation of our facilities, termination of certain contractual obligations, and the closure of our research and development laboratory in Singapore. We expect that our cost containment measures will significantly decrease our cash use in 2005 as compared to 2004.

Investment Income

        Investment income for the years ended December 31, 2004 and 2003 was $3.0 million and $5.1 million, respectively. The $2.1 million decrease in investment income in 2004 compared to 2003 was primarily due to our lower average cash balance in 2004 compared to 2003.

Interest Expense

        Interest expense for the year ended December 31, 2004 was $22.6 million, compared to $18.7 million for the same period in 2003. The $3.9 million increase in interest expense in 2004 compared to 2003 was primarily due to the effect of a higher debt balance during 2004 than during

49


2003 related to an increase in the loan to fund our Lilly research collaboration, offset by a decrease in the carrying value of our term loan from Silicon Valley Bank. A decrease in the average interest rate on our debt offset, in part, the effect of a higher average debt balance. The decrease in the average debt interest rate was primarily due to the retirement, in the fourth quarter of 2003, of higher interest rate debt with proceeds from our $32.0 million term loan from Silicon Valley Bank secured in December 2003. The debt we retired in the fourth quarter of 2003 consisted of convertible partner debt that carried interest rates ranging from 8.5% to 12%. The Silicon Valley Bank term loan bears interest at the prime rate, which was 5.25% at December 31, 2004. The loan is convertible to a fixed interest rate at our option at any time at the then-applicable prime rate plus 1.25%. In 2004, $13.0 million of the $22.6 million in interest expense did not require cash payment. This represents the accrual of interest expense related to the $100.0 million loan Lilly has made available to us to fund the research collaboration.

        We plan to draw the remaining $5.0 million from Lilly in March 2005, which will bring our total due to Lilly under our loan agreement to $100.0 million. Our loan to Lilly is due in August 2005. We can repay our Lilly research collaboration loan at our option in either cash or our common stock at a fixed conversion price of $40 per share. If we draw down the remaining amount available under the loan, we could repay the loan for 2.5 million shares of our common stock. We expect to substantially reduce our debt obligations in 2005 as a result of the repayment of our Lilly loan, combined with principal payments we are obligated to make on our loan with Silicon Valley Bank. Accordingly, we expect our interest expense to decrease in 2005.

Net Loss Applicable to Common Stock

        For the years ended December 31, 2004 and 2003, we reported a net loss of $142.5 million and $95.0 million, respectively. Our net loss applicable to common stock was $142.9 million for the year ended December 31, 2004, and $95.7 million for 2003, including $361,000 and $694,000, respectively, of accreted dividends on preferred stock. The decrease in accreted dividends in 2004 from 2003 was the result of our agreement in June 2004 with a subsidiary of Elan to acquire Elan's minority interest in Orasense and HepaSense. In connection with this agreement, Elan transferred its shares of Isis Series B preferred stock to a third party. Immediately upon transfer, these shares converted into 1,055,502 shares of Isis common stock, eliminating the 5% in-kind dividend. The increase in the net loss applicable to common stock in 2004 from 2003 was primarily the result of a decrease in revenue, increase in operating expenses, decrease in interest income, and increase in interest expense as described previously. In addition, during 2004 and 2003, we incurred charges of $32.4 million and $1.8 million, respectively, related to restructuring activities. In 2003, we incurred a non-cash loss on investments of $2.4 million related to the impairment of our investments in ATL and Hybridon. In 2004, we incurred a non-cash loss on investments of $5.1 million principally related to the impairment of our equity investment in Alnylam, reflecting the decrease in the market value of Alnylam's stock in 2004, which we believe was primarily a result of financial market conditions related to biotechnology companies. Our Alnylam alliance, established in 2004 to develop RNAi drugs, provides us with an opportunity to realize substantial value from our pioneering work in antisense mechanisms and oligonucleotide chemistry and is an example of Isis' strategy to participate in all areas of RNA-based drug discovery.

Net Operating Loss Carryforward

        At December 31, 2004, we had federal, foreign and California tax net operating loss carryforwards of approximately $517.1 million, $530,000 and $140.4 million, respectively. We also had federal and California research credit carryforwards of approximately $23.5 million and $10.0 million, respectively. The net operating losses, research credit carryforwards, and capitalized research expense make up the majority of our deferred tax assets. Subject to the limitation described below, we will use the net

50


operating loss and research credits, and realize the benefit of these deferred tax assets if we become profitable. We fully reserved all of our deferred tax assets, as their realization is uncertain. Our federal tax loss carryforwards and our research credit carryforwards will begin expiring in 2007 and 2005, respectively, unless previously utilized. Our foreign tax losses may be carried forward indefinitely and used to offset future taxable profits, provided there is no substantial change in ownership. Our California tax loss carryforwards will begin expiring in 2005, unless utilized. Our net operating loss and tax credit carryforwards will be subject to an annual limitation regarding utilization against taxable income in future periods due to "change of ownership" provisions of the Tax Reform Act of 1986. We believe that such limitation will not have a material adverse impact on the benefits that may arise from our net operating loss and tax credit carryforwards. However, there may be additional limitations arising from any future changes in ownership that may have a material adverse impact on us.

Years Ended December 31, 2003 and December 31, 2002

Revenue

        Total revenue for the year ended December 31, 2003 was $50.0 million, compared to $80.2 million for 2002. The decrease of $30.2 million was primarily due to the reduction in revenue associated with the clinical development of Affinitak and the conclusion of Elan's participation in the Orasense and HepaSense collaborations in late 2002. We did not have revenue associated with Orasense and HepaSense in 2003 as a result of the conclusion of Elan's participation in the joint ventures. New revenue sources not present in 2002 offset, in part, the decreases in total revenue in 2003.

        Under the category research and development revenue under collaborative agreements, for the year ended December 31, 2003, we earned $49.5 million, compared to $67.8 million for 2002. The decrease of $18.3 million was primarily due to the reduction in revenue associated with the clinical development of Affinitak. In March 2003, we announced the results of our Phase III clinical trial of Affinitak to treat patients with non-small cell lung cancer, which were not sufficient to support a single- study new drug application. New sources of revenue not present in 2002 slightly offset the previously described decreases in revenue. New sources of revenue from our Antisense Drug Discovery collaborations included:

        New revenue sources from our Ibis division resulted from the expansion of work to continue the advancement of our TIGER technology, which included work for government agencies such as the CDC, FBI, and DARPA. Our work for DARPA continued to be a collaborative effort with SAIC and accounted for approximately 16% and 6% of our revenue in 2003 and 2002, respectively.

        Research and development revenue from affiliates consisted of revenue associated with our two collaborations with Elan, Orasense and HepaSense. Elan concluded its participation in the HepaSense and Orasense collaborations in late 2002, in conjunction with its restructuring efforts. As a result, we reacquired product rights to ISIS 14803 for hepatitis C and the oral formulation of ISIS 104838 from the HepaSense and Orasense joint ventures, respectively. We did not earn revenue from these affiliates in 2003. During 2002, we recognized $8.9 million and $3.0 million as revenue from Orasense and HepaSense, respectively.

51

        Our revenue from licensing activities and royalties was $523,000 for the year ended December 31, 2003, compared with $417,000 in 2002.

Operating Expenses

        Total operating expenses were $129.0 million and $131.0 million for the years ended December 31, 2003 and 2002, respectively. The decrease of $2.0 million was primarily due to our implementation of an expense reduction plan during the second quarter of 2003, the completion of our development activities for Affinitak, and the termination of our GeneTrove database product offering in November 2002. Increased clinical development expenses for many of our other products and increased costs in the Ibis division partially offset the decrease in operating expenses. Increased expenses of $3.9 million and $430,000 for compensation related to stock options and restructuring activities, respectively, further offset the decrease in operating expenses. In order to analyze and compare our results of operations to other similar companies, we believe that it is important to exclude compensation expense or benefit related to stock options from operating expenses because it is based on the variability of our stock price rather than operations. We also believe that it is important to exclude restructuring activities because these costs are directly related to isolated events.

        For the year ended December 31, 2003, we reported total research and development expenditures of $117.0 million, compared to $124.1 million reported in 2002. Our research and development expenses consisted of costs for antisense drug discovery, antisense drug development, our Ibis division and related R&D Support costs. The antisense drug discovery costs included costs associated with our GeneTrove program. The decrease of $7.1 million in 2003 over 2002 was primarily due to the termination of our GeneTrove product offering and reorganization of the GeneTrove program in November 2002, our implementation of an expense reduction plan in April 2003, and a decrease in our total Affinitak related expenses. Increased clinical development expenses for many of our other products and our increased efforts in the Ibis division offset, in part, our decreases in research and development expenditures.

        Antisense drug discovery costs included in research and development expenses for the year ended December 31, 2003 totaled $36.8 million compared to $38.9 million for 2002. The decrease of $2.1 million in 2003 over 2002 was principally a result of our planned expense reductions started in the second quarter of 2003 and the termination of our GeneTrove database product offering and reorganization of the GeneTrove program in November 2002. These decreases were offset in part by the increase in expenses to support our research collaborations with Lilly, Amgen, and ITRI.

Antisense Drug Development

        During 2003, we had 11 drug candidates in various stages of development, including two drugs in Phase III clinical trials. In March 2003, we announced the results of our Phase III clinical trial of Affinitak for the treatment of non-small cell lung cancer. The results were not sufficient to support a single study new drug application. Affinitak related expenses decreased in 2003 compared to 2002. We had two Phase III trials of alicaforsen, or ISIS 2302, in people with active Crohn's disease. We conducted one of these studies in North America and the other in Europe. These studies were evaluating the safety and efficacy of alicaforsen. We also had Phase II programs ongoing for five additional products, Phase I programs ongoing for three additional products, and preclinical studies

52


ongoing for one project. In addition, during 2002 and 2003, Lilly reimbursed us for our costs related to our development of Affinitak.

        Development costs included in research and development expenses totaled $45.1 million and $55.3 million for the years ended December 31, 2003 and 2002, respectively. The decrease of $10.2 million was primarily due to planned expense reductions started in the second quarter of 2003 driven by a reduction in clinical development activity related to Affinitak. These decreases were offset, in part, by increased clinical development expenses for our other products, mainly alicaforsen for Crohn's disease and several products in Phase II and earlier stages of development.

        The planned expense reductions began in April 2003 when we initiated a restructuring effort in response to the disappointing results from our Phase III trial of Affinitak. As a result, we had a small reduction in our workforce, which primarily represented positions that were in support of the commercialization and manufacture of Affinitak. We completed our development activities for Affinitak in 2003. As a result, expenditures related to Affinitak decreased from $22.6 million in 2002 to $5.1 million in 2003. The majority of the 2003 expenditures occurred in the first quarter of 2003.

        Our second drug in Phase III clinical trials, alicaforsen for Crohn's disease, had development expenditures totaling $6.5 million for the year ended December 31, 2003, compared to $4.8 million for the same period of 2002. The increase of $1.7 million was the result of an increase in the number of patients undergoing treatment in our two Phase III trials. These trials were initiated in November 2001 and June 2002.

        Expenditures related to our other products in development totaled $29.3 million for the year ended December 31, 2003, compared to $23.1 million for 2002. The increase of $6.2 million in 2003 over 2002 was mainly the result of increased expenses for Phase II trials of alicaforsen in ulcerative colitis, the Phase I trials for ISIS 113715 for type 2 diabetes and preclinical studies and initiation of a Phase I trial of ISIS 301012 for cardiovascular disease.

        Ibis expenditures for the year ended December 31, 2003 totaled $9.9 million, compared to $8.3 million for 2002. The increase of $1.6 million was primarily related to Ibis' continued performance obligations under its multi-year government contracts with DARPA through our relationship with SAIC, awarded in October 2001, and USAMRIID, awarded in March 2002, and new performance obligations under Ibis' agreement with the CDC, awarded in September 2003, and with various other government agencies. Included as Ibis expenditures were fixtures and equipment accounted for as pass-through costs that Ibis purchased for government agencies under the contractual terms of their agreements. From June 2000 through June 2002, Ibis also received funding from its collaboration with Pfizer, which ended in June 2002 in accordance with the terms of the agreement.

        R&D Support costs for the year ended December 31, 2003 totaled $25.2 million, compared to $21.6 million for 2002. The increase of $3.6 million was primarily due to increases in our research and development efforts related to our efforts to prepare for the manufacture and commercialization of Affinitak in the first quarter of 2003, our increased efforts related to our government contracts and increased depreciation resulting from the completion of laboratory build-outs. Our planned expense reductions initiated in April 2003 offset, in part, the increases in our research and development efforts noted above.

53

        General and administrative expenses for the year ended December 31, 2003 totaled $9.3 million compared to $8.5 million for 2002. This $800,000 increase was primarily a result of an increase in employees and related benefits in the first quarter of 2003. A reduction in the number of employees and a corresponding reduction in expense as a result of the restructuring in April 2003 offset, in part, the increases noted above.

        Compensation expense for the year ended December 31, 2003 was $913,000, compared to compensation benefit of $3.0 million for the year ended December 31, 2002. Compensation expense for 2003 primarily consisted of expense for stock options associated with the employee stock option exchange program we initiated in April 2003. We accounted for options affected by the 2003 option exchange program as variable stock options in accordance with Accounting Principles Board Opinion No. 25, or APB 25, and Financial Accounting Standards Board Interpretation No. 44, or FIN 44. APB 25 and FIN 44 required us to account for these exchange options as variable stock options. Variable stock options can result in significant increases and decreases in compensation expense, as a result of the variability of our stock price. We also recorded nominal expense in 2003 related to stock options granted in prior years to consultants, and we accounted for these options in accordance with Emerging Issues Task Force Abstract No. 96-18, or EITF 96-18. The compensation benefit in 2002 represented the reversal of previously recorded compensation expense for stock options accounted for as variable stock options associated with the option exchange program we offered to non-officer employees in January 2000.

        In April 2003, we initiated a restructuring in response to disappointing results from the first Phase III trial of Affinitak. As a result, we had a small reduction in our workforce, which primarily represented positions that were in support of the commercialization and manufacture of Affinitak. Consequently, we incurred a restructuring charge of $1.8 million during the second quarter of 2003. We completed the utilization of the reserve related to this restructuring in the fourth quarter of 2003.

        In November 2002, we announced the termination of our functional genomics database product offering and the reorganization of our functional genomics program. As a result, we reduced our workforce by approximately 25 people. The restructuring plan included the write-down of certain intellectual property valued at $605,000. As a result of this plan, we incurred a one-time charge of $1.4 million for restructuring activities in the fourth quarter of 2002. We did not recognize any additional restructuring related charges for the year ended December 31, 2003, and completed utilization of the reserve related to this restructuring in the fourth quarter of 2003.

Equity in Loss of Affiliates

        In late 2002, Elan concluded its participation in the Orasense and HepaSense collaborations in conjunction with its restructuring efforts. As a result, we regained all rights to ISIS 104838, the compound that Elan and we were developing within Orasense. We also regained all rights to ISIS 14803, the compound that Elan and we were developing within HepaSense.

        We did not have equity in loss of affiliates for the year ended December 31, 2003. As mentioned previously, we used the equity method of accounting for our investments in Orasense and HepaSense in 2002. As a result, we recognized 80.1% of the total loss reported by Orasense and HepaSense as equity in loss of affiliates during 2002. Our equity in loss of affiliates for the year ended December 31, 2002 consisted of $9.5 million for Orasense and $6.5 million for HepaSense.

54


Investment Income

        Investment income for the years ended December 31, 2003 and 2002 was $5.1 million and $8.5 million, respectively. The $3.4 million decrease in investment income in 2003 compared to 2002 was primarily due to our lower cash, cash equivalents and short-term investments balances in 2003 compared to 2002, and a decline in interest rates as a result of then current market conditions.

Interest Expense

        Interest expense for the year ended December 31, 2003 was $18.7 million compared to $16.6 million for the same period in 2002. The $2.1 million increase in interest expense in 2003 compared to 2002 was primarily due to a higher average debt balance during 2003 than during 2002. The increase in debt compared to 2002 related primarily to additional drawdowns under our debt agreement with Lilly. A decrease in the average interest rate on our debt offset, in part, the effect of a higher average debt balance. The decrease in the average debt interest rate was primarily due to the retirement in May 2002 and July 2002 of higher interest rate debt with proceeds from the issuance, in May 2002, of our 51/2% convertible notes due in 2009 and to the retirement, in the fourth quarter of 2003, of higher interest rate debt with proceeds from our $32.0 million term loan from Silicon Valley Bank secured in December 2003. The debt retired in the fourth quarter of 2003 consisted of convertible partner debt that carried interest rates ranging from 8.5% to 12%.

        In 2003, $7.5 million of the $18.7 million in interest expense did not require cash payment. This represents the accrual of interest expense related to the $100.0 million loan Lilly has made available to us to fund the research collaboration.

Loss on Prepayment of 14% Notes

        For the year ended December 31, 2002, we reported a $2.3 million loss on prepayment of debt, which represented amounts related to unamortized issuance costs, unamortized warrants and prepaid interest, on the prepayment of approximately $74.0 million of our 14% Senior Subordinated Notes. No such prepayment occurred in 2003.

Gain on Prepayment of 12% Notes

        In July 2002, we used $14.7 million in cash to prepay $19.7 million of 12% convertible debt Elan held. As a result, we reported a $5.0 million gain on prepayment of debt for the year ended December 31, 2002. No such prepayment occurred in 2003.

Net Loss Applicable to Common Stock

        For the years ended December 31, 2003 and 2002, we reported a net loss of $95.0 million and $72.2 million, respectively. Our net loss applicable to common stock was $95.7 million for the year ended December 31, 2003, and $73.3 million for 2002, including $694,000 and $1.1 million, respectively, of accreted dividends on preferred stock. The decrease in accreted dividends in 2003 from 2002 was the result of the August 2002 conversion of 120,150 shares of Series A Convertible Preferred Stock into 656,674 shares of our common stock using a conversion price of $12.54 per share. Included in the conversion was approximately $2.1 million in preferred stock dividends accrued in prior years. The increase in the net loss applicable to common stock was primarily a result of the increase in loss from operations, a non-cash loss on investments of $2.4 million related to the other-than-temporary impairment of our investments in ATL and Hybridon and the absence of a net gain on debt extinguishment recorded in 2002.

55


Liquidity and Capital Resources

        We have financed our operations with revenue from research and development under collaborative agreements and from affiliates. Additionally, we have earned licensing and royalty revenue from the sale or licensing of our intellectual property. We have also financed our operations through the sale of our equity securities and the issuance of long-term debt. From our inception through December 31, 2004, we have earned approximately $443.1 million in revenue from contract research and development and the sale and licensing of our intellectual property. Since we were founded, we have raised net proceeds of approximately $593.2 million from the sale of equity securities. We have borrowed approximately $382.1 million under long-term debt arrangements to finance a portion of our operations.

        At December 31, 2004, we had cash, cash equivalents and short-term investments of $103.9 million, working capital of $82.2 million and a stockholders' deficit of $72.1 million. In comparison, we had cash, cash equivalents and short-term investments of $215.5 million, working capital of $194.0 million and stockholders' equity of $67.2 million as of December 31, 2003. Our $100.0 million Lilly research collaboration loan, of which $95.0 million was outstanding as of December 31, 2004, is due in August 2005. We can repay this loan at our option in either cash or our common stock at a fixed conversion price of $40 per share. If we draw down the remaining amount available under the loan, we could repay the loan for 2.5 million shares of our common stock. Accordingly, the outstanding balance on this loan has been classified as a long-term obligation in the current quarter. The decreases in our cash, cash equivalents and short-term investments and working capital were due primarily to cash used to fund our operations, to purchase property, plant, and equipment, pursue patents, and to pay our debt and capital lease obligations. In addition, we made a $10.0 million cash investment in Alnylam as part of our strategic alliance with them.

        As of December 31, 2004, our debt and other obligations totaled $258.9 million, compared to $250.6 million at December 31, 2003. Our debt and other obligations at December 31, 2004 included current and long-term deferred contract revenue of approximately $11.8 million and other contractual obligations. The increase in our debt and other obligations was primarily due to additional draw downs from the $100.0 million interest-free loan from Lilly, which we discounted to their present value by imputing interest on the amounts at 20% and accreting to their face value over their term by recording interest expense. The increase in debt was partially offset by the repayment in January of convertible partner debt from Boehringer Ingleheim International BmbH, or BI, of approximately $6.4 million, the payment of principal and interest related to our standard operating debt, and payments related to our capital leases. We also financed $3.2 million in capital additions under our existing capital lease financing arrangement. We expect that capital lease obligations will increase over time to fund capital equipment acquisitions required to support our business.

        We will continue to use lease financing as long as the terms remain commercially attractive. Based on our current operating plan with reasonable assumptions for new sources of revenue and cash, we believe our resources will be sufficient to meet our anticipated requirements through at least mid 2007. The following table summarizes our contractual obligations as of December 31, 2004. The table

56


provides a breakdown of when obligations become due. A more detailed description of the major components of our debt is provided in the paragraphs following the table:

 
   Payments Due by Period (in millions)
Contractual Obligations
(selected balances described below)
   Total
   Less than
1 year
   1-3 years
   3-5 years
   After
5 years
Lilly Research Collaboration Loan   $ 95.0   $ 95.0   $ —   $ —   $ —
51/2% Convertible Subordinated Notes   $ 125.0   $ —   $ —   $ 125.0   $ —
Standard Operating Debt   $ 32.2   $ 6.4   $ 18.8   $ 7.0   $ —
Capital Lease and Other Obligations   $ 6.7   $ 4.2   $ 2.3   $ 0.2   $ —
Operating Leases   $ 9.6   $ 2.8   $ 4.5   $ 1.9   $ 0.4

        Our contractual obligations consist primarily of our publicly traded convertible debt and Lilly research collaboration loan. We can repay our Lilly research collaboration loan at our option in either cash or our common stock at a fixed conversion price of $40 per share. If we draw down the remaining amount available under the loan, we could repay the loan for 2.5 million shares of our common stock. In addition, we also have standard operating debt, capital leases and other obligations. Our standard operating debt includes a term loan from Silicon Valley Bank, and our mortgage loan payable to another bank.

        In December 2003, we secured a $32.0 million term loan from Silicon Valley Bank to retire our existing debt to BI and Elan. We amortize the term loan over sixty months. The term loan requires equal monthly payments of principal plus accrued interest, and bears interest at the prime interest rate, which was 5.25% at December 31, 2004. The loan is secured by substantially all of our operating assets, excluding intellectual property, real estate, and certain equity investments. The loan is subject to certain liquidity requirements, including a requirement that we maintain a minimum balance in an account at Silicon Valley Bank at all times equal to the outstanding balance of the loan. The loan is convertible to a fixed interest rate at our option at any time at the then-applicable prime rate plus 1.25%. We used the proceeds from the loan to pay off existing debt to Elan of $5.1 million plus accrued interest and to BI of $22.6 million plus accrued interest, of which $6.4 million plus accrued interest we paid in January 2004. The carrying value of the term loan at December 31, 2004 and 2003 was $26.1 million and $32.0 million, respectively.

        In May 2002, we completed a $125.0 million convertible debt offering, which raised proceeds of approximately $120.9 million, net of $4.1 million in issuance costs. The subordinated notes bear interest at 5.5%, which is payable semi-annually, and mature in May 2009. Holders of the subordinated notes can, at any time, convert the notes into shares of common stock at a conversion price of $16.625 per share. At December 31, 2004 and 2003, the principal outstanding on the notes was $125.0 million.

        In August 2001, Lilly made available to us a $100.0 million interest-free loan to fund the joint research collaboration between the two companies. The loan is interest-free and is repayable, at our option, in cash or common stock at $40 per share at the end of four years. The term of the loan provides for quarterly draw downs by us. As of December 31, 2004, we had drawn down $95.0 million of the $100.0 million available. We discounted the $95.0 million loan to its present value by imputing interest on the amount at 20%, which represented market conditions in place at the time we entered into the loan. We are accreting the loan up to its face value over its term by recording interest expense. The difference between the cash received and the present value of the loan represents value given to us by Lilly to help fund the research collaboration. We account for this difference as deferred revenue and recognize it as revenue over the period of contractual performance. As of December 31, 2004, the balance in long-term obligations was $83.2 million and the balance in deferred revenue was $11.8 million.

57


        In addition to contractual obligations, we had outstanding purchase orders as of December 31, 2004 for the purchase of services, capital equipment and materials as part of our normal course of business.

        As part of our strategic decision to reorganize and refocus our resources to advance our most promising second-generation drugs and to continue the development of antisense technology, we decided to close our research and development laboratory in Singapore during the first quarter of 2005 and terminate our agreement with the Singapore Economic Development Board, or EDB. To date, we have received $1.5 million in cash payments under our $8.0 million grant from the EDB and do not anticipate receiving any additional payments under the agreement.

        We plan to continue to enter into more collaborations with partners to provide for additional revenue to us and we may be required to incur additional cash expenditures related to our obligations under any of the new agreements we may enter into. We currently intend to use our cash and short-term equivalents to finance our activities. However, we may also pursue other financing alternatives, like issuing additional shares of our common stock, issuing debt instruments, refinancing our existing debt, or securing lines of credit. Whether we use our existing capital resources or choose to obtain financing will depend on various factors, including the future success of our business, the prevailing interest rate environment and the condition of financial markets generally.

Prospective Information

        We expect to incur additional charges relating to restructuring activities during the first quarter of 2005, including those associated with employee termination costs, the consolidation of our facilities, termination of certain contractual obligations, and the closure of our research and development laboratory in Singapore. We expect that our cost containment measures will significantly decrease our cash use in 2005 as compared to 2004.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

        We are exposed to changes in interest rates primarily from our long-term debt arrangements and, secondarily, investments in certain short-term investments. We invest our excess cash in highly liquid short-term investments that are typically held for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions to manage exposure to interest rate changes. Accordingly, we believe that, while the securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.


Item 8. Financial Statements and Supplementary Data

        We filed our consolidated financial statements and supplementary data required by this item as exhibits hereto, and listed them under Item 15(a)(1) and (2), and incorporated them herein by reference.


Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        There has been no reported disagreements on any matter of accounting principles or procedures or financial statement disclosure in 2004 with our Independent Auditors.

58


Item 9A. Controls and Procedures

        Based on our evaluation as of the end of the period covered by this report on Form 10-K, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) were effective as of December 31, 2004 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

        There have been no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the date of the previously mentioned evaluation.

        The management of Isis Pharmaceuticals, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a—15(f). Isis' internal control over financial reporting is a process designed under the supervision of Isis' Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Isis' financial statements for external purposes in accordance with United States generally accepted accounting principles.

        As of December 31, 2004, management, with the participation of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of Isis' internal control over financial reporting based on the criteria for effective internal control over financial reporting established in "Internal Control—Integrated Framework," issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on the assessment, management determined that Isis maintained effective internal control over financial reporting as of December 31, 2004.

        Our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report, which is included elsewhere herein.

Report of Independent Registered Public Accounting Firm on Internal Controls Over Financial Reporting

To the Shareholders and the
Board of Directors of Isis Pharmaceuticals, Inc.

        We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that Isis Pharmaceuticals, Inc. (the "Company") maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO criteria"). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment about the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

59


        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2004 and 2003 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2004, and our report dated March 3, 2005 expressed an unqualified opinion thereon.

    /s/  ERNST & YOUNG LLP      
San Diego, California    
March 3, 2005    


Item 9B. Other Information

        Not applicable

60


PART III

Item 10. Directors and Executive Officers of the Registrant

        We incorporate by reference the information required by this Item with respect to Directors and Audit Committee financial expert by reference from the information under the caption "Election of Directors" and "Audit Committee", respectively, contained in our definitive Proxy Statement (the "Proxy Statement"), which we will file on or about April 11, 2005 with the Securities and Exchange Commission in connection with the solicitation of proxies for our 2004 Annual Meeting of stockholders to be held on May 26, 2005.

        We incorporate by reference the required information concerning our Code of Ethics from the information under the caption "Code of Ethics" contained in the Proxy Statement. We have filed our Code of Ethics as an exhibit to this Report on Form 10-K.

        Item 1, Part I of this Report contains the required information concerning our Executive Officers. We incorporate by reference the information required by this Item concerning compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, from the information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" contained in the Proxy Statement.


Item 11. Executive Compensation

        We incorporate by reference the information required by this item to the information under the caption "Executive Compensation" and "Compensation Committee Interlock and Insider Participation" contained in the Proxy Statement.


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        We incorporate by reference the information required by this item to the information under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" contained in the Proxy Statement.

Securities Authorized for Issuance Under Equity Compensation Plans

        The following table sets forth information regarding outstanding options and shares reserved for future issuance under our equity compensation plans as of December 31, 2004.

Plan Category
   Number of Shares
to be Issued
Upon Exercise of
Outstanding Options
   Weighted Average
Exercise Price of
Outstanding Options
   Number of Shares
Remaining Available
for Future Issuance
  
Equity compensation plans approved by stockholders   3,863,000 (a) $ 8.92   5,108,000 (c)
Equity compensation plans not approved by stockholders   4,804,000 (b) $ 7.88   792,000  
   
       
 
Total   8,667,000   $ 8.34   5,900,000  
   
       
 
(a)
Consists of two Isis plans: 1989 Stock Option Plan and the 2002 Non-Employee Directors' Stock Option Plan.

(b)
Consists of the 2000 Broad-Based Equity Incentive Plan, more fully described below.

(c)
Of these shares, 72,993 remained available for purchase under the 2000 Employee Stock Purchase Plan as of December 31, 2004. The 2000 Employee Stock Purchase Plan incorporates an evergreen

61

Description of 2000 Broad-Based Equity Incentive Plan

        We adopted the 2000 Broad-Based Equity Incentive Plan, or the 2000 Plan, to provide our employees, officers, directors and consultants an opportunity to benefit from increases in the value of our common stock through the granting of nonstatutory stock options, stock bonuses and rights to purchase restricted stock. At the time we adopted the 2000 Plan, we were not required to seek the approval of our stockholders. The Board has delegated administration of the 2000 Plan to the Compensation Committee of the Board, and the Compensation Committee has delegated administration of the 2000 Plan to the Non-Management Stock Option Committee with respect to certain option grants to employees who are not our executive officers. The Board has the power to construe and interpret the 2000 Plan and, subject to the provisions of the 2000 Plan, to select the persons to whom stock awards are to be made, to designate the number of shares to be covered by each stock award, to establish vesting schedules, to specify the exercise price and the type of consideration to be paid to us upon exercise or purchase.

        As of December 31, 2004, the 2000 Plan had 5,596,000 shares reserved for issuance, options to purchase an aggregate of 4,804,000 shares have been granted and were outstanding under the 2000 Plan, options to purchase an aggregate of 394,000 shares have been exercised under the 2000 Plan, and 792,000 shares remained available for grant thereunder.

        Options granted under the 2000 Plan generally have a term of ten years, have an exercise price equal to the fair market value at the time of grant, can only be exercised with a cash payment and vest at the rate of 25% per year after the first year and then at the rate of 2.08% per month thereafter during the optionee's employment or service as a consultant or term as an affiliate. Options granted pursuant to the April 2003 stock option exchange program as discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in the Notes to Consolidated Financial Statements, expire on December 31, 2008 and vested 33.34% on January 1, 2004 and then at the rate of 2.78% per month during the optionee's employment or service as a consultant or term as an affiliate.

        If any change is made in the common stock subject to the 2000 Plan, or subject to any stock award, without the receipt of consideration by us (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by us), we will adjust the 2000 Plan appropriately in the class(es) and maximum number of securities subject to the 2000 Plan, and we will adjust the outstanding stock awards appropriately in the class(es) and number of securities and price per share of common stock subject to such outstanding stock awards. Our Board will make such adjustments, and its determination will be final, binding and conclusive. We will not treat the conversion of any of our convertible securities as a transaction without receipt of consideration.

        In the event of our dissolution or liquidation, all outstanding stock awards will terminate immediately prior to such event.

        In the event of:

62

then any surviving corporation or acquiring corporation will assume any stock awards outstanding under the 2000 Plan or will substitute similar stock awards (including an award to acquire the same consideration paid to the shareholders in the transaction for those outstanding under the 2000 Plan). In the event any surviving corporation or acquiring corporation refuses to assume such stock awards or to substitute similar stock awards for those outstanding under the 2000 Plan, then with respect to stock awards held by participants whose continuous service has not terminated, we will accelerate the vesting of such stock awards in full (and, if applicable, the time during which such stock awards may be exercised) and the stock awards will terminate if not exercised (if applicable) at or prior to such event. With respect to any other stock awards outstanding under the 2000 Plan, such stock awards will terminate if not exercised (if applicable) prior to such event. In addition, as of December 31, 2004, approximately 4,804,000 stock awards granted under the 2000 plan will be accelerated in full if a transaction described above occurs, even if the surviving corporation assumes such award.


Item 13. Certain Relationships and Related Transactions

        We incorporate by reference the information required by this item to the information under the caption "Certain Relationships and Related Transactions" contained in the Proxy Statement.


Item 14. Principal Accountant Fees and Services

        We incorporate by reference the information required by this item to the information under the caption "Ratification of Selection of Independent Auditors" contained in the Proxy Statement.


PART IV

Item 15. Exhibits and Financial Statement Schedules

        (a)(1) Index to Financial Statements

        We submitted the consolidated financial statements required by this item in a separate section beginning on page F-1 of this Report.

        (a)(2) Index to Financial Statement Schedules

        We omitted these schedules because they are not required, or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.

        (a)(3) Index to Exhibits

        See Index to Exhibits on pages 66 through 70.

        (b) Exhibits

        We listed the exhibits required by this Item under Item 15(a)(3).

        (c) Financial Statement Schedules

        None.

63


SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on the 15th day of March, 2005.

    ISIS PHARMACEUTICALS, INC.

 
 
By:
/s/  STANLEY T. CROOKE      
     
Stanley T. Crooke, M.D., Ph.D.
 Chairman of the Board, President and Chief Executive Officer (Principal executive officer)

64


POWER OF ATTORNEY

        KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stanley T. Crooke and B. Lynne Parshall, or any of them, his or her attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signatures
   Title
   Date

 
 
 
 
 
/s/  STANLEY T. CROOKE      
Stanley T. Crooke, M.D., Ph.D.		   Chairman of the Board, President, and Chief Executive Officer
(Principal executive officer)		   March 15, 2005

/s/  B. LYNNE PARSHALL      
B. Lynne Parshall, J.D.
 
Director, Executive Vice President, Chief Financial Officer and Secretary
(Principal financial and accounting officer)
 
March 15, 2005

/s/  SPENCER R. BERTHELSEN      
Spencer R. Berthelsen, M.D.
 
Director
 
March 15, 2005

/s/  RICHARD D. DIMARCHI      
Richard D. DiMarchi
 
Director
 
March 15, 2005

/s/  CHRISTOPHER F. O. GABRIELI      
Christopher F. O. Gabrieli
 
Director
 
March 15, 2005

/s/  FREDERICK T. MUTO      
Frederick T. Muto
 
Director
 
March 15, 2005

/s/  JOHN C. REED, M.D.      
John C. Reed, M.D., Ph.D.
 
Director
 
March 15, 2005

/s/  MARK B. SKALETSKY      
Mark B. Skaletsky
 
Director
 
March 15, 2005

/s/  JOSEPH H. WENDER      
Joseph H. Wender
 
Director
 
March 15, 2005

65


INDEX TO EXHIBITS

Exhibit Number
   Description of Document
3.1   Amended and Restated Certificate of Incorporation filed June 19, 1991.(1)

3.2
 
Certificate of Amendment to Restated Certificate of Incorporation filed April 9, 2001.(19)

3.3
 
Bylaws.(19)

4.3
 
Certificate of Designation of the Series C Junior Participating Preferred Stock.(17)

4.4
 
Specimen Common Stock Certificate.(1)

4.7
 
Form of Right Certificate.(17)

4.13
 
Subscription, Joint Development and Operating Agreement dated January 14, 2000 among the Registrant, Elan Corporation, plc, Elan International Services, Ltd. and HepaSense, Ltd. (with certain confidential information deleted), together with the related Securities Purchase Agreement, Convertible Promissory Note, Warrant to Purchase Shares of Common Stock, Registration Rights Agreement and License Agreements.(14)

4.14
 
Securities Purchase Agreement, dated August 17, 2001, between the Registrant and Eli Lilly and Company.(20)

4.15
 
Registration Rights and Standstill Agreement, dated August 17, 2001, between the Registrant and Eli Lilly and Company.(20)

4.16
 
Loan Agreement, dated August 17, 2001, between the Registrant and Eli Lilly and Company.(20)

4.17
 
Registration Rights Agreement, dated May 1, 2002, among the Registrant, UBS Warburg LLC, Robertson Stephens, Inc., Needham & Company, Inc., and Roth Capital Partners, LLC.(16)

4.18
 
Indenture, dated as of May 1, 2002, between the Registrant and Wells Fargo Bank Minnesota, National Association, as Trustee, with respect to the $125,000,000 51/2% Convertible Subordinated Notes due 2009.(16)

4.19
 
Form of 51/2% Convertible Subordinated Note due 2009.(16)

10.1
 
Form of Indemnification Agreement entered into between the Registrant and its Directors and Officers with related schedule.(1)

10.2*
 
Registrants 1989 Stock Option Plan, as amended.(2)

10.3*
 
Registrants 1992 Non-Employee Directors Stock Option Plan, as amended.(4)

10.4*
 
Registrants Employee Stock Purchase Plan.(10)

10.5
 
Form of Employee Assignment of Patent Rights.(1)

10.6*
 
Registrants 2000 Broad-Based Equity Incentive Stock Option Plan and related form of option agreement.(10)

10.9
 
Imperial Bank Note Secured by Deed of Trust dated March 24, 1997 in the amount of $6,000,000, together with the related Deed of Trust and Assignment of Rents dated March 24, 1997.(5)

10.10
 
Imperial Bank Note Secured by Deed of Trust dated March 24, 1997 in the amount of $3,706,620, together with the related Deed of Trust and Assignment of Rents dated March 24, 1997.(5)
     

66


10.11
 
Asset Purchase Agreement between the Registrant and Gen-Probe Incorporated dated December 19, 1997 (with certain confidential information deleted).(6)

10.13
 
Patent Rights Purchase Agreement between the Registrant and Gilead Sciences, Inc., dated December 18, 1998 (with certain confidential information deleted).(9)

10.14
 
Rights Agreement dated as of December 8, 2000 between the Registrant and American Stock Transfer & Trust Company.(17)

10.15
 
Master Agreement between the Registrant and Hybridon, Inc., dated May 24, 2001 (with certain confidential information deleted).(19)

10.16
 
Development and License Agreement, dated August 14, 2001 between the Registrant and Eli Lilly and Company (with certain confidential information deleted).(20)

10.17
 
Subcontract Agreement, dated October 25, 2001 between the Registrant and Science Applications International Corporation.(21)

10.18
 
Master Agreement dated October 30, 2001 between the Registrant and Antisense Therapeutics Limited.(24)

10.19
 
Collaboration and License Agreement dated October 30, 2001 between the Registrant and Antisense Therapeutics Limited (with certain confidential information deleted).(24)

10.20
 
Clinical Supply Agreement dated October 30, 2001 between the Registrant and Antisense Therapeutics Limited (with certain confidential information deleted).(24)

10.21
 
Stock Purchase Agreement dated October 30, 2001 between the Registrant and Antisense Therapeutics Limited.(24)

10.22
 
Collaboration and Co-development Agreement, dated November 16, 2001 between the Registrant and OncoGenex Technologies Inc.(22)

10.23
 
Oligonucleotide Manufacturing and Supply Agreement dated December 4, 2001 between the Registrant and Integrated DNA Technologies, Inc. (with certain confidential information deleted).(24)

10.24
 
Amended and Restated IDT-Isis Licensing Agreement dated December 4, 2001 between the Registrant and Integrated DNA Technologies, Inc. (with certain confidential information deleted).(24)

10.26
 
License Agreement dated December 31, 2001 between the Registrant and Eyetech Pharmaceuticals, Inc. (with certain confidential information deleted).(25)

10.29
 
Amended and Restated Collaboration Agreement dated June 17, 2002, between the Registrant and Eli Lilly and Company (with certain confidential information deleted).(27)

10.31
 
Amended and Restated License Agreement among the Registrant, Orasense Ltd. and Elan Corporation Plc. dated October 24, 2002 (with certain confidential information deleted).(30)

10.32
 
Amended and Restated License Agreement among the Registrant, Orasense Ltd. and Elan Corporation Plc. dated October 24, 2002 (with certain confidential information deleted).(30)

10.35
 
Registrant's restated 10b5-1 Trading Plan.(29)

10.36
 
Registrant's 2002 Non-Employee Directors' Stock Option Plan.(31)

10.37
 
Registrant's Form of 2002 Non-Employee Directors' Stock Option Agreement.(31)
     

67


10.38
 
Waiver and Release Agreement dated June 5, 2003 between the Registrant and Eli Lilly and Company (with certain confidential information deleted).(32)

10.39
 
Amendment Number One to Development and License Agreement dated June 5, 2003 between the Registrant and Eli Lilly and Company (with certain confidential information deleted).(32)

10.41
 
Form of Severance Agreement dated April 2003 entered into between the Registrant and its executive officers and certain key employees, together with related schedule.(32)

10.42
 
Grant letter dated September 29, 2003 from the Centers for Disease Control and Prevention (with certain confidential information deleted).(33)

10.43*
 
Amendment No. 1 to Isis Pharmaceuticals Inc. 2000 Employee Stock Purchase Plan.(33)

10.44
 
Loan and Security Agreement dated December 15, 2003 between the Registrant and Silicon Valley Bank, including the related negative pledge agreement.(12)

10.45
 
Grant letter dated October 31, 2003 from the Singapore Economic Development Board to ISIS Pharmaceuticals Singapore Pte Ltd (with certain confidential information deleted)(12)

10.47
 
Subcontract No. 44076514 dated February 26, 2004 between Isis Pharmaceuticals, Inc. and Science Applications International Corporation (with certain confidential information deleted).(13)

10.48
 
Strategic Collaboration and License Agreement dated March 11, 2004 between Isis Pharmaceuticals, Inc. and Alnylam Pharmaceuticals, Inc. (with certain confidential information deleted).(18)

10.49
 
Investor Rights Agreement dated March 11, 2004 between Isis Pharmaceuticals, Inc. and Alnylam Pharmaceuticals, Inc.(23)

10.50
 
Securities Purchase Agreement dated June 4, 2004 between Isis Pharmaceuticals, Inc. and Elan Pharmaceutical Investments II, Ltd.(26)

10.51
 
Development Agreement dated September 30, 2004 between Isis Pharmaceuticals, Inc. and the National Institute of Allergy and Infectious Diseases (with certain confidential information deleted).(34)

10.52
 
Amendment No. 1 to License Agreement between Isis and Eyetech

10.53
 
Sale and Assignment Agreement between Isis and Drug Royalty USA, Inc., dated December 21, 2004 (with certain confidential information deleted)

10.54
 
Security Agreement between Isis and Drug Royalty USA, Inc, dated December 21, 2004 (with certain confidential information deleted)

10.55
 
Form of Option Agreement for Options Granted after March 8, 2005 under the 1989 Stock Option Plan

10.56
 
Form of Option Agreement for Options Granted after March 8, 2005 under the 2000 Broad-Based Equity Incentive Plan

10.57
 
Form of Option Agreement for Options Granted after March 8, 2005 under the 2002 Non-Employee Director's Stock Option Plan

10.58
 
Collaboration and License Agreement between Isis and Sarissa, dated Feb 10, 2005

14.1
 
Registrant's Code of Ethics and Business Conduct(12)
     

68


21.1
 
List of Subsidiaries for the Registrant.

23.1
 
Consent of Independent Registered Public Accounting Firm

24.1
 
Power of Attorney. Reference is made to page 65.

31.1
 
Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2
 
Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1
 
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2
 
Form of Confidentiality Agreement.(11)
(1)
Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-39640) or amendments thereto and incorporated herein by reference.

(2)
Filed as an exhibit to Registrant's Notice of Annual Meeting and Proxy Statement for the 2004 Annual Meeting of Stockholder's, filed with the SEC on April 12, 2004, and incorporated herein by reference.

(3)
Not used.

(4)
Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference.

(5)
Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference.

(6)
Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference.

(7)
Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference.

(8)
Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and incorporated herein by reference.

(9)
Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference.

(10)
Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference.

(11)
Filed as an exhibit to the Registrant's Registration Statement on Form S-3 (No. 333-71911) or amendments thereto and incorporated herein by reference.

(12)
Filed as an exhibit to the Registrant's Annual Report Form 10-K for the year ended Dec 31, 2003 and incorporated herein by reference.

(13)
Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference.

(14)
Filed as an exhibit to the Registrant's Report on Form 8-K dated January 28, 2000, as amended on October 5, 2001, and incorporated herein by reference.

69

(15)
Filed as an exhibit to the Registrant's Report on Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference.

(16)
Filed as an exhibit to the Registrant's Registration Statement on Form S-3 (No. 333-89066), originally filed on May 24, 2002, or amendment thereto and incorporated by reference.

(17)
Filed as an exhibit to Registrant's Report on Form 8-K dated December 8, 2000 and incorporated herein by reference.

(18)
Filed as Exhibit 10.24 to Alnylam Pharmaceutical Inc.'s Registration Statement on Form S-1, File No. 333-113162, and incorporated herein by reference.

(19)
Filed as an exhibit to the Registrant's report on Form 10-Q/A for the quarter ended June 30, 2001 and incorporated herein by reference.

(20)
Filed as an exhibit to the Registrant's Report on Form 8-K dated August 29, 2001 and incorporated herein by reference.

(21)
Filed as an exhibit to the Registrant's Report on Form 8-K filed October 29, 2001 and incorporated herein by reference.

(22)
Filed as an exhibit to the Registrant's Report on Form 8-K filed December 12, 2001 and incorporated herein by reference.

(23)
Filed as Exhibit 10.25 to Alnylam Pharmaceutical Inc.'s Registration Statement on Form S-1, File No. 333-113162, and incorporated herein by reference.

(24)
Filed as an exhibit to the Registrant's Report on Form 8-K filed January 4, 2002 and incorporated herein by reference.

(25)
Filed as an exhibit to the Registrant's Report on Form 8-K dated January 7, 2002 and incorporated herein by reference.

(26)
Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 and incorporated herein by reference.

(27)
Filed as an exhibit to the Registrant's Report on Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference.

(28)
Filed as an exhibit to the Registrant's Report on Form 8-K dated September 16, 2002 and incorporated herein by reference.

(29)
Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.

(30)
Filed as an exhibit to the Registrant's Report on Form 8-K dated November 6, 2002 and incorporated herein by reference.

(31)
Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.

(32)
Filed as an exhibit to the Registrant's Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.

(33)
Filed as an exhibit to the Registrant's Report on Form 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference.

(34)
Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference.

*
Indicates management compensatory plans and arrangements as required to be filed as exhibits to this Report pursuant to Item 14(c).

70


ISIS PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
   Page
Report of Independent Registered Public Accounting Firm   F-2

Consolidated Balance Sheets at December 31, 2004 and 2003
 
F-3

Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002
 
F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2004, 2003 and 2002
 
F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
 
F-6

Notes to Consolidated Financial Statements
 
F-7


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Isis Pharmaceuticals, Inc.

        We have audited the accompanying consolidated balance sheets of Isis Pharmaceuticals, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Isis Pharmaceuticals, Inc. at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Isis Pharmaceuticals, Inc.'s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2005 expressed an unqualified opinion thereon.

San Diego, California
March 3, 2005

F-2


ISIS PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 
   December 31,
  
 
   2004
   2003
  
ASSETS              
Current assets:              
  Cash and cash equivalents   $ 27,250   $ 33,117  
  Short-term investments     76,633     182,387  
  Contracts receivable     10,048     2,657  
  Inventory     2,722     13,995  
  Other current assets     8,956     7,405  
   
 
 
    Total current assets     125,609     239,561  
Property, plant and equipment, net     28,454     34,790  
Licenses, net     26,104     28,363  
Patents, net     19,097     22,374  
Deposits and other assets     3,854     8,479  
Investments in corporate securities     5,307     1,375  
   
 
 
      Total assets   $ 208,425   $ 334,942  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)              
Current liabilities:              
  Accounts payable   $ 6,967   $ 3,720  
  Accrued compensation     3,475     4,149  
  Accrued liabilities     8,238     6,527  
  Current portion of long-term obligations     10,546     16,477  
  Current portion of deferred contract revenue     14,190     14,684  
   
 
 
    Total current liabilities     43,416     45,557  
51/2% convertible subordinated notes     125,000     125,000  
Long-term obligations, less current portion     111,611     88,397  
Long-term deferred contract revenue, less current portion     531     8,810  

Stockholders' equity (deficit):
 
 
 
 
 
 
 
  Series B Convertible Exchangeable 5% Preferred stock, $0.001 par value; 4,605 shares authorized, no shares issued or outstanding at December 31, 2004; 16,620 shares authorized, 12,015 shares issued and outstanding at December 31, 2003     —     12,015  
  Accretion of Series B Preferred stock dividends     —     2,560  
  Common stock, $0.001 par value; 100,000,000 shares authorized 57,447,333 and 55,557,253 shares issued and outstanding at December 31, 2004 and 2003, respectively     57     56  
  Additional paid-in capital     623,706     604,948  
  Deferred compensation     (72 )   (294 )
  Accumulated other comprehensive income     2,623     3,476  
  Accumulated deficit     (698,447 )   (555,583 )
   
 
 
    Total stockholders' equity (deficit)     (72,133 )   67,178  
   
 
 
      Total liabilities and stockholders' equity (deficit)   $ 208,425   $ 334,942  
   
 
 

See accompanying notes.

F-3


ISIS PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

 
   Years Ended December 31,
  
 
   2004
   2003
   2002
  
Revenue:                    
  Research and development revenue under collaborative agreements   $ 32,617   $ 49,467   $ 67,820  
  Research and development revenue from affiliates     —     —     11,942  
  Licensing and royalty revenue     10,007     523     417  
   
 
 
 
    Total revenue     42,624     49,990     80,179  
   
 
 
 
Expenses:                    
  Research and development not including compensation (benefit) related to stock options of ($8), $673, and ($2,018) in 2004, 2003 and 2002, respectively     118,474     116,963     124,074  
  General and administrative not including compensation (benefit) related to stock options of $2, $240, and ($984) in 2004, 2003, and 2002, respectively     9,582     9,289     8,547  
  Compensation (benefit) related to stock options     (6 )   913     (3,002 )
  Restructuring activities     32,427     1,803     1,373  
   
 
 
 
    Total operating expenses     160,477     128,968     130,992  
   
 
 
 
Loss from operations:     (117,853 )   (78,978 )   (50,813 )
  Equity in loss of affiliates     —     —     (16,011 )
  Investment income     2,999     5,100     8,462  
  Interest expense     (22,592 )   (18,680 )   (16,562 )
  Loss on investment     (5,057 )   (2,438 )   —  
  Loss on prepayment of 14% Notes     —     —     (2,294 )
  Gain on prepayment of 12% Notes     —     —     4,976  
   
 
 
 
Net loss     (142,503 )   (94,996 )   (72,242 )
Accretion of dividends on preferred stock     (361 )   (694 )   (1,060 )
   
 
 
 
Net loss applicable to common stock   $ (142,864 ) $ (95,690 ) $ (73,302 )
   
 
 
 
Basic and diluted net loss per share   $ (2.52 ) $ (1.73 ) $ (1.35 )
   
 
 
 
Shares used in computing basic and diluted net loss per share     56,642     55,463     54,480  
   
 
 
 

See accompanying notes.

F-4


ISIS PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

Years Ended December 31, 2004, 2003 and 2002

(in thousands)

 
   Preferred stock
    
    
    
    
    
    
    
  
 
   Common stock
    
    
   Accumulated
other
comprehensive
income/(loss)
    
   Total
stockholders'
equity
(deficit)
  
Description
    
    
   Dividend
Accretion
   Additional
paid in
capital
   Deferred
compensation
   Accumulated
deficit
  
  Shares
   Amount
   Shares
   Amount
  
Balance at December 31, 2001   132   $ 24,030   $ 2,933   53,750   $ 54   $ 582,258   $ (245 ) $ 660   $ (386,591 ) $ 223,099  
Comprehensive Loss                                                          
  Net loss applicable to common stock   —     —     —   —     —     —     —     —     (73,302 )   (73,302 )
  Change in unrealized gains and (losses)   —     —     —   —     —     —     —     (1,268 )   —     (1,268 )
                                                     
 
Comprehensive loss   —     —     —   —     —     —     —     —     —     (74,570 )
                                                     
 
Dividends accrued on preferred stock   —     —     1,060   —     —     —     —     —     —     1,060  
Deferred compensation   —     —     —   —     —     (3,188 )   3,188     —     —     —  
Options exercised and employee stock purchase plan   —     —     —   683     1     5,139     —     —     —     5,140  
Compensation benefit relating to the granting of options   —     —     —   —     —     —     (3,002 )   —     —     (3,002 )
Issuance of common stock   —     —     —   126     —     3,750     —     —     —     3,750  
Conversion of preferred stock into common stock   (120 )   (12,015 )   (2,127 ) 657     —     14,142     —     —     —     —  
   
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2002   12   $ 12,015   $ 1,866   55,216   $ 55   $ 602,101   $ (59 ) $ (608 ) $ (459,893 ) $ 155,477  
   
 
 
 
 
 
 
 
 
 
 
Comprehensive Loss                                                          
  Net loss applicable to common stock   —     —     —   —     —     —     —     —     (95,690 )   (95,690 )
  Change in unrealized gains and (losses)   —     —     —   —     —     —     —     4,084     —     4,084  
                                                     
 
Comprehensive loss   —     —     —   —     —     —     —     —     —     (91,606 )
                                                     
 
Dividends accrued on preferred stock   —     —     694   —     —     —     —     —     —     694  
Deferred compensation   —     —     —   —     —     1,148     (1,148 )   —     —     —  
Options exercised and employee stock purchase plan   —     —     —   341     1     1,699     —     —     —     1,700  
Compensation benefit relating to the granting of options   —     —     —   —     —     —     913     —     —     913  
   
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2003   12   $ 12,015   $ 2,560   55,557   $ 56   $ 604,948   $ (294 ) $ 3,476   $ (555,583 ) $ 67,178  
   
 
 
 
 
 
 
 
 
 
 
Comprehensive Loss                                                          
  Net loss applicable to common stock   —     —     —   —     —     —     —     —     (142,864 )   (142,864 )
  Change in unrealized gains and (losses)   —     —     —   —     —     —     —     (853 )   —     (853 )
                                                     
 
Comprehensive loss   —     —     —   —     —     —     —     —     —     (143,717 )
                                                     
 
Dividends accrued on preferred stock   —     —     361   —     —     —     —     —     —     361  
Deferred compensation   —     —     —   —     —     (228 )   228     —     —     —  
Options exercised and employee stock purchase plan   —     —     —   834     —     4,051     —     —     —     4,051  
Compensation relating to the granting of options   —     —     —   —     —     —     (6 )   —     —     (6 )
Conversion of preferred stock into common stock   (12 )   (12,015 )   (2,921 ) 1,056     1     14,935     —     —     —     —  
   
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2004   —   $ —   $ —   57,447   $ 57   $ 623,706   $ (72 ) $ 2,623   $ (698,447 ) $ (72,133 )
   
 
 
 
 
 
 
 
 
 
 

See accompanying notes.

F-5


ISIS PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
   Years Ended December 31,
  
 
   2004
   2003
   2002
  
Operating activities:                    
  Net loss   $ (142,503 ) $ (94,996 ) $ (72,242 )
    Adjustments to reconcile net loss to net cash used in operating activities:                    
        Depreciation     8,401     8,551     5,985  
        Amortization of patents     1,442     1,217     927  
        Amortization of licenses     2,327     2,485     2,512  
        Compensation (benefit) related to stock options     (6 )   913     (3,002 )
        Deferred interest on long-term debt     13,049     5,369     8,634  
        Loss on prepayment of 14% notes     —     —     2,294  
        Gain on prepayment of 12% notes     —     —     (4,976 )
        Accrued interest on prepayment of debt     —     —     (34,706 )
        Equity in losses of affiliates     —     —     16,011  
        Loss on investments     5,057     2,438     —  
        Restructuring activities     32,427     —     —  
        Non-cash expenses related to patents and fixed assets     2,275     2,813     1,622  
        Gain on disposal of property, plant and equipment     —     —     (260 )
      Changes in operating assets and liabilities:                    
        Contract receivable     (7,391 )   12,249     (4,546 )
        Inventory     (9,699 )   (2,905 )   (11,090 )
        Other current and long-term assets     1,373     962     7,106  
        Accounts payable     3,247     (1,804 )   (2,147 )
        Accrued compensation     (674 )   819     (2,316 )
        Accrued liabilities     1,711     (267 )   2,812  
        Deferred contract revenues     (12,787 )   (33,318 )   (6,999 )
   
 
 
 
          Net cash used in operating activities     (101,751 )   (95,474 )   (94,381 )
   
 
 
 
Investing activities:                    
  Purchase of short-term investments     (72,479 )   (152,910 )   (200,563 )
  Proceeds from the sale of short-term investments     176,147     156,943     196,075  
  Purchases of property, plant and equipment     (3,526 )   (7,554 )   (36,834 )
  Licenses and other assets     (6,411 )   (6,404 )   (9,536 )
  Strategic investments     (10,000 )   —     —  
  Investments in affiliates     —     (5,193 )   (9,511 )
   
 
 
 
          Net cash provided by (used in) investing activities     83,731     (15,118 )   (60,369 )
   
 
 
 
Financing activities:                    
  Net proceeds from issuance of equity     4,051     1,700     8,890  
  Proceeds from 51/2% convertible subordinated notes     —     —     125,000  
  Proceeds from long-term borrowing     24,470     67,049     52,334  
  Principal payments on prepayment of debt     —     —     (52,704 )
  Principal payments on debt and capital lease obligations     (16,368 )   (26,896 )   (3,925 )
   
 
 
 
          Net cash provided by financing activities     12,153     41,853     129,595  
   
 
 
 
Net increase (decrease) in cash and cash equivalents     (5,867 )   (68,739 )   (25,155 )
  Cash and cash equivalents at beginning of year     33,117     101,856     127,011  
   
 
 
 
  Cash and cash equivalents at end of year   $ 27,250   $ 33,117   $ 101,856  
   
 
 
 
Supplemental disclosures of cash flow information                    
  Interest paid   $ 8,990   $ 12,778   $ 39,333  
Supplemental disclosures of non-cash investing and financing activities:                    
  Additions to debt for licensing costs   $ —   $ —   $ 1,050  
  Additions to deposits and other assets from sale of equipment   $ —   $ —   $ 300  
  Additions to other current assets from sale of equipment   $ —   $ —   $ 160  
  Additions to long-term investment for acquired corporate securities   $ —   $ 750   $ —  
  Conversion of preferred stock into common stock   $ 14,934   $ —   $ 14,142  
  Decrease in inventory and deferred revenue   $ —   $ 8,750   $ —  
  Decrease in property plant and equipment and notes payable   $ —   $ 21,200   $ —  

See accompanying notes.

F-6


ISIS PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004

1.     Organization and Significant Accounting Policies

        The consolidated financial statements include the accounts of Isis Pharmaceuticals, Inc. ("the Company") and its wholly-owned subsidiaries, Isis Pharmaceuticals Singapore Pte Ltd., Hepasense, Ltd. ("Hepasense"), and Orasense, Ltd ("Orasense"). There were no current operations or results of operations for Hepasense, Ltd. or Orasense, Ltd for the year ended December 31, 2004. As more fully described in Note 8—Restructuring Activities, the Company decided to close its Singapore operations in early 2005.

        Isis Pharmaceuticals was incorporated in California on January 10, 1989. In conjunction with its initial public offering, Isis Pharmaceuticals was reorganized as a Delaware corporation, as Isis Pharmaceuticals, Inc. ("Isis" or the "Company"), in April 1991. Isis was organized principally to develop human therapeutic drugs using antisense and combinatorial technology.

        Isis follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 128 Earnings per Share. Isis computes basic loss per share by dividing the net loss applicable to common stock by the weighted average number of common shares outstanding during the period ("Basic EPS method"). Isis computes diluted earnings (loss) per common share using the weighted-average number of common and dilutive common equivalent shares outstanding during the period ("Diluted EPS method"). Diluted common equivalent shares of 15.2 million at December 31, 2004 consisted of shares issuable upon exercise of stock options and convertible debt. As Isis incurred a loss in the years ended December 31, 2004, 2003 and 2002, Isis did not include diluted common equivalent shares in the computation of diluted net loss per share because the effect would be anti-dilutive.

        Contract revenue consists of non-refundable research and development funding and Isis records contract revenue as earned based on the performance requirements of Isis' collaborative research and development contracts. Isis recognizes contract fees for which no further performance obligations exist when Isis receives the payments or when Isis is reasonably certain it can collect the receivable. Isis records payments received in excess of amounts earned as deferred contract revenue. The Company expenses research and development costs as incurred. For the years ended December 31, 2004, 2003 and 2002, research and development costs of approximately $36.3 million, $30.2 million and $68.3 million, respectively, were related to collaborative research and development arrangements.

        Isis recognizes revenue when all of its contractual obligations are satisfied and collection of the underlying receivable is reasonably assured.

        Isis recognizes research and development revenue under collaborative agreements as it incurs the related expenses, up to contractual limits. Isis defers payments received under these agreements that

F-7

relate to future performance and records revenue as Isis earns it over the specified future performance period. Isis recognizes revenue that relates to nonrefundable, upfront fees over the period of the contractual arrangements as Isis satisfies its performance obligations. Isis recognizes revenue that relates to milestones, under existing arrangements, upon completion of the milestone's performance requirement. Isis recognizes revenue from arrangements entered into subsequent to June 30, 2003 in accordance with Emerging Issues Task Force Issue No. 00-21 ("EITF 00-21") Accounting for Revenue Arrangements with Multiple Deliverables. This issue addresses the timing and method of revenue recognition for revenue arrangements that include the delivery of more than one product or service. Isis sometimes enters into revenue arrangements that contain multiple deliverables. In these cases, Isis recognizes revenue from each element of the arrangement as long as Isis can determine a separate value for each element, Isis has completed its obligation to deliver or perform on that element, and Isis is reasonably assured of collecting the resulting receivable. Isis records revenue from federal research grants during the period in which it incurs the related expenditures. Isis recognizes revenue from product sales as it ships the products. Isis has implemented the provisions of Staff Accounting Bulletin No. 104 ("SAB 104"), which was issued in December 2003. SAB 104 updates portions of the interpretive guidance included in Topic 13 of the codification of Staff Accounting Bulletin No. 101 in order to make this interpretive guidance consistent with current authoritative accounting guidance and SEC rules and regulations. SAB 104 provides interpretation on selected revenue recognition issues and when revenue is properly recognizable. Revenue should not be recognized until it is realized or realizable and earned. It must meet the following criteria: 1) persuasive evidence of an arrangement exists, 2) delivery occurred or services were rendered, 3) the seller's price to the buyer is fixed or determinable and 4) collectibility is reasonably assured.

        As part of Isis' alliance with Eli Lilly and Company ("Lilly") in August 2001, Lilly provided Isis a $100.0 million interest free loan to fund the research collaboration. As of December 31, 2004, Isis had drawn down $95.0 million on the $100.0 million loan. Isis discounted the $95.0 million loan to its net present value by imputing interest on the amount at 20%, which represented market conditions in place at the time Isis entered into the loan. Isis accretes the loan up to its face value over its term by recording interest expense. The difference between the cash received and the present value of the loan represents value Lilly gave to Isis to help fund the research collaboration. Isis accounts for this value as deferred revenue and recognizes it as revenue over the period of performance.

        In late 2002, Isis terminated its HepaSense and Orasense collaborations with Elan Corporation plc ("Elan") and as a result, Isis no longer earns revenue from these collaborations.

        Isis recognizes licensing and royalty revenue immediately, if collectibility is reasonably assured, and if Isis is not required to provide services in the future.

        Financial instruments that potentially subject Isis to concentrations of credit risk consist primarily of cash equivalents, short-term investments and receivables. Isis places its cash equivalents and certain of its short-term investments with high credit-quality financial institutions. Isis invests its excess cash primarily in auction and money market instruments, and municipal and floating rate bonds. Isis and its

F-8

audit committee established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and liquidity.

        Isis considers all liquid investments with maturities of ninety days or less when purchased to be cash equivalents. Isis' short-term investments have initial maturities of greater than ninety days from date of purchase. Isis classifies its securities as "available-for-sale" in accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. Isis carries these investments at fair market value with any unrealized gains and losses recorded as a separate component of stockholders' equity. Fair value is based upon market prices quoted on the last day of the fiscal quarter. Isis uses the specific identification method to determine the cost of debt securities sold. Isis includes gross realized gains and losses in investment income and these amounts have not been material. During the third quarter of 2004, Isis recorded a non-cash loss on investments of $5.1 million, principally related to the impairment of the Company's equity investment in Alnylam Pharmaceuticals, Inc ("Alnylam"), compared to a non-cash loss on investments of $2.4 million in 2003 related to the impairment of investments in Antisense Therapeutics Limited ("ATL") and Hybridon, Inc. ("Hybridon"). The 2004 loss on investments reflected a decrease in the market value of Alnylam's stock in 2004, which Isis believes was primarily a result of financial market conditions related to biotechnology companies. In the fourth quarter of 2004, Isis recorded a net unrealized gain of $1.4 million related to its equity investment in Alnylam as a separate component of stockholders' equity. This reflected the increase in the market value of the investment since the impairment in the third quarter of 2004.

        Isis' inventory includes drugs with alternative uses that are used primarily for its clinical development activities and drug products it manufactures for its partners under contractual terms. Isis states its inventory at the lower of cost or market, with cost determined under the first-in, first-out method. Isis reviews inventory periodically and reduces the carrying value of items considered to be slow moving or obsolete to their estimated net realizable value. In the second quarter of 2003, Isis reduced the carrying value of its raw materials related to Affinitak to zero. In the fourth quarter of 2004, Isis reduced the carrying value of its inventory by $21.0 million (Note 8—Restructuring Activities).

        Inventory includes the following categories as of December 31, 2004 and 2003 (net realizable value in thousands):

 
   December 31,
 
   2004
   2003
Raw materials   $ 1,329   $ 1,526
Work in process     —     9,920
Finished goods     1,393     2,549
   
 
    $ 2,722   $ 13,995
   
 

F-9

        Property, plant and equipment is stated at cost and consists of the following (in thousands):

 
   December 31,
  
 
   2004
   2003
  
Land   $ 1,163   $ 1,163  
Buildings and improvements     30,305     29,859  
Equipment and computer software     27,234     49,108  
Furniture and fixtures     1,959     3,356  
   
 
 
      60,661     83,486  
Less accumulated depreciation     (32,207 )   (48,696 )
   
 
 
    $ 28,454   $ 34,790  
   
 
 

        During 2003, Isis reduced to zero approximately $21.2 million in buildings, building improvements and equipment related to the debt repayment waiver Lilly granted Isis for amounts Lilly loaned Isis to fund the construction of a new manufacturing suite dedicated to the commercial production of Affinitak. (Note 6—Collaborative Arrangements and Licensing Agreements). In the fourth quarter of 2004, Isis recorded a net write-down of $1.2 million for excess or idle property and equipment consisting of $2.9 million less accumulated depreciation of $1.7 million (Note 8—Restructuring Activities).

        Depreciation of property, plant and equipment is provided on the straight-line method over estimated useful lives as follows:

Building   31.5 years
Building improvements   15 years
Manufacturing facilities   10 years
Equipment   5 years
Computer software   3 years
Furniture and fixtures   5 years

        Leasehold improvements are depreciated using the shorter of the estimated useful life or remaining lease term.

        Isis obtains licenses from third parties and capitalizes the cost related to exclusive licenses. Isis' license from Hybridon comprises the majority of the license balance as of December 31, 2004, 2003 and 2002. Isis amortizes capitalized licenses over their estimated useful life or term of the agreement, which for current licenses is between nine years and 15 years. Accumulated amortization related to licenses was $9.8 million and $7.5 million at December 31, 2004 and 2003, respectively. Based on existing licenses, estimated amortization expense related to licenses is $2.3 million for each of the years ending December 31, 2005, 2006, 2007, 2008 and 2009.

        Isis capitalizes costs consisting principally of outside legal costs and filing fees related to obtaining patents. Isis reviews its capitalized patent costs regularly to determine that they include costs for patent

F-10

applications Isis is pursuing. Isis evaluates costs related to patents that the company is not actively pursuing for impairment and writes off any of these costs, if appropriate. Isis amortizes patent costs over their estimated useful lives of 10 years, beginning with the date the patents are issued. The weighted average remaining life of issued patents was 6.1 years and 6.5 years at December 31, 2004 and 2003, respectively. In the fourth quarter of 2004, Isis recorded a non-cash charge of $6.1 million related to the write-down of its patent costs to their estimated net realizable values (Note 8—Restructuring Activities).

        Accumulated amortization related to patents was $5.4 million and $4.4 million at December 31, 2004 and 2003, respectively. Based on existing patents, estimated amortization expense related to patents is as follows (in thousands):

Years Ending December 31,
   Amortization
(in thousands)
2005   $ 1,362
2006   $ 1,318
2007   $ 1,184
2008   $ 1,062
2009   $ 966

        Isis uses the equity method of accounting to account for its investments in 50% or less owned companies over which it has the ability to exercise significant influence. Isis also accounted for investments in its joint ventures, Orasense and HepaSense, using the equity method of accounting. At December 31, 2003, Isis had the following investments accounted for using the equity method:

        Orasense and HepaSense

        In April 1999 and January 2000, Isis and Elan formed Orasense, Ltd. and Hepasense, Ltd., respectively, both Bermuda limited companies. Each joint venture was owned 80.1% by Isis and 19.9% by Elan. While Isis owned 80.1% of the outstanding common stock of Orasense and HepaSense, throughout the respective terms of the collaborations related to the joint ventures, Elan and its subsidiaries retained significant minority investor rights that were considered "participating rights" as defined in EITF 96-16. Accordingly, Isis accounted for its investment in each joint venture under the equity method of accounting for the year ended December 31, 2002. In 2002, Elan concluded its participation in both the Orasense and HepaSense collaborations. In June 2004, Isis entered into an agreement with a subsidiary of Elan to acquire Elan's minority interest in Orasense and HepaSense. As a result, Isis owned 100% of Orasense and HepaSense at December 31, 2004 (Note 6—Collaborative Arrangements and Licensing Agreements).

        Isis has determined the estimated fair value of its financial instruments. The amounts reported for cash, accounts receivable, accounts payable and accrued expenses approximate the fair value because of their short maturities. Isis reports its investment securities at their estimated fair value based on quoted market prices of comparable instruments.

F-11

        Isis periodically evaluates carrying values of long-lived assets including property, plant and equipment and intangible assets, when events and circumstances indicate that these assets may have been impaired. Isis has adopted SFAS 144, Accounting for the Impairment of Long-Lived Assets. For the year ended December 31, 2002, Isis recorded an impairment charge of $605,000 for the write-down of intellectual property related to the restructuring of the GeneTrove program. In the fourth quarter of 2004, Isis recorded a charge of $11.5 million related to the write-down of equipment and intangible assets to their estimated net realizable values (Note 8—Restructuring Activities).

        The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

        Isis has implemented the provisions of Financial Accounting Standards Board Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, which addresses consolidation by business enterprises of variable interest entities either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. As of December 31, 2004, Isis had a collaborative arrangement with Ercole Biotech, Inc. ("Ercole"), a development stage biopharmaceutical company developing drugs based on RNA splicing technology. Isis considers Ercole to be a Variable Interest Entity ("VIE") under the provisions of FIN No. 46. Pursuant to the terms of a Note and Warrant Purchase Agreement (the "Agreement"), during 2003 and early 2004, Isis made cash payments to Ercole of $500,000 and $250,000 respectively, in exchange for a convertible promissory note (the "Note"). Isis expensed the payments when made. The Note is secured by all of Ercole's assets, including intellectual property and licenses, and will convert into securities that Ercole issues in a qualified financing, as defined by the Agreement. Isis is not required to consolidate Ercole's results of operations under FIN No. 46.

        In January 2000, Isis offered non-officer employees an opportunity to exchange certain of their existing out-of-the-money stock options for new options with exercise prices at the then-current market value. These options are required to be accounted for as variable stock options in accordance with Financial Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions Involving Stock Compensation—an Interpretation of APB Opinion No. 25. Isis reported the resulting compensation expense in the statement of operations. Variable stock options can result in significant increases and decreases in compensation expense, subject to the variability of Isis' stock price. As of December 31, 2002, optionholders had exchanged all of these options, or the options had expired. As of December 31, 2004 all of the exchanged, unexpired options were fully vested.

        In April 2003, Isis implemented an employee stock option exchange program ("2003 option exchange program") to maintain one of Isis' key assets, its employee base, in a manner that was sensitive to shareholder interests. The 2003 option exchange program allowed employees during the

F-12


offering period, which began on April 8, 2003 and ended on May 8, 2003, to surrender options, granted prior to January 5, 2002, which had higher exercise prices, in exchange for a lesser number of options, which had lower exercise prices. Employees exchanged 2.2 million options having a weighted-average exercise price of $14.89 for 1.0 million options having an exercise price of $5.15. The new options vest over three years beginning on January 1, 2003 and expire on December 31, 2008. Isis accounts for the affected options, until all these options have been exercised or cancelled, using variable accounting consistent with the provisions of APB 25 and FIN 44. As a result, Isis recorded non-cash compensation benefit of $8,000 in 2004 and non-cash compensation expense of approximately $886,000 in 2003 and will continue to account for the affected options using variable accounting. These amounts are included in Compensation (benefit) related to stock options on the Consolidated Statements of Operations with compensation expense related to non-employee options of $2,000 and $27,000 for 2004 and 2003, respectively.

        Isis has adopted the disclosure-only provision of SFAS 123, Accounting for Stock-Based Compensation("SFAS 123"). Accordingly, Isis has not recognized compensation expense, except primarily for compensation expense related to the affected options from the 2000 and 2003 option exchange programs, for the Isis stock option plans and the employee stock purchase plan ("ESPP").

        Had Isis determined compensation expense consistent with SFAS 123, Isis would have reported the following proforma amounts for net loss and basic and diluted net loss per share (in thousands, except per share amounts):

 
   2004
   2003
   2002
  
Net loss applicable to common stock—as reported   $ (142,864 ) $ (95,690 ) $ (73,302 )
Net loss applicable to common stock—pro forma   $ (150,045 ) $ (101,099 ) $ (95,329 )
Basic and diluted net loss per share—as reported   $ (2.52 ) $ (1.73 ) $ (1.35 )
Basic and diluted net loss per share—pro forma   $ (2.65 ) $ (1.82 ) $ (1.75 )

        For purposes of proforma disclosures, Isis estimated the fair value of each option grant and ESPP purchase rights on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

 
   Stock Options
   ESPP
  
 
   2004
   2003
   2002
   2004
   2003
   2002
  
Risk free interest rate   4.2 % 4.3 % 3.8 % 4.2 % 4.3 % 3.8 %
Dividend yield   0 % 0 % 0 % 0 % 0 % 0 %
Volatility   62.4 % 69.5 % 78.7 % 57.2 % 49.5 % 80.9 %
Expected Life   6.4 years   6.2 years   5.4 years   6 months   6 months   6 months  

        The weighted average fair value of options granted was $6.58 for 2004, $5.70 for 2003, and $11.34 for 2002. The weighted average fair value of the ESPP purchase rights was $4.67, $4.46, and $5.60 for 2004, 2003 and 2002, respectively.

        SFAS 130, Reporting Comprehensive Income ("SFAS 130") requires Isis to display comprehensive income (loss) and its components as part of Isis' full set of consolidated financial statements. The measurement and presentation of net income (loss) did not change. Comprehensive income (loss) is

F-13

comprised of net income (loss) and certain changes in equity that are excluded from net income (loss). Specifically, SFAS 130 requires unrealized holding gains and losses on Isis' available-for-sale securities, which Isis reported separately in stockholders' equity, to be included in accumulated other comprehensive income (loss). Comprehensive income (loss) for the years ended December 31, 2004, 2003 and 2002 has been reflected in the Consolidated Statements of Stockholders' Equity.

        Isis operates in two separate segments; Drug Discovery and Development and its Ibis division. In accordance with SFAS 131, Disclosure about Segments of an Enterprise and Related Information, Isis provides segment financial information and results for Drug Discovery and Development and its Ibis division based on the segregation of revenues and expenses used for management's assessment of operating performance and operating decisions. Expenses shared by the segments require the use of judgments and estimates in determining the allocation of expenses to the two segments. Different assumptions or allocation methods could result in materially different results by segment. Isis does not include asset or liability information by reportable segment since Isis does not currently segregate this information by segment and it is not used for purposes of making decisions about allocating resources to the segments and assessing their performance.

        On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS 123(R), Share-Based Payment("SFAS 123(R)"), which is a revision of SFAS 123. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. This statement also eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25. The statement is effective at the beginning of the first interim period beginning after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. Isis expects to adopt SFAS 123(R) on July 1, 2005.

        SFAS 123(R) permits public companies to adopt its requirements using one of two methods: 1) A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date, 2) A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. Isis plans to adopt SFAS 123 no later than July 1, 2005, but has not yet determined what method it will use.

        As permitted by SFAS 123, Isis currently accounts for share-based payments to employees using Opinion 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)'s fair value method may have a significant impact on its results of operations, although it will have no impact on its overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had Isis adopted

F-14


SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to the consolidated financial statements. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While Isis cannot estimate what those amounts will be in the future, as a result of its accumulated losses to date, Isis has not recognized a benefit of tax deductions in excess of recognized compensation cost in operating cash flows.

        In November 2004, the FASB issued SFAS No. 151, Inventory Costs ("SFAS 151"), an amendment of ARB No. 43, Chapter 4. This statement amends the guidance in ARB No. 43 Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that ".. . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal to require treatment as current period charges. .." This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement will be effective for inventory costs during the fiscal years beginning after June 15, 2005. Isis does not believe that the adoption of this statement will have a material impact on its financial condition or results of operations.

        In March 2004, the FASB issued EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1, which was originally effective for interim and annual reporting periods beginning after June 15, 2004 requires a three-step model to determine other-than-temporary impairments for all current and future investments in marketable securities. In September 2004, the FASB delayed the requirement to record impairment losses under EITF 03-1 until new guidance is issued. Isis does not expect that the adoption of EITF 03-1 will have a material impact on its operating results and financial position.

2.     Investments

        Isis invests its excess cash in United States 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 maximize trends in yields and interest rates without compromising safety and liquidity.

        The following table summarizes the contract maturity of debt securities held by Isis as of December 31, 2004:

Less than 1 year   55 %
1—3 years   39 %
3—5 years   6 %
   
 
Total   100 %
   
 

F-15

        Isis has an ownership interest of less than 20% each in three public and two private companies it conducts business with, and accounts for them under the cost method of accounting according to APB 18. The companies include Alnylam, ATL and Hybridon, which are publicly-traded, and Santaris Pharma A/S ("Santaris") and OncoGenex Technologies, Inc. ("OncoGenex"), which are privately-held. In determining if and when decreases in market value of Isis' equity positions below their cost are other-than-temporary, Isis examines historical trends in stock prices, the financial condition and near term prospects of the issuers, and Isis' current need for cash. When Isis determines that a decline in value is other-than-temporary, Isis recognizes an impairment loss in the current period operating results to the extent of the decline. See Note 1—Organization and Significant Accounting Policies for a discussion of impairment losses incurred in 2004 and 2003.

        The following is a summary of Isis' investments accounted for as available-for-sale securities (in thousands):

 
    
    
   Unrealized
    
December 31, 2004
   Maturity
in Years
   Amortized
Cost
   Estimated Fair
Value
  Gains
   Losses
U.S. corporate debt securities   1 or less   $ 27,564   $ —   $ (121 ) $ 27,443
U.S. Treasury securities and obligations of U.S. government agencies   1 or less     14,715     —     (98 )   14,617
       
 
 
 
  Total short-term investments         42,279     —     (219 )   42,060
       
 
 
 
U.S. corporate debt securities   1 to 2     6,715     —     (47 )   6,668
U.S. Treasury securities and obligations of U.S. government agencies   1 to 3     28,169     —     (264 )   27,905
Equity securities   —     8,367     3,282     (129 )   11,520
       
 
 
 
  Total long-term investments         43,251     3,282     (440 )   46,093
       
 
 
 
        $ 85,530   $ 3,282   $ (659 ) $ 88,153
       
 
 
 
 
    
    
   Unrealized
    
December 31, 2003
   Maturity
in Years
   Amortized
Cost
   Estimated Fair
Value
  Gains
   Losses
U.S. corporate debt securities   1 or less   $ 40,112   $ 147   $ (6 ) $ 40,253
U.S. Treasury securities and obligations of U.S. government agencies   1 or less     26,286     116     —     26,402
       
 
 
 
  Total short-term investments         66,398     263     (6 )   66,655
       
 
 
 
U.S. corporate debt securities   1 to 2     50,793     487     (16 )   51,264
U.S. Treasury securities and obligations of U.S. government agencies   1 to 5     64,442     173     (147 )   64,468
Equity securities   —     3,424     2,722     —     6,146
       
 
 
 
  Total long-term investments         118,659     3,382     (163 )   121,878
       
 
 
 
        $ 185,057   $ 3,645   $ (169 ) $ 188,533
       
 
 
 

F-16

        Investments considered to be temporarily impaired at December 31, 2004 are as follows:

 
    
   Less than 12 Months of temporary impairment
   Greater than 12 Months of
temporary impairment
   Total temporary
impairment
  
 
   Number of
Investments
   Fair Value
   Unrealized
Losses
   Fair Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
  
U.S. corporate debt securities   29   $ 31,922   $ (168 ) $ —   —   31,922   (168 )
U.S. Treasury securities and obligations of U.S. government agencies   29     26,714     (205 )   14,408   (157 ) 41,122   (362 )
   
 
 
 
 
 
 
 
      Total Debt Securities   58     58,636     (373 )   14,408   (157 ) 73,044   (530 )
Equity securities   1     474     (129 )   —   —   474   (129 )
   
 
 
 
 
 
 
 
  Total temporarily impaired securities   59   $ 59,110   $ (502 ) $ 14,408   (157 ) 73,518   (659 )
   
 
 
 
 
 
 
 

        Isis believes that the decline in value is temporary and primarily related to the change in market interest rates since purchase. Isis anticipates full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a change in the market interest rate environment.

3.     Long-Term Obligations and Commitments

        Long-term obligations consisted of the following (in thousands):

 
   December 31,
  
 
   2004
   2003
  
Convertible partner debt              
  Eli Lilly   $ 95,000   $ 73,750  
  Boehringer Ingleheim     —     6,376  
   
 
 
    Total convertible partner debt   $ 95,000   $ 80,126  
Standard operating debt     32,181     38,392  
51/2% convertible subordinated notes     125,000     125,000  
Capital leases and other obligations     6,741     7,116  
   
 
 
Total   $ 258,922   $ 250,634  
Less: current portion     (10,546 )   (16,477 )
Less: Eli Lilly debt classified as deferred revenue     (11,765 )   (20,760 )
   
 
 
Total Long-Term Obligations   $ 236,611   $ 213,397  
   
 
 

Convertible Partner Debt

        In August 2001, Lilly made available to Isis a $100.0 million loan facility to fund joint research between the two companies. The loan is interest-free and payable, at Isis' option, in cash or common stock at $40 per share in August 2005. The loan facility provides for quarterly draw-downs by Isis in varying amounts. As of December 31, 2004 and 2003, Isis had drawn down $95.0 million and

F-17

$73.8 million, respectively. Isis accounts for this loan using an imputed interest rate of 20%, consistent with market conditions in place at the time the loan agreement was entered into. Isis carries the net present value of the draw-downs as a long-term obligation and records interest expense over the term of the loan. The difference between the cash received and the present value of the loan represents value Lilly gave Isis to help fund the research collaboration. Isis accounts for this difference as deferred revenue and recognizes it as research and development revenue under collaborative agreements over the period of performance. At December 31, 2004 and 2003, the balance in long-term obligations related to this loan was $83.2 million and $53.0 million, respectively, and the balance in deferred revenue was $11.8 million and $20.8 million, respectively. Isis can repay this loan at its option in either cash or our common stock at a fixed conversion price of $40 per share. If Isis draws down the remaining amount available under the loan, it could repay the loan for 2.5 million shares of Isis common stock. Accordingly, the outstanding balance on this loan has been classified as a long-term obligation on the accompanying consolidated balance sheet.

        During 1999 and 2000, in conjunction with the HepaSense and Orasense joint ventures, Elan made available to Isis credit facilities of up to $30.4 million, evidenced by convertible promissory notes. The terms of these notes provided for interest at 12% annually, with maturities through January 2006. The notes were convertible into the common stock of Isis at any time by either party, as defined by the underlying agreements. In July 2002, Isis prepaid $19.7 million of the then-outstanding debt with $14.7 million in cash, resulting in a gain of approximately $5.0 million for the year ended December 31, 2002. As of December 31, 2002, there was $7.2 million outstanding under the Orasense credit facility. Isis paid these borrowings in full from the proceeds of the Company's term loan with Silicon Valley Bank in December 2003. Isis can no longer borrow funds against these credit facilities.

        During 1997 and 1996, Isis borrowed a total of $22.6 million under a $40.0 million line of credit made available pursuant to the terms of its collaborative agreement with Boehringer Ingelheim ("BI"). Borrowings under the line of credit bore interest at the seven year United States interbanking rate plus 2.0%, determined at the time each advance was made, and ranged from 8.36% to 8.46%. Principal borrowings were repayable in cash or Isis common stock, at the option of Isis. In October 2003, Isis repaid, in cash, the first installment of $8.3 million, plus interest. Isis repaid the remaining principal installments of $7.9 million, plus interest, and $6.4 million, plus interest, in December 2003 and January 2004, respectively, using the proceeds of the Company's term loan with Silicon Valley Bank.

Standard Operating Debt

        In December 2003, Isis obtained a $32.0 million term loan from Silicon Valley Bank. The term loan is secured by substantially all of Isis' operating assets, excluding intellectual property, real estate, and certain equity investments. The term loan bears interest at the prime rate (5.25% at December 31, 2004), is payable in equal monthly payments of principal and interest, matures in December 2008, and is convertible at the election of Isis to a fixed rate at the then-applicable prime rate plus 1.25%. The term loan is subject to certain liquidity and other covenants, including a requirement that Isis maintain a minimum balance in an account at the lending bank at all times equal to the outstanding balance of the loan. Isis was in compliance with these covenants as of December 31, 2004 and 2003. Isis used the proceeds of the loan to pay off the Elan and BI partner debt in late 2003 and early 2004. The carrying

F-18


value of this loan at December 31, 2004 and 2003 was $26.1 million and $32.0 million, respectively, which approximated fair value.

        In December 2002, Isis obtained a credit facility evidenced by promissory notes of up to $6.7 million from a bank to refinance two existing notes. The loan is secured by Isis' real property and bears interest at the prime rate plus 0.5% (5.75% at December 31, 2004), is payable in monthly payments of principal and interest, with the final principal payment due on December 2006. Isis borrowed its final installment of $998,000 on this loan in January 2003. The carrying value of this loan at December 31, 2004 and 2003 was $6.1 million and $6.4 million respectively, which approximated fair value.

Convertible Subordinated Notes

        In May 2002, Isis completed a $125.0 million convertible debt offering, which raised proceeds of approximately $120.9 million, net of $4.1 million in issuance costs. Isis includes the issuance costs in the balance sheet under Deposits and Other Assets and is amortizing these issuance costs to interest expense over the life of the debt. The subordinated notes mature in 2009 and bear interest at 5.5%, which is payable semi-annually. The notes are convertible, at the option of the note holders, into approximately 7.5 million shares of common stock at a conversion price of $16.625 per share. At December 31, 2004 and 2003, the principal and accrued interest outstanding on the notes was $125.0 million and $1.1 million, respectively. The fair value of the subordinated notes was $104.9 million and $101.2 million as of December 31, 2004 and 2003, respectively. Isis did not include these convertible notes in the computation of diluted net loss per share because the effect would be anti-dilutive.

        Isis used a portion of the net proceeds from the convertible notes to prepay amounts outstanding on its 14% Senior Subordinated Notes, and certain obligations under its credit facilities with Elan. These early debt retirements resulted in a $2.3 million loss on prepayment of 14% Notes and a $5.0 million gain on prepayment of 12% Notes, and are included as such on the accompanying Consolidated Statements of Operations for the year ended December 31, 2002.

Capital Leases and Other Obligations

        At December 31, 2004 and 2003, Isis had approximately $5.8 million and $6.3 million outstanding, respectively, under various capital equipment leases which bear interest at rates ranging from 5.64% to 9.82% and mature at various dates through 2008. At December 31, 2004 and 2003, Isis had approximately $900,000 and $860,000, respectively, under various contractual obligations, of which $700,000 represented amounts due to Integrated DNA Technologies, Inc. ("IDT") as part of the supply agreement entered into in December 2001 (Note 6—Collaborative Arrangements and Licensing Agreements).

F-19


        Annual debt and other obligation maturities at December 31, 2004 are as follows (in thousands):

2005   $ 105,546
2006     13,533
2007     7,555
2008     7,288
2009     125,000
   
Total   $ 258,922
   

        Isis leases equipment and certain office and lab space under non-cancelable operating and capital leases with terms through May 2010. Two of the building leases have two extension options for five years each. Annual future minimum payments under capital and operating leases as of December 31, 2004 are as follows (in thousands):

 
   Operating
Leases
   Capital Leases
  
2005   $ 2,759   $ 3,735  
2006     2,802     1,571  
2007     1,705     869  
2008     993     190  
2009     920     —  
Thereafter     391     —  
   
 
 
Total minimum payments   $ 9,570   $ 6,365  
   
       
Less amount representing interest           (524 )
         
 
Present value of future minimum payments         $ 5,841  
Less current portion           (3,408 )
         
 
Long-term portion         $ 2,433  
         
 

        Rent expense for the years ended December 31, 2004, 2003, and 2002 was $3.1 million, $3.2 million, and $2.9 million, respectively. Cost of equipment under capital leases at December 31, 2004 and 2003 was $23.9 million and $20.7 million, respectively. Accumulated depreciation of equipment under capital leases at December 31, 2004 and 2003 was approximately $16.9 million and $13.6 million, respectively.

4.     Stockholders' Equity

Preferred Stock

        Isis is authorized to issue up to 15,000,000 shares of "blank check" Preferred Stock. As of December 31, 2004, there were no Series A Convertible Exchangeable 5% Preferred Stock or Series B Convertible Exchangeable 5% Preferred Stock shares issued or outstanding. Series C Junior Participating Preferred Stock is designated but not outstanding.

F-20


        In June 2004, the holder of the Company's Series B Convertible Exchangeable Preferred Stock transferred its shares to a third party. Immediately upon transfer, these shares converted into 1,055,502 shares of Isis common stock, eliminating the 5% in-kind dividend, thereby reducing future dilution of approximately 86,000 shares of Isis common stock. Isis also cancelled a warrant the holder of the Company's Series B Convertible Exchangeable Preferred Stock held to purchase 14,881 shares of Isis common stock. In addition, a warrant the holder of the Company's Series B Convertible Exchangeable Preferred Stock held to purchase 215,000 shares of Isis common stock expired unexercised in April 2004.

        In December 2000, Isis adopted a Preferred Share Purchase Rights Plan (the "Plan"). The Plan provides for a dividend distribution of one preferred stock purchase right (a "Right") for each outstanding share of Isis common stock, par value $0.001 per share (the "Common Shares"), held of record at the close of business on January 10, 2001, and on each subsequently issued share of Isis common stock. The Rights are not currently exercisable. Under certain conditions involving an acquisition or proposed acquisition by any person or group holding 20% or more of Isis' common stock, the Rights permit the holders (other than the 20 percent holder) to purchase one one-hundredth of a share of Series C Junior Preferred Stock, par value $0.001 per share (the "Preferred Shares"), at a price of $85 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustment. Each one one-hundredth of a share of Preferred Shares has designations and powers, preferences and rights, and the qualifications, limitations and restrictions which make its value approximately equal to the value of a Common Share. Under certain conditions, Isis' Board of Directors may redeem the Rights in whole, but not in part, at a price of $0.001 per Right.

Common Stock

        At December 31, 2004 and 2003, Isis had 100,000,000 shares of common stock authorized, of which 57,451,671 and 55,557,253 were issued and outstanding, respectively. As of December 31, 2004, total common shares reserved for future issuance was approximately 14,573,000.

Stock Option Plans

        In June 1989 and as amended, Isis' Board of Directors adopted, and the stockholders subsequently approved, a stock option plan that provides for the issuance of non-qualified and incentive stock options for the purchase of up to 13,200,000 shares of common stock to its employees, directors, and consultants. The term of the plan is scheduled to end in January 2014. The 1989 Plan does not allow Isis to grant stock bonuses or restricted stock awards and prohibits Isis from repricing any options outstanding under the plan unless the Company's stockholders approve the repricing. Options granted after December 31, 1995 vest over a four-year period, with 25% exercisable at the end of one year from the date of the grant and the balance vesting ratably thereafter. Options granted before January 1, 1996 generally vested over a five-year period. Options granted after May 26, 2004 have a term of seven years while options granted before May 26, 2004 have a term of ten years. At December 31, 2004, a total of 3,514,000 options were outstanding, options to purchase 2,007,000 shares were exercisable, and 4,640,000 shares were available for future grant.

F-21

        In January 2000, Isis adopted the 2000 Broad-Based Equity Incentive Plan (the "2000 Plan"), which provides for the issuance of non-qualified stock options for the purchase of up to 3,990,000 shares of common stock to its employees, directors, and consultants. In May 2002, the Board of Directors increased the 2000 Plan by 2,000,000 shares, authorizing up to 5,990,000 shares of common stock under the 2000 Plan for issuance to employees, directors, and consultants. Typically options expire 10 years from the date of grant. Options granted under this plan generally vest over a four-year period, with 25% exercisable at the end of one year from the date of the grant and the balance vesting ratably thereafter. Options granted under this plan, pursuant to the April 2003 stock option exchange program expire on December 31, 2008 and vested 33.34% on January 1, 2004 and then at the rate of 2.78% per month during the optionee's employment or service as a consultant, employee or director. At December 31, 2004, a total of 4,804,000 options were outstanding, 3,086,000 shares were exercisable, and 792,000 shares were available for future grant.

        In the event of:


then any surviving corporation or acquiring corporation will assume any stock awards outstanding under the 2000 Plan or will substitute similar stock awards (including an award to acquire the same consideration paid to the shareholders in the transaction for those outstanding under the 2000 Plan). In the event any surviving corporation or acquiring corporation refuses to assume such stock awards or to substitute similar stock awards for those outstanding under the 2000 Plan, then with respect to stock awards held by participants whose continuous service has not terminated, such stock awards automatically vest in full (and, if applicable, the time during which such stock awards may be exercised) and the stock awards will terminate if not exercised (if applicable) at or prior to such event. With respect to any other stock awards outstanding under the 2000 Plan, such stock awards will terminate if not exercised (if applicable) prior to such event. In addition, as of December 31, 2004, approximately 4,804,000 stock awards granted under the 2000 plan will be accelerated in full if a transaction described above occurs, even if the surviving corporation assumes such award.

        In September 2001, Isis' Board of Directors adopted, and the stockholders subsequently approved, an amendment and restatement of the 1992 Non-Employee Directors' Stock Option Plan, which provides for the issuance of non-qualified stock options to Isis' non-employee directors. The name of the resulting new plan is the 2002 Non-Employee Directors' Stock Option Plan, and it has an aggregate of 803,000 shares of common stock reserved for issuance. Options under this plan expire 10 years from the date of grant. Options granted become exercisable in four equal annual installments beginning one year after the date of grant. At December 31, 2004, a total of 349,000 options were outstanding, 166,000 of the shares issued under this plan were exercisable and 395,000 shares were available for

F-22

future grant. The following table summarizes stock option activity for the years ended December 31, 2002 through December 31, 2004 (in thousands, except per share data):

 
   Number of Shares
   Price Per Share
   Weighted Average
Price Per Share
Outstanding at December 31, 2001   8,220   $3.75 to $26.65   $ 9.88
  Granted   2,197   $6.87 to $22.19      
  Exercised   (505 ) $4.00 to $17.88      
  Terminated   (656 ) $5.38 to $24.17      
   
         
Outstanding at December 31, 2002   9,256   $3.75 to $26.65   $ 11.34
  Granted   2,724   $3.12 to  $7.85      
  Exercised   (35 ) $4.00 to  $6.81      
  Terminated   (3,734 ) $3.75 to $26.65      
   
         
Outstanding at December 31, 2003   8,211   $3.12 to $26.65   $ 8.66
  Granted   2,163   $4.30 to  $9.50      
  Exercised   (508 ) $3.12 to  $8.15      
  Terminated   (1,199 ) $3.75 to $22.19      
   
         
Outstanding at December 31, 2004   8,667   $3.12 to $26.65   $ 8.34
   
         

        The following table summarizes information concerning currently outstanding and exercisable options (in thousands, except contractual life and exercise price data):

 
   Options Outstanding
   Options Exercisable
Range of Exercise Price
   Number
Outstanding As of
12/31/04
   Weighted Average
Remaining
Contractual Life
   Weighted Average
Exercise Price
   Number
Exercisable As of
12/31/04
   Weighted Average
Exercise Price
$ 3.12—$4.98   234   7.73   $ 4.18   68   $ 4.05
$ 4.76—$7.52   5,280   6.65   $ 6.32   2,594   $ 6.38
$ 7.22—$10.82   1,550   6.47   $ 9.31   1,194   $ 9.55
$ 10.88—$16.30   1,148   4.39   $ 12.86   1,065   $ 12.85
$ 16.35—$18.70   228   6.10   $ 17.36   169   $ 17.43
$ 21.05—$26.65   227   6.97   $ 21.19   169   $ 21.19
     
           
     
      8,667             5,259      
     
           
     

        In 2000, Isis' Board of Directors adopted, and the stockholders subsequently approved, the 2000 Employee Stock Purchase Plan and Isis reserved 200,000 shares of common stock for issuance thereunder. In each of the subsequent years, an additional 200,000 shares of common stock were reserved for the 2000 Employee Stock Purchase Plan, resulting in a total of 800,000 shares authorized in the plan. 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 offering period or the end of each six-month purchase period. During 2004, 327,145 shares were issued under this plan to employees at prices ranging from $4.47 to $4.86 per share. At December 31, 2004, 72,993 shares were available for purchase under this plan.

F-23

Warrants

        In June 2004, Isis entered into an agreement with a subsidiary of Elan to acquire Elan's minority interest in Orasense and HepaSense. In connection with this agreement, Isis cancelled a warrant Elan held to purchase 14,881 shares of Isis common stock that was issued in 2000 as part of the joint venture collaboration between Isis and Elan to form HepaSense.

        In 2002, Isis issued a warrant to purchase 6,304 shares of common stock to Elan for the achievement of a development milestone related to the HepaSense joint venture between Isis and Elan. As of December 31, 2004, this warrant remained outstanding at an exercise price of $59.48 per share. The warrant expires April 25, 2007.

        In 1999, Isis issued a warrant to purchase 215,000 shares of common stock to Elan as part of the joint venture collaboration between Isis and Elan to form Orasense. The warrant expired unexercised on April 19, 2004.

        In 1997 and 1998, Isis issued warrants to purchase 500,000 and 300,000 shares of common stock, respectively, in conjunction with a private debt financing agreement. The warrants expired unexercised on November 1, 2004 (Note 3—Long-Term Obligations and Commitments).

5.     Income Taxes

        Significant components of Isis' deferred tax assets as of December 31, 2004 and 2003 are shown below (in thousands). Isis recognized valuation allowances of $283.7 million and $235.0 million for 2004 and 2003, respectively, to offset the net deferred tax assets as realization of such assets is uncertain.

 
   2004
   2003
  
Deferred tax assets:              
  Capitalized research expense   $ 43,132   $ 86,827  
  Net operating loss carryforwards     189,148     110,652  
  Research and development credits     33,966     30,095  
  Deferred revenue     5,998     9,573  
  Accrued restructuring     13,335     —  
  Other, net     7,525     5,180  
   
 
 
  Total deferred tax assets     293,104     242,327  
Deferred tax liabilities:              
  Intangible Assets     (9,393 )   (7,361 )
   
 
 
  Total deferred tax liabilities     (9,393 )   (7,361 )
   
 
 
  Total net deferred tax assets     283,711     234,966  
  Valuation allowance for deferred tax assets     (283,711 )   (234,966 )
   
 
 
  Net deferred tax assets   $ —   $ —  
   
 
 

        At December 31, 2004, approximately $7.1 million of the valuation allowance for deferred tax assets related to stock option deductions which, when recognized, will be allocated directly to additional paid-in capital.

        At December 31, 2004, Isis had federal, foreign and California tax net operating loss carryforwards of approximately $517.1 million, $530,000 and $140.4 million, respectively. Isis also had federal and

F-24


California research credit carryforwards of approximately $23.5 million and $10.0 million, 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% to 60% limitation on the utilization of California loss carryforwards. The federal tax loss carryforwards and the research credit carryforwards will begin expiring in 2007 and 2005, respectively, unless previously utilized. The foreign tax losses may be carried forward indefinitely and used to offset future taxable profits, provided there is no substantial change in ownership. The California tax loss carryforwards will begin expiring in 2005, unless utilized.

        Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of Isis' net operating loss and credit carryforwards may be limited due to cumulative changes in ownership of more than 50%. Isis believes that changes in ownership have occurred, but believes that such limitations will not have a material impact upon the utilization of the carryforwards.

6.     Collaborative Arrangements and Licensing Agreements

Eli Lilly and Company

        In August 2001, Isis entered into a broad strategic relationship with Lilly, including four key components:

        First, Lilly purchased $75.0 million of Isis common stock at $18 per share.

        Second, Isis licensed to Lilly rights to Affinitak, which was being tested in a Phase III trial for the treatment of non-small cell lung cancer, and which Lilly has decided to discontinue funding. Lilly paid Isis $25.0 million in up-front fees for Affinitak and reimbursed Isis for Isis' Affinitak development costs. During 2003 and 2002, Isis earned revenue of $11.1 million and $31.9 million, respectively, related to the reimbursement of Affinitak costs. Isis earned no revenue related to Affinitak during 2004.

        Third, Isis initiated with Lilly a four-year antisense drug discovery collaboration in the areas of metabolic and inflammatory diseases and a related gene functionalization and target validation collaboration to determine the function of up to 1,000 genes. Key achievements and developments under this collaboration include:

F-25

        Fourth, Lilly committed to lend Isis, interest-free, up to $100.0 million over a four-year period to fund its obligations under the drug discovery collaboration. Isis can repay this loan at its option in either cash or Isis common stock, at a fixed conversion price of $40 per share. During 2004, 2003 and 2002, Isis recorded revenue related to the research collaboration loan of $13.0 million, $7.5 million, and $3.2 million, respectively and corresponding interest expense during 2004, 2003, and 2002, of $13.0 million, $7.5 million, and $3.2 million, respectively. .

        Subsequent to August 2001, Isis and Lilly entered into additional agreements under the collaboration, as follows:

F-26

Antisense Drug Discovery Collaborations

        In November 2003, Isis received a grant of up to $8.0 million over three years from the Singapore Economic Development Board ("Singapore EDB"), which was intended to fund, in part, the broadening of two of Isis' RNA-based drug discovery and development programs: micro-RNA drug discovery and antisense drug discovery targeting the coronavirus associated with Severe Acute Respiratory Syndrome, or SARS. In connection with this grant, Isis established Isis Pharmaceuticals Singapore Pte Ltd, a wholly-owned subsidiary of Isis Pharmaceuticals, Inc. During 2004, Isis earned revenue of $1.5 million from this grant. Isis earned no revenue from the grant in 2003.

        As part of a strategic decision to reorganize and refocus the Company's resources to advance its most promising second-generation drugs and to continue the development of antisense technology, Isis decided to close its research and development laboratory in Singapore during the first quarter of 2005 and terminate its agreement with the Singapore EDB. To date, Isis has received $1.5 million in cash payments under this $8.0 million grant from the Singapore EDB and does not anticipate any additional payments, or additional revenue, under the agreement.

        In June 2003, Isis initiated a collaboration with the Industrial and Technology Research Institutes of Taiwan ("ITRI") to identify antisense candidates targeting the coronavirus associated with SARS. The collaboration entitled Isis to an upfront payment, milestone payments, and the potential for future funding. During 2003, Isis earned revenue under this collaboration of $2.0 million, comprised of $1.0 million for an up-front payment and $1.0 million related to the achievement of certain milestones. The milestones related to the identification of second-generation antisense drugs that inhibit SARS virus replication and the successful completion of preclinical studies evaluating aerosol and parenteral delivery of antisense drugs as specified under the agreement. Isis earned no revenue during 2004 under this collaboration. This collaboration has ended in accordance with its terms.

        In December 2001, Isis entered into a three-year collaboration with Amgen, Inc. ("Amgen") to discover new antisense drugs. Amgen has the right to develop and commercialize antisense drugs resulting from the collaboration. Under the terms of the agreement, Isis is entitled to receive milestone payments upon key clinical, research and commercial achievements, as well as royalties on sales of any products resulting from the collaboration. During 2004 and 2003, Isis earned revenue of $783,000 and

F-27

$1.9 million, respectively, related to quarterly research support and progress research milestones under this drug discovery collaboration. In December 2004, Isis' collaboration with Amgen ended in accordance with its terms.

        In May 2001, Isis licensed to Merck & Co, Inc. ("Merck"), Isis' preclinical Type 2 diabetes antisense drug candidate, ISIS 113715. In exchange for the license, Isis received an upfront payment. In addition, Isis received development funding and earned a development milestone. During 2002, Isis earned revenue of $840,000 under this agreement. Isis reacquired full product rights to ISIS 113715 from Merck in December 2002. As a result, no revenue was earned for the years ended December 31, 2004 and 2003.

        In June 1998, Isis entered into a research collaboration with Merck to discover small molecule drug candidates to treat patients infected with HCV. The collaboration, which concluded in May 2003 in accordance with its terms, provided that Merck would pay Isis' annual research support and milestone payments. Within the collaboration, Isis and Merck designed, synthesized, and evaluated novel compounds that Merck screened in its proprietary assays for identifying HCV replication inhibitors. Merck had the right to commercialize any drugs from the collaboration, and Isis retains the right to use technology developed in the collaboration in its antisense program. During 2003, and 2002, Isis earned revenue of $900,000 and $2.2 million, respectively, from Merck under the terms of this agreement. Isis earned no revenue for the year ended December 31, 2004.

Satellite Company Collaborations

        In February 2005, Isis licensed an anti-cancer antisense drug to Sarissa, Inc., a biotechnology company emerging from the University of Western Ontario. The drug is an antisense inhibitor of thymidylate synthase, "TS", a well-known drug target that protects cancer cells from the effects of several chemotherapy treatments. In preclinical studies, antisense inhibition of TS suppressed human tumor cell growth and overcame tumor cell resistance to marketed TS-targeted drugs.

        Under the terms of the agreement, in exchange for the exclusive, worldwide license to the TS antisense drug, Sarissa issued to Isis a $1.0 million debt instrument (the "Sarissa Note"), which will convert into Sarissa's common stock upon its successful completion of a venture capital financing. Isis has not yet determined a value for the Sarissa Note. Under the agreement, Sarissa agreed to pay Isis milestone payments totaling up to $5.5 million for key clinical and regulatory achievements and royalties on any product sales. Sarissa is solely responsible for preclinical and clinical development of the drug.

        In March 2004, Isis entered into a strategic alliance with Alnylam to develop and commercialize RNAi therapeutics. Under the terms of the agreement, Isis exclusively licensed to Alnylam its patent estate relating to antisense motifs and mechanisms and oligonucleotide chemistry for double-stranded RNAi therapeutics in exchange for a $5.0 million technology access fee, participation in fees for Alnylam's partnering programs, as well as future milestone and royalty payments. For each of these drugs, the potential milestone payments total $3.4 million and are payable upon the occurrence of

F-28

specified development and regulatory events. Isis will retain rights to a limited number of RNAi therapeutic targets and all rights to single-stranded RNAi therapeutics. In addition, Alnylam and Isis will share the proceeds of any licenses Alnylam grants under its previously announced InterfeRx program that include sublicenses to Isis' patents. Isis agreed to provide Alnylam with access to its resources for development and commercialization of RNAi therapeutics, including process development, bioanalytic methods, quality control and manufacturing. Isis also made a $10 million equity investment in Alnylam.

        In turn, Alnylam nonexclusively licensed Isis its patent estate relating to antisense motifs and mechanisms and oligonucleotide chemistry to research, develop and commercialize single-stranded RNAi therapeutics and to research double-stranded RNAi compounds. Isis also received a license to develop and commercialize double-stranded RNAi drugs targeting a limited number of therapeutic targets on either an exclusive or co-exclusive basis depending on the target. If Isis develops or commercializes an RNAi-based drug using Alnylam's technology, Isis will pay Alnylam milestones and royalties. For each of these drugs, the potential milestone payments total $3.4 million and are payable upon the occurrence of specified development and regulatory events. As of December 31, 2004, Isis did not have an RNAi-based drug in clinical development. As part of the collaboration, each party granted the other party a nonexclusive cross license to its respective patent estate relating to antisense motifs and mechanisms and oligonucleotide chemistry for microRNA therapeutics.

        In September 2004, Isis recorded a non-cash loss on investment of $5.0 million related to the impairment of its equity investment in Alnylam. The loss on investment reflected a decrease in the market value of Alnylam's stock in 2004, which Isis believes was primarily a result of financial market conditions related to biotechnology companies. Isis' balance sheet at December 31, 2004 includes a short-term investment at fair market value of approximately $2.0 million and a long-term investment at fair market value of $3.9 million.

        During 2004, Isis generated revenue from its relationship with Alnylam totaling $5.5 million, or 13%, of total revenue.

        In May 2003, Isis and Ercole initiated a multi-year collaboration to discover antisense drugs that regulate alternative RNA splicing. As part of the collaboration, the two parties cross-licensed their respective splicing-related intellectual property. As part of this collaboration, Isis granted Ercole a license to its Bcl-x molecule and certain of its chemistry patents. In addition, Isis took an equity ownership position in Ercole, with the initial funding in the form of convertible debt, which the companies anticipate will convert into securities that Ercole issues in its next venture capital financing. Isis also has the option to make an additional equity investment in Ercole. Pursuant to the terms of a Note and Warrant Purchase Agreement, during 2003 and early 2004, Isis made cash payments to Ercole of $500,000 and $250,000, respectively in exchange for a convertible promissory note ("the Note"). Isis expensed the payments when made. The Note is secured by all of Ercole's assets, including intellectual property and licenses. The Note will convert into securities that Ercole issues in a qualified financing, as defined by the agreement.

        In December 2001, Isis licensed its compound, ATL 1102, formerly Isis 107248, to ATL, a publicly-traded company listed on the Australian Stock Exchange. Isis and ATL are participating in a five-year

F-29

antisense drug discovery and development collaboration, under which ATL pays Isis research fees and reimbursed Isis for costs related to preclinical work on ATL 1102. ATL has the option to license additional drugs from Isis. In connection with this collaboration, Isis received 30.0 million shares of ATL common stock upon completion of ATL's initial public offering ("IPO"), representing an initial ownership percentage of approximately 14%, and options to purchase an additional 20.0 million shares of ATL common stock, which expire in 2008. Isis valued its initial ownership at $2.8 million, and is recognizing revenue based on this amount over the term of the agreement. For the years ended December 31, 2004, 2003 and 2002, Isis recorded revenue of $1.4 million, $811,000 and $3.7 million respectively, related to this collaboration. As of December 31, 2004, Isis' ownership percentage in ATL, including 10.3 million shares Isis purchased subsequent to shares it acquired in the IPO, was approximately 11%. Isis' balance sheets at December 31, 2004 and 2003 include a short-term investment at fair market value of $3.8 million and $3.6 million, respectively, related to this equity investment.

        Pursuant to a November 2001 drug development collaboration, Isis agreed to co-develop and commercialize the anti-cancer antisense drug candidate, OGX-011, or ISIS 112989, with OncoGenex, a privately-held Canadian oncology-focused research and development company. Pursuant to the agreement, Isis shares in the costs of developing OGX-011. In exchange, Isis shares in any revenue generated by OncoGenex for OGX-011. In a September 2003 drug development collaboration, Isis also agreed to license certain technology and collaborate on the initial development of a second anti-cancer antisense drug candidate, OGX-225, a second-generation drug, with OncoGenex. Under the terms of the collaboration, during 2003 OncoGenex paid Isis an up-front fee and Isis acquired an ownership interest in OncoGenex of less than 10%. In addition, OncoGenex agreed to provide to Isis milestone payments totaling up to $3.5 million for key clinical and regulatory achievements and royalties on product sales. As of December 31, 2004, OncoGenex had not triggered any of these milestone payments related to OGX-225.

        For the years ended December 31, 2004 and 2003, Isis earned revenue of $669,000 and $750,000, respectively, related to its collaboration with OncoGenex. Isis earned no revenue from OncoGenex during 2002. Isis' balance sheets at December 31, 2004 and 2003 include a long-term investment of $750,000 related to this equity investment, reflecting the value of Isis' initial investment. While there is no readily determinable market value for these securities, there has been no indication that Isis' investment in OncoGenex has been impaired; accordingly, Isis believes that the carrying value of this investment is equal to or below its current fair market value. As of December 31, 2004, Isis' balance sheet included deferred revenue of $1.6 million with corresponding finished goods inventory of $1.4 million on its balance sheet related to an agreement to supply clinical trial material to OncoGenex for which Isis has continuing obligations. Isis expects to recognize the $1.6 million in revenue and related costs of $1.4 million during the first quarter of 2005.

        In January 2005, Isis broadened its antisense drug development partnership with OncoGenex to include the development of two additional second-generation antisense anti-cancer drug candidates. Under the terms of the agreement, OncoGenex is responsible for the preclinical and clinical development of the drug. OncoGenex agreed to pay Isis an upfront fee, milestone payments for key clinical and regulatory achievements, and royalties on future product sales.

F-30


        In November 1998 and September 2000, Isis entered into license agreements with Santaris, a privately-held company, formerly Pantheco A/S, a privately-held company. The agreement was amended in May 2003. Under the terms of the amended and restated license agreements, Isis licensed its novel antisense chemistry, Peptide Nucleic Acid, or PNA, to Santaris on a limited exclusive basis to develop products. The license is restricted to a limited number of molecular targets that are subject to Isis' approval. Santaris has agreed to pay Isis royalties on any products developed under the license.

        As part of its original license agreements with Pantheco, Isis received shares of Pantheco common stock. In May 2003, Pantheco A/S and Cureon A/S merged to form Santaris Pharma A/S. Prior to the merger, Isis purchased additional shares of Pantheco for $55,000 as a result of antidilution provisions related to Pantheco's stock. After the merger and as of December 31, 2004 and 2003, Isis' ownership interest in Santaris was less than 10%. Isis' balance sheets at December 31, 2004 and 2003 included a long-term investment of $625,000, respectively, related to this equity investment, reflecting the value of Isis' initial investment. While there is no readily determinable market value for these securities, there has been no indication that Isis' investment in Santaris has been impaired; accordingly, Isis believes that the carrying value of this investment is equal to or below its current fair market value.

Antisense Commercialization Collaboration

        In July 1997, Isis and Novartis Ophthalmics AG, ("Novartis"), formerly CIBA Vision Corporation, entered into an agreement granting Novartis exclusive worldwide distribution rights for Vitravene. Under the terms of the agreement, Isis is responsible for manufacturing Vitravene and Novartis is responsible for worldwide sales and marketing. Due to the low incidence of CMV retinitis among patients with AIDS, Novartis AG currently offers Vitravene on a limited basis. During 2002, Isis earned revenue of $2.5 million related to a milestone payment from Novartis, and $293,000 in revenue related to the shipment of Vitravene. Isis earned no revenue related to Vitravene during 2004 and 2003.

Ibis Collaborations

        To develop the TIGER technology and applications, our Ibis division has received contracts from a number of government agencies, including DARPA, the NIAID, part of the NIH, the CDC and the FBI. Each of these agencies represents a significant source of funding for its TIGER program. To date, the Ibis division has earned $40.1 million in revenue under its government contracts and grants. Also, it has approval to invoice its government partners an additional $8.6 million under its existing contracts and grants. The Ibis division may receive continued approval to invoice its government partners under these contracts based upon a variety of factors, including the accomplishment of program objectives and the exercise of additional contract options by the contracting agencies. In addition, these agencies may terminate these awards. The Ibis division has received contracts and grants from numerous government agencies valued at up to $63.2 million.

        In October 2004, Isis was granted three government contracts valued at up to $10.0 million from the NIAID, the FBI and an undisclosed government agency for the continued development of our TIGER system. Under the NIAID award, Isis intends to develop an application to use its TIGER technology to assess the safety of investigational vaccines and the components used for the

F-31


manufacturing of biological products by identifying foreign infectious organisms that may be present. Under the FBI award, Isis will continue ongoing development of a microbial agent database.

        Isis receives funding from DARPA through a subcontract with SAIC, on a multi-year project for the ongoing development of TIGER. This project combines Isis' expertise in microbial genome sequence analysis and advanced mass spectrometry technology with SAIC's advanced signal processing capabilities. In March 2004, Isis entered into a two-year contract with SAIC that provides for up to $19.5 million in funding by DARPA. During 2004 and 2003, revenue from SAIC comprised 18% and 16%, respectively, of Isis' total revenue.

        In September 2003, Isis received a three-year grant for up to $6.0 million from the CDC to develop and apply the TIGER technology to the surveillance of human infectious disease in the United States. Using the grant from the CDC, Isis expects to develop and provide TIGER technology for CDC projects focused on emerging human infectious disease.

Licensing Agreements

        In December 2001, Isis licensed to Eyetech, a publicly-held company, certain of its patents necessary for Eyetech to develop, make and commercialize Macugen, a non-antisense compound intended for use in the treatment of ophthalmic diseases. Eyetech paid Isis a $2.0 million upfront fee and agreed to pay milestone and royalty payments in exchange for non-exclusive, worldwide rights to the intellectual property licensed from Isis. In December 2002, Eyetech entered into an agreement with Pfizer to develop and commercialize Macugen.

        During 2004, Isis earned from Eyetech $4.0 million in milestones associated with the filing of an NDA and FDA approval for Macugen for the treatment of wet age-related macular degeneration. Isis' license with Eyetech also may generate additional milestone payments aggregating up to $2.8 million based on achieving specified regulatory milestones with respect to the use of Macugen for each additional therapeutic indication.

        In December 2004, Isis sold a portion of its royalty rights in Macugen to Drug Royalty USA, Inc. ("DRC) in exchange for aggregate payments of $24.0 million over the next three years. Under the terms of the agreement, Isis and DRC will share the royalty rights on Macugen through 2009. After 2009, Isis retains all royalties for Macugen under its Eyetech agreement. Under the agreement, through 2009 DRC will receive royalties on the first $500.0 million of annual sales of Macugen. Isis and DRC will each receive 50 percent of royalties on annual sales between $500.0 million and $1.0 billion. Isis retains 90% of all royalties on annual sales in excess of $1.0 billion and 100% of all royalties after 2009. Isis has retained all milestones payable to Isis by Eyetech under the companies' original license agreement.

        As part of the sale, Isis agreed to pay DRC liquidated damages if any one of a defined set of defaults occurs. The amount of liquidated damages will be calculated such that DRC will receive a ten per cent per annum return, compounded quarterly on the total of all purchase price payments made by DRC to us through the default date minus the total of any royalties received by DRC through the default date. In addition, DRC may withhold any installment of the purchase price if immediately prior to such payment, Isis fails to meet a minimum liquidity requirement equal to the then outstanding

F-32


balance on its loan with Silicon Valley Bank; plus the potential amount of liquidated damages, assuming that DRC has paid the impending purchase price installment; plus its cash burn over the most recent three months. As collateral for its obligations under the sale agreement, Isis granted DRC a first priority security interest in the patents licensed by Isis to Eyetech under the license agreement and in the license agreement itself.

        In May 2001, Isis entered into an agreement with Hybridon under which Isis acquired an exclusive license to all of Hybridon's antisense chemistry and delivery patents and technology. Hybridon retained the right to practice its licensed antisense patent technologies and to sublicense it to collaborators under certain circumstances. In addition, Hybridon received a non-exclusive license to Isis' suite of RNase H patents. In exchange for the license to Hybridon's antisense patents, Isis paid $15.0 million in cash and agreed to pay Hybridon $19.5 million in Isis common stock before May 2003. In return for access to Isis' patents, Hybridon agreed to pay Isis $6.0 million in Hybridon common stock before May 2004. In September 2001 and October 2001, Isis issued to Hybridon 357,143 shares of its common stock valued at $5.0 million and 500,000 shares of its common stock valued at $10.0 million, respectively. In May 2002, Hybridon issued to Isis 1,005,499 shares of its common stock valued at $1.3 million and paid Isis $700,000 in cash. In August 2002, Hybridon and Isis cancelled the remaining reciprocal financial obligations related to this agreement. The cancellation of the obligations resulted in a decrease to Isis' carrying value for the license in the amount of $500,000. Isis' balance sheet at December 31, 2004 and 2003 reflected a licensing asset, net of amortization, of $21.3 million and $23.2 million, respectively, and a short-term investment at fair market value of $474,000 and $1.1 million, respectively, related to this agreement. Early in 2005, Isis liquidated its short term investment for cash proceeds of $655,000.

        In March 1999, Isis licensed certain antisense patents from Integrated DNA Technologies, Inc. ("IDT"), a leading supplier of antisense inhibitors for research. These patents are useful in functional genomics and in making certain antisense drugs. In December 2001, Isis expanded this license agreement to allow Isis to exclusively sublicense this intellectual property for functional genomics purposes. Under the license, Isis paid IDT $4.2 million through December 31, 2004 and expects to pay IDT an aggregate of $700,000 in 2005.

        In addition, in December 2001 Isis established a long-term research-scale antisense inhibitor supply agreement with IDT. In this supply agreement IDT agreed to manufacture research-scale antisense inhibitors and research reagents to Isis' specifications. Isis paid IDT $5.0 million toward the future purchase of antisense inhibitors. During the fourth quarter of 2004, Isis recorded a non-cash charge of $4.2 million to write off this unused portion as part of its restructuring activities (Note 8, "Restructuring Activities").

Joint Ventures

        Isis and Elan formed Orasense, a joint venture to develop technology for the formulation of oral drugs, and HepaSense, a joint venture to develop an antisense drug to treat patients chronically infected with the Hepatitis C virus, or HCV, during 1999 and 2000, respectively. In late 2002, Elan

F-33

concluded its participation in both of the related collaborations. Pursuant to a June 2004 agreement, Isis acquired Elan's minority interest in Orasense and HepaSense. As part of the agreement, Isis eliminated all future royalties to Elan related to these joint ventures.

        During 2002, Isis earned revenue of $3.0 million from HepaSense, and $8.9 million from Orasense, which Isis included in its consolidated statements of operations as research and development revenue from affiliates. During 2002, Isis recorded $6.5 million as equity in the loss of HepaSense, and $9.5 million as equity in the loss of Orasense. As of December 31, 2004 and 2003, Isis had no receivable or funding obligation related to Orasense or HepaSense.

7.     Segment Information and Concentration of Business Risk

        Prior to 2004, the Company managed itself on a fully integrated basis in one operating segment. As a result of the technological and organizational advances that Isis' Ibis division made during 2004, combined with the future commercialization plans for its TIGER program and the significant contribution that it made to Isis' 2004 revenue, Isis believes it is appropriate to discuss the financial results of its Ibis division as a separate operating segment. In addition, based upon the distinct nature of the products and services each segment provides, Isis determined that it operates in two reportable segments, Drug Discovery and Development, and Ibis. Segment operating loss includes research and development, general and administrative expenses, and other charges attributable to the segment. Costs excluded from the segments consist of compensation expense (benefit) related to stock options and restructuring activities.

        The Drug Discovery and Development segment generates revenue from collaborations with corporate partners and from licensing proprietary patent rights. Revenue from collaborations with corporate partners may consist of upfront payments, funding for research and development activities, milestones and royalties. This segment's proprietary technology to discover and characterize novel antisense inhibitors has enabled its scientists to modify the properties of its antisense drug candidates for optimal use with particular targets and thus, to produce a broad proprietary portfolio of compounds applicable to many disease targets.

        The Ibis segment generates revenue from grants and contracts from United States government agencies, including DARPA, the CDC, the FBI and the NIAID, a part of the NIH. Within the Ibis division, the Company has invented a technology that has the potential to revolutionize the identification of infectious diseases. This technology is called TIGER, which is the product of core technology development and small molecule drug discovery research conducted within the Ibis division during its early years. Prior to the development of TIGER, the Ibis division focused on discovering novel small molecule antimicrobial drugs.

        Prior to 2004, Isis did not allocate R&D support or general and administrative costs to its operating segments. Isis believes that it would be impractical to obtain comparative information for prior periods, and that such comparisons between any period in 2004 and the comparable periods in prior years for R&D support costs and general and administrative expenses by segment would be meaningless; therefore, Isis has not presented segment financial information for periods prior to 2004. Isis does not include asset or liability information by reportable segment since Isis does not currently segregate this information by segment and it is not used for purposes of making decisions about allocating resources to the segments and assessing their performance.

F-34

        The following is information for net sales and operating income by segment for the year ended December 31, 2004.

Revenue:

   Drug Discovery and
Development
   Ibis
   Corporate
   Total
  
  Research and development   $ 21,684   $ 10,933   $ —   $ 32,617  
  Licensing and royalty     10,007     —     —     10,007  
   
 
 
 
 
    Total segment revenue   $ 31,691   $ 10,933   $ —   $ 42,624  
   
 
 
 
 
Loss from operations   $ (82,135 ) $ (3,297 ) $ (32,421 ) $ (117,853 )
   
 
 
 
 

Geographic Information

        Revenue by geographic area for the year ended December 31, 2004 is as follows:

US   $ 41,124
Singapore     1,500
   
  Total   $ 42,624
   

        Long-lived assets by geographic area as of December 31, 2004 are as follows:

US   $ 82,515
Singapore     301
   
Total   $ 82,816
   

Concentrations of Business Risk

        Isis does not generate sales from products but has historically funded its operations in part from collaborations with corporate partners and various government agencies. A relatively small number of partners historically have accounted for a significant percentage of Isis' revenue. Revenue from significant partners as a percentage of total revenue was as follows:

 
   2004
   2003
   2002
  
Partner A   37 % 62 % 57 %
Partner B   18 % 16 % 0 %
Partner C   13 % 0 % 0 %
Partner D   0 % 0 % 11 %

        During 2004, 2003 and 2002, Isis derived approximately 28%, 20% and 7%, respectively, of its revenue from agencies of the United States Government, including approximately 18%, 16% and zero, respectively, of revenue from one significant customer.

        Contract receivables from four significant partners comprised approximately 30%, 20%, 17% and 10% of contract receivables at December 31, 2004. Contract receivables from three significant partners comprised approximately 49%, 17% and 15% of contract receivables at December 31, 2003.

F-35


8.     Restructuring Activities

        During the fourth quarter of 2004, Isis recorded a $32.4 million non-cash charge for restructuring activities resulting from management's strategic decision to reorganize and refocus the Company's resources to advance its most promising second-generation drugs and to continue its development of antisense technology. As a result, in 2004 Isis recorded write-downs which approximated the carrying value of tangible and intangible assets considered non-essential to the Company's current focus. These charges are summarized below:

 
   Year Ended
December 31,
2004
 
   (in thousands)
Excess or idle equipment costs   $ 1,161
Write-down of inventories to estimated net realizable value     20,972
Write-down of prepaid expenses to estimated net realizable value     4,149
Write-down of patent costs to estimated net realizable value     6,145
   
  Total   $ 32,427
   

        In connection with the decision to reorganize and refocus the Company's resources, in January 2005 Isis commenced several cost containment measures, including a reduction in workforce of approximately 160 employees, the consolidation of its facilities in the United States, and the closure of the Company's research and development laboratory in Singapore. Isis expects to complete these restructuring efforts by the end of the second quarter 2005. Pursuant to SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," Isis expects to record the majority of these charges during the first quarter of 2005.

        In April 2003, Isis initiated a restructuring in response to disappointing results from the first Phase III trial of Affinitak. As a result, Isis had a small reduction in its workforce, which primarily represented positions that Isis used to support the commercialization and manufacture of Affinitak. Consequently, Isis incurred a restructuring charge of approximately $1.8 million during the second quarter of 2003. Isis completed the utilization of the reserve related to this restructuring in the fourth quarter of 2003.

        In November 2002, Isis announced the termination of the GeneTrove database product offering and the resulting reorganization of the GeneTrove program. As a result, Isis had a small reduction in workforce. The restructuring plan also provided for the write-down of certain intellectual property. As a result of this plan, Isis recognized restructuring related charges of approximately $1.4 million as operating expenses in the fourth quarter of 2002. Isis fully utilized the reserve related to this restructuring in the fourth quarter of 2003.

9.     Employee Postemployment Benefits

        Isis has an employee 401(k) salary deferral plan, covering all domestic employees. Employees may make contributions by withholding a percentage of their salary up to the IRS annual limit ($13,000 and $16,000 in 2004 for employees under 50 years old and over 50 years old, respectively). Isis made approximately $478,000 and $463,000 in matching contributions for the years ended December 31, 2004 and 2003, respectively.

F-36


10.   Affiliate Supplementary Disclosure

Orasense

        Due to the significant minority investor rights retained by Elan and its subsidiaries, Isis accounted for its investment in Orasense under the equity method of accounting through 2002. At inception, Elan granted Orasense a license to its intellectual property for $15.0 million. The term of the license was three years and amortization expense related to this license was $1.3 million for the year ended December 31, 2002. Through December 2002, Orasense incurred research and development expenses, performed by Elan and Isis on Orasense's behalf, in the course of its product development. In conjunction with its restructuring efforts, Elan concluded its participation in the Orasense collaboration effective December 31, 2002. As a result, Isis regained all rights to ISIS 104838, the compound that Elan and Isis were developing within Orasense.

        In June 2004, Isis acquired Elan's minority interest in Orasense. Through the agreement, Isis eliminated all future royalties to Elan related to the technology for the formulation of oral drugs developed within the Orasense collaboration.

        In 2004, Orasense incurred approximately $811,000 in research and development expenses through the date of Isis' acquisition of Elan's minority interest in Orasense.

        The following table presents summary financial information for Orasense as of and for the year ended December 31, 2003 (in thousands, except per share amounts)

Balance Sheet:        
Assets        
  Cash and cash equivalents   $ 6  
   
 
    Total assets   $ 6  
   
 
Liabilities and Stockholders' Equity        
  Amounts due to affiliates   $ —  
  Common stock, $1.00 par value; 12,000 authorized, issued and outstanding at December 31, 2003     12  
  Additional paid-in capital     50,129  
  Accumulated deficit     (50,135 )
   
 
    Total liabilities and stockholders' equity   $ 6  
   
 
Results of Operations:        
  Revenue   $ —  
  Research and development expenses     4,207  
   
 
    Total operating expenses     4,207  
   
 
    Net loss   $ (4,207 )
   
 

HepaSense

        Due to the significant minority investor rights retained by Elan and its subsidiaries, Isis accounted for its investment in HepaSense under the equity method of accounting through 2002. At inception, Elan granted HepaSense a license to its intellectual property for $15.0 million. The term of the license was three years and amortization expense related to this license totaled $5.0 million for the year ended

F-37


December 31, 2002. HepaSense incurred research and development expenses, performed by Elan and Isis on Hepasense's behalf, in the course of its product development. In conjunction with its restructuring efforts, Elan concluded its participation in the HepaSense collaboration in 2002 and Isis regained all rights to ISIS 14803. As a result of the collaboration termination, there was no activity during the years ended December 31, 2004 and 2003.

        In June 2004, Isis acquired Elan's minority interest in HepaSense. Through the agreement, Isis eliminated all future royalties to Elan related to ISIS 14803.

        The following table presents summary financial information for HepaSense as of and for the year ended December 31, 2003 (in thousands, except per share amounts):

Balance Sheet:        
Assets        
  Cash and cash equivalents   $ 4  
   
 
    Total assets   $ 4  
   
 
Liabilities and Stockholders' Equity        
  Common stock, $1.00 par value; 6,001 shares authorized, issued and outstanding at December 31, 2003   $ 6  
  Series A Preferred stock, $1.00 par value; 6,000 shares authorized, issued and outstanding at December 31, 2003     6  
  Additional paid-in capital     26,221  
  Accumulated deficit     (26,229 )
   
 
    Total liabilities and stockholders' equity   $ 4  
   
 

F-38

11.   Quarterly Financial Data (Unaudited)

        The following financial information reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods. Summarized quarterly data for the years ended December 31, 2004, and 2003 are as follows (in thousands, except per share data).

 
   First Quarter
   Second Quarter
   Third Quarter
   Fourth Quarter
  
2004 Quarters                          
Revenue   $ 12,303   $ 9,843   $ 9,093   $ 11,385  
Operating expenses (1)     34,638     31,183     31,473     63,183  
Loss from operations (1)     (22,335 )   (21,340 )   (22,380 )   (51,798 )
Net loss (1)     (26,306 )   (25,949 )   (32,708 )   (57,540 )
Accretion of dividends on preferred stock     (181 )   (180 )   —     —  
Net loss applicable to common stock (1)   $ (26,487 ) $ (26,129 ) $ (32,708 ) $ (57,540 )
Basic and diluted net loss per share(3)   $ (0.47 ) $ (0.47 ) $ (0.57 ) $ (1.00 )
 
   First Quarter
   Second Quarter
   Third Quarter
   Fourth Quarter
  
2003 Quarters                          
Revenue   $ 13,980   $ 15,017   $ 11,294   $ 9,699  
Operating expenses (2)     32,892     34,536     30,361     31,179  
Loss from operations (2)     (18,912 )   (19,519 )   (19,067 )   (21,480 )
Net loss (2)     (24,321 )   (23,097 )   (22,203 )   (25,375 )
Accretion of dividends on preferred stock     (171 )   (172 )   (175 )   (176 )
Net loss applicable to common stock (2)   $ (24,492 ) $ (23,269 ) $ (22,378 ) $ (25,551 )
Basic and diluted net loss per share(3)   $ (0.44 ) $ (0.42 ) $ (0.40 ) $ (0.46 )
(1)
Loss includes charges related to restructuring activities of $32.4 million incurred during quarter ended December 31, 2004.

(2)
Includes charges related to restructuring activities of $1.8 million incurred during the quarter ended June 30, 2003.

(3)
Net loss per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly net loss per share will not necessarily equal the total for the year.

12.   Subsequent Events

        On or about January 27, 2005, Ajinomoto Co., Inc. ("Ajinomoto") filed a Demand for Arbitration against Isis with the American Arbitration Association in San Diego, California. The Demand relates to a 1994 license agreement between Ajinomoto and Isis, which purports to license certain intellectual property in exchange for initial payments, royalties and certain milestone payments relating to the development of products covered by the license. Ajinomoto alleges that several products developed by Isis are covered by the license and seeks a determination of products covered by the license, along with an accounting of any sums due as a result. Ajinomoto alleges these sums amount to no less than $3.9 million. Ajinomoto also seeks a determination that the license is still in force. Isis strongly believes that it has not developed any products covered by the license, and intends to vigorously defend the claim. A hearing on this matter has not yet been set. Isis estimates that the potential range of loss on this claim is zero to $2.1 million, and believes it is reasonably possible, but not probable, that it will ultimately pay any amounts to Ajinomoto related to this claim. As such, Isis has not recorded a loss related to this claim as of December 31, 2004.

F-39



QuickLinks

FORWARD-LOOKING STATEMENTS
TRADEMARKS
PART I
PART II
PART III
PART IV
SIGNATURES
POWER OF ATTORNEY
INDEX TO EXHIBITS
ISIS PHARMACEUTICALS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ISIS PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
ISIS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except for per share amounts)
ISIS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Years Ended December 31, 2004, 2003 and 2002 (in thousands)
ISIS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
ISIS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.52


Amendment No. 1

        This AMENDMENT No. 1 (the "Amendment") is entered into as of the 21 day of December, 2004 ("the Effective Date") by and among EYETECH PHARMACEUTICALS, INC., a Delaware Corporation having its principal place of business at 3 Times Square, 12th Floor, New York, NY 10036 ("EYETECH") and ISIS PHARMACEUTICALS, INC., a Delaware Corporation having its principal place of business at 2292 Faraday Ave., Carlsbad CA ("ISIS") to amend the License Agreement effective as of December 31, 2001 ("the Agreement"), by and among EYETECH and ISIS. Capitalized terms used and not otherwise defined herein shall have the meanings given them in the Agreement.

        WHEREAS, ISIS wishes to induce Eyetech to agree to provide a Consent of Assignment by agreeing to amend the Agreement to amend the definition of Net Sales and timing of milestone payments set forth therein.

        Now, therefore in consideration of the foregoing and the covenants and promises contained in this Amendment, the Parties hereby amend the Agreement as follows:

        1.     The preamble of Section 3.1.2 is hereby amended as follows:

        2.     The definition for Net Sales set forth in Exhibit A is hereby replaced with the following definition:

        If any such sales to third parties are made in transactions that are not at arm's length between the buyer and the seller, then the gross amount to be included in the calculation of Net Sales shall be the amount that would have been invoiced had the transaction been conducted at arm's length. Such amount that would have been invoiced shall be determined, wherever possible, by reference to the average selling price of EYE001 in arm's-length transactions in the relevant country.

1

        If Eyetech, its affiliate or sublicensee sells EYE001 in unfinished form to a third party for resale, then the gross amount to be included in the calculation of Net Sales arising from such sale shall be the amount invoiced by the third party upon resale, in lieu of the amounts invoiced by Eyetech, its affiliates or sublicensee when selling EYE001 in unfinished form. Otherwise, where Eyetech, its affiliate or sublicensee sells EYE001 in finished form to a third party that does not require a sublicense under the Eyetech Patent Rights for further resale (each such third party hereinafter a "Distributor"), the amount to be included in the calculation of Net Sales shall be the price invoiced from Eyetech or its affiliate or sublicensee to the third party, not the amount invoiced by the third party upon resale.

        If, in addition to or in lieu of a transfer price paid for quantities of EYE001 supplied, any Distributor provides consideration to Eyetech, its affiliate or sublicensee in connection with any EYE001 or the Distributor's rights or relationship with Eyetech, its affiliate or sublicensee in relation thereto, then such consideration shall be included in the calculation of Net Sales in the Quarter in which it becomes due to Eyetech or its affiliate or sublicensee (as applicable). Notwithstanding the foregoing, amounts received by Eyetech, or its affiliates or sublicensees, for the sale of EYE001 among Eyetech and its affiliates or sublicensees for resale shall not be included in the computation of Net Sales hereunder.

        With the exception of clinical trials, including Phase IV trials, and the use of reasonable samples, EyeTech, its affiliates or sublicensees will be treated as having sold EYE001 for an amount equal to the fair market value of EYE001 if: (a) EYE001 is used by EyeTech, its affiliates or sublicensees without charge or provision of invoice, or (b) EYE001 is provided to a third party by EyeTech, its affiliates or sublicensees without charge or provision of invoice and used by such third party.

        Net Sales shall be determined from books and records maintained in accordance with GAAP, consistently applied throughout the organization and across all products of the entity whose sales of EYE001 are giving rise to Net Sales.

        3.     Except as specified above, all other terms and provisions of the Agreement shall remain in full force and effect.

        4.     This Amendment shall be construed and the rights of the parties determined in accordance with the laws of the law of the state of Delaware without giving effect to its conflict of laws rules.

        5.     This Amendment may be executed in counterparts, each of which shall constitute an original but both of which shall together constitute one and the same instrument.

* * * *

        IN WITNESS WHEREOF, the parties have duly executed this Amendment as of the Effective Date.

EYETECH PHARMACEUTICALS, INC.   ISIS PHARMACEUTICALS, INC.

By:
/s/  GLENN SBLENDORIO      
Name: Glenn Sblendorio
Title: Chief Financial Officer
 
By:
/s/  B. LYNNE PARSHALL      
Name: B. Lynne Parshall
Title: EVP & CFO

2



QuickLinks

Amendment No. 1

QuickLinks -- Click here to rapidly navigate through this document

CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. §§ 200.80(b)4, AND 240.24

Exhibit 10.53


AGREEMENT FOR SALE

AND

ASSIGNMENT OF RIGHTS

        THIS AGREEMENT (the "Agreement") is made and entered into as of this 21 day of December, 2004 (the "Effective Date") by and between ISIS PHARMACEUTICALS, INC., a subsisting corporation under the laws of the State of Delaware ("ISIS") and DRUG ROYALTY USA, INC., a subsisting corporation under the laws of the State of Nevada ("DRC").

RECITALS:

A.
Capitalized terms used herein have the meanings set forth in Schedule "A" hereto.

B.
ISIS is the exclusive owner of the Licensed Patent Rights and has granted to Eyetech, pursuant to the License Agreement, a non-exclusive license under the Licensed Patent Rights, including a right of sublicense, to make, have made, use and sell the Product world-wide.

C.
ISIS and DRC have entered into a non-binding letter of intent dated [***], 2004 (the "LOI"), pursuant to which ISIS has agreed to sell, assign, transfer, set-over and convey to DRC the Assigned Rights in consideration of the payment by DRC to ISIS of the Purchase Price. DRC and ISIS wish to enter into this Agreement to effect the sale, assignment, transfer, set-over and conveyance to DRC of the Assigned Rights on the terms and conditions set forth herein.

        NOW, THEREFORE, in consideration of the recitals and mutual covenants set forth herein, the payment by DRC to ISIS of [***] US dollars (US$[***]) and other good and valuable consideration (the receipt and sufficiency of which is hereby acknowledged), the parties agree as follows:


ARTICLE 1
ASSIGNMENT AND SALE

1.1    Sale and Assignment.    Subject to the terms and conditions of this Agreement, ISIS hereby sells, assigns, transfers, sets-over and conveys to DRC all right, title and interest in and to the Assigned Rights free and clear of any Encumbrance. For greater certainty, DRC shall not purchase or assume any of ISIS' obligations under the License Agreement in connection with the foregoing, including any responsibility to prosecute and/or maintain the Patents or the Licensed Patent Rights.

        An example as to how royalty payments would be calculated and payable to DRC in connection with the Royalty Interest and to ISIS in connection with the ISIS Royalty Interest is set out in Schedule "B" hereto.

1.2    Purchase Price.


1.3    Eyetech Consent.    On or before Closing, ISIS shall obtain from Eyetech, in writing, a consent and agreement (the "Eyetech Consent") in form and substance reasonably satisfactory to DRC, providing, among other matters: (i) Eyetech's consent to the sale, assignment, transfer, set-over and conveyance by ISIS to DRC of the Assigned Rights and acknowledgement that DRC shall have the right to exercise such Assigned Rights directly against Eyetech; (ii) Eyetech's agreement to pay the Royalties to [***] (without any setoff against any amounts owing by ISIS to Eyetech) in accordance with the terms and conditions of the License Agreement, as amended in accordance with the terms of this Agreement;

2

(iii) Eyetech's agreement to provide directly to both DRC and ISIS copies of any royalty statements and other information that Eyetech is obligated to provide under the License Agreement in connection with the Royalties; (iv) Eyetech's agreement that ISIS may disclose to DRC information provided to ISIS by Eyetech pursuant to or in connection with the License Agreement; and (v) Eyetech's agreement to permit an independent, certified public accountant appointed by DRC, in ISIS' stead, to examine Eyetech's records and other material documents relating or relevant to the calculation of the Royalties or to the Net Sales of the Product associated therewith; and (vi) Eyetech's confirmation that DRC shall have the right to assign all right, title and interest in and to the Assigned Rights and the Eyetech Consent to a [***], at any time, without further notice to or consent from Eyetech. In connection with the foregoing, ISIS shall use its commercially reasonable efforts to obtain from Eyetech on or before Closing, in writing, in form and substance reasonably satisfactory to DRC, Eyetech's agreement to change the Reporting Periods under the License Agreement to calendar quarters.

1.4    Entitlement and Payments; No Offsets.


ARTICLE 2
REPRESENTATIONS AND WARRANTIES

        2.1    ISIS' Representations and Warranties.    Except as qualified by the exceptions set forth in Schedule "C" hereto (the "Schedule of Exceptions"), ISIS represents and warrants to DRC as follows and acknowledges that DRC is relying on such representations and warranties in entering into this Agreement:

3

4

5

6

2.2    DRC's Representations and Warranties.    DRC represents and warrants to ISIS as follows and acknowledges that ISIS is relying on such representations and warranties in entering into this Agreement:

2.3    Knowledge.    Any reference in Sections 2.1 or 2.2 to "ISIS' knowledge", "DRC's knowledge" or any similar expressions shall mean the knowledge of any executive officer of ISIS or DRC or any attorney advising such party with respect to this Agreement, the Patents or the License Agreement, as applicable.

2.4    Survival of Representations and Warranties.    All representations and warranties of the parties hereunder shall survive the execution and delivery of this Agreement and Closing without time limit. Any investigation or other examination that may have been made or may be made at any time by or on behalf of the party to whom representations and warranties are made shall not limit, diminish or in any way affect the representations and warranties in this Agreement, and each party may rely on the representations and warranties in this Agreement irrespective of any information obtained by it by any investigation, examination or otherwise unless such party has actual knowledge as at the Effective Date that such representations or warranties are false or incorrect.


ARTICLE 3
COVENANTS

3.1    Notification.

7

3.2    Certain Conduct.    Without the prior written consent of DRC, ISIS shall not: (i) sell, assign, transfer, deliver, license or otherwise dispose of any of the Patents for use in the Field; (ii) create or permit to exist any Encumbrance (other than the Encumbrance created in favor of DRC under the Security Agreement) on the Patents, the License Agreement or the Assigned Rights; (iii) respond to any Communication that could adversely affect the exploitation of the Patents or the Product in the Field; (iv) amend or terminate the License Agreement or fail to perform and fulfill its obligations under the License Agreement in accordance with the terms thereof, except as permitted under Section 9.9 of the License Agreement; (v) consent to any assignment of the License Agreement by Eyetech; or (vi) agree to do any of the foregoing or take any other action that does or would materially reduce or otherwise materially adversely affect the Patents in the Field, the License Agreement or the Assigned Rights or cause any representation or warranty set forth in Section 2.1 to become untrue as of the date of such action, including (A) granting or permitting any license of the Patents, other than under the License Agreement, for use in the Field, (B) failing to diligently process, prosecute, and maintain in full force and effect the [***] Patents in each of the countries of the Major Market in which ISIS has an issued patent or pending patent application or (C) failing to diligently enforce in full force and effect the [***] Patents in the Field in each of the countries of the Major Market in which ISIS has an issued patent. For purposes of clarification, the granting of a Permitted License will not be deemed a violation of this Section 3.2.

3.3    Termination of License Agreement.    In the event that the License Agreement is terminated by ISIS with the prior written consent of DRC or by Eyetech, ISIS covenants to use its commercially reasonable efforts to (a) negotiate, execute and deliver (i) a new license agreement for the license of the Licensed Patent Rights for use in the Field, (ii) if both parties agree, in good faith, that the negotiation, execution and delivery of such a new license agreement is highly unlikely, an assignment or sale of the Licensed Patent Rights for use in the Field, or (iii) any other arrangement for the exploitation of the Licensed Patent Rights for use in the Field, each on terms that are reasonably satisfactory to DRC, and (b) obtain all approvals and consents which are necessary or, in DRC's sole

8


discretion, desirable in connection therewith, including a written consent of the other party to the New License Agreement substantially in the form of the Eyetech Consent. If ISIS does not complete such negotiation, execution and delivery and obtain such approvals and consents within [***] months following the termination of the License Agreement, then ISIS shall assist and cooperate with DRC, and DRC shall be authorized in the name of ISIS for the benefit of DRC, at DRC's sole discretion, cost and expense (including DRC's payment of ISIS' reasonable attorney fees in connection therewith, if any), to negotiate, execute and deliver a new license agreement for the license of the Licensed Patent Rights for use in the Field on the same or better terms (when taken as a whole) as the License Agreement. For avoidance of doubt, as between the parties hereto, the Royalty Interest shall be equal to (i) [***]% of all payments, property and other consideration that is less than or equal to [***] for any calendar years prior to 2010 plus the pro rated dollar amount attributable to any Additional Period, (ii) [***]% of all payments, property and other consideration that is greater than [***] but less than or equal to [***] for any calendar years prior to 2010 plus the pro rated dollar amount attributable to any Additional Period and (iii) [***]% of all payments, property and other consideration that is greater than [***] for any calendar years prior to 2010 plus the pro rated dollar amount attributable to any Additional Period (collectively, the "New Royalty Interest") under such new license, assignment or sale, or other arrangement (the "New License Agreement"). In such event, ISIS agrees to comply with the provisions of this Agreement in connection with the New License Agreement and references herein to Royalty Interest, the License Agreement, the Assigned Rights and the ISIS Rights shall be deemed to be references to the New Royalty Payments, the New License Agreement, all of the right, title and interest (but none of the obligations) of ISIS in and to the New License Agreement, and subject to ISIS' right to retain rights equivalent to the ISIS Rights, respectively, and references to Eyetech shall be deemed to be references to the other party to the New License Agreement.

3.4    Confidentiality.    All information furnished by DRC to ISIS or by ISIS to DRC in connection with this Agreement and the transactions contemplated hereby, as well as the terms, conditions and provisions of this Agreement, shall be kept confidential by ISIS and DRC and shall be used by ISIS and DRC only in connection with this Agreement and the transactions contemplated hereby, except in connection with the enforcement of rights under this Agreement and except to the extent that such information (i) is already known by the party to whom the information is disclosed or in the public domain at the time the information is disclosed, (ii) thereafter becomes lawfully obtainable from other sources, (iii) is required to be disclosed in any document to be filed with any federal, state, provincial, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or (iv) is required to be disclosed under securities laws or regulations applicable to ISIS, DRC or their respective affiliates, or by court or administrative order. Notwithstanding the foregoing, ISIS and DRC may disclose such information to their respective affiliates, directors, officers, investors, bankers, advisors, trustees and representatives (collectively "Representatives"), provided that such persons shall be informed of the confidential nature of such information and shall be obligated to keep such information confidential pursuant to the terms of this Section 3.4.

3.5    Performance of Obligations.

9

3.6    Grant of Security Interest.    As general and continuing security for the due payment and performance of all of ISIS' obligations under this Agreement, the License Agreement and the ISIS Closing Documents, ISIS shall grant to DRC a first-ranking security interest in and to the Patents and the License Agreement (as it relates to the ISIS Rights but not the Assigned Rights) subject to the terms of a security agreement in form and substance satisfactory to both parties (the "Security Agreement"). The Security Agreement shall provide that, among other matters, subject to the terms and conditions hereof and thereof, (a) ISIS may exploit (including through granting Permitted Licenses) the Patents and the Licensed Patent Rights for any purpose other than in the Field and (b) DRC may only exercise its rights under the Security Agreement to the extent of its Damages and only as contemplated by part (ii) of Section 5.3(b) and Section 5.3(c), but not for breach of any other provision of this Agreement by ISIS. ISIS shall keep the Patents and the License Agreement free at all times from any Encumbrances, except the Encumbrance granted in favour of DRC or others pursuant to the terms and conditions of the Security Agreement.

3.7    No Liability.    DRC will have no liability to ISIS for any act, omission or failure to act by DRC on behalf of ISIS under Sections 3.3, 3.5 or 7.1 or for any act, omission or failure to act by DRC or any agent in connection with the Encumbrance granted to DRC under the Security Agreement, including in any enforcement or realization of such Encumbrance except for any loss or damage suffered by ISIS that results from the willful misconduct or gross negligence of DRC or any such agent. No such act, omission or failure to act by DRC or its agents shall relieve ISIS of any of its obligations hereunder or under the License Agreement.

10


3.8    Books and Records.    ISIS will treat its sale and assignment to DRC of the Assigned Rights pursuant to Section 1.1 as a sale and assignment on ISIS' books and records. Subject to any re-conveyance of the Assigned Rights under Section 5.3 or Subsections 5.A.2(b) or (c), ISIS will disclose in the footnotes to its audited financial statements filed with the SEC that ISIS has (i) sold and assigned the Assigned Rights to DRC (or its permitted assigns) and (ii) granted DRC (or its permitted assigns) a security interest pursuant to the Security Agreement as general and continuing security for the due payment and performance of all of ISIS' obligations under this Agreement, the License Agreement and the ISIS Closing Documents.

3.9    Silicon Valley Bank Loan; Notes.


ARTICLE 4
CLOSING; DELIVERIES ON CLOSING

4.1    Closing.    Subject to satisfaction or waiver of all deliveries set forth below, the closing with respect to the sale, assignment, transfer, set-over and conveyance of the Assigned Rights (the "Closing") shall occur on the Effective Date.

11


4.2    Deliveries by ISIS.    ISIS hereby agrees to deliver to DRC on the Effective Date:

4.3    Deliveries by DRC.    DRC hereby agrees to deliver to ISIS on the Effective Date:

12


ARTICLE 5.A
SPECIAL EVENTS OF DEFAULT

5.A.1    Special Events of Default.    Following the occurrence of any Special Event of Default, DRC shall have a period of [***] days (such [***] days commencing on the earlier of (i) the date of receipt by DRC of written notification from ISIS of the occurrence of such Special Event of Default and (ii) the date DRC becomes actually aware of the occurrence of a Special Event of Default and has notified ISIS of same in writing) to notify ISIS in writing that either: (a) DRC waives such Special Event of Default, such that the parties' respective rights and obligations hereunder shall continue; or (b) DRC elects to exercise DRC's remedies under Subsection 5.A.2 below (collectively, the "Special Event of Default Remedies").

5.A.2    Special Event of Default Remedies.    If DRC elects to exercise the Special Event of Default Remedies or fails to waive in writing the Special Event of Default before the expiry of the [***] day period in Section 5.A.1, then:

13

5.A.3    Payment Date and Interest on Overdue Amounts.    All amounts payable by ISIS under Section 5.A.2 shall be due within [***] days following written notice by DRC of its election to exercise the Special Event of Default Remedies or upon the expiry of the [***] day period in Section 5.A.1 if no written notice of waiver is provided by DRC. Overdue amounts shall bear interest at the rate of [***] per annum, compounded quarterly, until paid in full.

14


ARTICLE 5
TERM AND TERMINATION

5.1    Term.    Subject to this Article 5 and Article 5.A, the term of this Agreement shall commence as of the Effective Date and shall continue until the date of receipt by DRC of the Royalties for the calendar quarter ending on December 31, 2009; provided that, notwithstanding the term of this Agreement, DRC shall be entitled to receive any payments relating to the Royalty Interest accruing on or prior to the termination or expiry of this Agreement.

5.2    [Intentionally Deleted]

5.3    Termination on Event of Default

15

5.4    Scope of DRC Remedies.    DRC acknowledges and agrees that if an event constitutes both an Event of Default and a Special Event of Default, DRC may exercise its remedies either under Section 5.3 or Article 5.A but it may not exercise its remedies under both Section 5.3 and Article 5.A.


ARTICLE 6
MUTUAL INDEMNITY

6.1    Mutual Indemnification.    ISIS hereby indemnifies and holds DRC harmless from any Damages suffered or incurred by DRC to the extent resulting from (i) any material breach of a representation or warranty of ISIS contained herein or in any certificate or update delivered pursuant to Subsections 1.2(b) or (c), or (ii) the material breach by ISIS of any covenant contained in this Agreement or any ISIS Closing Documents, or (iii) any Encumbrance of the Assigned Rights or any claim with respect to the Patents, the Licensed Patent Rights or the Product. DRC hereby indemnifies and holds ISIS harmless from any Damages suffered or incurred by ISIS to the extent resulting from (i) any material breach of a representation or warranty of DRC contained herein, or (ii) the material breach by DRC of any covenant contained in this Agreement or any DRC Closing Documents. For greater certainty, neither party shall indemnify the other for any Damages related to any action or inaction on the part of Eyetech.

6.2    Third Party Claims Procedure.    The indemnified party shall give notice (the "Indemnity Notice") to the indemnifying party specifying the particulars of any third party claim within [***] days after it receives notification of the claim; provided, however, that failure to give such notice within such time period shall not prejudice the rights of the indemnified party except to the extent that the failure to give such notice materially adversely affects the ability of the indemnifying party to defend the claim or to cure the breach of the representation, warranty, covenant or obligation giving rise to the claim. Subject to the terms of this Section 6.2, the indemnifying party shall have sole control over the defense and settlement of such claim. The indemnifying party may not settle or compromise the claim without the prior written consent of the indemnified party unless such settlement or compromise (i) involves no payment (whether by cash, securities or other instrument), assignment, granting of a license or admission of fault or wrongdoing by the indemnified party and (ii) the indemnified party receives a comprehensive general release of all claims from the applicable third parties. The indemnified party shall provide to the indemnifying party, in confidence, all files, books, records and other information in its possession or control which may be relevant to the defense of such claim. The indemnified party shall co-operate in all reasonable respects in the defense of such claim but at the expense of the indemnifying party. If the indemnifying party fails to diligently defend such claim throughout the period

16


that such claim exists, its right to defend the claim shall terminate and the indemnified party may assume the defense of such claim at the sole expense of the indemnifying party. In such event, the indemnified party may compromise or settle such claim, without the consent of the indemnifying party.

6.3    Limitation on Indemnity.    Neither party may make a claim for indemnity pursuant to Section 6.1 hereof unless and until the aggregate dollar amount of all such party's Damages exceeds $[***]. Furthermore, notwithstanding Section 6.1 of this Agreement: (a) ISIS' obligation to indemnify DRC pursuant to the terms of this Agreement will not exceed the product of (i) [***] multiplied by (ii) the total accrued payments received by ISIS pursuant to Section 1.2 at the time of such indemnification; and (b) DRC's obligation to indemnify ISIS pursuant to the terms of this Agreement will not exceed the product of (i) [***] multiplied by (ii) the total amounts paid (or if not paid, due and payable) by DRC pursuant to Section 1.2 at the time of such indemnification.

6.4    No Limitation on Special Event of Default Remedies.    Notwithstanding the foregoing, this Article 6 shall not apply to or limit any Special Event of Default Remedies.


ARTICLE 7
MISCELLANEOUS

7.1    Additional Documents and Acts; Powers of Attorney.

7.2    Specific Performance.    Each of the parties hereto acknowledges that the other party may have no adequate remedy at law if it fails to perform any of its obligations under this Agreement. In such event, each of the parties agrees that the other party shall have the right, in addition to any other rights it may have (whether at law or in equity), to pursue equitable remedies such as injunction and specific performance of this Agreement.

17


7.3    Notices.    All notices, consents, waivers and other communications hereunder shall be in writing and shall be delivered in person, sent by overnight courier, facsimile transmission or posted by registered or certified mail, return receipt requested, with postage prepaid, addressed as follows:

or to such other address or addresses as DRC or ISIS may from time to time designate by notice as provided herein. Any such notice shall be deemed given when actually received when so delivered personally or by overnight courier or if mailed, other than during a period of general discontinuance or disruption of postal service due to strike, lockout or otherwise, on the fifth (5th) day after its postmarked date thereof or if sent by facsimile transmission on the date sent if such day is a business

18

day or the next following business day if such day is not a business day. For the purposes of this Agreement, "business day" means any day other than Saturday, Sunday or a statutory or civic holiday observed in Toronto, Ontario or Carlsbad, California.

7.4    Successors and Assigns.    This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of ISIS and DRC. This Agreement may not be assigned in whole or in part by either party without the prior written consent of the other party; provided, however that (i) DRC may assign this Agreement in whole or in part by way of [***] and/or to [***] and/or as part of a sale of a material part of DRC whether by way of reorganization or otherwise, without the consent of ISIS provided DRC gives prompt written notice of such assignment to ISIS and the assignee (or in the case of any financial institution or other lender, any purchaser from such financial institution or other lender) agrees in writing to be bound hereby and (ii) ISIS may assign this Agreement in connection with the sale of all or substantially all of its business (whether by sale of assets, stock or merger) without the consent of DRC provided ISIS gives prompt written notice of such assignment to DRC and the assignee agrees in writing to be bound hereby.

7.5    Expenses.    Each party shall be responsible for and bear all of its own costs and expenses (including but not limited to any legal fees, any accountants' fees and any brokers' or finders' or investment banking fees or any prior commitment in respect thereof) with regard to the negotiation and consummation of the transaction contemplated hereby. Notwithstanding the foregoing, each party represents and warrants to the other that the other party will not be liable for any brokerage commission, finder's fee or other like payment in connection with the transactions contemplated hereby because of any action taken by, or agreement or understanding reached by, that party.

7.6    Entire Agreement.    This Agreement, together with the Schedules to this Agreement and officer's certificates and other documents to be delivered pursuant hereto (which are incorporated herein by reference), supersedes any other agreement, whether written or oral, that may have been made or entered into by the parties hereto relating to the matters contemplated hereby, including the LOI and the letter of intent between the parties dated [***], 2004, and constitutes the entire agreement of the parties hereto with respect to the subject matter hereof. Any conflict or inconsistency between the main body of this Agreement, the Schedules and/or any other documents to be delivered pursuant hereto shall be resolved in accordance with the following order of priority: (a) main body of this Agreement; (b) Schedules; and (c) other documents, except that the Schedule of Exceptions is intended to qualify ISIS' representations and warranties under this Agreement.

7.7    True Sale Security Agreement.

19

7.8    Amendments, Supplements, Waivers.    This Agreement may be amended or supplemented only by a written agreement signed by DRC and ISIS. Any waiver of, or consent to depart from, the requirements of any provision of this Agreement shall be effective only if it is in writing and signed by the party giving it, and only in the specific instance and for the specific purpose for which it has been given. No failure on the part of any party to exercise, and no delay in exercising, any right under this Agreement shall operate as a waiver of such right. No single or partial exercise of any such right shall preclude any other or further exercise of such right or the exercise of any other right.

7.9    Interpretation.    When a reference is made in this Agreement to Articles, Sections or Schedules, such reference shall be to an Article, Section or Schedule to this Agreement unless otherwise indicated. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation" and shall not be construed to limit any general statement which it follows to the specific or similar items or matters immediately following it. "Person" includes an individual, body corporate, partnership, joint venture, cooperative, trust or unincorporated organization, domestic or foreign government or any agency or instrumentality thereof, or any other entity recognized by law. Neither party hereto shall be or be deemed to be the drafter of this Agreement for the purposes of construing this Agreement against one party or the other.

7.10    Public Announcement.    The parties agree to discuss and coordinate all public announcements concerning the transactions contemplated herein except as may be necessary, in the opinion of counsel to the party making such disclosure, to comply with the requirements of any applicable law. If any such public statement or release is so required, the party making such disclosure shall consult with the other party prior to making such statement or release, and the parties shall use reasonable efforts, acting in good faith, to agree upon a text for such statement or release which is satisfactory to all parties. The form of press release to be issued by DRC immediately after Closing with respect to this transaction shall be mutually agreed to by the parties on or prior to the Effective Date. Notwithstanding the foregoing, nothing herein shall prohibit DRC or any of its affiliates from disclosing DRC's interest in the Assigned Rights to any of its or their affiliates, agents, representatives and employees, in any annual or other periodic corporate report, to any financing sources (whether equity or debt) and its or their legal, financial or industry advisors, or to any actual or potential underwriter and its legal, accounting and industry advisors, in connection with securing financing.

7.11    Headings and Captions.    The headings and captions in this Agreement are for convenience and reference purposes only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement.

7.12    Currency.    Unless specified otherwise, all statements of or references to monetary amounts in this Agreement are to US Dollars.

20


7.13    Severability.    If any provision of this Agreement is held to be invalid or unenforceable, the remaining provisions shall nevertheless be given full force and effect.

7.14    Governing Law.    This Agreement shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of law thereof. Subject to Section 7.15, the parties hereto attorn to and submit to the non-exclusive jurisdiction of the courts of the State of New York.

7.15    Binding Arbitration of Certain Disputes.

21

7.16    WAIVER OF JURY TRIAL.    EACH PARTY IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING IN CONNECTION WITH OR RELATING TO THIS AGREEMENT OR ANY AGREEMENT ENTERED INTO PURSUANT HERETO AND AGREES THAT ANY SUCH SUIT, ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. THE PROVISION OF THIS SECTION 7.15 SHALL NOT APPLY TO ANY ACTION TO ENFORCE THE LICENSED PATENT RIGHTS AGAINST EYETECH OR OTHERS IN THE FIELD.

7.17    Time.    Time is of the essence of this Agreement and each of its provisions.

        7.18    Counterparts and Facsimile Execution.    This Agreement may be executed in two or more counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. To evidence the fact that it has executed this Agreement, a party may send a copy of its executed counterpart to the other party by facsimile transmission. That party shall be deemed to

22


have executed this Agreement on the date it sent such facsimile transmission. In such event, such party shall forthwith deliver to the other party the counterpart of this Agreement executed by such party.

        IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date.

    ISIS PHARMACEUTICALS, INC.

 
 
By:
/s/  B. LYNNE PARSHALL      
Name: B. Lynne Parshall
Title: Executive Vice President, CFO and Director

 
 
DRUG ROYALTY USA, INC.

 
 
By:
/s/  BEHZAD KHOSROWSHAHI      
Name: Behzad Khosrowshahi Title: President

23


SCHEDULE "A"
DEFINITIONS

        Capitalized terms used in this Agreement and not defined in this Schedule "A" shall have the meanings attributed thereto in the License Agreement.

        "Additional Period" means the number of days between the date of termination of the License Agreement and the date of first commercial sale of the Product under the New License Agreement.

        "Aggregate Payments" has the meaning set forth in Subsection 5.A.2(a) of this Agreement.

        "Aggregate Receipts" has the meaning set forth in Subsection 5.A.2(a) of this Agreement.

        "Agreement" has the meaning set forth on the cover page of this Agreement.

        "Arbitrable Matter" has the meaning set forth in Subsection 7.15(a) of this Agreement.

        "Assigned Rights" means ISIS' entire right, title and interest in and to the following rights under the License Agreement:

Notwithstanding the foregoing, except for as specified in clauses (i) through (iv) above, ISIS retains all it right, title and interests under the License Agreement, including, but not limited to its right to any amounts payable by Eyetech as provided under Sections 3.1.1 or 3.1.2 of the License Agreement and, subject to the terms of this Agreement and the Security Agreement, the right to exploit (including through the granting of Permitted Licenses) the Patents, Licensed Patent Rights and/or Product outside the Field (collectively, the "ISIS Rights").

        "Business Day" has the meaning set forth in Section 7.3 of this Agreement.

        "Cash Burn" has the meaning attributed thereto in Section 3.9 of this Agreement.

        "Closing" has the meaning set forth in Section 4.1 of this Agreement.

        "Communication" has the meaning set forth in Subsection 3.1(b) of this Agreement.

        [***]

        "Cure Period" has the meaning set out in the definition of Special Events of Default.

        "Damages" means any damage, loss, claim, cost, liability, action, cause of action, demand or expense, including reasonable legal fees, suffered or incurred by either party in connection with this Agreement, the Security Agreement and/or the Eyetech Consent.

        "Default Date" has the meaning set forth in Subsection 5.A.2(a) of this Agreement.

        "DRC" has the meaning set forth on the cover page of this Agreement.

        "DRC Closing Documents" has the meaning set forth in Subsection 4.3(b).

        "Effective Date" has the meaning set forth on the cover page of this Agreement.

24


        "Encumbrance" means any lien, charge, security interest, mortgage, option, privilege, pledge, trust or deemed trust (whether contractual, statutory or otherwise arising) or any other encumbrance, right or claim of any other person of any kind whatsoever whether choate or inchoate, other than the Permitted Licenses.

        "EU" means the European Union as constituted from time to time.

        "EU Application" means a patent application filed by ISIS with the European Patent Office that if issued would meet the requirements for an EU Patent.

        "EU Patent" means one or more patent(s) issued in the EU, the issued claims of which [***].

        "EU Percentage" means (i) [***] per cent ([***]%) if the applicable Special Event of Default occurs during the first [***] months following the first commercial sale of the Product in the US (the "US Twenty-four Month Period"); or (ii) the percentage of worldwide Net Sales that are comprised of Net Sales of the Product in the EU for the [***] calendar months immediately preceding the Default Date, if the Default Date occurs after the expiry of the US [***] Month Period. The percentage of worldwide Net Sales that are comprised of Net Sales of the Product in the EU shall be determined by examining EyeTech's royalty reports delivered under the License Agreement. If such reports do not provide enough information to determine the appropriate percentage, then the appropriate percentage shall be determined based on information of US and EU Net Sales as reported by IMS. If IMS (or a comparable company acceptable to both DRC and ISIS, acting reasonably) is not able to provide such data, then the appropriate percentage shall be determined based on publicly available information acceptable to both DRC and ISIS acting reasonably.

        "EU [***]Month Period" has the meaning set forth in the definition of US Percentage.

        "Event of Default" means any Level I Event of Default or any Level II Event of Default.

        "Exercise Date" means the date upon which ISIS must or does exercise any right or perform any obligation of ISIS under the Patents or Licensed Patent Rights (to the extent that they directly or indirectly relate to the Field and ISIS' obligations under this Agreement) to comply with the License Agreement or must enforce or defend such right to avoid the loss of such right or any adverse effect to ISIS' rights under the Patents or Licensed Patent Rights to the extent that they directly or indirectly relate to the Field and ISIS' obligations under this Agreement.

        "Eyetech" means Eyetech Pharmaceuticals, Inc.

        "Eyetech Breach Date" has the meaning set out in the definition of Special Events of Default.

        "Eyetech Consent" has the meaning set forth in Section 1.3 of this Agreement.

        "FDA" means the United States Food and Drug Administration.

        "Field" means [***].

        "First Payment Date" has the meaning set forth in clause (i) of Subsection 1.2(a) of this Agreement.

        "Independent" has the meaning set forth in Subsection 7.15(b) of this Agreement.

        "IMS" means IMS Health Incorporated.

        "ISIS" has the meaning set forth on the cover page of this Agreement.

        "ISIS Closing Documents" has the meaning set forth in Subsection 4.2(d) of this Agreement.

        "ISIS Rights" has the meaning set forth in the definition of Assigned Rights above.

        "ISIS Royalty Interest" means all Royalties not forming part of the Royalty Interest.

25


        "Level I Events of Default".    Each of the following events will constitute a Level I Event of Default under this Agreement:

26

        "Level II Events of Default".    Each of the following events will constitute a Level II Event of Default under this Agreement:

        "License Agreement" means the license agreement dated as of December 31, 2001 between ISIS and Eyetech, as such agreement may be amended, replaced, succeeded or substituted from time to time.

        "Licensed Patent Rights" has the meaning ascribed to it in the License Agreement.

        "Liquidated Damages Amount" has the meaning set forth in Subsection 5.A.2(a) of this Agreement.

        "Liquidity" has the meaning attributed thereto in Section 3.9 of this Agreement.

        "Loan" means the loan granted by Silicon Valley Bank to ISIS in the original principal amount of US$32,000,000 pursuant to the Silicon Valley Bank Agreement.

        [***]

        "LOI" has the meaning set forth on the cover page of this Agreement.

        "Major Market" means the [***].

        [***]

        "Material Agreement" at any time means, any contract, commitment or instrument to which ISIS is a party that is listed as an exhibit to a periodic or current report filed by ISIS with the United States Securities and Exchange Commission at such time.

        "Minimum Liquidity" at the time immediately prior to the First Payment Date, Second Payment Date or Third Payment Date, as applicable, means Liquidity equal to the total of: (i) all amounts (including principal and interest) of the Loan (or any replacement thereof pursuant to Section 3.9 of this Agreement) then outstanding; (ii) the Liquidated Damages Amount, assuming for the purposes of this definition that the Purchase Price component that is due on the immediately following payment date has been paid by DRC; and (iii) ISIS' Cash Burn as the calculation relates to the [***] period ending immediately prior to the date of the certificate contemplated by Subsection 1.2(b).

27


        "Naked Manufacturing License" means a Permitted License granted by ISIS that includes rights to one or more [***] Patents and that is a license to enable the manufacture of products (at scales of more than [***]) outside the Field to conduct drug development (but not solely drug research) but does not include a Permitted License to enable the manufacture of a product that is outside the Field and that is discovered, developed or commercialized under a bona fide collaboration between ISIS and a third party.

        "Net Sales" has the meaning set forth in the License Agreement [***], provided that if DRC re-conveys to ISIS the Assigned Rights, or any part thereof, pursuant to Subsection 5.3(a), Subsection 5.A.2 (b) or Subsection 5.A.2 (c) of this Agreement, "Net Sales" shall be deemed to mean the Net Sales that relate to the Assigned Rights, if any, that have been retained by DRC.

        "New Royalty Interest" has the meaning set forth in Section 3.3 of this Agreement.

        "New License Agreement" has the meaning set forth in Section 3.3 of this Agreement.

        "New US Patent" means a US patent that is issued to ISIS based on the US Application, the issued claims of which [***].

        "Note Agreements" means, collectively, the Notes, the indenture between ISIS and Wells Fargo Bank Minnesota, National Association, as trustee, dated as of May 1, 2002 (the "Note Indenture") and any related documentation.

        "Notes" means the five and one half per cent (51/2%) convertible subordinated notes of ISIS due 2009.

        "Patents" means the patents listed on Schedule "E" hereto, as such Schedule may be updated from time to time pursuant to Subsection 1.2(c) or Subsection 3.1(d). For avoidance of doubt, "Patents" are included in the Licensed Patent Rights.

        "Permitted License(s)" means a license granted by ISIS to a third party to exploit the Patents outside the Field that does not grant the licensee thereunder a security interest in the Patents.

        "person" includes an individual, corporation, partnership, joint venture, trust, syndicate, unincorporated organization, the Crown or any agency or instrumentality thereof or any other entity recognized by law.

        "Product" means Eyetech's EYE001 NX1838 non-antisense therapeutic product (also known as Macugen), or any product containing Eyetech's EYE001 NX1838 non-antisense therapeutic product for the treatment of ophthalmic conditions. The Product will also include any minor chemical modifications to EYE001 NX1838.

        "Purchase Price" has the meaning set forth in Section 1.2 of this Agreement.

        "Representatives" has the meaning set forth in Section 3.4 of this Agreement.

        "Royalties" means all of the royalties payable by Eyetech in respect of Net Sales made by Eyetech, its affiliates and sublicensees made on or before December 31, 2009 (as calculated in accordance with and as provided under Sections 3.1.3, 4.1 and 8.4 of the License Agreement) and any collections or recoveries received by ISIS or lump sum payments made by Eyetech or its sublicensees in lieu thereof, including in connection with any litigation to enforce the License Agreement or the Licensed Patent Rights.

        "Royalty Interest" means, in connection with Net Sales of the Product made on or before December 31, 2009:

28

        "Schedule of Exceptions" has the meaning set forth in Section 2.1 of this Agreement.

        "Second Payment Date" has the meaning set forth in clause (ii) of Subsection 1.2(a) of this Agreement.

        "Secondary Market" means any country requested by DRC via written notice to ISIS to be treated as a Secondary Market country for the purposes hereof (effective upon ISIS' receipt of such notice).

        "Security Agreement" has the meaning set forth in Section 3.6 of this Agreement.

        "Selected SVB Covenants" has the meaning set forth in Subsection 3.9(b) of this Agreement.

        "Silicon Valley Bank Agreement" means the loan and security agreement between ISIS and Silicon Valley Bank dated December 15, 2003.

        "Silicon Valley Bank Consent" has the meaning set forth in Subsection 4.2(d) of this Agreement.

        "Special Event of Default" means the occurrence of any one of the following events prior to the earlier of December 31, 2009 and the date on which both the [***]:

        "Special Event of Default Remedies" has the meaning set forth in Section 5.A.1 of this Agreement.

29

        "Terminating Party" has the meaning set forth in Subsection 5.3(c) of this Agreement.

        "Third Payment Date" has the meaning set forth in clause (iii) of Subsection 1.2(a) of this Agreement.

        "US Application" means a US patent application filed by ISIS claiming [***] which if issued would meet the requirements for a New US Patent.

        "US Percentage" means (i) [***] if the applicable Special Event of Default occurs during the first [***] months following the first commercial sale of the Product in the EU (the "EU [***] Month Period"); or (ii) the percentage of worldwide Net Sales that are comprised of Net Sales of the Product in the United States for the [***] calendar months immediately preceding the Default Date, if the Default Date occurs after the expiry of the EU [***] Month Period. The percentage of worldwide Net Sales that are comprised of Net Sales of the Product in the United States shall be determined by examining EyeTech's royalty reports delivered under the License Agreement. If such reports do not provide enough information to determine the appropriate percentage, then the appropriate percentage shall be determined based on information of US and EU Net Sales as reported by IMS. If IMS (or a comparable company acceptable to both DRC and ISIS, acting reasonably) is not able to provide such data, then the appropriate percentage shall be determined based on publicly available information acceptable to both DRC and ISIS acting reasonably.

        "US [***] Month Period" has the meaning set forth in the definition of EU Percentage.

30


SCHEDULE "B"
CALCULATION OF ROYALTY INTEREST AND ISIS ROYALTY INTEREST

        The following sets out an example of how any amounts payable to DRC and to ISIS (if applicable) pursuant to the Royalty Interest and the ISIS Royalty Interest, respectively, will be calculated:


Cumulative Net Sales as of
Expiry of First Calendar
Quarter of Year X
   Royalty Interest/
First DRC Payment
   ISIS Royalty Interest
US$100,000,000   100% of all royalties payable for first calendar quarter

(i.e.: 100% ×[***]% × US$100,000,000 = US$[***])		   Nil

Cumulative Net Sales as of
Expiry of Second Calendar
Quarter of Year X
   Royalty Interest/
Second DRC Payment
   ISIS Royalty Interest/
First ISIS Payment
US$600,000,000   (I) 100% of all royalties payable on cumulative Net Sales for Year X at or below the First Threshold

plus

(II) 50% of all royalties payable on cumulative Net Sales for Year X above the First Threshold but at or below the Second Threshold

less

(III) the First DRC Payment
(i.e.: (100% ×[***]% × US$500,000,000) + [50% ×[***]% × (US$600,000,000 – US$500,000,001)] – US$[***] = US$[***])		   50% of all royalties payable on cumulative Net Sales for Year X above the First Threshold

(i.e.: 50% ×[***]% ×(US$600,000,000 – US$500,000,001) = US$[***])

31

Cumulative Net Sales as of
Expiry of Third Calendar
Quarter of Year X
   Royalty Interest
   ISIS Royalty Interest
US$1,100,000,000   (I) 100% of all royalties payable on cumulative Net Sales for Year X at or below the First Threshold

plus

(II) 50% of all royalties payable on cumulative Net Sales for Year X above the First Threshold but at or below the Second Threshold

plus

(III) 10% of all royalties payable on cumulative Net Sales for Year X above the Second Threshold

less

(IV) the total of the First DRC Payment and the Second DRC Payment

(i.e.: (100% × [***]% × US$500,000,000) + [50% × [***]% × (US$1,000,000,000 – US$500,000,001)] + [10% × [***]% × (US$1,100,000,000 – US$1,000,000,001)] – (US$[***] + US$[***] = US$[***])		   (i) 50% of all royalties payable on cumulative Net Sales for Year X above the First Threshold but at or below the Second Threshold

plus

(ii) 90% of all royalties payable on cumulative Net Sales for Year X above the Second Threshold

less

(iii) the First ISIS Payment

(i.e.: [50% × [***]% × (US$1,000,000,000 – US$500,000,001)] + [90% × [***]% × (US$1,100,000,000 – US$1,000,000,001)] – US$[***] = US$[***])

32


SCHEDULE "E"
PATENTS

[***]

33


SCHEDULE "F"

EXAMPLE TERMINATION EVENT RE-CONVEYANCE CALCULATION

Assuming that (i) DRC has re-conveyed to ISIS the Assigned Rights as they relate to the EU (as a result of the occurrence of a Special Event of Default) (the "EU Re-conveyance"); (ii) in connection with the EU Re-conveyance it is determined that the EU Percentage equals 42%; (iii) a Termination Event occurs following the EU Re-conveyance and prior to the Third Payment Date and (iv) as a result of a dispute DRC is not required to pay the third installment or any Damages on account thereof, then the portion of the Assigned Rights that are to be re-conveyed by DRC to ISIS would be calculated based on the following:

In this example, as at the Termination Event, DRC would therefore be required to re-convey [***]% (i.e. 100% less [***]%) of the Assigned Rights that DRC held as at such date to ISIS.

34



QuickLinks

AGREEMENT FOR SALE AND ASSIGNMENT OF RIGHTS
ARTICLE 1 ASSIGNMENT AND SALE
ARTICLE 2 REPRESENTATIONS AND WARRANTIES
ARTICLE 3 COVENANTS
ARTICLE 4 CLOSING; DELIVERIES ON CLOSING
ARTICLE 5.A SPECIAL EVENTS OF DEFAULT
ARTICLE 5 TERM AND TERMINATION
ARTICLE 6 MUTUAL INDEMNITY
ARTICLE 7 MISCELLANEOUS
SCHEDULE "A" DEFINITIONS
SCHEDULE "B" CALCULATION OF ROYALTY INTEREST AND ISIS ROYALTY INTEREST
SCHEDULE "E" PATENTS
SCHEDULE "F"

QuickLinks -- Click here to rapidly navigate through this document

CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. §§ 200.80(b)4, AND 240.24

Exhibit 10.54


SECURITY AGREEMENT

        THIS SECURITY AGREEMENT (this "Agreement") is made and entered into as of this 21 day of December, 2004 by and between ISIS PHARMACEUTICALS, INC., a subsisting corporation under the laws of the State of Delaware ("ISIS"), and DRUG ROYALTY USA, INC., a subsisting corporation under the laws of the State of Nevada ("DRC").

RECITALS:

A.
ISIS and DRC are parties to the Sale and Assignment Agreement.

B.
ISIS has covenanted pursuant to the terms of the Sale and Assignment Agreement to enter into this Agreement, under which ISIS grants to DRC a first priority security interest in and to the Collateral as general and continuing security for the due performance and payment of all of ISIS' obligations to DRC under the Sale and Assignment Agreement.

        NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, ISIS covenants, acknowledges, represents and warrants to and in favor of DRC as follows:

        SECTION 1.    Definitions.    

        For purposes of this Agreement, capitalized terms used herein shall have the meanings set forth in Schedule 1 hereto.

        SECTION 2.    Grant of Security.    

        ISIS hereby grants to DRC a continuing security interest in and lien on all right, title and interest of ISIS in and to the following personal property, whether now or hereinafter existing, whether tangible or intangible and wherever the same may be located (collectively, the "Collateral"):

        Subject to the terms and conditions of this Agreement, in no event shall the granting of a security interest in the Collateral pursuant hereto be construed to limit or otherwise restrict ISIS' ability to exploit (including through granting Permitted Licenses) the Patents and the Licensed Patent Rights for any purposes outside the Field.

        Each item of Collateral listed in this Section 2 that is defined in Articles 8 or 9 of the UCC, shall have the meaning set forth in the UCC, it being the intention of ISIS that the description of the Collateral set forth above be construed to include the broadest possible range of assets, except for assets expressly excluded as set forth in this Agreement.

        SECTION 3.    Security for Obligations.    

        This Agreement secures, and the Collateral charged by ISIS is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including without limitation the payment of amounts that would become due but for the operation of the automatic stay under Subsection 362(a) of the Bankruptcy Code), of all Secured Obligations of ISIS.

        SECTION 4.    ISIS to Remain Liable.    

        Anything contained herein to the contrary notwithstanding, (a) ISIS shall remain liable under any contracts, licenses and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by DRC of any of its rights hereunder shall not release ISIS from any of its duties or obligations under the contracts, licenses and agreements included in the Collateral, and (c) DRC shall not have any obligation or liability under any contracts, licenses and agreements included in the Collateral by reason of this Agreement, nor shall DRC be obligated to perform any of the obligations or duties of ISIS thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.

        SECTION 5.    Representations and Warranties.    

        ISIS represents and warrants as follows:

2

        SECTION 6.    Further Assurances.    

        SECTION 7.    Certain Covenants of ISIS.    

        ISIS shall:

3

        SECTION 8.    Special Covenants With Respect to the Collateral.    

4

        SECTION 9.    DRC Appointed Attorney-in-Fact.    

        ISIS hereby irrevocably appoints DRC, or any person or agent as DRC may designate, as ISIS' attorney-in-fact, with full authority in the place and stead of ISIS and in the name of ISIS, DRC or otherwise, from time to time in DRC's discretion to take any action and to execute any instrument that DRC may in its sole discretion deem necessary or advisable to accomplish the following:

5

        SECTION 10.    Standard of Care.    

        The powers conferred on DRC hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the accounting for moneys actually received by DRC hereunder, DRC shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. DRC shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which DRC accords its own property.

        SECTION 11.    Remedies Upon Event of Default.    

6

        SECTION 12.    Application of Proceeds.    

        Except as expressly provided elsewhere in this Agreement, all proceeds received by DRC in respect of any sale of, collection from, or other realization upon all or any part of the Collateral (collectively, "Proceeds") shall be applied to satisfy (to the extent of the net proceeds received by DRC) such item or part of the Secured Obligations (including, but not limited to any Damages) as DRC may designate (with the right to reapply such proceeds to such other items or part of the Secured Obligations). Once the Proceeds have satisfied the Secured Obligations, DRC will return to ISIS any Proceeds in excess of the amount required to satisfy the Secured Obligations, whether such excess Proceeds are then held or later received by DRC.

        SECTION 13.    Reimbursement of Expenses.    

        SECTION 14.    Calculation of Damages.    

7

        SECTION 15.    Continuing Security Interest; Termination and Release.    

        SECTION 16.    Amendments; Etc.    

        No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by ISIS therefrom, shall in any event be effective unless the same shall be in writing and signed by DRC and, in the case of any such amendment or modification, by ISIS. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given.

        SECTION 17.    Notices.    

        All notices, consents, waivers and other communications hereunder shall be in writing and shall be delivered in person, sent by overnight courier, facsimile transmission or posted by registered or certified mail, return receipt requested, with postage prepaid, addressed to the address of DRC or ISIS, as applicable, provided in Section 7.3 of the Sale and Assignment Agreement or to such other address or addresses as DRC or ISIS may from time to time designate by notice as provided herein. Any such notice shall be deemed given when actually received when so delivered personally or by overnight courier or if mailed, other than during a period of general discontinuance or disruption of postal service due to strike, lockout or otherwise, on the fifth (5th) day after its postmarked date thereof or if sent by facsimile transmission on the date sent if such day is a business day or the next following business day if such day is not a business day. For the purposes of this Agreement, "business day" means any day other than Saturday, Sunday or a statutory or civic holiday observed in Toronto, Ontario or Carlsbad, California.

        SECTION 18.    Failure or Indulgence Not Waiver; Remedies Cumulative.    

        No failure or delay on the part of DRC in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.

        SECTION 19.    Severability.    

        If a court deems any part of this Agreement unenforceable, the parties agree that only the offending part shall be stricken and that the remaining parts shall be unaffected.

        SECTION 20.    Headings.    

        Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect.

8


        SECTION 21.    Governing Law; Terms; Rules of Construction.    

        THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE UCC PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Sale and Assignment Agreement, terms used in Articles 8 and 9 of the UCC are used herein as therein defined.

        SECTION 22.    Consent to Jurisdiction and Service of Process.    

        ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ISIS ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, ISIS, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO ISIS AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 16; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER ISIS IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT DRC RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST ISIS IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 21 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE.

9

        SECTION 23.    Waiver of Jury Trial.    

        ISIS AND DRC HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. ISIS and DRC acknowledge that this waiver is a material inducement for ISIS and DRC to enter into a business relationship, that ISIS and DRC have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. ISIS and DRC further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 22 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court.

        SECTION 24.    Counterparts.    

        This Agreement may be executed in any number of counterparts, each of which shall be deemed an original instrument, but all of which together shall constitute one and the same instrument, and shall become binding when one or more counterparts have been signed by each party hereto and delivered to each other party hereto.

        SECTION 25.    Successors and Assigns.    

        This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of ISIS and DRC. This Agreement may not be assigned in whole or in part by either party without the prior written consent of the other party; provided, however that (i) DRC may assign this Agreement in whole or in part by way of [***] and/or to [***] and/or as part of a sale of a material part of DRC whether by way of reorganization or otherwise, without the consent of ISIS provided DRC gives prompt written notice of such assignment to ISIS and the assignee (or in the case of any financial institution or other lender, any purchaser from such financial institution or other lender) agrees in writing to be bound hereby and (ii) ISIS may assign this Agreement in connection with the sale of all or substantially all of its business (whether by sale of assets, stock or merger) without the consent of DRC provided ISIS gives prompt written notice of such assignment to DRC and the assignee agrees in writing to be bound hereby.

10


        IN WITNESS WHEREOF, ISIS and DRC have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above.

  ISIS PHARMACEUTICALS INC.

 
By:
/s/  B. LYNNE PARSHALL      
    Name:   B. Lynne Parshall
    Title:   Executive Vice President, CFO and Director

 
DRUG ROYALTY USA, INC.

 
By:
/s/  BEHZAD KHOSROWSHAHI      
    Name:   Behzad Khosrowshahi
    Title:   President

11


SCHEDULE 1 TO
SECURITY AGREEMENT

DEFINITIONS

        Capitalized terms used in this Agreement and not defined in this Schedule 1 shall have the meanings attributed thereto in the Sale and Assignment Agreement.

        "Agreement" has the meaning set forth on the cover page of this Agreement.

        "Collateral" has the meaning set forth in Section 2 of this Agreement.

        "DRC" has the meaning set forth on the cover page of this Agreement.

        "Grant" has the meaning set forth in Subsection 5(f) of this Agreement.

        "ISIS" has the meaning set forth on the cover page of this Agreement.

        "License Agreement" means that certain License Agreement effective as of December 31, 2001 pursuant to which ISIS granted to Eyetech a non-exclusive license under the Licensed Patent Rights to make, have made, use and sell EYE001 (for greater certainty, the Product) world-wide, with the right to sublicense, as such agreement relates to the ISIS Rights but not the Assigned Rights and as such agreement may be amended, restated, supplemented or otherwise modified from time to time.

        "Major Market" means [***], any [***] country, [***] or the [***].

        "obligations" means indebtedness, obligations, promises, covenants, responsibilities, duties and liabilities (actual or contingent, direct or indirect, matured or unmatured, now existing or arising hereafter), whether arising by agreement or statute, at law, in equity or otherwise, and "obliged", "obligation" and "obligated" shall have corresponding meanings.

        "Patent Collateral" means all rights, title and interest (including rights acquired pursuant to a license or otherwise) in and to the Patents, including, without limitation, the [***] Patents, as the same may be amended from time to time, all rights corresponding thereto (including, without limitation, ISIS' rights under the [***] License and the right, exercisable only upon the occurrence and during the continuation of an Event of Default, to sue for past, present and future infringements in the name of ISIS or in the name of DRC), and all re-issues, re-examinations, divisions, continuations, renewals, extensions, continuations-in-part and foreign counterparts thereof.

        "proceeds" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary.

        "Sale and Assignment Agreement" means the Agreement for Sale and Assignment of Rights between ISIS and DRC dated as of December 21, 2004, as such agreement may be amended, restated, supplemented or otherwise modified from time to time, pursuant to which ISIS has agreed to sell, assign, transfer, set-over and convey to DRC the Assigned Rights in consideration of the payment by DRC to ISIS of the Purchase Price.

        "Secured Obligations" means all obligations and liabilities of every nature of ISIS now or hereafter existing under or arising out of or in connection with the Sale and Assignment Agreement, whether for damages, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to ISIS, would accrue on such obligations, whether or not a claim is allowed against ISIS for such interest in the related bankruptcy proceeding), reimbursement of fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or

12


recovered directly or indirectly from DRC as a preference, fraudulent transfer or otherwise, and all obligations of every nature of ISIS now or hereafter existing under this Agreement.

        "UCC" means Uniform Commercial Code, as it exists on the date of this Agreement or as it may hereafter be amended, in the State of New York.

13

SCHEDULE 5(b)
TO
SECURITY AGREEMENT

Office Locations, Type and Jurisdiction of Organization

Name
   Type of
Organization
   Office Locations
   Jurisdiction
of Organization
   Organization
Number
ISIS Pharmaceuticals Inc.   Corporation       Delaware    

14


SCHEDULE 5(d)(i)
TO
SECURITY AGREEMENT

[***]

15

SCHEDULE 5(e)
TO
SECURITY AGREEMENT

Filing Offices

Grantor
   Filing Offices
ISIS Pharmaceuticals Inc.   (a) Secretary of State for the State of Delaware
    (b) Secretary of State for the State of California

16

EXHIBIT I TO
SECURITY AGREEMENT


[FORM OF GRANT OF PATENT SECURITY INTEREST]


GRANT OF PATENT SECURITY INTEREST

WHEREAS, ISIS PHARMACEUTICALS, INC., a Delaware corporation (the "Grantor"), has entered into a security agreement dated December 21, 2004, (said security agreement, as it may hereinafter be amended, restated, supplemented or otherwise modified from time to time, being the "Security Agreement") between the Grantor and DRC Royalty USA Inc., a Nevada Corporation ("DRC") pursuant which the Grantor has granted to DRC certain security as general and continuing security for the due payment and performance of all of the Grantor's obligations to DRC under that certain sale and assignment agreement between the Grantor and DRC dated December 21, 2004. All capitalized terms not defined herein have the meanings attributed thereto in the Security Agreement.

        NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, subject to the terms and conditions of the Security Agreement, the Grantor hereby grants to DRC a security interest in all of the Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which the Grantor now has or hereafter acquires an interest and wherever the same may be located (the "Patent Collateral"):

(a)
all right, title and interest (including rights acquired pursuant to a license or otherwise) in and to the patents listed on Schedule A-1 attached hereto ("Patents"), as the same may be amended from time to time, all rights corresponding thereto (including, without limitation, Debtor's rights under the [***] license and the right, exercisable only upon the occurrence and during the continuation of an event of default, to sue for past, present and future infringements in the name of Debtor or in the name of Secured Party), and all re-issues, re-examinations, divisions, continuations, renewals, extensions, continuations-in-part and foreign counterparts thereof; and

(b)
all proceeds, products, royalties, payments, property and license fees of or from any and all of the foregoing collateral and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof) or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing collateral, excluding (i) all proceeds and other consideration arising under permitted licenses of the Patent Collateral and (ii) the milestone payments pursuant to Sections 3.1.1 and 3.1.2 of the License Agreement.

        The Grantor does hereby further acknowledge and affirm that the rights and remedies of DRC with respect to the security interest in the Patent Collateral granted hereby are more fully set forth in the Security Agreement dated December 21, 2004 between the Grantor and DRC, the terms and provisions of which are incorporated by reference herein as if fully set forth herein.

17


        IN WITNESS WHEREOF, the Grantor has caused this Grant of Patent Security Interest to be duly executed and delivered by its officer thereunto duly authorized as of the 21st day of December, 2004.

  ISIS PHARMACEUTICALS, INC.

 
By:
 
    
Signature

 
 
 
    
Name (printed)

 
 
 
    
Title

18

SCHEDULE A-1

[***]

19

EXHIBIT II TO
SECURITY AGREEMENT

SPECIAL POWER OF ATTORNEY

STATE OF  
    )      
          ) ss.:    
COUNTRY OF  
    )      

KNOW ALL MEN BY THESE PRESENTS, that ISIS PHARMACEUTICALS, INC., a Delaware corporation ("Grantor"), hereby appoints and constitutes DRUG ROYALTY USA, INC., a Nevada corporation ("DRC"), and each of its officers, or any person or agent as DRC may direct, its true and lawful attorney, with full power of substitution and with full power and authority in the place and stead of Grantor, and in the name of Grantor, DRC or otherwise, from time to time in DRC's discretion to take any action and to execute any instrument that DRC may, in its sole discretion, deem necessary or advisable to accomplish the following:

This Power of Attorney is made pursuant to a security agreement dated December 21, 2004 between Grantor and DRC (the "Security Agreement") and is subject to the terms and provisions thereof. This Power of Attorney, being coupled with an interest, is irrevocable until all "Secured Obligations", as such term is defined in the Security Agreement, are indefeasibly paid in full and the Security Agreement is terminated in writing by DRC.

20


Date: <*>

    ISIS PHARMACEUTICALS, INC.

 
 
By:
 
        Name:
        Title:

STATE OF  
    )      
          ) ss.:    
COUNTRY OF  
    )      

On this        day of                        , 2004, before me personally came                        , to me known, who being duly sworn, did depose and say, that he is the                        of ISIS PHARMACEUTICALS, INC., the corporation described in and which executed the foregoing instrument.

 
Notary Public

21

EXHIBIT III TO
SECURITY AGREEMENT


ASSIGNMENT OF PATENTS

THIS ASSIGNMENT AGREEMENT ("Assignment") entered into this <*> day of <month*>, <year*>. [NTD: to be executed only upon the occurrence and continuance of an Event of Default]

B E T W E E N:

-and-

        WHEREAS, Assignor desires to assign, and Assignee desires to acquire, Assignor's entire, right, title and interest in and to the (i) patent applications; and (ii) patents, filed and/or issued on such dates, under such application, serial or grant numbers, and in such countries as described in the attached Schedule "A" (collectively the "Patents").

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows:

Assignor does hereby sell, assign and transfer to Assignee, Assignor's whole right, title and interest to: (i) the Patents, any foreign applications or issued patents corresponding thereto, any divisionals, continuations, continuations-in-part, re-examinations, reissues, renewals and extensions thereof, whether presently pending or filed in the future; and (ii) all causes of action (either in law or equity) and the right to sue, counterclaim, and recover for past, present and future infringement of the rights assigned to Assignee; the same to be held and enjoyed by Assignee as fully and exclusively as they would have been by the Assignor had this sale, assignment and transfer not been made

Assignor further represents and agrees with Assignee, its successors and assigns, that it will from time to time and at all times hereafter, upon every reasonable request of Assignee, its successors and assigns, make, do and execute or cause and procure to be made, done and executed all further acts, deeds or assurances as may be reasonably required by Assignee, its successors and assigns, for more effectually and completely vesting in Assignee, its successors and assigns the Patents hereby assigned in accordance with the terms hereof.

This Assignment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, and all of which counterparts, taken together, shall constitute but one and the same Assignment.

22


IN WITNESS WHEREOF, the parties have executed and delivered this Assignment as of the date first written above.

ISIS PHARMACEUTICALS, INC.   [DRUG ROYALTY USA,
INC./TRANSFEREE/ASSIGNEE]

By:
    
 
By:
    
  Name:     Name:
  Title:     Title:
STATE OF  
    )      
          ) ss.:    
COUNTRY OF  
    )      

On this        day of                        ,             , before me personally came                        , to me known, who being duly sworn, did depose and say, that he is the                        of ISIS PHARMACEUTICALS, INC., the corporation described in and which executed the foregoing instrument.

 
Notary Public
STATE OF  
    )      
          ) ss.:    
COUNTRY OF  
    )      

On this        day of                        ,             , before me personally came                        , to me known, who being duly sworn, did depose and say, that he is the                        of [DRUG ROYALTY USA, INC./TRANSFEREE/ASSIGNEE], the corporation described in and which executed the foregoing instrument.

 
Notary Public

23


SCHEDULE A
PATENTS

[***]

24



QuickLinks

SECURITY AGREEMENT
SCHEDULE 1 TO SECURITY AGREEMENT
SCHEDULE 5(d)(i) TO SECURITY AGREEMENT
[FORM OF GRANT OF PATENT SECURITY INTEREST]
GRANT OF PATENT SECURITY INTEREST
ASSIGNMENT OF PATENTS
SCHEDULE A PATENTS

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.55

Optionee:       
   Date:       


Isis Pharmaceuticals, Inc.
Supplemental Stock Option Agreement

        Isis Pharmaceuticals, Inc. (the "Company"), pursuant to its 1989 Stock Option Plan (the "Plan") has this day granted to the undersigned optionee, an option to purchase shares of the common stock of the Company ("Common Stock") as described herein. This option is not intended to qualify and will not be treated as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). This option is subject to all of the terms and conditions as set forth herein and on Attachment I hereto, which is incorporated herein in its entirety.

    Number of Shares Subject to Option:       

Vesting Schedule:

Number of Shares (installment)
   Date of Earliest Exercise (vesting)(1)
        
        
        
        

Exercise Price Per Share:(2)
 
$            
 
Expiration Date:(3)
 
    
Percentage of Full-Time Work:           %
(1)
After the first year, the option will vest monthly with 2.08% of the total grant vesting each month; provided, however, that during any period in which the undersigned provides service at less than the Percentage of Full-Time Work set forth above, a reduced number of shares will vest as follows: the percentage of shares which will vest during such period of reduced service will equal (a) the percentage of shares that would vest as set forth on this schedule, multiplied by (b) the percentage of full-time work furnished during the period of reduced service divided by the Percentage of Full Time Work as set forth above. Increases of work percentage up to but not in excess of the Percentage of Full Time Work specified above will result in a corresponding increase in the percentage of shares vesting. This reduction in vesting will not apply during any period of paid leave or the first 20 weeks of a period of unpaid leave. No shares will vest during unpaid leave after the first 20 weeks of such leave. Shares which do not vest because of reductions in work percentage or unpaid leave will be canceled and no longer subject to this option.

(2)
Not less than 85% of the fair market value of the Common Stock on the date of grant of this option.

(3)
Less than 7 years from the date of grant of this option.

Isis Pharmaceuticals, Inc.        

By:
 
    
 
Optionee:
 
    
Duly authorized on behalf of
    the Board of Directors		   Address:    

Optionee:

        Acknowledges receipt of the option as described herein and the attachments referenced therein and understands that all rights and liabilities with respect to this option are set forth in the option and the Plan; and acknowledges that as of the date of grant of this option, it sets forth the entire understanding between the optionee and the Company regarding the acquisition of stock in the Company and supersedes all prior oral and written agreements on that subject.

ATTACHMENT I
TERMS OF SUPPLEMENTAL STOCK OPTION

        The grant hereunder is in connection with and in furtherance of the Company's compensatory benefit plan for participation of the Company's employees (including officers), directors or consultants and is intended to comply with the provisions of Rule 701 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act").

        The details of your option are as follows:

        1.     The total number of shares of Common Stock subject to this option is set forth on the first page of the Supplemental Stock Option Agreement. Subject to the limitations contained herein, this option shall be exercisable with respect to each installment indicated in the Vesting Schedule set forth on the first page of the Supplemental Stock Option Agreement on or after the date of vesting applicable to such installment.

        2.     (a) The Exercise Price of this option is set forth on the first page of the Supplemental Stock Option Agreement.

        3.     The minimum number of shares with respect to which this option may be exercised at any one time is 1,000, unless the number of shares available for exercise (that is, the remaining vested shares pursuant to paragraph 1) equals less than 1,000 shares, in which case the minimum number of shares exercised must equal the number of shares then vested.

        4.     Notwithstanding anything to the contrary contained herein, this option may not be exercised unless the shares issuable upon exercise of this option are then registered under the Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Act.

        5.     The term of this option commences on the date hereof and, unless sooner terminated as set forth below or in the Plan, terminates on the Expiration Date. This option shall terminate prior to the expiration of its term as follows: 3 months after the termination of your employment with the Company or an affiliate of the Company (as defined in the Plan) for any reason or for no reason unless:

However, this option may be exercised following termination of employment only as to that number of shares as to which it was exercisable on the date of termination of employment under the provision of paragraph 1 of this option.

        6.     (a) This option may be exercised, to the extent specified above, by delivering a notice of exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require pursuant to subparagraph 5(f) of the Plan.

        7.     This option is not transferable except by will or by the laws of descent and distribution, and is exercisable during your lifetime only by you; notwithstanding the foregoing, you may transfer part or all of this option to any of the following:

        Furthermore, you may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of your death, will thereafter be entitled to exercise the option.

        8.     This option is not an employment contract and nothing in this option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company, or of the Company to continue your employment with the Company. In the event that this option is granted to you in connection with the performance of services as a consultant or director, references to employment, employee and similar terms shall be deemed to include the performance of services as a consultant or a director, as the case may be, provided, however, that no rights as an employee shall arise by reason of the use of such terms.

        9.     Any notices provided for in this option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, 5 days after deposit in the United States mail, postage prepaid, addressed to you at the address specified on the attached or at such other address as you hereafter designate by written notice to the Company.

        10.   This option is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this option, including without limitation the provisions of paragraph 5 of the Plan relating to option provisions, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this option and those of the Plan, the provisions of the Plan shall control.

Attachments:



QuickLinks

Isis Pharmaceuticals, Inc. Supplemental Stock Option Agreement

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.56

Optionee:       
   Date:       


Isis Pharmaceuticals, Inc.
2000 Plan Supplemental Stock Option Agreement

        Isis Pharmaceuticals, Inc. (the "Company"), pursuant to its 2000 Broad-Based Equity Incentive Plan (the "Plan") has this day granted to the undersigned optionee, an option to purchase shares of the common stock of the Company ("Common Stock") as described herein. This option is not intended to qualify and will not be treated as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). This option is subject to all of the terms and conditions as set forth herein and on Attachment I hereto, which is incorporated herein in its entirety.

    Number of Shares Subject to Option:       

Vesting Schedule:

Number of Shares (installment)
   Date of Earliest Exercise (vesting)(1)
        
        
        
        

Exercise Price Per Share:(2)
 
    
 
Expiration Date:(3)
 
    
Percentage of Full-Time Work:   100%
(1)
After the first year, the option will vest monthly with 2.08% of the total grant vesting each month; provided, however, that during any period in which the undersigned provides service at less than the Percentage of Full-Time Work set forth above, a reduced number of shares will vest as follows: the percentage of shares which will vest during such period of reduced service will equal (a) the percentage of shares that would vest as set forth on this schedule, multiplied by (b) the percentage of full-time work furnished during the period of reduced service divided by the Percentage of Full Time Work as set forth above. Increases of work percentage up to but not in excess of the Percentage of Full Time Work specified above will result in a corresponding increase in the percentage of shares vesting. This reduction in vesting will not apply during any period of paid leave or the first 20 weeks of a period of unpaid leave. No shares will vest during unpaid leave after the first 20 weeks of such leave. Shares which do not vest because of reductions in work percentage or unpaid leave will be canceled and no longer subject to this option.

(2)
Not less than 85% of the fair market value of the Common Stock on the date of grant of this option.

(3)
Less than 10 years from the date of grant of this option.

Isis Pharmaceuticals, Inc.        

By:
 
    
 
Optionee:
 
    
Duly authorized on behalf of
    the Board of Directors		   Address:    

Optionee:

        Acknowledges receipt of the option as described herein and the attachments referenced therein and understands that all rights and liabilities with respect to this option are set forth in the option and the Plan; and acknowledges that as of the date of grant of this option, it sets forth the entire understanding between the optionee and the Company regarding the acquisition of stock in the Company and supersedes all prior oral and written agreements on that subject.

ATTACHMENT I
TERMS OF SUPPLEMENTAL STOCK OPTION

        The grant hereunder is in connection with and in furtherance of the Company's 2000 Broad-Based Equity Incentive Plan (the "Plan") for participation of the Company's employees (including officers), directors or consultants and is intended to comply with the provisions of Rule 701 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act").

        The details of your option are as follows:

        1.     The total number of shares of Common Stock subject to this option is set forth on the first page of the Supplemental Stock Option Agreement. Subject to the limitations contained herein, this option is exercisable with respect to each installment indicated in the Vesting Schedule set forth on the first page of the Supplemental Stock Option Agreement on or after the date of vesting applicable to such installment.

        2.     Notwithstanding any provision in the Plan to the contrary, in the event of a Change in Control (as defined below) then the vesting and exercisability of this stock option will be accelerated in full; provided, however, that if such potential acceleration of the vesting and exercisability of this stock option would cause a contemplated Change in Control transaction that would otherwise be eligible to be accounted for as a "pooling-of-interests" transaction to become ineligible for such accounting treatment under generally accepted accounting principles as determined by the Company's independent certified public accountants prior to the Change of Control, such acceleration will not occur.

        For purposes of this paragraph 2 only, Change in Control means: (i) a sale of all or substantially all of the assets of the Company; (ii) a merger or consolidation in which the Company is not the surviving corporation and in which beneficial ownership of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of Directors has changed; (iii) a reverse merger in which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, and in which beneficial ownership of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of Directors has changed; or (iv) an acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or subsidiary of the Company or other entity controlled by the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of Directors.

        3.     (a) The Exercise Price of this option is set forth on the first page of the Supplemental Stock Option Agreement.

        4.     The minimum number of shares with respect to which this option may be exercised at any one time is 1,000, unless the number of shares available for exercise (that is, the remaining vested shares pursuant to paragraph 1) equals less than 1,000 shares, in which case the minimum number of shares exercised must equal the number of shares then vested.

        5.     Notwithstanding anything to the contrary contained herein, this option may not be exercised unless the shares issuable upon exercise of this option are then registered under the Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Act.

        6.     The term of this option commences on the date hereof and, unless sooner terminated as set forth below or in the Plan, terminates on the Expiration Date. This option shall terminate prior to the


expiration of its term as follows: 3 months after the termination of your employment with the Company or an Affiliate of the Company (as defined in the Plan) for any reason or for no reason unless:

However, this option may be exercised following termination of employment only as to that number of shares as to which it was exercisable on the date of termination of employment under the provision of paragraph 1 of this option.

        7.     (a) This option may be exercised, to the extent specified above, by delivering a notice of exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours.

        8.     This option is not transferable except by will or by the laws of descent and distribution, and is exercisable during your lifetime only by you; notwithstanding the foregoing, you may transfer part or all of this option to any of the following:

        Furthermore, you may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of your death, will thereafter be entitled to exercise the option.

        9.     This option is not an employment contract and nothing in this option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company, or of the Company to continue your employment with the Company. In the event that this option is granted to you in connection with the performance of services as a consultant or director, references to employment, employee and similar terms shall be deemed to include the performance of services as a consultant or a director, as the case may be, provided, however, that no rights as an employee shall arise by reason of the use of such terms.

        10.   Any notices provided for in this option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, 5 days after deposit in the United States mail, postage prepaid, addressed to you at the address specified on the attached or at such other address as you hereafter designate by written notice to the Company.

        11.   This option is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this option, including without limitation the provisions of paragraph 6 of the Plan relating to option provisions, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this option and those of the Plan, the provisions of the Plan shall control.

Attachments:   2000 Broad-Based Equity Incentive Plan
Notice of Exercise



QuickLinks

Isis Pharmaceuticals, Inc. 2000 Plan Supplemental Stock Option Agreement

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.57


2002 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
GRANT NOTICE

Optionee:       
   Date:       


Isis Pharmaceuticals, Inc.
Non-Statutory Stock Option Agreement

        ISIS PHARMACEUTICALS, INC. (the "Company"), pursuant to its 2002 Non-Employee Directors' Stock Option Plan (the "Plan"), hereby grants to Optionholder an option to purchase the number of shares of the Company's Common Stock set forth below. This option is subject to all of the terms and conditions as set forth herein and in the Stock Option Agreement (Attachment I hereto), the Plan and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety.

    Number of Shares Subject to Option:       

Vesting Schedule:

Number of Shares (installment)
   Date of Earliest Exercise (vesting)
        
        
        
        

Exercise Price Per Share:(1)
 
    
 
Expiration Date:(2)
 
    
(1)
Not less than 100% of the fair market value of the Common Stock on the date of grant of this option.

(2)
Less than 10 years from the date of grant of this option.

Isis Pharmaceuticals, Inc.        

By:
 
    
 
Optionee:
 
    
Duly authorized on behalf of
    the Board of Directors		   Address:    

Optionee:

        Additional Terms/Acknowledgements:    The undersigned Optionholder acknowledges receipt of, and understands and agrees to, this Grant Notice, the Stock Option Agreement and the Plan. Optionholder further acknowledges that as of the Date of Grant, this Grant Notice, the Stock Option Agreement and the Plan set forth the entire understanding between Optionholder and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements on that subject with the exception of (i) options previously granted and delivered to Optionholder under the Plan, and (ii) the following agreements only:

OTHER AGREEMENTS:       
        

ISIS PHARMACEUTICALS, INC.
2002 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

STOCK OPTION AGREEMENT
(NONSTATUTORY STOCK OPTION)

        Pursuant to your Stock Option Grant Notice ("Grant Notice") and this Stock Option Agreement, Isis Pharmaceuticals, Inc. (the "Company") has granted you an option under its 2002 Non-Employee Directors' Stock Option Plan (the "Plan") to purchase the number of shares of the Company's Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan.

        The details of your option are as follows:

        1.    VESTING.    Subject to the limitations contained herein, your option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service.

        2.    NUMBER OF SHARES AND EXERCISE PRICE.    The number of shares of Common Stock subject to your option and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments, as provided in the Plan.

        3.    METHOD OF PAYMENT.    Payment of the exercise price is due in full upon exercise of all or any part of your option. You may make payment of the exercise price in cash or by check.

        4.    WHOLE SHARES.    You may exercise your option only for whole shares of Common Stock.

        5.    SECURITIES LAW COMPLIANCE.    Notwithstanding anything to the contrary contained herein, you may not exercise your option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option must also comply with other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material compliance with such laws and regulations.

        6.    TERM.    You may not exercise your option before the commencement of its term or after its term expires. Unless otherwise provided in Section 11(d) of the Plan, the term of your option commences on the Date of Grant and expires upon the earliest of the following:

        7.    EXERCISE.    

        8.    TRANSFERABILITY.    This option is not transferable except by will or by the laws of descent and distribution, and is exercisable during your lifetime only by you; notwithstanding the foregoing, you may transfer part or all of this option to any of the following:

        Furthermore, you may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of your death, will thereafter be entitled to exercise the option.

        9.    RIGHT OF REPURCHASE.    To the extent provided in the Company's bylaws as amended from time to time, the Company shall have the right to repurchase all or any part of the shares of Common Stock you acquire pursuant to the exercise of your option.

        10.    OPTION NOT A SERVICE CONTRACT.    Your option is not an employment or service contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate.

        11.    WITHHOLDING OBLIGATIONS.    You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein.

        12.    NOTICES.    Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, 5 days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company.

        13.    GOVERNING PLAN DOCUMENT.    Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control.



QuickLinks

2002 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN GRANT NOTICE
Isis Pharmaceuticals, Inc. Non-Statutory Stock Option Agreement

QuickLinks -- Click here to rapidly navigate through this document

CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. §§ 200.80(b)4, AND 240.24

Exhibit 10.58


COLLABORATION AND LICENSE AGREEMENT

        THIS COLLABORATION AND LICENSE AGREEMENT ("Agreement") is made and entered into effective as of February 10, 2005 (the "Effective Date"), by and among Sarissa, Inc., having principal offices at 121 Timber Drive, London, ON, N6K4A2, Canada ("Sarissa") and Isis Pharmaceuticals, Inc., having principal offices at 2292 Faraday Avenue, Carlsbad CA 92008 ("Isis"). Sarissa and Isis each may be referred to herein individually as a "Party," or collectively as the "Parties."

        WHEREAS, Isis and Sarissa wish to collaborate in the identification of a lead TS ASO targeted to inhibit Thymidylate Synthase ("TS"), using Isis' proprietary MOE chemistry, on the terms set forth below;

        NOW, THEREFORE, the Parties do hereby agree as follows:


ARTICLE 1—DEFINITIONS

        Capitalized terms used in this Agreement and not otherwise defined herein have the meanings set forth in Appendix 1.


ARTICLE 2—
SCOPE OF COLLABORATION; COLLABORATION ACTIVITIES

        Section 2.1    Scope of Collaboration.    The Parties wish to collaborate to identify TS ASOs (the "Collaboration"), according to the Project Plan attached hereto as Appendix 2.1 and made part of this Agreement. Following the completion of the Project Plan, Sarissa will be solely responsible for the continued development and commercialization of any Products subject to royalty and milestone payments to be paid to Isis as set forth in this Agreement.

        Section 2.2    Collaboration Activities.    

        Section 2.3    Selecting TS ASOs.    

If requested by Sarissa in order to facilitate further development and commercialization of the Product, the Parties will mutually agree to a consulting agreement under which Isis will provide consulting in addition to the hours set forth in the Project Plan.

        Section 2.4    Manufacturing of Product.    


ARTICLE 3—
GRANT OF RIGHTS

        Section 3.1    License Grant for Collaboration Activities.    

2


ARTICLE 4—FINANCIAL PROVISIONS

        Section 4.1    Up-Front Payment by Sarissa.    Sarissa will pay an up-front license fee of $1,000,000 (U.S.) to Isis, payable in Sarissa's sole discretion either (i) in cash or (ii) by convertible promissory note. The Note will be issued in accordance with the Note Purchase Agreement executed concurrently herewith.

        Section 4.2    Payment for Additional TS ASOs.    If Sarissa elects to select an TS ASO for use in an additional Product as set forth in Section 2.3.2, Sarissa will pay Isis an up-front fee of $1,000,000 (U.S.) for each TS ASO selected. Such up-front fee may be paid in cash or equity securities of Sarissa at Sarissa's discretion, provided that any equity securities so issued to Isis will be issued at the same per-share price and will be of the same class with the same rights and preferences as the equity securities issued in Sarissa's most recent Qualified Financing. Notwithstanding the foregoing, (i) if Sarissa's most recent Qualified Financing occurred more than [***] months prior to the date such up-front fee becomes due, Isis in its sole discretion can elect to be paid in cash only and (ii) in no event will Isis be required to take equity in excess of 18% of all shares of Sarissa, fully diluted as converted. In addition to the up-front fee, Sarissa will pay to Isis the milestone payments and royalty payments detailed in Article 4 hereof as and when such milestone payments and royalty payments are due for a Product containing such TS ASO. All milestone payments and royalty payments for such Product will be in addition to all milestone payments and royalty payments required to be made for any other Product being developed or commercialized by Sarissa.

        Section 4.3    Milestone Payments by Sarissa.    Sarissa will pay to Isis the relevant milestone payment not more than 30 days after achievement, by Sarissa or a sublicensee, of each of the applicable events in the first primary indication for each Product developed hereunder; provided however that additional milestone payments will be reduced by [***]% when a Product meets the same milestone in an additional indication once that milestone payment has already been paid for the first primary indication, as follows:

Event
   Payment
[***]   [***]
[***]   [***]
[***]   [***]
[***]   [***]

        Section 4.4    Royalty Payments by Sarissa.    In consideration of Isis' collaborative efforts and the licenses granted hereunder, Sarissa will pay Isis a royalty of [***]% of Net Sales of the Product. Sarissa will pay such royalties for the Term of the Agreement.

        Section 4.5    Third Party Payments.    In addition to the royalty set forth in Section 4.4, Sarissa will pay to Isis a royalty of [***]% of Net Sales of Product, pursuant to a license agreement with [***], dated [***], and a royalty of [***]% of Net Sales of Product pursuant to a license agreement with [***] dated [***]. In the event that Isis negotiates reduced royalties with these Third Party licensors, the royalties due hereunder will still be paid to Isis. Notwithstanding the foregoing, the Parties agree that if the Isis Patent Rights licensed by Isis from [***] and/or [***] and sublicensed under this Agreement cease to have any Valid Claims during the term of this Agreement, then Sarissa will no longer be responsible for paying the royalties flowing through to [***] and/or [***], as applicable, and the total royalty payable will be reduced accordingly. Isis will promptly advise Sarissa in writing regarding any

3


changes to its licenses with [***] or [***] that would materially affect the respective royalties under such agreements.

        Section 4.6    Timing of Royalty Payments.    The royalties will become due and payable within 60 days of each respective Royalty Due Date and shall be calculated in respect of the Net Sales in the 3 month period immediately preceding the applicable Royalty Due Date.

        Section 4.7    Payment Method.    Any amounts due to a Party under this Agreement will be paid in U.S. dollars, by wire transfer in immediately available funds to an account designated by the receiving Party. Any payments or portions thereof due hereunder which are not paid on the date such payments are due under this Agreement will bear interest at a rate equal to the lesser of the prime rate as published in The Wall Street Journal, Eastern Edition, on the first day of each calendar quarter in which such payments are overdue, plus 6%, or the maximum rate permitted by law, whichever is lower, calculated on the number of days such payment is delinquent, compounded monthly.

        Section 4.8    Currency; Foreign Payments.    If any currency conversion will be required in connection with any payment hereunder, such conversion will be made by using the exchange rate for the purchase of U.S. dollars as published in The Wall Street Journal, Eastern Edition, on the last business day of the calendar quarter to which such payments relate. If at any time legal restrictions prevent the prompt remittance of any payments in any jurisdiction, the applicable Party may notify the other and make such payments by depositing the amount thereof in local currency in a bank account or other depository in such country in the name of the receiving Party or its designee, and such Party will have no further obligations under this Agreement with respect thereto.

        Section 4.9    Taxes.    A Party may deduct from any amounts it is required to pay to the other Party pursuant to this Agreement an amount equal to that withheld for or due on account of any taxes (other than taxes imposed on or measured by net income) or similar governmental charge imposed on the receiving Party by a jurisdiction of the paying Party ("Withholding Taxes"). The paying Party will provide the receiving Party a certificate evidencing payment of any Withholding Taxes hereunder within 30 days of such payment and will reasonably assist the receiving Party, at the receiving Party's expense, to obtain the benefit of any applicable tax treaty.

        Section 4.10    Records Retention; Audit.    

4


ARTICLE 5—
CONFIDENTIALITY

        Section 5.1    Disclosure and Use Restriction.    Except as expressly provided herein, the Parties agree that, for the Term and for five (5) years thereafter, each Party will keep completely confidential and will not publish, submit for publication or otherwise disclose, and will not use for any purpose except for the purposes contemplated by this Agreement, any Confidential Information received from the other Party.

        Section 5.2    Press Releases.    Press releases or other similar public communication by either Party relating to this Agreement, unless relating solely to a Product being developed by the Party making the communication, will be approved in advance by the other Party, which approval will not be

5

unreasonably withheld or delayed, except for those communications required by Applicable Law, disclosures of information for which consent has previously been obtained, and information of a similar nature to that which has been previously disclosed publicly with respect to this Agreement, each of which will not require advance approval, but will be provided to the other Party as soon as practicable after the release or communication thereof.

        Section 5.3    Publications.    At least [***] days prior to submission of any material related to the research or development activities hereunder for publication or presentation, the submitting Party will provide to the other Party a draft of such material for its review and comment. The receiving Party will provide any comments to the submitting Party within [***] days of receipt of such materials. No publication or presentation with respect to the research or development activities hereunder will be made unless and until the other Party's comments on the proposed publication or presentation have been addressed and changes have been received and agreed upon and any information determined by the other Party to be Confidential Information has been removed. If requested in writing by the other Party, the submitting Party will withhold material from submission for publication or presentation for a reasonable time to allow for the filing of a patent application.


ARTICLE 6—
INTELLECTUAL PROPERTY

        Section 6.1    Intellectual Property Ownership.    

        Section 6.2    Prosecution of Patents.    

6

        Section 6.3    Enforcement of Patents    

7

        Section 6.4    Validity and Enforceability of Parties' Technology.    The Parties agree that during the Term of this Agreement, and for [***] years thereafter, neither Party will bring any action in a court of law, or otherwise challenge the validity or enforceability of the other Party's Technology licensed under this Agreement. Notwithstanding the foregoing, nothing in this Section 6.4 will be deemed to waive or limit either Party's right to assert inventorship or ownership of any invention related to TS ASOs.

8


ARTICLE 7—
TERM AND TERMINATION

        Section 7.1    Term.    Unless earlier terminated in accordance with the provisions of this Article 7 or Section 9.2, the term of this Agreement (the "Term") commences upon the Effective Date and will continue until for so long as a Product is being developed or commercialized.

        Section 7.2    Rights in Bankruptcy.    All rights and licenses granted under or pursuant to this Agreement by Isis or Sarissa are, and will otherwise be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code, licenses of rights to "intellectual property" as defined under Section 101 of the United States Bankruptcy Code. The Parties agree that the Parties, as licensees of such rights under this Agreement, will retain and may fully exercise all of their rights and elections under the United States Bankruptcy Code. The Parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against a Party under the United States Bankruptcy Code, the Party hereto that is not a Party to such proceeding will be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property, which, if not already in the non-subject Party's possession, will be promptly delivered to it (a) upon any such commencement of a bankruptcy proceeding upon the non-subject Party's written request therefor, unless the Party subject to such proceeding elects to continue to perform all of its obligations under this Agreement or (b) if not delivered under clause (a) above, following the rejection of this Agreement by or on behalf of the Party subject to such proceeding upon written request therefor by the non-subject Party.

        Section 7.3    Consequences of Expiration or Termination.    

        Section 7.4    Accrued Rights; Surviving Obligations.    


ARTICLE 8—
MATERIAL BREACH OF THIS AGREEMENT

        Section 8.1    Material Breach.    Failure by a Party to comply with any of its material obligations contained herein will entitle the Party not in default to give to the defaulting Party notice specifying the nature of the material breach, requiring the defaulting Party to make good or otherwise cure such

9

default, and stating its intention to trigger the provisions of Section 12.4 if such default is not cured. If such default is not cured within 90 days after the receipt of such notice (or, if such default cannot be cured within such 90-day period, if the Party in default does not commence actions to cure such default within such period and thereafter diligently continue such actions), the Party not in default will be entitled, without prejudice to any of its other rights conferred on it by this Agreement, to trigger the provisions of Section 12.4; provided, however, that in the event of a good faith dispute with respect to the existence of a material breach, the 90-day cure period will be stayed until such time as the dispute is resolved pursuant to Section 12.4 hereof.


ARTICLE 9—
DISCONTINUED DEVELOPMENT BY SARISSA

        Section 9.1    In the event of a Discontinuance, whether voluntary or as determined under this Agreement, Isis will have a reversion right as further described in Section 9.2.

        Section 9.2    Reversion Rights.    Within 90 days from the date of Discontinuance, Isis may elect to unilaterally continue development of ASO Compounds that modulate TS, including, but not limited to the Discontinued Product by notice in writing to Sarissa (an "Election Notice") that Isis is exercising its rights under this Section 9.2. If Sarissa has not received an Election Notice from Isis within such 90 day period, Isis will be deemed to have declined to exercise its reversion rights, and this Agreement will terminate with respect to such Discontinued Product. Upon receipt of an Election Notice, Sarissa will grant to Isis an exclusive, worldwide license or sublicense, as the case may be, to all Product-Specific Technology Patents controlled by Sarissa solely to develop, make, have made, use, sell, offer for sale, have sold and import ASO Compounds that modulate TS, including, but not limited to the Discontinued Product. The license granted hereunder will be sublicensable only in connection with a license of a Discontinued Product to a Third Party for the continued development and commercialization of the Discontinued Product in accordance with the terms of this Agreement. In consideration of Sarissa's collaborative efforts and the licenses granted hereunder, Isis will pay to Sarissa (a) all royalty, milestone and other payments owing by Sarissa to a Third Party for additional Product Specific Technology Patents in-licensed by Isis as a result of such reversion (for flow-through to the applicable Third Party); plus (b) a royalty on Net Sales of the Discontinued Product at the applicable royalty rate noted in the following table, based on the stage of development the Discontinued Product at the time of the Discontinuance:

Stage
   Applicable Royalty
[***]   [***]
[***]   [***]
[***]   [***]
*
In addition to the [***]% royalty above, Isis will also reimburse Sarissa for Sarissa's out-of-pocket expenses to [***] as a result of, and through the date of, such reversion.

Isis shall pay such royalties for the Term of the Agreement. All royalties and other payments due hereby will be paid in accordance with the provisions of Sections 4.6 through 4.10.

        Section 9.3    Isis Bankruptcy after Reversion.    After exercising its reversion rights under Section 9.2, in the event of the filing or institution of bankruptcy, reorganization, liquidation or receivership proceedings by Isis or upon an assignment of a substantial portion of the assets for the benefit of creditors by Isis; provided, however, in the case of any involuntary bankruptcy proceeding such right to terminate will only become effective if Isis consents to the involuntary bankruptcy or such proceeding is not dismissed within 90 days of the filing thereof. Sarissa will have 30 days from the receipt of notice of such bankruptcy to notify Isis in writing whether or not Sarissa wishes to negotiate with Isis regarding the development and/or commercialization of a Discontinued Product. If Sarissa fails

10


to respond within such 30 days or if Sarissa declines in writing to exercise its right of first negotiation, then Isis will be free to develop and commercialize (either on its own or with a Third Party) the Discontinued Product. If Sarissa wishes to negotiate a license or development or commercialization rights in such Discontinued Product, Isis and Sarissa will negotiate in good faith the terms of the license or collaboration agreement. If, despite good faith negotiations, Isis and Sarissa do not reach agreement within 120 days from Sarissa's exercise of its right of first negotiation, then Isis will be free to develop and commercialize (either on its own or with a Third Party) the Discontinued Product.


ARTICLE 10—
INDEMNIFICATION AND INSURANCE

        Section 10.1    Indemnification of Isis.    Sarissa will indemnify Isis, and its respective directors, officers, employees and agents, and defend and hold each of them harmless, from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and expenses) to the extent arising from or occurring as a result of any and all liability suits, investigations, claims or demands by a Third Party (collectively, "Losses") arising from or occurring as a result of or in connection with (a) the gross negligence or willful misconduct on the part of Sarissa or its licensees or sublicensees in performing any activity contemplated by this Agreement, or, (b) the manufacture, use, handling, storage, sale or other disposition of a Product that is sold by Sarissa, its Affiliates, agents or sublicensees.

        Section 10.2    Indemnification of Sarissa.    Isis will indemnify Sarissa, and its respective directors, officers, employees and agents, and defend and save each of them harmless, from and against any and all Losses arising from or occurring as a result of or in connection with (a) the gross negligence or willful misconduct on the part of Isis or its licensees or sublicensees in performing any activity contemplated by this Agreement, or, (b) the manufacture, use, handling, storage, sale or other disposition of a Product that is sold by Isis, its Affiliates, agents or sublicensees.

        Section 10.3    Indemnification Procedure.    Each Party's agreement to indemnify and hold the other harmless is conditioned upon the indemnified Party (i) providing written notice to the indemnifying Party of any claim, demand or action arising out of the indemnified activities within thirty (30) days after the indemnified Party has knowledge of such claim, demand or action, (ii) permitting the indemnifying Party to assume full responsibility to investigate, prepare for and defend against any such claim or demand, (iii) assisting the indemnifying Party, at the indemnifying Party's reasonable expense, in the investigation of, preparation of and defense of any such claim or demand; and (iv) not compromising or settling such claim or demand without the indemnifying Party's prior written consent.

        Section 10.4    Insurance.    Each Party will have and maintain such types and amounts of liability insurance as is normal and customary in the industry generally for parties similarly situated, and will upon request provide the other Party with a certificate of insurance. Each party will promptly notify the other Party of any material change in insurance coverage or lapse in coverage in that regard.


ARTICLE 11—
REPRESENTATIONS AND WARRANTIES

        Section 11.1    Representations, Warranties and Covenants.    Each Party hereby represents, warrants and covenants to the other Party as of the Effective Date as follows:

11

        Section 11.2    DISCLAIMER OF WARRANTY.    EXCEPT FOR THE EXPRESS WARRANTIES SET FORTH IN SECTIONS 11.1, SARISSA AND ISIS MAKE NO REPRESENTATIONS AND GRANT NO WARRANTIES, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, AND SARISSA AND ISIS EACH SPECIFICALLY DISCLAIM ANY OTHER WARRANTIES, WHETHER WRITTEN OR ORAL, OR EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF QUALITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE OR PURPOSE OR ANY WARRANTY AS TO THE VALIDITY OF ANY PATENTS OR THE NON-INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES.


ARTICLE 12—
MISCELLANEOUS

        Section 12.1    Assignment.    Without the prior written consent of the other Party hereto, neither Party will sell, transfer, assign, delegate, pledge or otherwise dispose of, whether voluntarily, involuntarily, by operation of law or otherwise, this Agreement or any of its rights or duties hereunder; provided, however, that either Party hereto may (i) assign or transfer this Agreement or any of its rights or obligations hereunder without the consent of the other Party to any Third Party with which it has merged or consolidated, or to which it has transferred all or substantially all of its assets or stock to which this Agreement relates if in any such event the Third Party assignee or surviving entity assumes

12


in writing all of the assigning Party's obligations under this Agreement or (ii) assign or transfer its rights under Article 4 (but no liabilities) to a Third Party in connection with a royalty factoring transaction. Any purported assignment or transfer in violation of this Section will be void ab initio and of no force or effect.

        Section 12.2    Severability.    If any provision of this Agreement is held to be illegal, invalid or unenforceable by a court of competent jurisdiction, such adjudication shall not affect or impair, in whole or in part, the validity, enforceability, or legality of any remaining portions of this Agreement. All remaining portions shall remain in full force and effect as if the original Agreement had been executed without the invalidated, unenforceable or illegal part.

        Section 12.3    Governing Law.    This Agreement will be governed by and construed in accordance with the laws of Delaware without reference to any rules of conflicts of laws.

        Section 12.4    Dispute Resolution.    

13

        Section 12.5    Notices.    All notices or other communications that are required or permitted hereunder will be in writing and delivered personally with acknowledgement of receipt, sent by facsimile (and promptly confirmed by personal delivery, registered or certified mail or overnight courier as provided herein), sent by nationally-recognized overnight courier or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows:

        If to Sarissa, to:

        If to Isis, to:

or to such other address as the Party to whom notice is to be given may have furnished to the other Party in writing in accordance herewith. Any such communication will be deemed to have been given (i) when delivered, if personally delivered or sent by facsimile on a Business Day, (ii) on the Business Day after dispatch, if sent by nationally-recognized overnight courier, and (iii) on the third business day following the date of mailing, if sent by mail. It is understood and agreed that this Section 12.5 is not

14

intended to govern the day-to-day business communications necessary between the Parties in performing their duties, in due course, under the terms of this Agreement.

        Section 12.6    Entire Agreement; Modifications.    This Agreement sets forth and constitutes the entire agreement and understanding between the Parties with respect to the subject matter hereof and all prior agreements, understanding, promises and representations, whether written or oral, with respect thereto (including, but not limited to that certain material transfer agreement dated March 22, 1996, between Isis and D. James Koropatnick) are superseded hereby. Each Party confirms that it is not relying on any representations or warranties of the other Party except as specifically set forth herein. No amendment, modification, release or discharge will be binding upon the Parties unless in writing and duly executed by authorized representatives of both Parties.

        Section 12.7    Relationship of the Parties.    It is expressly agreed that the Parties will be independent contractors of one another and that the relationship between the Parties will not constitute a partnership, joint venture or agency.

        Section 12.8    Waiver.    Any term or condition of this Agreement may be waived at any time by the Party that is entitled to the benefit thereof, but no such waiver will be effective unless set forth in a written instrument duly executed by or on behalf of the Party waiving such term or condition. Any such waiver will not be deemed a waiver of any other right or breach hereunder.

        Section 12.9    Counterparts.    This Agreement may be executed in two (2) or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument.

        Section 12.10    No Benefit to Third Parties.    The representations, warranties, covenants and agreements set forth in this Agreement are for the sole benefit of the Parties hereto and their successors and permitted assigns, and they will not be construed as conferring any rights on any other parties.

        Section 12.11    Further Assurance.    Each Party will duly execute and deliver, or cause to be duly executed and delivered, such further instruments and do and cause to be done such further acts and things, including the filing of such assignments, agreements, documents and instruments, as may be necessary to carry out the provisions and purposes of this Agreement.

15

        IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written.

SARISSA, INC.   ISIS PHARMACEUTICALS, INC.

Per: /s/  MARK VINCENT      
 
Per: /s/  B. LYNNE PARSHALL      

Mark Vincent
President and CEO
 
B. Lynne Parshall
Executive Vice President and CFO

16


APPENDIX 1

Definitions

        "Affiliate" of a party means any other party that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with such first party. For purposes of this definition only, "control" and, with correlative meanings, the terms "controlled by" and "under common control with" will mean (a) the possession, directly or indirectly, of the power to direct the management or policies of a party, whether through the ownership of voting securities or by contract relating to voting rights or corporate governance, and (b) the ownership, directly or indirectly, of more than fifty percent (50%) of the voting securities or other ownership interest of a party; provided that, if local law restricts foreign ownership, control will be established by direct or indirect ownership of the maximum ownership percentage that may, under such local law, be owned by foreign interests.

        "Antisense Compound" means an oligomeric compound or analog, mimic or mimetic thereof having a sequence that is partially or wholly complementary to the sequence of a messenger RNA (pre-mRNA or mRNA), viral RNA, or noncoding RNA that directly modulates RNA expression.

        "Applicable Law" means the applicable laws, rules, and regulations, including any rules, regulations, guidelines, or other requirements of the Regulatory Authorities, that may be in effect from time to time.

        "Business Day" means any day, other than Saturday, Sunday or any statutory holiday in the United States.

        "Calendar Year" means each successive period of 12 months commencing on January 1 and ending on December 31.

        "Collaboration" has the meaning set forth in Section 2.1.

        "Commercially Reasonable Efforts" means, with respect to the research, development, manufacture or commercialization of the Product, efforts and resources commonly used in the biotechnology industry for products of similar commercial potential at a similar stage in its lifecycle, taking into consideration their safety and efficacy, cost to develop, priority in relation to other products under development by the other Party, the competitiveness of alternative products, proprietary position, the likelihood of regulatory approval, profitability, and all other relevant factors.

        "Confidential Information" means all information and know-how and any tangible embodiments thereof provided by or on behalf of one Party to the other Party either in connection with the discussions and negotiations pertaining to this Agreement or in the course of performing this Agreement, including data; knowledge; practices; processes; ideas; research plans; engineering designs and drawings; research data; manufacturing processes and techniques; scientific, manufacturing, marketing and business plans; and financial and personnel matters relating to the disclosing Party or to its present or future products, sales, suppliers, customers, employees, investors or business.

        Notwithstanding the foregoing, information or know-how of a Party shall not be deemed Confidential Information for purposes of this Agreement if such information or know-how:

A-1

        "Control" means, with respect to any Patent or other intellectual property right, possession of the right (whether by ownership, license or otherwise), to assign, or grant a license, sublicense or other right to or under, such Patent or right as provided for herein without violating the terms of any agreement or other arrangement with any Third Party or incurring any additional financial or other obligation to a Third Party except the obligations specifically described in Section 4.5

        "Discontinuance" means the occurrence of any one of the following:

        "Discontinued Product" means a TSA ASO that was abandoned as part of a Discontinuance.

        "Election Notice" has the meaning set forth in Section 9.2.

        "Equity Securities" means Sarissa's preferred or common stock (any other convertible security sold in connection therewith).

        "FDA" means the United States Food and Drug Administration and any successor agency thereto.

        "Gene Walk" means the manufacturing of greater than 30 individual sequences corresponding to TS and the evaluation of such sequences in a high-throughput screen that enables an analysis of each sequence's ability to down regulate TS mRNA in vitro.

        "GAAP" means generally accepted accounting principles of the United States consistently applied.

        "IND" means an investigational new drug application filed with the FDA or TPD for authorization to commence human clinical trials, and its equivalent in other countries or regulatory jurisdictions.

        "Isis Core Technology Patents" means Patents Controlled by Isis on the Effective Date that are necessary for the development and commercialization of the Product, but not including the Isis Product-Specific Technology Patents, or Patents Controlled by Isis that claim formulation, delivery, manufacturing technologies or chemistries (except for the MOE chemistry). A representative list of the Isis Core Technology Patents is attached hereto as Appendix 3.

        "Isis Patent Rights" means any Patents owned or Controlled by Isis.

        "Joint Patents" means all Patents that claim, and only to the extent that they claim, Joint Technology.

        "Joint Technology" has the meaning set forth in Section 6.1.1.

        "Losses" has the meaning set forth in Section 10.1.

        "Major Market" means the [***].

A-2


        "NDA" means a New Drug Application filed with the FDA after completion of clinical trials to obtain marketing approval for commercial product in the United States or equivalent application for regulatory approval in other Major Market countries.

        "Net Sales" means the gross invoice price of the Product sold by the Party having the right to sell or have sold the Product pursuant to this Agreement, and/or sublicensees of such Party, to a Third Party which is not a sublicensee of the selling party (unless such sublicensee is the end user of the Product, in which case the amount billed therefor shall be deemed to be the amount that would be billed to a Third Party in an arm's-length transaction) for sales of such Product to such end users less the following items, as allocable to such Product (if not previously deducted from the amount invoiced): (i) trade discounts, credits or allowances, (ii) credits or allowances additionally granted upon returns, rejections or recalls, (iii) freight, shipping and insurance charges, (iv) taxes, duties or other governmental tariffs (other than income taxes), and (v) government mandated rebates.

        "Note" means the Convertible Promissory Note attached as Exhibit A to the Note Purchase Agreement.

        "Patents" shall include (x) all U.S. patents and patent applications, (y) any substitutions, divisions, continuations, reissues, renewals, registrations, confirmations, re-examinations, extensions, supplementary protection certificates and the like, and any provisional applications, of any such patents or patent applications, and (z) any foreign or international equivalent of any of the foregoing.

        "Phase I Clinical Trial" means the initial clinical testing of the Product in humans (first-in-humans study) with the intention of gaining a preliminary assessment of the safety of the Product.

        "Pivotal Quality Clinical Trial" means a human clinical trial of the Product designed to be of a size and statistical power to support an NDA filing alone or in combination with other studies. If it is unclear whether or not a study design will be sufficient to support an NDA filing (other than by virtue of the uncertainty of efficacy data from that trial) the study will be deemed to be a Pivotal Quality Clinical Trial on the initiation of activities to support an NDA filing. Initiation of a Phase III clinical study will be deemed to be initiation of a Pivotal Quality Clinical Trial.

        "Product" means a pharmaceutical preparation comprising any single TS ASO or Tandem selected by Sarissa under Section 2.3.1 or 2.3.2. After the Project Plan has been completed, the Parties will append to this Agreement the specific sequence and chemistry of each TS ASO which constitutes the active pharmaceutical ingredient in each Product.

        "Product-Specific Technology" means any discovery, device, process, method of use, composition, or formulation, whether or not patented or patentable, which is made or Controlled solely by Isis or Sarissa, or jointly by Isis and Sarissa, prior to the Effective Date or during the Term of this Agreement, and which relate only to the composition of matter or gene targets down regulated by a Product.

        "Product-Specific Technology Patents" means all Patents that disclose or claim Product-Specific Technology. A representative list of the Product-Specific Technology Patents is attached hereto as Appendix 4.

        "Project Plan" means the Parties' initial development plan for Collaboration Activities, as further described on Schedule 2.3.

        "Qualified Financing" means (i) with respect to Sarissa's first financing, when Sarissa issues and sells shares of its Equity Securities to investors on or before the [***] year anniversary of this Agreement in a financing with total proceeds received by Sarissa of not less than $[***]; and (ii) with respect to any subsequent financing, when Sarissa issues and sells shares of its Equity Securities to investors in a financing with total proceeds received by Sarissa of not less than $[***].

A-3


        "Regulatory Approval" means (a) in the United States, approval by the FDA of an NDA, or similar application for marketing approval, and satisfaction of any related applicable FDA registration and notification requirements (if any), and (b) in a Major Market other than the United States, approval by regulatory authorities having jurisdiction over such country of a single application or set of applications comparable to an NDA and satisfaction of any related applicable regulatory and notification requirements (if any).

        "Regulatory Authority" means any applicable government entities regulating or otherwise exercising authority with respect to the development and commercialization of the Product.

        "Regulatory Documentation" means all applications, registrations, licenses, authorizations and approvals (including all Regulatory Approvals), all correspondence submitted to or received from Regulatory Authorities (including minutes and official contact reports relating to any communications with any Regulatory Authority), all supporting documents and all clinical studies and tests, including the manufacturing batch records, relating to the Product, and all data contained in any of the foregoing, including all regulatory drug lists, advertising and promotion documents, adverse event files and complaint files.

        "Royalty Due Dates" means the last working days of March, June, September and December of each and every year during which this Agreement remains in full force and effect.

        "Tandem" means two or more TS ASOs that (i) where identified as part of the same Gene Walk and (ii) are used in combination with each other to simultaneously modulate TS.

        "Technology" means Isis Patent Rights, Sarissa Product-Specific Technology Patents, Joint Patents and/or the Joint Technology (including any Joint Product-Specific Technology), as applicable.

        "Term" has the meaning set forth in Section 7.1.

        "Third Party" means any party other than Isis or Sarissa or their respective Affiliates.

        "TS" has the meaning set forth in the preamble to this Agreement.

        "TS ASO" means a single-stranded oligonucleotide or an analog thereof that hybridizes to TS mRNA using Watson-Crick base pairing and inhibits production of TS via an RNase-H mechanism.

        "Valid Claim" means a claim which (i) in the case of any unexpired United States or foreign patent, shall not have been donated to the public, disclaimed or held invalid or unenforceable by a court of competent jurisdiction in an unappealed or unappealable decision, or (ii) in the case of any United States or foreign patent application, shall not have been permanently cancelled, withdrawn, or abandoned.

        "Withholding Taxes" has the meaning set forth in Section 4.9.

A-4


APPENDIX 2.3.1
PROJECT PLAN

[***]


APPENDIX 3
ISIS CORE TECHNOLOGY PATENTS

[***]


APPENDIX 4
PRODUCT-SPECIFIC TECHNOLOGY PATENTS

[***]



QuickLinks

COLLABORATION AND LICENSE AGREEMENT
ARTICLE 1—DEFINITIONS
ARTICLE 2— SCOPE OF COLLABORATION; COLLABORATION ACTIVITIES
ARTICLE 3— GRANT OF RIGHTS
ARTICLE 4—FINANCIAL PROVISIONS
ARTICLE 5— CONFIDENTIALITY
ARTICLE 6— INTELLECTUAL PROPERTY
ARTICLE 7— TERM AND TERMINATION
ARTICLE 8— MATERIAL BREACH OF THIS AGREEMENT
ARTICLE 9— DISCONTINUED DEVELOPMENT BY SARISSA
ARTICLE 10— INDEMNIFICATION AND INSURANCE
ARTICLE 11— REPRESENTATIONS AND WARRANTIES
ARTICLE 12— MISCELLANEOUS
APPENDIX 1 Definitions
APPENDIX 2.3.1 PROJECT PLAN
APPENDIX 3 ISIS CORE TECHNOLOGY PATENTS
APPENDIX 4 PRODUCT-SPECIFIC TECHNOLOGY PATENTS

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 21.1


LIST OF SUBSIDIARIES FOR THE REGISTRANT

Isis Pharmaceuticals Singapore Pte Ltd., a Singapore Limited Private Company
Hepasense, Ltd., a Bermuda Limited Company
Orasense, Ltd., a Bermuda Limited Company
PerIsis I Development Corporation, a Delaware Corporation



QuickLinks

LIST OF SUBSIDIARIES FOR THE REGISTRANT

QuickLinks -- Click here to rapidly navigate through this document


Exhibit 23.1


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 33-55790, 33-72124 33-75068, 33-96138, 333-71911, 333-90811, 333-38844, 333-71116, 333-71176, 333-89066, 333-89626 and Form S-8 Nos. 333-116962, 33-42356, 33-42970, 33-51236, 33-54840, 33-58450, 33-43330, 33-75150, 33-90780, 333-05825, 333-55683, 333-40336, 333-59296, 333-91572, 333-106859) of Isis Pharmaceuticals, Inc. and in the related Prospectuses of our reports dated March 3, 2005, with respect to: (1) the consolidated financial statements of Isis Pharmaceuticals, Inc., and (2) management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Isis Pharmaceuticals, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2004.

San Diego, California
March 10, 2005



QuickLinks

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

QuickLinks -- Click here to rapidly navigate through this document


EXHIBIT 31.1


CERTIFICATION

I, Stanley T. Crooke, certify that:

        Dated: March 15, 2005

/s/  STANLEY T. CROOKE, M.D., PH.D.      
Stanley T. Crooke, M.D., Ph.D.
 Chief Executive Officer		    



QuickLinks

CERTIFICATION

QuickLinks -- Click here to rapidly navigate through this document


EXHIBIT 31.2


CERTIFICATION

I, B. Lynne Parshall, certify that:

1.
I have reviewed this Annual Report on Form 10-K of Isis Pharmaceuticals, Inc.;

2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.
Based on my knowledge, the consolidated financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, consolidated results of operations and consolidated cash flows of the registrant as of, and for, the periods presented in this annual report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: Match 15, 2005

/s/  B. LYNNE PARSHALL      
B. Lynne Parshall, J.D.
 Chief Financial Officer		    



QuickLinks

CERTIFICATION

QuickLinks -- Click here to rapidly navigate through this document


Exhibit 32.1


CERTIFICATION

        Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Stanley T. Crooke, the Chief Executive Officer of Isis Pharmaceuticals, Inc., (the "Company"), and B. Lynne Parshall, the Chief Financial Officer of the Company, each hereby certifies that, to the best of his or her knowledge:

Dated: March 15, 2005

/s/  STANLEY T. CROOKE      
Stanley T. Crooke, M.D., Ph.D.
 Chief Executive Officer		   /s/  B. LYNNE PARSHALL      
B. Lynne Parshall, J.D.
 Chief Financial Officer

        A signed original of this written statement required by Section 906 has been provided to Isis Pharmaceuticals, Inc. and will be retained by Isis Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

        This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Isis Pharmaceuticals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.



QuickLinks

CERTIFICATION