<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

(MARK ONE)

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

       For the quarterly period ended June 30, 1998

                                       OR

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

       For the transition period from ________ to ________

       Commission file number 0-19125

                           ISIS PHARMACEUTICALS, INC.
          ------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

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

                     2292 Faraday Avenue, Carlsbad, CA 92008
          ------------------------------------------------------------
          (Address of principal executive offices, including zip code)

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


          ------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)

    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.

    (1)    Yes  [X] No  [ ]                         (2) Yes  [X]  No [ ]

    Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

      Common stock $.001 par value                  26,907,483 shares
      ----------------------------           ------------------------------
                 (Class)                     (Outstanding at July 31, 1998)

                    EXHIBIT INDEX: Located at page number 10.


                                       1

<PAGE>   2
                           ISIS PHARMACEUTICALS, INC.
                                    FORM 10-Q
                                      INDEX


<TABLE>
<CAPTION>
                                                                                   PAGE
                                                                                   ----
<S>          <C>                                                                   <C>

PART I       FINANCIAL INFORMATION


ITEM 1:      Financial Statements

             Condensed Balance Sheets as of June 30, 1998 and December 31, 1997      3

             Condensed Statements of Operations for the three months
             and six months ended June 30, 1998 and 1997                             4

             Condensed Statements of Cash Flows for the six  months
             ended June 30, 1998 and 1997                                            5

             Notes to Financial Statements                                           6


ITEM 2:      Management's Discussion and Analysis of Financial Condition
             and Results of Operations

             Results of Operations                                                   7

             Liquidity and Capital Resources                                         8

             Year 2000 Computer Issues                                               9


PART II      OTHER INFORMATION


ITEM 1:      Legal Proceedings                                                      10


ITEM 2:      Changes in Securities                                                  10


ITEM 3:      Default upon Senior Securities                                         10


ITEM 4:      Submission of Matters to a Vote of Security Holders                    10


ITEM 5:      Other Information                                                      10


ITEM 6:      Exhibits and Reports on Form 8-K                                       11

SIGNATURES                                                                          12
</TABLE>



                                       2

<PAGE>   3
                           ISIS PHARMACEUTICALS, INC.
                            CONDENSED BALANCE SHEETS
                        (in thousands, except share data)

                                     ASSETS


<TABLE>
<CAPTION>
                                                                         June 30,       December 31,
                                                                           1998             1997
                                                                        ----------      ------------
                                                                        (Unaudited)        (Note)
<S>                                                                     <C>             <C>       
Current assets:
  Cash and cash equivalents                                             $   38,852       $   38,102
  Short-term investments                                                    45,515           48,684
  Prepaid expenses and other current assets                                  2,815            2,364
                                                                        ----------       ----------
          Total current assets                                              87,182           89,150

Property, plant and equipment, net                                          19,787           18,785
Patent costs, net                                                            8,266            7,485
Deposits and other assets                                                    2,400            2,461
                                                                        ----------       ----------
                                                                        $  117,635       $  117,881
                                                                        ==========       ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                      $    2,746       $    2,843
  Accrued payroll and related expenses                                       1,482            2,242
  Accrued liabilities                                                        4,066            4,347
  Deferred contract  revenues                                               22,558           14,893
  Current portion of long term debt and capital lease                  
  obligations                                                                2,166            2,252
                                                                        ----------       ----------
          Total current liabilities                                         33,018           26,577

Long-term debt and capital lease obligations, less current portion          71,919           56,452

Stockholders' equity:
  Common stock, $.001 par value; 50,000,000 shares
    authorized, 26,855,000 shares and 26,655,000 shares
    issued and outstanding at June 30, 1998 and December 31, 1997,
    respectively                                                                27               27
  Additional paid-in capital                                               191,913          188,793
  Unrealized gain on investments                                               266              165
  Accumulated deficit                                                     (179,508)        (154,133)
                                                                        ----------       ----------
          Total stockholders' equity                                        12,698           34,852
                                                                        ----------       ----------
                                                                        $  117,635       $  117,881
                                                                        ==========       ==========
</TABLE>


Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date.

                             See accompanying notes.


                                       3

<PAGE>   4
                           ISIS PHARMACEUTICALS, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                  (in thousands, except for per share amounts)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                         Three months ended               Six  months ended
                                              June 30,                         June 30,
                                       ------------------------        ------------------------
                                         1998            1997            1998            1997
                                       --------        --------        --------        --------
<S>                                    <C>             <C>             <C>             <C>     
Revenues:
  Research and development
     revenue under collaborative
     agreements                        $  5,832        $  5,793        $ 11,672        $ 10,419
  Interest income                         1,216             766           2,271           1,713
                                       --------        --------        --------        --------
                                          7,048           6,559          13,943          12,132
Expenses:
  Research and development               16,532          13,374          31,391          25,160
  General and administrative              2,261           2,054           4,119           3,761
  Interest expense                        2,102             557           3,806           1,191
                                       --------        --------        --------        --------
                                         20,895          15,985          39,316          30,112
                                       --------        --------        --------        --------
Net loss                               $(13,847)       $ (9,426)       $(25,373)       $(17,980)
                                       ========        ========        ========        ========

Basic and diluted net loss
  per share                            $   (.52)       $   (.36)       $   (.95)       $   (.68)

Shares used in computing basic
  and diluted net loss per share         26,836          26,381          26,788          26,330
                                       ========        ========        ========        ========
</TABLE>


                             See accompanying notes.


                                       4

<PAGE>   5
                           ISIS PHARMACEUTICALS, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                                                          Six months ended
                                                                              June 30,
                                                                      ------------------------
                                                                        1998            1997
                                                                      --------        --------
<S>                                                                   <C>             <C>      
Cash used in operations:                                              $(15,112)       $(11,698)

Investing activities:
    Short-term investments                                               3,169           5,797
    Property and equipment                                              (1,881)         (3,856)
    Other assets                                                          (817)         (1,492)
                                                                      --------        --------
            Net cash provided from investing activities                    471             449
                                                                      --------        --------
Financing activities:
    Net proceeds from issuance of common stock                           3,120           1,659
    Proceeds from long-term borrowings                                  13,354          11,378
    Principal payments on debt and capital lease obligations            (1,083)         (3,019)
                                                                      --------        --------
           Net cash provided from  financing activities                 15,391          10,018
                                                                      --------        --------
Net increase (decrease) in cash and cash equivalents                       750          (1,231)

Cash and cash equivalents at beginning of period                        38,102          37,082
                                                                      --------        --------
Cash and cash equivalents at end of period                            $ 38,852        $ 35,851
                                                                      ========        ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Interest paid                                                     $  1,599        $  1,080

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
    Additions to long-term debt obligations for acquisitions of
      property, plant and equipment                                   $    919        $    670
</TABLE>


                             See accompanying notes.


                                       5

<PAGE>   6
                           ISIS PHARMACEUTICALS, INC.


                          NOTES TO FINANCIAL STATEMENTS

1.      BASIS OF PRESENTATION

        The unaudited interim financial statements for the three and six month
periods ended June 30, 1998 and 1997 have been prepared on the same basis as the
Company's audited financial statements for the year ended December 31, 1997. The
financial statements include all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such dates and the operating results
and cash flows for those periods. Results for the interim periods are not
necessarily indicative of the results for the entire year. For more complete
financial information, these financial statements, and notes thereto, should be
read in conjunction with the audited financial statements for the year ended
December 31, 1997 included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.

2.       COMPREHENSIVE INCOME

        As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). This
statement requires the Company to report in the financial statements, in
addition to net income, comprehensive income and its components including
foreign currency translation adjustments and unrealized gains and losses on its
available-for-sale securities. SFAS 130 also requires the Company to reclassify
financial statements for earlier periods provided for comparative purposes. For
the three and six month periods ended June 30, 1998 and 1997 comprehensive
income was not materially different than net income.

3.       SUBSEQUENT EVENT

        In August 1998, the Company entered into an agreement to exclusively
license its issued patents covering immune stimulation by phosphorothioate
oligonucleotides to CpG ImmunoPharmaceuticals, Inc. The agreement grants CpG
ImmunoPharmaceuticals, Inc. exclusive worldwide rights to certain applications
covered by issued U.S. Patents No. 5,663,153; No. 5,723,335; and related patent
applications, not including claims for antisense therapeutics. The terms of the
agreement provide that the Company will receive $5 million in cash payments in
1998. In addition, Isis will receive a 5% equity interest in CpG
ImmunoPharmaceuticals, Inc. Based on recent cash purchases of equity securities
of CpG ImmunoPharmaceuticals, Inc., the value of Isis' equity position will
approximate $1.4 million.


                                       6

<PAGE>   7


I
TEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

        In addition to historical information contained in this Report, this
Report contains forward-looking statements regarding the Company's business and
products and their projected prospects and qualities, and the Company's
relationships with its corporate partners. Such statements are subject to
certain risks and uncertainties, particularly those inherent in both the process
of discovering, developing and commercializing safe and effective drugs, and the
endeavor of building a business around such potential products. Actual results
could differ materially from those projected in this Form 10-Q. As a result, the
reader is cautioned not to place undue reliance on these forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in Isis' Annual Report on Form 10-K for
the year ended December 31, 1997 which is on file with the U.S. Securities and
Exchange Commission, a copy of which is available from the Company.

        Since its inceptions in January 1989, almost all of the Company's
resources have been devoted to its research, drug discovery and drug development
programs. The Company is not yet profitable and expects to continue to have
operating losses for the next several years. Isis' revenue comes from
collaborative research and development agreements with pharmaceutical companies,
research grants and interest income. The revenue from the collaboration
increases the amount of research and development activity that the Company is
able to fund and offsets a portion of its research and development costs. To
date, Isis has not received any significant revenue from the sale of products.

RESULTS OF OPERATIONS

        The Company's revenue from collaborative research and development
agreements was $5.8 million for the second quarter and $11.7 million for the six
month period ended June 30, 1998, compared with $5.8 million and $10.4 million,
respectively, for the same periods in 1997. The revenue increase was primarily
due to the increasing level of development activity supported by our corporate
partners. The Company also had interest income totaling $1.2 million for the
quarter and $2.3 million for the six month period compared with $0.8 million and
$1.7 million for the same periods in 1997. This increase in interest income was
primarily due to higher average investment balances in the quarter ended June
30, 1998.

        Research and development expenses increased to $16.5 million for the
three months and $31.4 million for the six months ended June 30, 1998 from $13.4
million and $25.2 million for the same periods in 1997. This increase was
attributable to an increase in preclinical and clinical development activities
including compounds advancing into more expensive stages of clinical
development. We expect that research and development expenses will continue to
increase as compounds continue to advance in clinical development.

        General and administrative expenses increased to $2.3 million for the
quarter and $4.1 million for the six months ended June 30, 1998, from $2.1
million and $3.8 million for the same periods in 1997. This increase in general
and administrative expense is related to additional staffing in general and
administrative functions required to support the growth in research and
development. We expect that general and administrative expenses will continue to
increase in the future to support our growing research and development efforts.

        Interest expense increased to $2.1 million for the second quarter and
$3.8 million for the six month period ended June 30, 1998, compared with $0.6
million and $1.2 million for the same periods in 1997. This increase in interest
expense is due to borrowing $25 million in a private debt financing completed in
the fourth quarter of 1997 with an additional $15 million follow-on private debt
financing in the second quarter of 1998. Under the terms of these financing
arrangements payment of interest is deferred for the first five years.
Therefore, of the $2.1 million of interest expense recognized in the second
quarter, $1.3 million was accrued under the long-term debt agreements and will
not require current cash payment. Similarly, of the $3.8 million interest
expense for the six-month period ended June 30, 1998, $2.2 million was accrued
under the long-term debt agreements and will not require current cash payment.


                                       7

<PAGE>   8

        During the quarter ended June 30, 1998, the Company recorded a net loss
of $13.8 million, or $0.52 per share, compared with $9.4 million, or $0.36 per
share, for the same period in 1997. During the six-month period ended June 30,
1998, the Company's net loss amounted to $25.4 million, or $0.95 per share,
compared to $18.0 million, or $0.68 per share for the same period in 1997. We
expect that operating losses will increase for several more years as research
and development activities grow. Operating losses may fluctuate from quarter to
quarter because of differences in the timing of revenue and expense recognition.

        The Company believes that inflation and changing prices have not had a
material effect on its ongoing operations to date.

LIQUIDITY AND CAPITAL RESOURCES

        Isis has financed its operations with revenue from contract research and
development through the sale of equity securities and the issuance of long-term
debt. From its inception through June 30, 1998, Isis has earned approximately
$117 million in revenue from contract research and development. The Company has
also raised net proceeds of approximately $180 million from the sale of equity
securities since it was founded. Since 1996, Isis has borrowed approximately
$62.6 million under long-term debt arrangements to finance a portion of its
operations.

        As of June 30, 1998, the Company had cash, cash equivalents and
short-term investments totaling $84.4 million and working capital of $54.2
million. In comparison, the Company had cash, cash equivalents and short-term
investments of $86.8 million and working capital of $62.6 million as of December
31, 1997. The decreases in cash and working capital resulted from the funding of
operating losses, investments in capital equipment and principal payments on
debt and capital lease obligations, offset in part, by an additional $15 million
private debt financing.

        The Company's collaborative agreement with Boehringer Ingelheim provides
Isis with a $40 million line of credit. This line of credit is available under
certain circumstances and is to be used to support the collaboration cell
adhesion programs. As of June 30, 1998, the outstanding balance under this line
of credit was $22.6 million.

        In October 1997, Isis borrowed $25 million in a private transaction. The
loan bears interest at 14% per annum and must be repaid on November 1, 2007. No
payments of either principal or interest are required during the first five
years of the loan. After the first five years, interest must be paid quarterly.
No principal payments are required until November 1, 2007. In conjunction with
this transaction, Isis issued warrants to purchase 500,000 shares of common
stock at a price of $25 per share. On May 1, 1998, the Company completed a
follow-on $15 million private debt financing. This financing was a follow-on to
the Company's October 1997 $25 million private debt financing and bears the same
terms and conditions. Because interest is deferred during the first five years,
the combined principal balance of both borrowings will accrue to a total of $78
million on November 1, 2002. In conjunction with this follow-on transaction,
Isis issued warrants to purchase 300,000 shares of common stock at a price of
$25 per share. The warrants issued in connection with both of these financings
expire on November 1, 2004. The debt under these arrangements is carried on the
balance sheet net of the amortized amount allocated to the warrants and
including accrued interest. The combined carrying amount of these notes at June
30, 1998 was $42.4 million.

        The Company had long-term debt and capital lease obligations at June 30,
1998 totaling $71.9 million, versus $56.5 million at December 31, 1997. This
increase was due to the additional follow-on debt financing and the accrual of
interest on the ten-year notes described above, partially offset by principal
repayments on existing obligations. We expect that capital lease obligations
will increase over time to fund capital equipment acquisitions required for the
Company's growing business. We will continue to use lease financing as long as
the terms remain commercially attractive. We believe that the Company's existing
cash, cash equivalents and short-term investments, combined with interest income
and contract revenue will be sufficient to meet its anticipated requirements for
at least two years.


                                       8

<PAGE>   9
Year 2000 Computer Issues

        Until recently many computer programs were written to store only 2
digits of date-related information. Thus the programs were unable to distinguish
between the year 1900 and the year 2000. As a result, many computer experts have
significant concerns regarding how those programs will function after December
31, 1999. This is frequently referred to as the "Year 2000 Problem." The Company
is in the process of reviewing its computer systems and other equipment that
utilize embedded microprocessors to assess the potential exposure to this
problem. Because Isis was founded in 1989 and all of its computer systems and
equipment have been purchased or upgraded since that time, we believe the risk
of material disruption to the Company's operations as a result of the presence
of this defect in its own computer systems and equipment is minimal.

        The company has also initiated discussions with its significant
suppliers, corporate partners and financial institutions to ensure that those
parties have appropriate plans to address Year 2000 issues where their systems
could impact Isis' operations. The Company is assessing the extent to which its
operations are vulnerable should those organizations fail to properly modify
their computer systems.

        A team of Isis employees is conducting the Company's Year 2000
initiative. The team's activities are designed to ensure that there is no
adverse effect on the Company's core business operations and that transactions
with customers, suppliers, corporate partners and financial institutions are
fully supported. These efforts are scheduled to be completed by early 1999.
While the Company believes its planning and preparations will be adequate to
address its Year 2000 concerns, there can be no guarantee that the systems of
other companies on which the Company's systems and operations rely will be
converted on a timely basis and will not have a material effect on the Company.
The Company does not yet have a formal contingency plan. A contingency plan will
be finalized as the risk assessment is completed. Based on the information
obtained to date, the cost of identifying and remediating exposures to the Year
2000 Problem is not expected to be material to the Company's results of
operations or financial position.




                                       9

<PAGE>   10

        

I
TEM 1. LEGAL PROCEEDINGS

        The Company is not a party to any material legal proceedings.


ITEM 2. CHANGES IN SECURITIES

        Not applicable.


ITEM 3. DEFAULT UPON SENIOR SECURITIES

        Not applicable.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        (a) The Company held its Annual Meeting of Stockholders on May 22, 1998.

        (b) Burkhard Blank, M.D., Stanley T. Crooke, M.D. Ph.D. and Mark B.
        Skaletsky were elected to serve as directors for a three-year term and
        until their successors are duly elected and qualified.


<TABLE>
<CAPTION>
                                              Votes in Favor      Votes Withheld
                                              --------------      --------------
<S>                                           <C>                 <C>    
         Burkhard Blank                         26,104,455            356,894
         Stanley T. Crooke                      26,111,827            356,772
         Mark B. Skaletsky                      26,111,427            357,172
</TABLE>


        Other directors whose terms of office continued after the Annual Meeting
        were as follows: Christopher F. O. Gabrieli, Daniel L. Kisner, M.D.,
        Alan C. Mendelson, J.D., William R. Miller, Larry Soll, Ph.D., and
        Joseph H. Wender.

        (c) The following items were approved at the Annual Meeting:

            (1) An increase in the number of shares authorized for issuance
                under the Company's 1998 Stock Option Plan from 8,200,000 to
                10,200,000, the extension of the term of the 1989 Plan until
                January 31, 2008 and the amendment to the stockholder approval
                requirements of the 1989 Plan.


<TABLE>
                      <S>                                 <C>
                      Votes in favor:                     14,082,001
                      Votes withheld:                      2,411,387
                      Abstentions:                           151,590
                      Unvoted:                             9,823,621
</TABLE>


            (2) The selection of Ernst & Young LLP as independent auditors of
                the Company for its fiscal year ending December 31, 1998. 


<TABLE>
                      <S>                                 <C>
                      Votes in favor:                     26,336,372 
                      Votes withheld:                         68,746 
                      Abstentions:                            63,481
</TABLE>



ITEM 5. OTHER INFORMATION

        Pursuant to the Company's bylaws, stockholders who wish to bring matters
        or propose nominees for director at the Company's 1999 annual meeting of
        stockholders must provide specified information to the Company by
        December 14, 1998 (unless such matters are included in the Company's
        proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act
        of 1934, as amended).


                                       10

<PAGE>   11


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     a. Exhibits

        The following documents are exhibits to this Form 10-Q:

        10.1  First Supplement to Purchase Agreement for 14% Senior Subordinated
              Discount Notes due November 1, 2007 and Warrants for Common Stock
              dated May 1, 1998 (with certain confidential information deleted).

        10.2  Research Collaboration and License Agreement between Merck & Co.,
              Inc. and Isis Pharmaceuticals, Inc. dated June 1, 1998 (with
              certain confidential information deleted).

        27    Financial Data Schedule 

     b. Reports on Form 8-K

        The Company filed no reports on Form 8-K during the quarter ended 
        June 30, 1998.



                                       11

<PAGE>   12
                           ISIS PHARMACEUTICALS, INC.


                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                           ISIS PHARMACEUTICALS, INC.
                                  (Registrant)


Date: August 14, 1998   By: /S/ STANLEY T. CROOKE
                            ----------------------------------------------------
                            Stanley T. Crooke, M.D., Ph.D.
                            Chairman of the Board and Chief Executive Officer
                            (Principal Executive Officer)


Date: August 14, 1998   By: /S/ B. LYNNE PARSHALL
                            ----------------------------------------------------
                            B. Lynne Parshall
                            Executive Vice President and Chief Financial Officer
                            (Principal Financial Officer)


                                       12





<PAGE>   1
                                                                    EXHIBIT 10.1


                                        CONFIDENTIAL TREATMENT REQUESTED UNDER
                                        17 C.F.R. SECTIONS 200.80(b)(4), 200.83
                                        AND 240.24B-2. * INDICATES OMITTED
                                        MATERIAL THAT IS THE SUBJECT OF A
                                        CONFIDENTIAL TREATMENT REQUEST THAT IS
                                        FILED SEPARATELY WITH THE COMMISSION

                     FIRST SUPPLEMENT TO PURCHASE AGREEMENT

THIS FIRST SUPPLEMENT TO PURCHASE AGREEMENT (this "First Supplement"), dated as
of May 1, 1998, between ISIS PHARMACEUTICALS, INC., a Delaware corporation
(including any corporation succeeding thereto by merger, consolidation or
acquisition of all or substantially all of its assets, the "Company"), and the
Purchaser listed on Schedule I hereto (the "Purchaser").

        WHEREAS, the Company and the Purchaser are parties to a Purchase
Agreement (the "Purchase Agreement"), dated as of October 24, 1997 (the "Initial
Closing Date"), pursuant to which the Purchaser purchased from the Company ten
14% Senior Subordinated Discount Notes due November 1, 2007, in the aggregate
principal amount, at maturity, of $50,000,000 (the "Initial Notes");

        WHEREAS, pursuant to the Purchase Agreement, the Company issued ten
warrants evidencing the right to purchase, in the aggregate, 500,000 shares of
Common Stock, $0.001 par value per share, of the Company (the "Initial Warrants"
and, together
 with the Initial Notes, the "Initial Securities");

        WHEREAS, the Company now wishes to sell, and the Purchaser now wishes to
purchase, five additional 14% Senior Subordinated Discount Notes due November 1,
2007, in the aggregate principal amount, at maturity, of $27,862,337.93 (the
"First Supplement Notes");

        WHEREAS, in order to induce the Purchaser to purchase the First
Supplement Notes and in connection therewith, the Company has duly authorized
the issuance to the Purchaser of six additional warrants evidencing the right to
purchase, in the aggregate, 300,000 shares of Common Stock, $0.001 par value per
share, of the Company (the "First Supplement Warrants" and, together with the
First Supplement Notes, the "First Supplement Securities"); and

        WHEREAS, the Company and the Purchaser wish to enter into this First
Supplement in order to amend the Purchase Agreement, to provide for the purchase
and sale of the First Supplement Notes and to provide for the issuance of the
First Supplement Warrants;

<PAGE>   2

        NOW, THEREFORE, in consideration of the agreements herein contained, the
parties hereto hereby agree that the Purchase Agreement, together with all
recitals and Exhibits thereto, is hereby amended and supplemented as follows in
accordance with this First Supplement, effective as of the date hereof:

                                    ARTICLE I

                INCORPORATION OF PURCHASE AGREEMENT; DEFINITIONS

        1.1 INCORPORATION OF PURCHASE AGREEMENT. This First Supplement
constitutes a supplement to the Purchase Agreement, and the Purchase Agreement
and this First Supplement shall be read together and shall have effect so far as
practicable as though all of the provisions thereof and hereof are contained in
one instrument.

        1.2 DEFINITIONS. Except as otherwise expressly provided or unless the
context otherwise requires, all terms used herein that are defined in the
Purchase Agreement shall have the meanings assigned to them in the Purchase
Agreement.

                                   ARTICLE II

                        AMENDING AND MODIFYING PROVISIONS

        2.1 AMENDMENTS TO DEFINITIONS. (a) Definition in Introductory Paragraph
of Purchase Agreement. The following term which is defined in the Introductory
Paragraph of the Purchase Agreement is hereby amended so that it will have the
meaning set forth below whenever such term is used in the Purchase Agreement,
this First Supplement or any other supplement to the Purchase Agreement:

        "The term 'Agreement' shall mean the Purchase Agreement, the First
Supplement, and, when executed by the Company and the Purchaser, any other
supplement to the Purchase Agreement, taken as a whole."

        (b) Definitions in Section 1.1 of Purchase Agreement. The following
terms which are defined in Section 1.1 of the Purchase Agreement are hereby
amended so that they will have the respective meanings set forth below whenever
such term is used in the Purchase Agreement , this First Supplement or any other
supplement to the Purchase Agreement:

        "The term 'Notes' shall mean the Initial Notes, the First Supplement
Notes and, when issued to the Purchaser, or another financial institution with
the written consent of the Purchaser, any other 14% Senior Subordinated Discount
Note due November 1, 2007 of the Company issued pursuant to any other supplement
to the Purchase Agreement (including all debt securities issued in exchange or
replacement thereto)."


                                       2

<PAGE>   3

        "The term 'Securities' shall mean the Initial Securities, the First
Supplement Securities, and, when issued to the Purchaser, or another financial
institution with the written consent of the Purchaser, all other Notes and
Warrants issued pursuant to any other supplement to the Purchase Agreement."

        "The term 'Warrants' shall mean the Initial Warrants, the First
Supplement Warrants and, when issued to the Purchaser, or another financial
institution with the written consent of the Purchaser, any other warrants of the
Company issued pursuant to any other supplement to the Purchase Agreement
evidencing the right to purchase, in the aggregate, shares of Common Stock,
$0.001 par value per share, of the Company."

        (c) Definitions in Section 1.2(b) of Purchase Agreement. The following
term which is defined in Section 1.2(b) of the Purchase Agreement is hereby
amended so that it will have the meaning set forth below whenever such term is
used in the Purchase Agreement, this First Supplement or any other supplement to
the Purchase Agreement:

        "The term 'Closing Date' shall mean the Initial Closing Date, the First
Supplement Closing Date (as defined in Section 3.2(b) of the First Supplement)
and any closing date for the purchase from the Company of any Securities by the
Purchaser, or another financial institution with the written consent of the
Purchaser, pursuant to any supplement to the Purchase Agreement."

        (d) Amendment to Section 9.2 of Purchase Agreement. Section 9.2 of the
Purchase Agreement is hereby amended to add the following defined terms having
the respective meanings set forth below:

        "The term 'First Supplement' shall mean that certain First Supplement to
Purchase Agreement, dated as of May 1, 1998, between the Company and the
Purchaser."

        "The term 'First Supplement Closing Date' shall mean May 1, 1998, the
date of the purchase and sale of the First Supplement Notes."

        "The term 'First Supplement Notes' shall mean the 14% Senior
Subordinated Discount Notes due November 1, 2007, in the aggregate principal
amount, at maturity, of $27,862,337.93, of the Company, issued to the Purchaser
in connection with the First Supplement."

        "The term 'First Supplement Securities' shall mean the First Supplement
Notes, together with the First Supplement Warrants."

        "The term 'First Supplement Warrants' shall mean the warrants evidencing
the right to purchase, in the aggregate, 300,000 shares of Common Stock, $0.001
par value per share, of the Company, issued to the Purchaser in connection with
the First Supplement."


                                       3

<PAGE>   4

        "The term 'Initial Closing Date' shall mean October 24, 1997, the date
of the Purchase and Sale of the Initial Notes."

        "The term 'Initial Notes' shall mean the 14% Senior Subordinated
Discount Notes due November 1, 2007, in the aggregate principal amount, at
maturity, of $50,000,000, of the Company, issued to the Purchaser in connection
with the Purchase Agreement."

        "The term 'Initial Securities' shall mean the Initial Notes, together
with the Initial Warrants."

        "The term 'Initial Warrants' shall mean the warrants evidencing the
right to purchase, in the aggregate, 500,000 shares of Common Stock, $0.001 par
value per share, of the Company, issued to the Purchaser in connection with the
Purchase Agreement."

        "The term 'Purchase Agreement' shall mean that certain Purchase
Agreement, dated as of October 24, 1997, between the Company and the Purchaser."

                                   ARTICLE III

            AUTHORIZATION AND ISSUANCE OF FIRST SUPPLEMENT SECURITIES

        3.1 AUTHORIZATION OF ISSUE. The Company has duly authorized the issuance
of the First Supplement Notes. Each First Supplement Note shall be substantially
in the form of the Note attached as Exhibit A to the Purchase Agreement. In
order to induce the Purchaser to purchase the First Supplement Notes and in
connection therewith, the Company has duly authorized the issuance of the First
Supplement Warrants evidencing the right to purchase, in the aggregate, 300,000
shares of Common Stock, $0.001 par value per share, of the Company at the Basic
Purchase Price (as defined in the form of Warrant attached as Exhibit B to the
Purchase Agreement) of $25.00 per share; such number of shares and such Basic
Purchase Price being subject to adjustment as provided in the form of Warrant
attached as Exhibit B to the Purchase Agreement. Each First Supplement Warrant
shall be substantially in the form of the Warrant attached as Exhibit B to the
Purchase Agreement.

        3.2 ISSUANCE OF FIRST SUPPLEMENT SECURITIES. (a) Purchase of First
Supplement Notes; Delivery of First Supplement Warrants. Subject to the terms
hereof, (i) the Company agrees to sell, and the Purchaser agrees to purchase, on
the First Supplement Closing Date hereinafter referred to, First Supplement
Notes in the aggregate principal amount, at maturity, of $27,862,337.93 at a
price equal to $15,000,000, payable in immediately available funds and (ii) the
Company agrees to deliver to the Purchaser, and the Purchaser agrees to accept,
on the First Supplement Closing Date hereinafter referred to, the First
Supplement Warrants evidencing the right to purchase, in the aggregate, 300,000
shares of Common Stock, $.001 par value per share, at the Basic Purchase Price
of $25.00 per share, 


                                       4

<PAGE>   5
such number of shares and such Basic Purchase Price being subject to adjustment
as provided in the form of Warrant attached as Exhibit B to the Purchase
Agreement.

        (b) First Supplement Closing Date, Delivery of First Supplement Notes
and First Supplement Warrants. The date for the purchase and sale of the First
Supplement Notes hereunder (the "First Supplement Closing Date") shall be May 1,
1998 or such other date as may be agreed to by the parties hereto. The purchase
and sale of the First Supplement Notes hereunder shall take place at 1:00 P.M.,
Eastern Time, on the First Supplement Closing Date, at the offices of the
Purchaser, ( * ) or such other place as the parties hereto may designate. On the
First Supplement Closing Date, the Company will deliver to the Purchaser against
payment of the purchase price therefor, five Notes in the aggregate principal
amount, at maturity, of $27,862,337.93, dated the First Supplement Closing Date
and registered in the name of the Purchaser's nominee set forth on Schedule I
attached hereto, and in connection with the delivery of the First Supplement
Notes to the Purchaser on the First Supplement Closing Date, and simultaneously
with such delivery, the Company will deliver to the Purchaser six First
Supplement Warrants, registered in the name of the Purchaser's nominee set forth
on Schedule I attached hereto, and evidencing the right to purchase an aggregate
of 300,000 shares of Common Stock, $.001 par value per share, at the Basic
Purchase Price of $25.00 per share, such number of shares and such Basic
Purchase Price being subject to adjustment as provided in the form of the
Warrant attached as Exhibit B to the Purchase Agreement.

        3.3 SECURITIES LAWS. (a) The Company's Representation and Agreements.
The Company represents and warrants to the Purchaser that the Company has not,
directly or through any agent, offered any of the First Supplement Securities or
any similar security for sale to, or solicited any offers to buy any thereof
from, or otherwise approached or negotiated in respect thereof with, any Person
other than the Purchaser who was offered the First Supplement Securities in a
private sale for investment, and the Company agrees that neither the Company nor
any agent acting on the Company's behalf has done or caused to be done or will
do or cause to be done or omit to do or cause to be done anything which would
result in bringing the issuance or sale of the First Supplement Notes and the
First Supplement Warrants within the registration requirements of Section 5 of
the Securities Act.

        (b) The Purchaser's Representations and Agreements. The Purchaser
represents and warrants, and in entering into this First Supplement the Company
understands and acknowledges, that it is acquiring the First Supplement
Securities for its own account for investment purposes and not with a view to,
or for sale in connection with, any distribution (as such term is used under
Section 2(11) of the Securities Act) thereof. Without limiting the foregoing,
the Purchaser acknowledges and agrees that the First Supplement Securities have
not and will not be registered under the Securities Act or any applicable state
securities laws and it agrees that it will reoffer or resell the First
Supplement Securities or the First Supplement Warrant Shares purchased by it
under this First Supplement (i) only (A) to the 

- --------

* CONFIDENTIAL TREATMENT REQUESTED


                                       5


<PAGE>   6

Company, (B) pursuant to any transaction under and meeting the requirements of
Rule 144A, as amended from time to time, promulgated under the Securities Act,
(C) pursuant to an exemption from registration under the Securities Act in
accordance with Rule 144, as amended from time to time, promulgated under the
Securities Act, or (D) in accordance with any other available exemption from the
requirements of Section 5 of the Securities Act and (ii) in accordance with any
applicable federal and state securities laws. The Purchaser further agrees to
hold the Company harmless from any claim, demand or liability for broker's or
finder's placement fees or commissions payable by the Purchaser alleged to have
been incurred by Purchaser in connection with this transaction.

                                   ARTICLE IV

                                   RESTATEMENT
                                OF THE COMPANY'S
                         REPRESENTATIONS AND WARRANTIES

        4.1 REPRESENTATIONS AND WARRANTIES. Except as described on Schedule 4.1
annexed hereto, the representations and warranties of the Company set forth in
Article II of the Purchase Agreement were true and correct as of the Initial
Closing Date, were true and correct as if made at all times between the Initial
Closing Date and the First Supplement Closing Date, and are true and correct as
if made on the First Supplement Closing Date.

                                    ARTICLE V

                               CLOSING CONDITIONS

        The Purchaser's obligation to purchase and pay for the First Supplement
Notes and the First Supplement Warrants on the First Supplement Closing Date is
subject to the complete satisfaction of the Purchaser, on or before the First
Supplement Closing Date, of the conditions set forth in this Article.

        5.1 OPINION OF COMPANY'S COUNSEL. The Purchaser shall have received from
Cooley Godward LLP, counsel for the Company, an opinion, dated the First
Supplement Closing Date, substantially in the form set forth in Exhibit A
hereto.

        5.2 REPRESENTATIONS AND WARRANTIES. The Company's representations and
warranties contained in Section 3.3(a) and in Article IV of this First
Supplement shall be true on and as of the First Supplement Closing Date. There
shall exist on the First Supplement Closing Date no Event of Default and no
condition or event which, with notice or lapse of time or both, would constitute
an Event of Default if the First Supplement Securities had been outstanding at
all times from and after the date hereof, and all agreements and conditions to
be performed or satisfied by the Company hereunder on or before the First


                                       6

<PAGE>   7

Supplement Closing Date shall have been duly performed or satisfied. The Company
shall have delivered to the Purchaser a certificate, dated the First Supplement
Closing Date and signed by its Chief Executive Officer or its President or one
of its Vice Presidents and by its Secretary or an Assistant Secretary, to each
of the foregoing effects.

        5.3 CONSENTS AND APPROVALS. The Company shall have delivered to the
Purchaser a certificate, dated the First Supplement Closing Date and signed by
its Chief Executive Officer or its President or one of its Vice Presidents,
listing any consents, waivers, approvals, authorizations, registrations, filings
and notifications of the character referred to in Section 2.11 of the Purchase
Agreement which are necessary, to which shall be attached evidence, satisfactory
to the Purchaser, that the same that are required to be obtained or made prior
to the First Supplement Closing Date have been obtained or made and are in full
force and effect, or stating that none is necessary.

        5.4 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings and
all documents incident to the transactions contemplated by this First Supplement
shall be reasonably satisfactory in form and substance to the Purchaser and the
Purchaser shall have received copies of all documents and records relating
thereto which the Purchaser may reasonably request.

        5.5 LEGALITY OF INVESTMENT. The Purchaser's acquisition of the First
Supplement Securities shall be permitted as of the First Supplement Closing Date
under the provisions of all applicable laws or governmental regulations, and
such acquisition shall not subject the Purchaser to any penalty or other onerous
condition in or pursuant to any such law or regulation; and the Purchaser shall
have received such certificates or other evidence as the Purchaser may
reasonably request to establish compliance with this condition.

        5.6 AMENDMENT TO INITIAL WARRANTS. With the consent of the Purchaser,
the Company shall have amended each of the Initial Warrants with an amendment
substantially in the form of Exhibit B attached hereto (each, a "Warrant
Amendment"), and within a reasonable time after the First Supplement Closing
Date the Purchaser will cause each Initial Warrant to bear a legend indicating
the existence of the Warrant Amendment which amends such Initial Warrant.

                                   ARTICLE VI

                                    COVENANTS

        6.1 PRIVATE PLACEMENT NUMBERS. Within two Business Days after the First
Supplement Closing Date, the Company shall apply to Standard & Poor's
Corporation for assignment of a Private Placement Number for the First
Supplement Notes and the First Supplement Warrants.


                                       7

<PAGE>   8
                                   ARTICLE VII

                                  MISCELLANEOUS

        7.1 FULL FORCE AND EFFECT. Except as supplemented and amended hereby,
the Purchase Agreement and all Notes and the Warrants issued pursuant thereto
are in all respects ratified and confirmed and all the terms and provisions
thereof shall remain in full force and effect.

        7.2 INTEGRATION AND SEVERABILITY. The Purchase Agreement and this First
Supplement embody the entire agreement and understanding between the Purchaser
and the Company and supersede all prior agreements and understandings relating
to the subject matter hereof. In case any one or more of the provisions
contained in the Purchase Agreement or the First Supplement or in any Security,
or any application thereof, shall be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein and therein, and any other application thereof, shall not in
any way be affected or impaired thereby.

        7.3 GOVERNING LAW. The Purchase Agreement, this First Supplement, the
Notes and the Warrants shall be construed in accordance with and governed by the
laws of the State of New York (without giving effect to the principles of
conflict of laws thereof). If any action or proceeding shall be brought by the
Purchaser or by any Holder in order to enforce any right or remedy under the
Purchase Agreement or this First Supplement or under any Security, the Company
hereby consents and will, and the Company will cause each Subsidiary to, submit
to the jurisdiction of any state or federal court of competent jurisdiction
sitting within the area comprising the Southern District of New York on the date
of this First Supplement. Nothing contained in this section shall affect the
right of any Holder of Notes to serve legal process in any other manner
permitted by law or to bring any action or proceeding in the courts of any
jurisdiction against the Company or to enforce a judgment obtained in the courts
of any other jurisdiction.

        7.4 COUNTERPARTS. This First Supplement may be signed by each party
hereto upon a separate copy in which event both of said copies shall constitute
a single counterpart of this First Supplement. This First Supplement may be
executed in two or more counterparts, each of which shall be deemed an original,
and it shall not be necessary in making proof of this First Supplement to
produce or account for more than one such counterpart.


                                       8

<PAGE>   9

        IN WITNESS WHEREOF, the Company and the Purchaser have caused this First
Supplement to be executed by their respective officers thereunto duly authorized
as of the day and year first above written.

                                ISIS PHARMACEUTICALS, INC.

                                By: /s/    Stanley T. Crooke
                                    --------------------------------------------
                                    Name:  Stanley T. Crooke
                                    Title: Chairman and Chief Executive Officer

                                    (                      *                   )

- --------

* CONFIDENTIAL TREATMENT REQUESTED


                                       9

<PAGE>   10
                                                                      SCHEDULE I


                        PURCHASER AND PAYMENT INFORMATION



<TABLE>
<CAPTION>
PURCHASER                                                             NOTES
(NAME AND ADDRESS)                                               TO BE PURCHASED
- ------------------                                               ---------------
<S>                                                              <C>
1. (      *      )                                               $27,862,337.93

Registration Instructions
(           *            )

Delivery Instructions:
(           *            )

Wire Instructions:
(           *            )

Notices:
(           *            )
</TABLE>


- ----------

* CONFIDENTIAL TREATMENT REQUESTED

<PAGE>   11

                        SCHEDULE 4.1 TO FIRST SUPPLEMENT


The authorized Capital Stock of the Company consists solely of (i) 50,000,000
shares of Common Stock, par value $.001 per share, of which 26,820,342 are
outstanding as of April 24, 1998, all of which have been duly authorized and
validly issued by the Company and are fully paid, nonassessable and free of
preemptive rights and (ii) 15,000,000 shares of Preferred Stock, par value $.001
per share, none of which has been issued.


<PAGE>   12
                                                                       EXHIBIT B


                          FORM OF AMENDMENT TO WARRANT

                           To Purchase Common Stock of

                           ISIS PHARMACEUTICALS, INC.

                            Expiring November 1, 2004

THIS AMENDMENT (this "Amendment to Warrant WR-1"), dated as of May 1, 1998, to
that Warrant WR-1 ("Warrant WR-1"), dated as of October 24, 1997 issued by ISIS
PHARMACEUTICALS, INC., a Delaware corporation, to the holder set forth in such
Warrant WR-1 (the "Holder").

        WHEREAS, the Company is party to a Purchase Agreement, dated as of
October 24, 1997, pursuant to which the Company issued ten warrants evidencing
the right to purchase, in the aggregate, 500,000 shares of Common Stock, $0.001
par value per share, of the Company;

        WHEREAS, the Company is now party to a First Supplement to Purchase
Agreement, dated as of May 1, 1998 (the "First Supplement"), pursuant to which
the Company issued an additional six warrants evidencing the right to purchase,
in the aggregate, 300,000 shares of Common Stock, $0.001 par value per share, of
the Company;

        WHEREAS, the Company wishes to amend Warrant WR-1, and the Holder wishes
to consent to such amendment of Warrant WR-1, so that Warrant WR-1 will reflect
the issuance of the additional Warrants pursuant to the First Supplement;

        NOW, THEREFORE, Warrant WR-1, together with all recitals and Exhibits
thereto, is hereby amended and supplemented as follows in accordance with this
Amendment to Warrant WR-1, effective as of the date hereof:

                                    ARTICLE I

                   INCORPORATION OF WARRANT WR-1; DEFINITIONS

        1.1 INCORPORATION OF WARRANT WR-1. This Amendment to Warrant WR-1
constitutes a supplement to Warrant WR-1, and Warrant WR-1 and this Amendment to
Warrant WR-1 shall be read together and shall have effect so far as practicable
as though all of the provisions thereof and hereof are contained in one
instrument.


<PAGE>   13

        1.2 DEFINITIONS. Except as otherwise expressly provided or unless the
context otherwise requires, all terms used herein that are defined in Warrant
WR-1 shall have the meanings assigned to them in Warrant WR-1.

                                   ARTICLE II

                        AMENDING AND MODIFYING PROVISIONS

        2.1 AMENDMENTS TO DEFINITION IN SECTION 1 OF WARRANT WR-1. The following
term which is defined in Section 1 of Warrant WR-1 is hereby amended so that it
will have the respective meaning set forth below whenever such term is used in
Warrant WR-1:

        "'Warrants' shall mean all Warrants of the Company (including this
        Warrant) (i) described in Section 1.1 of the Purchase Agreement, whether
        issued or issuable, which are identical as to terms and conditions,
        except as to the names and addresses of the Warrantholders thereunder
        and the number of shares of the Stock for which they may be exercised,
        and which evidence the right to purchase an aggregate of not in excess
        of 500,000 shares of the Stock (prior to making any adjustments of the
        character provided in Section 6 thereof), including all amendments
        thereto, and together with all Warrants issued in exchange, transfer or
        replacement of any thereof, (ii) described in Section 2.1(b) of the
        First Supplement to Purchase Agreement (the "First Supplement"), dated
        as of May 1, 1998, between the Company and the Purchaser, whether issued
        or issuable, which are identical as to terms and conditions, except as
        to the names and addresses of the Warrantholders thereunder and the
        number of shares of the Stock for which they may be exercised, and which
        evidence the right to purchase an aggregate of not in excess of 300,000
        shares of the Stock (prior to making any adjustments of the character
        provided in Section 6 thereof), including all amendments thereto, and
        together with all Warrants issued in exchange, transfer or replacement
        of any thereof and (iii) when issued to the purchaser listed on Schedule
        I to the First Supplement, or another financial institution with the
        written consent of the purchaser listed on Schedule I to the First
        Supplement, described in any Supplement to the Purchase Agreement,
        whether issued or issuable, which are identical as to terms and
        conditions, except as to the names and addresses of the Warrantholders
        thereunder and the number of shares of the Stock for which they may be
        exercised, including all amendments thereto, and together with all
        Warrants issued in exchange, transfer or replacement of any thereof."

        2.1 AMENDMENT AND MODIFICATION TO SECTION 5C. Section 5(C) of Warrant
WR-1 is hereby amended and restated in its entirety as follows: :

               "C.    Registration Requested by Warrantholders.

                                       2

<PAGE>   14

                      (1) At any time and from time to time after the date
hereof, the Warrantholders shall have the right to request the Company to effect
the registration under the Securities Act of all or part of such Warrantholders'
Registrable Securities. Upon receipt by the Company of any such request, the
Company shall promptly give notice of such proposed registration to all
Warrantholders and thereupon shall, as expeditiously as possible, use its best
efforts to effect the registration under the Securities Act of:

                             (i) all Registrable Securities which the Company
               has been requested to register pursuant to clause (1) of Section
               5C of any Warrant; and

                             (ii) all other Registrable Securities which
               Warrantholders have, within 20 days after the Company has given
               such notice, requested the Company to register;

all to the extent requisite to permit the sale or other disposition by the
Warrantholders of the Registrable Securities so to be registered.

                      (2) If the managing underwriter of the public offering to
be effected pursuant to a registration statement filed pursuant to clause (1) of
Section 5C of any Warrant shall advise the Company in writing (with a copy to
each holder of Registrable Securities requesting registration) that, in its
opinion, the number of securities requested to be included in such registration
(including securities of the Company which are not Registrable Securities)
exceeds the number which can be sold in such offering, the Company will include
in such registration to the extent of the number which the Company is so advised
can be sold in such offering:

                             (i) first, Registrable Securities requested to be
               included in such registration by the Warrantholders pursuant to
               clauses (i) and (ii) of Section 5C(l) of any Warrant, pro rata
               among such holders on the basis of the number of Registrable
               Securities requested to be included by each; and

                             (ii) second, other securities of the Company
               proposed to be included in such registration, in accordance with
               the priorities, if any, then existing among the Company and the
               holders of such other securities.

                      (3) The Warrantholders requesting inclusion in a
registration statement under this Section 5C and Section 5C of the other
Warrants may withdraw from any requested registration pursuant to this Section
5C and Section 5C of the other Warrants by giving written notice to the Company
prior to the filing date of such registration statement; provided, however, that
for a period of three months after such withdrawal, such Warrantholders may not
request any registration pursuant to this Section 5C and Section 5C of the other
Warrants.


                                       3

<PAGE>   15

                      (4) The Company shall not be required to effect more than
a total of three effective registrations under Section 5C of this Warrant and
Section 5C of any other Warrant.

                      (5) The Company shall not be required to effect a
registration pursuant to Section 5C of any Warrant unless the offering includes
Registrable Securities having a Fair Market Value of at least $4 million in the
aggregate.

                      (6) The Company shall not be required to effect any
registration within twelve months of the effective date of any other
registration under Section 5C of any Warrant."

                                   ARTICLE III

                                  MISCELLANEOUS

        3.1 FULL FORCE AND EFFECT. Except as supplemented and amended hereby,
Warrant WR-1 is in all respects ratified and confirmed and all the terms and
provisions hereof shall remain in full force and effect.

        3.2 GOVERNING LAW; CONSENT TO JURISDICTION. This Amendment to Warrant
WR-1 shall be governed by, and construed in accordance with, the laws of the
State of New York (without giving effect to the conflict of laws principles
thereof).


                                       4

<PAGE>   16

               IN WITNESS WHEREOF, ISIS PHARMACEUTICALS, INC. has caused this
Amendment to Warrant WR-1 to be signed by its duly authorized officer under its
corporate seal, attested by its duly authorized officer, and to be dated as of
May 1, 1998.

                                        ISIS PHARMACEUTICALS, INC.


                                        By:
                                            ------------------------------------
                                            Stanley T. Crooke
                                            Chairman and Chief Executive Officer

[Corporate Seal]

Attest:

- ----------------------------------
B. Lynne Parshall
Executive Vice President, Chief
Financial Officer and Secretary


<PAGE>   17

                      CONSENT TO AMENDMENT TO WARRANT WR-1

               IN WITNESS WHEREOF, ( * ), pursuant to Section 13 of Warrant
WR-1, hereby consents to this Amendment to Warrant WR-1.

                                           (                  *                )


- ----------

* CONFIDENTIAL TREATMENT REQUESTED



<PAGE>   1
                                                                    EXHIBIT 10.2

                                        CONFIDENTIAL TREATMENT REQUESTED UNDER
                                        17 C.F.R. SECTIONS 200.80(b)(4), 200.83
                                        AND 240.24B-2. * INDICATES OMITTED
                                        MATERIAL THAT IS THE SUBJECT OF A
                                        CONFIDENTIAL TREATMENT REQUEST THAT IS
                                        FILED SEPARATELY WITH THE COMMISSION


                  RESEARCH COLLABORATION AND LICENSE AGREEMENT

                                  by and among

                                MERCK & CO., INC.

                                       and

                           ISIS PHARMACEUTICALS, INC.

<PAGE>   2
                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                            PAGE
<S>                                                                                         <C>
ARTICLE I - DEFINITIONS ....................................................................  1
ARTICLE II - RESEARCH PROGRAM AND DRUG DEVELOPMENT PROGRAM .................................  7
    2.1 General.............................................................................  7
    2.2 Description of Research.............................................................  7
    2.3 Conduct Research....................................................................  8
    2.4 Joint Research Committee............................................................  8
    2.5 Exchange of Information.............................................................  9
    2.6 Records and Reports................................................................. 10
    2.7 Research Information and Inventions................................................. 10
    2.8 Research Program Term............................................................... 10
    2.9 Provision of Compounds.............................................................. 11
ARTICLE III - LICENSE; DEVELOPMENT AND COMMERCIALIZATION ................................... 12
    3.1 License Grant....................................................................... 12
    3.2 Retained Rights..................................................................... 12
    3.3 Merck Grant......................................................................... 12
    3.4 Development and Commercialization................................................... 13
    3.5 Cell Adhesion Preclusion............................................................ 13
ARTICLE IV - CONFIDENTIALITY AND PUBLICATION................................................ 14
    4.1 Non-disclosure and Non-Use Obligations.............................................. 14
    4.2 Permitted Disclosure of Proprietary Information..................................... 14
    4.3 Dual Information.................................................................... 15
    4.4 Publication and Public Disclosures ................................................. 15
ARTICLE V - PAYMENTS; ROYALTIES AND REPORTS ................................................ 15
    5.1 Commitment Fee and Option Payment................................................... 15
    5.2
 Research Program Funding............................................................ 15
    5.3 Milestone Payments.................................................................. 16
    5.4 Royalties........................................................................... 18
    5.5 Reports; Payment of Royalty......................................................... 20
    5.6 Audits.............................................................................. 21
    5.7 Payment Exchange Rate............................................................... 21
    5.8 Income Tax Withholding.............................................................. 22
ARTICLE VI - REPRESENTATIONS AND WARRANTIES................................................. 22
    6.1 Isis Representations and Warranties................................................. 22
    6.2 Merck Representations and Warranties................................................ 22
ARTICLE VII - PATENT MATTERS ............................................................... 23
    7.1 Filing, Prosecution and Maintenance of Patents...................................... 23
</TABLE>



<PAGE>   3


<TABLE>
<S>                                                                                         <C>
    7.2 Right of Other Parties to Prosecute and Maintain Patents............................ 23
    7.3 Interference, Opposition, Reexamination and Reissue................................. 23
    7.4 Enforcement and Defense............................................................. 24
    7.5 Patent Term Restoration............................................................. 25
ARTICLE VIII - TERM AND TERMINATION......................................................... 25
    8.1 Term and Expiration................................................................. 25
    8.2 Termination by Notice............................................................... 25
    8.3 Termination......................................................................... 26
    8.4 Effect of Expiration or Termination................................................. 27
ARTICLE XI - PUBLICITY...................................................................... 27
    9.1 Public Disclosure .................................................................. 27
ARTICLE X - MISCELLANEOUS................................................................... 27
    10.1  Force Majeure..................................................................... 27
    10.2  Assignment........................................................................ 28
    10.3  Severability...................................................................... 28
    10.4  Notices........................................................................... 28
    10.5  Applicable Law.................................................................... 29
    10.6  Dispute Resolution................................................................ 29
    10.7  Entire Agreement.................................................................. 29
    10.8  Headings.......................................................................... 30
    10.9  Independent Contractors........................................................... 30
    10.10 Waiver............................................................................ 30
    10.11 Counterparts...................................................................... 30
</TABLE>



<PAGE>   4
                                                                          6/1/98

                  RESEARCH COLLABORATION AND LICENSE AGREEMENT

        THIS AGREEMENT effective as of June 1, 1998 (the "Effective Date")
between Merck & Co., Inc., a corporation organized and existing under the laws
of New Jersey ("Merck") and Isis Pharmaceuticals, Inc., a corporation organized
and existing under the laws of Delaware ("Isis") together referred to as the
"Parties".

                                   WITNESSETH:

        WHEREAS, Isis has expertise in the area of nucleoside and nucleotide
chemistry and is willing to utilize that expertise to discover Research
Compounds (as hereinafter defined) under the terms of this Agreement; and

        WHEREAS, Merck and Isis desire to enter into a research collaboration to
discover Research Compounds (as hereinafter defined) upon the terms and
conditions set forth herein; and

        WHEREAS, Merck desires to obtain a license under Isis Intellectual
Property (as hereinafter defined), upon the terms and conditions set forth
herein;

        NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants herein contained, the Parties hereby agree as follows:

                                    ARTICLE I

                                  DEFINITIONS

        Unless specifically set forth to the contrary herein, the following
terms, whether used in the singular or plural, shall have the respective
meanings set forth below:

1.1     "Affiliate" shall mean (i) any corporation or business entity of which
        fifty percent (50%) or more of the securities or other ownership
        interests representing the equity, the voting stock or general
        partnership interest are owned, controlled or held, directly or
        indirectly, by a Party; or (ii) any corporation or business entity
        which, directly or indirectly, owns, controls or holds fifty percent
        (50%) (or the maximum ownership interest permitted by law) or more of
        the securities or other ownership interests representing the equity, the
        voting stock or, if applicable, the general partnership interest, of a
        Party.

1.2     "Anti-Viral Animal Product(s)" shall mean Anti-Viral Products for animal
        use.

1.3     "Anti-Viral Human Product(s)" shall mean Anti-Viral Products for human
        use.


<PAGE>   5

1.4     "Anti-Viral Product(s)" ( * )

1.5     "Calendar Quarter" shall mean the respective periods of three (3)
        consecutive calendar months ending on March 31, June 30, September 30
        and December 31.

1.6     "Calendar Year" shall mean each successive period of twelve (12) months
        commencing on January 1 and ending on December 31.

1.7     ( * )

1.8     "Collection Animal Products" shall mean Collection Products for animal
        use.

1.9     "Collection Human Products" shall mean Collection Products for human
        use.

1.10   "Collection Products". ( * )

1.11    "Combination Product" shall mean a Royalty Bearing Product which
        includes one or more therapeutically active ingredients other than
        Compound, in combination with Compound.

1.12    "Compounds" shall mean Research Compounds and Derived Compounds.

1.13    "Derived Compound(s)" shall mean a chemical entity derived by Merck from
        a Research Compound after the term of the Research Program or any
        derivative or analog of any such chemical entity or salt or ester
        thereof, including but not limited to Oligonucleotides.

                                               *CONFIDENTIAL TREATMENT REQUESTED


                                       2

<PAGE>   6

1.14    "Effective Date" shall mean the date first set forth above.

1.15    "Extended Research Program Term" shall have the meaning set forth in
        Section 2.8.

1.16    "FDA" shall mean the United States Food and Drug Administration and any
        successor agency having substantially the same functions.

1.17    "First Commercial Sale" shall mean, with respect to any Royalty Bearing
        Product, the first sale for end use or consumption of such Royalty
        Bearing Product in a country after all required approvals, including
        marketing and pricing approvals, have been granted by the governing
        health authority of such country.

1.18    "Full Time Equivalent" or "FTE" shall mean the equivalent of a full-time
        scientist's work time over a twelve-month period (including normal
        vacations, sick days and holidays). The portion of an FTE year devoted
        by a scientist to the Research Program shall be determined by dividing
        the number of working days during any twelve-month period devoted by
        such employee to the Research Program by the total number of working
        days during such twelve-month period.

1.19    "HCV Human Products" shall mean HCV Products for human use.

1.20    HCV Product(s)" shall mean any preparations in final form for sale by
        prescription, over-the-counter or any other method for any indication,
        including human or animal use, which contain Compound(s) which (i) are
        approved as an RMC Development Candidate during the Research Program
        or within ten (10) years thereafter and (ii) are initially developed for
        the prevention and/or treatment of infections caused by hepatitis C
        virus. It is understood that Compounds which are claimed in or covered
        by Isis Patent Assets or Isis Research Patent Assets and which meet the
        criteria set forth in (ii) above but do not meet the criteria set forth
        in (i) above are Compounds included in Article 1.10.

1.21    "Isis Compounds" shall mean nucleoside and/or nucleotide small molecules
        identified and/or discovered by Isis (i) prior to the commencement of
        this Agreement or (ii) during the term of the Research Program but
        outside the course of the Research Program which are, in the sole
        discretion of Isis, provided by Isis to Merck under the terms of this
        Agreement.

1.22    "Isis Field" shall mean the use of Research Compounds solely for the
        purpose of developing Oligonucleotide products for therapeutic
        indications other than the prevention and/or treatment of infections
        caused by Hepatitis C virus.

1.23    "Isis Intellectual Property" shall mean (i) Isis Know-How, (ii) Isis
        Patent Assets, (iii) Isis Research Know-How and (iv) Isis Research
        Patent Assets to the extent that (iii) and (iv) are owned solely by
        Isis.


                                       3

<PAGE>   7
1.24    "Isis Know-How" shall mean all information and materials, including but
        not limited to, discoveries, processes, formulas, data, non-patented
        inventions, know-how and trade secrets of Isis conceived prior to the
        Effective Date or during the term of the Research Program but outside
        its scope, to the extent Isis is not precluded from licensing such
        know-how to Merck by the terms of any third party agreement, which are
        necessary or useful to Merck (a) in the conduct of Merck's activities
        under the Research Program or (b) to make, have made, use, import or
        sell Research Compounds and to incorporate Research Compounds into
        Licensed Products.

1.25    "Isis Patent Assets" shall mean issued patents and patent applications
        (which shall be deemed to include certificates of invention and
        applications for certificates of invention), other than Isis Research
        Patents Assets, which during the Research Program or any Extended
        Research Program Term are owned by Isis or which Isis through license or
        otherwise acquires rights, to the extent Isis is not precluded from
        licensing such Isis Patent Assets to Merck by the terms of any third
        party agreement, which claim or cover Research Compounds and/or Derived
        Compounds their uses or a method of their manufacture, including all
        divisions, continuations, continuations-in-part, reissues, renewals,
        extensions, supplementary protection certificates or the like of any
        such patents and patent applications and foreign equivalents thereof;
        provided, however, that if a patent (other than an Isis Patent Asset) of
        which Isis is the sole or joint owner issues after the Research Program
        Term or any Extended Research Program Term which (i) claims or covers a
        composition of matter or a process and (ii) prevents Merck from making,
        having made, using, importing and/or selling a Research Compound, then
        such patent shall be deemed to be part of Isis Patent Assets solely to
        the extent such patent is necessary to enable Merck to make, have made,
        use, import and/or sell such, Research Compound (or any Derived Compound
        claimed in or covered by such patent, other than an Oligonucleotide).

1.26    "Isis Research Know-How" shall mean all information and Materials,
        including but not limited to, discoveries, processes, formulas, data,
        non-patented inventions, know-how and trade secrets of Isis conceived in
        the course of the Research Program, including know-how conceived jointly
        with Merck. It is understood that, notwithstanding the foregoing, Merck
        retains its joint ownership of know-how conceived jointly with Isis
        during the Research Program.

1.27    "Isis Research Patent Assets" shall mean patents and patent applications
        (which shall be deemed to include certificates of invention and
        applications for certificates of invention) which claim inventions
        conceived solely by Isis or jointly by Isis and Merck in the course of
        the Research Program and all divisions, continuations,
        continuations-in-part, reissues, renewals, extensions, supplementary
        protection certificates or the like of any such patents and patent
        applications and foreign equivalents thereof. It is understood that,
        notwithstanding the foregoing, Merck


                                        4

<PAGE>   8

        retains its joint ownership of patents and patent applications of
        inventions conceived in the course of the Research Program jointly with
        Isis.

1.28    "Joint Research Committee" shall mean the committee described in Section
        2.4.

1.29    "Licensed Product" shall mean any preparation, including but not limited
        to a Royalty Bearing Product, in final form for sale by prescription,
        over-the-counter or any other method for any indication, including human
        or animal use, which contains one or more Compound(s), including in
        combination with a therapeutically active ingredient which is not a
        Compound.

1.30    "Major Market Country" shall mean Japan, the United Kingdom, France,
        Germany, Italy or Spain.

1.31    "Merck Know-How" shall mean all information and materials, including but
        not limited to, discoveries, processes, formulas, data, non-patented
        inventions, knowhow and trade secrets of Merck, to the extent Merck is
        not precluded from licensing such know-how to Isis by the terms of any
        third party agreement, which during the term of the Research Program are
        not generally known and which are necessary to Isis in the performance
        of its obligations under the Research Program.

1.32    "Merck Patent Assets" shall mean issued patents and patent applications
        (which shall be deemed to include certificates of invention and
        applications for certificates of invention which are owned by Merck and
        which claim or cover-the manufacture, use or sale of Compounds and all
        divisions, continuations, continuations in-part, reissues, renewals,
        extensions, supplementary protection certificates or the like of any
        such patents and patent applications and foreign equivalents thereof.

1.33    "NDA" shall mean a new drug application filed with the FDA for marketing
        authorization of a Royalty Bearing Product.

1.34    "Net Sales" shall mean ( * )

                                       5

                                               *CONFIDENTIAL TREATMENT REQUESTED


<PAGE>   9

1.35    "Oligonucleotide" shall mean ( * )

1.36    "Proprietary Information" shall mean any and all scientific, clinical,
        regulatory, marketing, financial and commercial information or data,
        whether communicated in writing, orally or by any other means, which is
        provided by one Party to the other Party in connection with this
        Agreement. Proprietary Information shall include, without limitation,
        Merck Know-How and Isis Know-How and Isis Research Know-How.

1.37    "RMC Development Candidate" shall mean a Compound which has been
        approved, in Merck's sole discretion, by the Merck Research Management
        Committee (or its successor) for initiation of formal development
        studies, including safety assessment.

1.38    "Research Compounds" shall mean ( * )


                                       6

                                               *CONFIDENTIAL TREATMENT REQUESTED

<PAGE>   10
1.39    "Research Field" shall mean chemistry efforts to design ( * ) small
        molecules which inhibit hepatitis C virus polymerase.

1.40    "Research Program" shall mean the collaborative research effort between
        the parties as described in Attachment 2.1 to identify and discover
        nucleoside and nucleotide analogs which may be useful in the prevention
        and/or treatment of infections caused by Hepatitis C virus and other
        indications.

1.41    "Research Program Term" shall have the meaning set forth in Section 2.8.

1.42    "Royalty Bearing Products" shall mean HCV Products, Anti-Viral Products
        and Collection Products.

1.43    "Territory" shall mean all countries of the world.

1.44    "Valid Patent Claim" shall mean a claim of an issued and unexpired
        patent included within Isis Patent Assets, Isis Research Patent Assets
        or Merck Patent Assets, which has not been revoked or held unenforceable
        or invalid by a decision of a court or other governmental agency of
        competent jurisdiction, unappealable or unappealed within the time
        allowed for appeal, and which has not been disclaimed, denied or
        admitted to be invalid or unenforceable through reissue or disclaimer or
        otherwise.

                                   ARTICLE II

                                RESEARCH PROGRAM

2.1     General. Isis and Merck shall engage in the Research Program upon the
        terms and conditions set forth in this Agreement. The activities to be
        undertaken in the course of the Research Program are set forth in this
        Article II and in Attachment 2.1 which may be amended from time to time
        upon the mutual agreement of the parties. Isis shall dedicate the
        efforts of at least ( * ) during each year of the Research Program Term.

2.2     Description of Research. Isis and Merck will cooperate in the design,
        synthesis and evaluation of nucleosides and nucleotides as candidate
        inhibitors of the ( * ) hepatitis C virus. Isis and Merck chemists will
        collaborate in the design of the modular synthesis and purification of
        the ( * ) Isis will prepare ( * ) for screening by Merck. Prodrug and
        other modifications of selected compounds will also be synthesized by
        Isis to explore structure-activity relationships. It is understood that
        Merck, in its sole discretion, may also perform the activities to be
        carried out by Isis. Merck ( * ) will provide support for the modular
        syntheses


                                        7

                                               *CONFIDENTIAL TREATMENT REQUESTED

<PAGE>   11
        at Isis by supplying (as agreed by Isis and Merck) pre-weighed samples,
        with structures, of various starting materials from the Merck
        proprietary chemical compound collection. All biochemical and biological
        studies of ( * ) prepared by Isis, which will be directed to the
        identification and optimization of lead compounds, will be performed by
        Merck. It is understood that Merck's activities under the Research
        Program may also, in Merck's discretion, be carried out by Merck's
        Affiliates and at other Merck sites.

2.3     Conduct of Research. Isis and Merck each shall conduct the Research
        Program in a good scientific manner, and in compliance in all material
        respects with all requirements of applicable laws, rules and regulations
        and all applicable standard laboratory practices to attempt to achieve
        their objectives efficiently and expeditiously. Isis and Merck each
        shall proceed diligently with the work set out in the Research Program
        by using their respective good faith efforts.

2.4     Joint Research Committee. The parties hereby establish a joint research
        committee to direct and monitor the Research Program as follows:

        2.4.1   Composition of the Committee. The Research Program shall be
                conducted under the direction of a joint research committee (the
                "Joint Research Committee") comprised of three named
                representatives of Merck and three named representatives of
                Isis. Each of Merck and Isis shall appoint its respective
                representatives to the Joint Research Committee, and from time
                to time may substitute one or more of its representatives, in
                its sole discretion, effective upon notice to the other Party of
                such change. It is anticipated that these representatives shall
                have appropriate technical credentials and knowledge, and
                ongoing familiarity with the Research Program. The Merck
                representatives initially shall be ( * ) and the Isis
                representatives initially shall be ( * ) Additional employees of
                Isis or Merck (or its Affiliates) may from time to time, by
                mutual consent of the parties, be invited to attend Joint
                Research Committee meetings. To the extent a party's
                representative is unable to attend a Joint Research Committee
                meeting, his or her vote on any matter coming before the Joint
                Research Committee may be cast by another representative of that
                party.

        2.4.2   Chairman and Vice Chairman. The Chairman of the Joint Research
                Committee shall be selected by Merck and the Vice Chairman shall
                be selected by Isis. The Chairman and the Vice Chairman shall be
                the primary contacts between the parties with respect to the
                Research Program. Each Party shall notify the other as soon as
                practicable upon changing this appointment.


                                       8

                                               *CONFIDENTIAL TREATMENT REQUESTED

<PAGE>   12

        2.4.3   Meetings and Decisions. The Joint Research Committee shall meet
                at least once each Calendar Quarter at such locations as shall
                be determined by the Joint Research Committee. Each Party shall
                bear its own expenses related to attendance of such meetings by
                its representatives. At the first such meeting, which shall take
                place within thirty (30) days after the Effective Date, the
                Joint Research Committee shall discuss any necessary or
                recommended changes in the Research Program. The Joint Research
                Committee may meet by means of teleconference or video
                conference or other similar communications equipment. The Joint
                Research Committee shall confer and make decisions regarding the
                status and direction of the Research Program and the other
                matters specified in the Research Program and shall also advise
                on issues regarding any technical, budgetary or economic matters
                relating to the Research Program, provided that the Joint
                Research Committee shall not have authority to decide on
                technical, budgetary or economic matters. Decisions of the Joint
                Research Committee shall be made by a majority of the members.
                In the event that the Joint Research Committee cannot or does
                not, after good faith efforts, achieve a majority on an issue,
                the Chief Executive Officer of Isis, or his designee, acting as
                the duly authorized representative of Isis, and the Executive
                Vice President of Merck Research Laboratories, acting as the
                duly authorized representative of Merck, shall discuss the
                matter and attempt, in good faith, to reach agreement with
                respect to such decision. In the event that the Chief Executive
                Officer of Isis, or his designee, and the Executive Vice
                President of Merck Research Laboratories shall be unable to
                reach agreement, Merck shall, in its sole discretion, make the
                final decision.

        2.4.4   Records. The Joint Research Committee shall maintain accurate
                records to document the discussions and decisions at each
                meeting. Meeting minutes or summaries shall be prepared in
                accordance with procedures established by the Joint Research
                Committee at its first meeting and shall be distributed to all
                members of the Joint Research Committee after approval of drafts
                by the Chairman and Vice Chairman.

2.5     Exchange of Information. Merck and Isis, respectively, shall promptly
        disclose to each other during the Research Program Term or the Extended
        Research Program Term all Merck Know-How and Isis Know-How and Isis
        Research Know-How and any relevant Isis Patent Assets. During the term
        of the Research Program and for a period of ten (10) years thereafter,
        Isis agrees that Merck (including any agents or Affiliates of Merck)
        shall have the freedom to operate under Isis Patent Assets for the
        purpose of performing any Research Program activities or any other
        activities necessary or useful for the identification or development of
        Compounds and/or Derived Compounds ( * )


                                        9

                                               *CONFIDENTIAL TREATMENT REQUESTED

<PAGE>   13
2.6     Records and Reports.

        2.6.1   Records. Isis shall maintain records in sufficient detail and in
                good scientific manner appropriate for patent and regulatory
                purposes, which shall be complete and accurate and shall fully
                and properly reflect all work done and results achieved in the
                performance of the Research Program.

        2.6.2   Copies and Inspection of Records. Merck shall have the right,
                during normal business hours and upon reasonable notice, to
                inspect and copy all such records of Isis referred to in Section
                2.6.1. Merck shall maintain such records and the information
                disclosed therein in confidence in accordance with Section 4.1.
                Merck shall have the right to arrange for its employees, agents
                and outside consultants to visit Isis at its offices and
                laboratories during normal business hours and upon reasonable
                notice, and to discuss the Research Program and its results in
                detail with the technical personnel of Isis.

        2.6.3   Progress Reports. Within sixty (60) days following the end of
                the Research Program Term (or the Extended Research Program Term
                if applicable), Isis shall provide to the Joint Research
                Committee a written final report which shall describe the work
                performed on the Research Program, evaluate the work performed
                in relation to the goals of the Research Program and provide
                such other information required by the Research Program or
                reasonably requested by Merck relating to the progress of the
                goals or performance of the Research Program. Upon request, Isis
                shall provide copies of the records described in Section 2.6.1.
                above.

2.7     Research information and inventions. All information and inventions
        conceived or reduced to practice in the course of the Research Program:

        (a)     solely by employees of Isis shall be owned solely by Isis;

        (b)     solely by employees of Merck (or its agents or Affiliates) shall
                be owned solely by Merck;

        (c)     jointly by employees of Isis and Merck (or its Affiliates) shall
                be owned jointly by Isis and Merck.

        Isis shall promptly disclose to Merck the development, making,
        conception or reduction to practice of the research information and
        inventions referred to in subsections (a) and (c) herein.

2.8     Research Program Term. The term of the Research Program shall commence
        on the Effective Date and continue for a period of three years (the
        "Research Program Term"). Merck may terminate the Research Program Term
        upon six (6) months prior written notice given at the completion of the
        second year of the Research


                                       10

<PAGE>   14
        Program Term. Termination will be within six (6) months of the notice.
        In such event, Merck will be liable for funding of the Research Program
        until its termination. It is understood that Merck, in its sole
        discretion, may reduce its efforts under the Research Program during the
        six month notice period. Unless the Research Program is terminated, the
        parties may agree to extend the Research Program Term for (a) one or
        more additional one-year terms or (b) one additional term of a period of
        at least six (6) months but less than one (1) year (each an "Extended
        Research Program Term". Neither party may terminate an Extended Research
        Program Term, other than a termination for cause as set forth in Article
        8.3.1. The parties shall agree to any such extension at least ninety
        (90) days prior to the end of the current Research Program Term or
        Extended Research Program Term and shall negotiate in good faith to
        complete a mutually acceptable schedule of Research Program activities
        to be carried out during such Extended Research Program Term. The
        Schedule shall include the number of FTE's to be devoted to the Research
        Program by Isis during the Extended Research Program Term.

2.9     Use of Compounds. Research Compounds and Derived Compounds will be
        incorporated by Merck into Merck's chemical compound collection. It is
        understood that Merck may utilize Research Compounds and Derived
        Compounds for any purpose, including the provision of samples of such
        Compounds to third parties, subject to the license granted to Isis in
        the Isis Field. It is further understood that, subject to the
        limitations of paragraph 3.5 hereof, Merck may develop such Research
        Compounds and Derived Compounds for any purpose subject to any royalty
        obligations set forth in Article 5. Isis Compounds may be screened by
        Merck only for activity relative to Hepatitis C polymerase and other
        anti-viral activity and will be returned to Isis at the end of the
        Research Program, unless Merck is developing such Isis Compound(s) for
        any anti-viral indication. It is understood that should Merck thereafter
        abandon development of such Isis Compound(s), Merck will return such
        Isis Compound(s) to Isis at that time.

2.10    Exclusive Efforts. During the Research Program Term and any Extended
        Research Program Term, Isis shall work exclusively with Merck in
        the Research Field. Upon completion of the Research Program Term or any
        Extended Research Program Term(s), Isis agrees to refrain from
        conducting any activities in the Research Field for a period equal to
        the lesser of ( * ) 

        To the extent that, at the end of the period set forth in the prior
        sentence, Merck has an HCV Product in development, pending regulatory
        approval or on the market, Isis shall continue to refrain from
        conducting any activities in the Research Field during the pendency of
        any such activities for a period not to exceed ( * ) additional years.


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<PAGE>   15
                                   ARTICLE III

                   LICENSE; DEVELOPMENT AND COMMERCIALIZATION

3.1     License Grant

        (a) Isis hereby grants to Merck an exclusive, sublicensable license in
        the Territory, subject to the rights retained by Isis in Article 3.2,
        under Isis Research Know-How and Isis Research Patent Assets, to utilize
        Isis Research Know-How for any and all purposes and to practice all
        inventions claimed in Isis Research Patent Assets, including but not
        limited to the right to make, have made, use, import and/or sell
        Compounds ( * ) and Licensed Products.

                (b) Isis hereby grants to Merck an exclusive, sublicensable
        license in the Territory, subject to the rights retained by Isis in
        Article 3.2, under Isis Know-How, to make, have made, use, import and/or
        sell Compounds (except for a Derived Compound which is an
        Oligonucleotide) and Licensed Products.

                (c) At the time of the approval of an RMC Development Candidate
        which is a Research Compound, Isis agrees to grant to Merck an
        exclusive, sublicensable, license in the Territory, subject to the
        rights retained by Isis in Article 3.2, under those Isis Patent Assets
        which are necessary or useful to make, have made, use, import and/or
        sell such Research Compound and Licensed Products which contain such
        Research Compound.

                (d) At the time of approval of an RMC Development Candidate
        which is a Derived Compound ( * ) Isis agrees to grant to Merck a
        non-exclusive, sublicensable license in the Territory, subject to rights
        retained by Isis in Article 3.2, under those Isis Patent Assets
        necessary or useful to make, have made, use and/or sell such-Derived
        Compounds.

3.2     Isis Retained Rights. Except as specifically set forth herein, Merck is
        not granted any other license by implication or otherwise and Isis
        expressly reserves all rights not granted to Merck hereunder.
        Notwithstanding the licenses granted in Article 3.1, Isis shall retain
        the right to use Isis Research Know-How and to practice under Isis
        Research Patent Assets for the purpose of performing its obligations
        under the Research Program and in the Isis Field. The rights retained by
        Isis in the Isis Field under this Article 3.2 shall be exclusive, but
        for a research license granted to Merck and its Affiliates to conduct
        research in the Isis Field during the term of this Agreement.

3.3     Merck Retained Rights. Except as specifically set forth herein, Isis is
        not granted any other license by implication or otherwise and Merck
        expressly reserves all rights not granted to Isis hereunder.


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<PAGE>   16
3.4     Merck Grant. Merck grants to Isis an exclusive, royalty-free,
        sublicensable license in the Territory under those Merck Patent Assets
        or Isis Research Patent Assets which are owned by Merck during the
        Research Term or any Extended Research Term and Merck Know-How to
        develop, make, have made, use and sell Research Compounds in the Isis
        Field, subject to a research license retained by Merck and its
        Affiliates in the Isis Field. In addition, Merck grants to Isis the
        right to utilize Merck Know-How solely for the purpose of performing its
        obligations under the Research Program. To the extent a Merck Patent
        Asset which is filed within one (1) year of the Research Program (i)
        claims or covers a composition of matter or a process and (ii) prevents
        Isis from making, having made, using, importing and/or selling a
        Research Compound in the Isis Field, Merck shall grant Isis an
        exclusive, royalty-free, sublicensable license in the Territory under
        such Merck Patent Assets to make, have made, use and/or sell Research
        Compounds in the Isis Field.

3.5     Development and Commercialization. Merck shall use reasonable efforts,
        consistent with the usual practice followed by Merck in pursuing the
        commercialization and marketing of pharmaceutical products of similar
        market potential, at its own expense, to develop and commercialize one
        HCV Product and any Royalty Bearing Product for which Merck has been
        granted a license under Paragraph 3.1(c) or (d) on a commercially
        reasonable basis in such countries in the Territory where in Merck's
        reasonable opinion it is commercially viable to do so. In the event
        that, at any time during the term of the Agreement Merck, in good faith,
        determines that the use of Compounds for Hepatitis C polymerase
        inhibition is not scientifically or commercially viable, Merck will have
        no further due diligence obligation for HCV Products under this
        Agreement. In the event that Merck determines that the therapeutic 
        target of a Compound for which it has been granted a license under 
        Paragraph 3.1(c) or (d) is no longer scientifically or commercially 
        viable, the license under paragraph 3.1(c) or (d) for such Compound will
        terminate. To the extent Merck thereafter requests Isis to regrant such
        license under the terms and conditions of this Agreement, Isis will do
        so unless precluded by a third party agreement.

3.6     ( * ) Merck may not utilize Isis Intellectual Property to develop
        inhibitors of ( * ) nor may Merck utilize Research Compounds identified
        and/or discovered solely by Isis or jointly by Merck and Isis to
        identify inhibitors of ( * ) during the time that Isis is precluded from
        doing so by the terms of its Collaborative Agreement with  ( * ) 


                                       13

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<PAGE>   17
                                   ARTICLE IV

                         CONFIDENTIALITY AND PUBLICATION

4.1     Non-Disclosure and Non-Use Obligations. All Proprietary Information
        disclosed by one Party to the other Party hereunder shall be maintained
        in confidence and shall not be disclosed to any non-party or used for
        any purpose except as expressly permitted herein without the prior
        written consent of the disclosing Party. The foregoing non-disclosure
        and non-use obligations shall not apply to the extent that such
        Proprietary Information:

        (a)     is known by the receiving Party at the time of its receipt, and
                not through a prior disclosure by the disclosing Party, as
                documented by business records;

        (b)     is properly in the public domain;

        (c)     is subsequently disclosed to a receiving Party by a third party
                who may lawfully do so and is not under an obligation of
                confidentiality to the disclosing Party; or

        (d)     is developed by the receiving Party independently of Proprietary
                Information received from the other Party, as documented by
                written records.

4.2     Permitted Disclosure of Proprietary Information. Notwithstanding Section
        4.1, a Party receiving Proprietary Information of the other Party may
        disclose such Proprietary Information:

        (a)     to governmental or other regulatory agencies in order to obtain
                patents subject to this Agreement, or to gain approval to
                conduct clinical trials or to market Licensed Product pursuant
                to this Agreement, but such disclosure may be only to the extent
                reasonably necessary to obtain such patents or authorizations;

        (b)     by Merck to its permitted sublicensees, agents, consultants,
                Affiliates and/or other third parties for the research and
                development, manufacturing and/or marketing of Compound(s)
                and/or Licensed Product(s) (or for such parties to determine
                their interest in performing such activities) in accordance with
                this Agreement on the condition that such third parties agree to
                be bound by the confidentiality obligations contained in this
                Agreement; or

        (c)     if required to be disclosed by law or court order, provided that
                notice is promptly delivered to the non-disclosing Party in
                order to provide an opportunity to challenge or limit the
                disclosure obligations.


                                       14

<PAGE>   18
4.3     Dual Information. It is understood that Isis Research Know-How will be
        deemed to be Proprietary Information of both Merck and Isis.

4.4     Publication and Public Disclosures. Merck and Isis each acknowledge the
        other Party's interest in publishing its research results. Each Party
        also recognizes the mutual interest in obtaining valid patent protection
        and in protecting business interests and trade secret information.
        Consequently, either Party wishing to make a publication or to make an
        oral disclosure regarding any activity of the Research Program shall
        deliver to the other Party a copy of the proposed written publication or
        an outline of an oral disclosure at least sixty (60) days prior to
        submission for publication or presentation. The reviewing Party shall
        have the right (a) to propose modifications to the publication or oral
        disclosure for patent reasons, trade secret reasons or business reasons
        or (b) to request a reasonable delay in publication or oral disclosure
        in order to protect patentable information. If the reviewing Party
        requests a delay, the publishing or disclosing Party shall delay
        submission or presentation for a period of sixty (60) days to enable
        patent applications protecting each Party's rights in such information
        to be filed in accordance with Article VII below. Upon expiration of
        such sixty (60) days, the publishing Party shall be free to proceed with
        the publication or oral disclosure. If the reviewing Party requests
        modifications to the publication or oral disclosure, the publishing
        Party shall edit such publication to prevent disclosure of trade secret
        or proprietary business information prior to submission of the
        publication or prior to oral disclosure.

                                    ARTICLE V

                         PAYMENTS; ROYALTIES AND REPORTS

5.1     Commitment Fee and Option Payment. In consideration for Isis's
        commitment to perform its obligations under the Research Program and for
        access to the Isis Intellectual Property granted hereunder, Merck shall
        pay to Isis a non-refundable commitment fee of ( * ) within thirty (30)
        days after the Effective Date.

5.2     Research Program Funding. In consideration for Isis's performance of its
        obligations under the Research Program and subject to the terms and
        conditions contained herein, Merck shall pay Isis:

        (a) During the First Three Years of the Research Program Term: an amount
        equal to ( * ) per year payable in four quarterly installments of ( * )
        for a minimum of ( * ) FTE's for each year. The first such annual
        installment shall be due no later than June 30, 1998. The remaining
        installments shall be due at the end of each succeeding calendar
        quarter.


                                       15

                                               *CONFIDENTIAL TREATMENT REQUESTED

<PAGE>   19

        (b) For any Additional Year(s) of the Research Program Term: If the
        Research Program Term is extended for one (1) or more subsequent periods
        in accordance with Section 2.8 above, payments for such additional year
        or years shall be negotiated annually, based upon an adjusted FTE rate
        calculated as follows multiplied by the agreed upon number of FTE's. The
        FTE rate shall be determined for the first extension by applying the
        percentage change in the Consumer Price Index for urban wage earners and
        clerical workers - U.S. City Average, from December 1, 1999 to May 30,
        2001 to the FTE rate in effect during the Research Program of ( * ). For
        any additional extension, the percentage change in the Index for the
        twelve (12) months preceding the extension shall be applied to the
        current FTE rate in effect.

5.3     Milestone Payments.

        5.3.1 Subject to the terms and conditions contained in this Agreement,
        Merck shall pay to Isis the following non-refundable milestone payments
        as set forth in this Article V:

        (a)     ( * ) upon approval by Merck's Research Management Committee (or
                its successors) in its sole discretion, of a Compound as ( * )

        (b)     ( * )

        (c)     ( * )

        (d)     ( * )

               and

        (e)     ( * )

        5.3.2   ( * )

        5.3.3   ( * )


                                       16

                                               *CONFIDENTIAL TREATMENT REQUESTED

<PAGE>   20

        5.3.4   ( * )

        5.3.5   ( * )

        5.3.6   In the event Milestones are paid pursuant to Sections
                5.3.1-5.3.5 for a Royalty Bearing Product and the Royalty
                Bearing Product is thereafter developed for an indication which
                would have incurred greater Milestones if the product had
                initially been developed for the additional indication, the
                greater Milestone payments will apply and the Royalty Bearing
                Product will be considered to have been developed for the
                additional indication initially for purposes of the Milestones.

        5.3.7   In addition to the milestones set forth above, Merck shall pay
                Isis (*) in consideration of Isis's efforts in identifying
                Research Compounds for the prevention and/or treatment of
                infections caused by Hepatitis C virus, in the event Merck
                elects to continue efforts to pursue an HCV Product at the
                conclusion of the Research Program Term or within (3) months
                thereafter.

        5.3.8   Merck shall notify Isis in writing within thirty (30) days after
                the achievement of each milestone, and such notice shall be
                accompanied by payment of the appropriate milestone payment.


                                       17

                                               *CONFIDENTIAL TREATMENT REQUESTED

<PAGE>   21

        5.3.9   ( * )

5.4     Royalties.

        5.4.1  Royalties Payable By Merck. Subject to the terms and conditions
               of this Agreement, for each Royalty Bearing Product, Merck shall
               pay to Isis royalties on a country-by-country basis as follows:

               (a) if the sale of an HCV Human Product would, but for the
               licenses granted under this Agreement, infringe a Valid Patent
               Claim of an Isis Patent Asset, an Isis Research Patent Asset or a
               Merck Patent Asset covering the sale of such product in the
               country of sale, Merck shall pay a royalty of ( * ) of Net Sales
               (i) in the case of an Isis Patent Asset or an Isis Research
               Patent Asset, until the last to expire of such patent(s) or (ii)
               in the case of a Merck Patent Asset, ( * )

               (b) for sales of HCV Human Product(s) other than those covered in
               Subsection 5.4.1(a) above, Merck shall pay a royalty of ( * ) of
               Net Sales for a period of ( * ) from First Commercial Sale in
               each country;

               (c) if the sale of an Anti-Viral Human Product would, but for the
               licenses granted pursuant to this Agreement, infringe a Valid
               Patent Claim of an Isis Patent Asset, an Isis Research Patent
               Asset or a Merck Patent Asset in the country of sale, Merck shall
               pay a royalty of ( * ) of Net Sales (i) in the case of an Isis
               Patent Asset or an Isis Research Patent Asset, until the last to
               expire of such patent(s) or (ii) in the case of a Merck Patent
               Asset, ( * )

               (d) for sales of Anti-Viral Human Products, other than those
               covered in subsections 5.4.1(c) above, Merck shall pay a royalty
               of ( * ) of Net Sales for a period of ( * ) from First Commercial
               Sale in each country;

               (e) if the sale of a Collection Human Product would, but for the
               license granted under this Agreement, infringe a Valid Patent
               Claim of an Isis Patent Asset or an Isis Research Patent Asset
               covering the sale of such product in the country of sale, Merck
               shall pay a royalty of ( * ) of Net Sales until the last to
               expire of such patent(s);


                                       18

                                               *CONFIDENTIAL TREATMENT REQUESTED


<PAGE>   22



               (f) for sales of Collection Human Products other than those
               covered in subsection 5.4.1(e) above, Merck shall pay a royalty
               of ( * ) of Net Sales for a period of ( * ) from First Commercial
               Sale in each country;

               (g) for Anti-Viral Animal Products and Collection Animal
               Products, Merck shall pay ( * ) of the royalties set forth in
               this Section 5.4.1 for, respectively, the corresponding
               Anti-Viral Human Products and Collection Human Products;

               (h) in the event a Royalty Bearing Product is initially marketed
               as an ( * ) and is thereafter marketed as an ( * ) the royalties
               set forth in Section 5.4.1(a) and (b), as the case may be, will
               apply instead of the royalties set forth in Sections 5.4.1 (c)
               and (d), as the case may be, in each country where an HCV
               indication is approved commencing with the approval of the HCV
               indication in each such country.

Royalties on each Royalty Bearing Product at the rate set forth above shall be
effective as of the date of First Commercial Sale of a Royalty Bearing Product
in a country and shall continue during the term(s) set forth above subject to
the following:

               (x) that only one royalty shall be due with respect to the same
               unit of Royalty Bearing Product;

               (y) that no royalties shall be due upon the sale or other
               transfer among Merck, its Affiliates or sublicensees, but in such
               cases the royalty shall be due and calculated upon Merck's or its
               Affiliate's or its sublicensee's Net Sales to the
               first-independent third party; and

               (z) no royalties shall accrue on the disposition of Royalty
               Bearing Products in reasonable quantities by Merck, its
               Affiliates or sublicenses as sample(s) (promotion or otherwise)
               or as donations (for example, to non-profit institutions or
               government agencies).

               5.4.2 No Other Royalties. It is understood that no royalties
               shall be due and owing to Isis by Merck on sales of Licensed
               Products which are not Royalty Bearing Products.

               5.4.3 Managed Pharmaceutical Contract. Merck may sell Royalty
               Bearing Products to an independent third party (such as a
               retailer or wholesaler) and may subsequently perform services
               relating to Royalty Bearing Products and other products under a
               managed pharmaceutical benefits contract or other similar
               contract. In such cases, it is agreed by the parties that Net
               Sales shall be based on the invoice price to an independent
               retailer or wholesaler, as set

                                               *CONFIDENTIAL TREATMENT REQUESTED

                                       19



<PAGE>   23



               forth in the definition of Net Sales in Article I hereof,
               notwithstanding that Merck may receive compensation arising from
               the performance of such services.

        5.4.4  Change in Sales Practices. The parties acknowledge that during
               the term of this Agreement, Merck's sales practices for the
               marketing and distribution of Royalty Bearing Products may change
               to the extent to which the calculation of the payment for
               royalties on Net Sales may become impractical or even impossible.
               In such event the parties agree to meet and discuss in good faith
               new ways of compensating Isis to the extent currently
               contemplated under Section 5.4.1.

        5.4.5  Royalties for Bulk Compound. In those cases where Merck sells
               bulk Compound rather than a Royalty Bearing Product in packaged
               form to an independent third party, the royalty obligations of
               this Article V shall be applicable to the bulk Compound sold.

        5.4.6  Compulsory Licenses. If a compulsory license is granted to a
               third party with respect to a Royalty Bearing Product in any
               country in the Territory with a royalty rate lower than the
               royalty rate provided by Section 5.4.1., then the royalty rate to
               be paid by Merck on Net Sales in that country under Section 5.4.1
               shall be reduced to the rate paid by the compulsory Third Party
               licensee.

        5.4.7  Third Party Licenses. If one or more licenses from a third party
               or parties are required by Merck, its Affiliates and/or
               sublicensees in order to develop, make, have made, use, sell or
               import Royalty Bearing Products, ( * ) of any royalties actually
               paid under such third party licenses by Merck for sale of such
               Royalty Bearing Product shall be creditable against the royalty
               payments to be paid to Isis by Merck with respect to the sale of
               such Royalty Bearing Products in such country, provided, however,
               that the royalties set forth in Article 5.4.1 shall not be
               reduced to less than ( * ) of the amounts set forth therein.
               Unused credits may be carried over into subsequent royalty
               periods.

5.5     Reports; Payment of Royalty. Following the First Commercial Sale of a
        Royalty Bearing Product and during the term of the Agreement, Merck
        shall furnish to Isis a quarterly written report for the Calendar
        Quarter showing all Net Sales of Royalty Bearing Products subject to
        royalty payments sold by Merck, its Affiliates and its sublicensees in
        the Territory during the reporting period and the royalties payable
        under this Agreement. Reports shall be due on the thirtieth (30th) day
        following the close of each Calendar Quarter. Royalties shown to have
        accrued by each royalty report shall be due and payable on the date such
        royalty report is due. Merck shall keep complete and accurate records in
        sufficient detail to enable the royalties payable hereunder to be
        determined.

                                       20

                                               *CONFIDENTIAL TREATMENT REQUESTED




<PAGE>   24



5.6     Pass Through Royalties. In the event the licenses granted by Isis under
        Article 3 would include rights licensed to Isis by a third party, Isis
        shall inform Merck prior to providing such rights to Merck, and shall
        advise Merck of any payments that would be due to the third party. In
        the event that Merck is agreeable to making such payments, Isis will
        include the third party rights in the license grant to Merck. The
        parties will discuss in good faith a reasonable apportionment to Merck
        of fees which are not measured by Net Sales of Compounds or Licensed
        Products.

5.7     Audits.

        (a)  Upon the written request of Isis and not more than once in each
             Calendar Year, Merck shall permit an independent certified public
             accounting firm of nationally recognized standing selected by Isis
             and reasonably acceptable to Merck, to have access during normal
             business hours to such of the records of Merck as may be reasonably
             necessary to verify the accuracy of the royalty reports hereunder
             for any year ending not more than twenty-four (24) months prior to
             the date of such request. The accounting firm shall disclose to
             Isis only whether the royalty reports are correct or incorrect and
             the specific details concerning any discrepancies. Upon the
             expiration of twenty-four (24) months following the end of any 
             year, the calculation of royalties payable with respect to such 
             year shall be binding and conclusive upon Isis, and Merck and its
             sublicensees shall be released from any liability or accountability
             with respect to royalties for such year.

        (b)  If such accounting firm correctly concludes that additional
             royalties were owed during such period, Merck shall pay the
             additional royalties within thirty (30) days of the date Isis
             delivers to Merck such accounting firm's written report so
             correctly concluding. The fees charged by such accounting firm
             shall be paid by Isis unless the additional royalties owed by Merck
             exceed ( * ) of the royalties paid for the royalty period subject
             to the audit, in which case Merck shall pay the reasonable fees of
             the accounting firm.

        (c)  Merck shall include in each sublicense granted by it pursuant to
             this Agreement a provision requiring the sublicensee to make
             reports to Merck, to keep and maintain records of sales made
             pursuant to such sublicense and to grant access to such records by
             Isis's independent accountant to the same extent required of Merck
             under this Agreement.

        (d)  Isis shall treat all financial information subject to review under
             this Section 5.7 or under any sublicense agreement in accordance
             with the confidentiality provisions of this Agreement, and shall
             cause its accounting firm to enter into an acceptable
             confidentiality agreement with Merck obligating it to retain all
             such financial information in confidence pursuant to such
             confidentiality agreement.

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<PAGE>   25


5.8     Payment Exchange Rate. All payments to Isis under this Agreement shall
        be made in United States dollars by bank wire transfer in immediately
        available funds to such bank account in the United States designated in
        writing by Isis from time to time. In the case of sales outside the
        United States, the rate of exchange to be used in computing the amount
        of currency equivalent in United States dollars due Isis shall be made
        at the rate of exchange utilized by Merck in its worldwide accounting
        system, prevailing on the third to the last business day of the Calendar
        Quarter to which such payments relate.

5.9     Income Tax Withholding. If laws, rules or regulations require
        withholding of income taxes or other taxes imposed upon payments set
        forth in this Article V, Merck shall make such withholding payments as
        required and subtract such withholding payments from the payments set
        forth in this Article V. Merck shall submit appropriate proof of payment
        of the withholding taxes to Isis within a reasonable period of time.

                                   ARTICLE VI

                         REPRESENTATIONS AND WARRANTIES

6.1     Isis Representations and Warranties. Isis represents and warrants to
        Merck that as of the date of this Agreement:

        (a)    it has the full right, power and authority to enter into this
               Agreement, to perform the Research Program and to grant the
               licenses granted under Article III hereof,

        (b)    to the best of its knowledge, Isis has not previously assigned,
               transferred, conveyed or otherwise encumbered its right, title
               and interest in the Isis Intellectual Property so as to interfere
               with Isis' ability to perform the Research Program activities or
               grant the licenses contemplated hereunder;

        (c)    Isis has not taken nor will not take any action which would, in
               Isis's good faith judgment, interfere with any obligations of
               Isis set forth in this Agreement, including but not limited to
               the obligation to grant Merck the licenses described in
               Paragraphs 3.1(c) and (d).

6.2     Merck Representations and Warranties. Merck represents and warrants to
        Isis that as of the date of this Agreement it has the full right, power
        and authority to enter into this Agreement and to perform the Research
        Program.

                                       22



<PAGE>   26


                                   ARTICLE VII

                                 PATENT MATTERS

7.1     Filing, Prosecution and Maintenance of Patents. Merck shall have the
        first right to file, prosecute and maintain the Isis Research Patent
        Assets upon appropriate consultation with Isis and Isis shall cooperate
        fully in the filing and prosecution of such patents. In the event that
        Merck decides not to file, prosecute or maintain the Isis Research
        Patent Assets, Isis may do so. In each case, the filing party shall
        consult with the non-filing party with respect thereto, and shall supply
        the non-filing party with a copy of the application as filed, together
        with notice of its filing date and serial number. Each party shall keep
        the other party advised of the status of the actual and prospective
        patent filings. Isis shall promptly give notice to Merck of the grant,
        lapse, revocation, surrender, invalidation or abandonment of any Isis
        Research Patent Asset or Isis Patent Asset licensed or sub-licensed to
        Merck by Isis for which Isis is responsible and Merck shall give such
        notice to Isis for Isis Research Patent Assets for which Merck is
        responsible. The Party that is the filing party under this Section shall
        be responsible for the payment of all costs and expenses related to such
        filing.

7.2     Right of Other Parties to Prosecute and Maintain Patents. Any Party
        having the first right to file, prosecute and maintain the patent
        applications and patents referred to in Section 7.1 shall give notice to
        the other Party of any desire to cease prosecution and/or maintenance of
        such patent and, in such case, shall permit the other Party, at the
        other Party's sole discretion, to continue prosecution or maintenance at
        its own expense.

7.3     Interference, Opposition, Reexamination and Reissue.

        (a)     Each Party, within ten (10) days of learning of such an event,
                shall inform the other of any request for, or filing or
                declaration of, any interference, opposition or reexamination
                relating to Isis Research Patent Assets. Merck and Isis
                thereafter shall consult and cooperate fully to determine an
                appropriate course of action with respect to any such proceeding
                and shall agree upon the Parties' rights of review and approval
                of submissions relating to such proceeding, provided, that Merck
                shall have the first right to control any such proceeding.

        (b)     In connection with any interference, opposition, reissue, or
                reexamination proceeding relating to Isis Research Patent
                Assets, Merck and Isis will cooperate fully and will provide
                each other with any information or assistance that either
                reasonably may request. Merck shall keep Isis informed of
                developments in any such action or proceeding, including, to the
                extent permissible, the status of any settlement negotiations
                and the terms of any offer related thereto.

                                       23



<PAGE>   27


        (c)    Merck shall bear the expense of any interference, opposition,
               reexamination, or reissue proceeding relating to Isis Research
               Patent Assets, provided that Merck is prosecuting the
               interference or opposition or that Merck has prosecuted the
               application resulting in the re-examination or reissue.

7.4     Enforcement and Defense.

        (a)     Each Party shall promptly give the other party notice of any
                infringement of Isis Research Patent Assets, or any
                misappropriation or misuse of Isis Research Know-How, that comes
                to such Party's attention. The Parties shall thereafter consult
                and cooperate fully to determine a course of action, including,
                without limitation, the commencement of legal action by one or
                both of the Parties. Merck shall have the first right to
                initiate and prosecute such legal action at its own expense and
                in the name of Merck and if necessary, Isis, or to control the
                defense of any declaratory judgment action relating to Isis
                Research Patent Assets or Isis Research Know-How. Merck shall
                promptly inform Isis if it elects not to exercise such first
                right, and Isis thereafter shall have the right either to
                initiate and prosecute such action or to control the defense of
                such declaratory judgment action in the name of Isis.

        (b)    If Merck elects not to initiate and prosecute an infringement
               action as provided in Subsection 7.4(a), and Isis elects to do
               so, the cost of any agreed upon course of action, including the
               costs of any legal action commenced or the defense of any
               declaratory judgment, shall be borne solely by Isis.

        (c)     For any such legal action, in the event that any Party is unable
                to initiate or prosecute such action solely in its own name, the
                other Party will join such action voluntarily and will execute
                and cause its Affiliates under its control to execute all
                documents necessary for the Party to prosecute and maintain such
                action. In connection with any such action, the Parties will
                cooperate fully and will provide each other with any information
                or assistance that either reasonably may request Each Party
                shall keep the other informed of developments in any such action
                or proceeding, including, to the extent permissible by law, the
                status of any settlement negotiations and the terms of any offer
                related thereto.

        (d)     Any recovery obtained by Merck or Isis shall be shared as
                follows:

                (i)     the Party that initiated and prosecuted the action shall
                        recoup all of its costs and expenses incurred in
                        connection with the action, whether by settlement or
                        otherwise;

                (ii)    the other Party shall then, to the extent possible,
                        recover its costs and expenses incurred in connection
                        with the action;

                                       24



<PAGE>   28


                (iii)   the remaining recovery shall be allocated between the
                        parties on a pro rata basis under which Isis shall
                        receive a proportion based on the royalties it lost and
                        Merck shall receive a proportion based on its lost
                        profits.

        (e)    Isis shall inform Merck of any certification regarding any Isis
               Research Patent Assets it has received pursuant to either 21
               U.S.C. Sections 355(b)(2)(A)(iv) or (j)(2)(A)(vii)(IV) or under
               Canada's Patented Medicines (Notice of Compliance) Regulations
               Article 5 and shall provide Merck with a copy of such
               certification within five (5) business days of receipt. Isis's
               and Merck's rights with respect to the initiation and prosecution
               of any legal action as a result of such certification or any
               recovery obtained as a result of such legal action shall be
               allocated as defined in Subsections 7.4(a) through (d).

7.5     Patent Term Restoration. The Parties shall cooperate in obtaining patent
        term restoration or supplemental protection certificates or their
        equivalents in any country in the Territory where applicable. If
        elections with respect to obtaining such patent term restoration are to
        be made, Merck shall have the right to make the election and Isis shall
        abide by such election.

                                  ARTICLE VIII

                              TERM AND TERMINATION

8.1     Term and Expiration. This Agreement shall be effective as of the
        Effective Date and unless terminated earlier pursuant to Sections 8.2 or
        8.3 below, the term of-this Agreement shall continue in effect until
        expiration of all royalty obligations hereunder. Upon expiration of this
        Agreement due to expiration of all royalty obligations hereunder,
        Merck's licenses pursuant to Section 3.1 shall become fully paid-up,
        perpetual licenses.

8.2     Termination by Notice. Notwithstanding anything contained herein to the
        contrary, after expiration or termination of the initial Research
        Program Term or any Extended Research Program Term, Merck shall have the
        right to terminate this Agreement at any time by giving ninety (90) days
        advance written notice to Isis. In the event of such termination, (i)
        the rights and obligations hereunder, including any payment obligations
        not due and owing as of the termination date shall terminate and (ii)
        Merck shall have no further rights with respect to Isis Intellectual
        Property, other than the right to utilize Research Compounds and Derived
        Compounds in its chemical collection for any purpose, subject to the
        payment by Merck of milestones and royalties set forth in Article 5,
        including royalties on HCV Products and Anti-Viral Products.

                                       25



<PAGE>   29


8.3     Termination.

        8.3.1   Termination for Cause. Any Party may terminate this Agreement by
                notice to the other Party at any time during the term of this
                Agreement:

                (a)     if the other Party is in breach of its material
                        obligations hereunder by causes and reasons within its
                        control and has not cured such breach within ninety (90)
                        days after notice requesting cure of the breach; or

                (b)     upon the filing or institution of bankruptcy,
                        reorganization, liquidation or receivership proceedings,
                        or upon an assignment of a substantial portion of the
                        assets for the benefit of creditors by the other Party;
                        provided, however, in the case of any involuntary
                        bankruptcy proceeding such right to terminate shall only
                        become effective if the Party consents to the
                        involuntary bankruptcy or such proceeding is not
                        dismissed within ninety (90) days after the filing
                        thereof.

        8.3.2   Effect of Termination for Cause on License.

                (a)     In the event that Merck terminates this Agreement under
                        Section 8.3.1(a), Merck's licenses pursuant to this
                        Agreement shall become perpetual licenses, and Isis
                        shall, within one month from such termination, return or
                        cause to be returned to Merck all substances or
                        compositions delivered or provided by Merck hereunder,
                        as well as any other materials provided by Merck. It is
                        understood that in the event Merck contends it suffers
                        damages as a result of the breach, Merck may place a
                        portion of the payments to be made by Merck pursuant to
                        Article 5 that would reasonably cover Merck's alleged
                        damages, into an interest-bearing escrow account pending
                        resolution of any dispute between the parties relating
                        to the material breach or termination of the agreement,
                        including a dispute over damages, pursuant to paragraph
                        9.6.

                (b)     In the event that Isis terminates this Agreement under
                        Section 8.3.1(a), Merck's exclusive licenses set forth
                        under Article 3 will terminate and become non-exclusive.
                        Merck shall pay to Isis fifty percent (50%) of the
                        royalty payments set forth in Article 5. No milestone
                        payments will be due from Merck.

                (c)     In the event Merck terminates this Agreement under
                        Section 8.3.1(b) or this Agreement is otherwise
                        terminated under 8.3.1(b), all rights and licenses
                        granted pursuant to this Agreement are, and shall
                        otherwise be deemed to be, for purposes of Section
                        365(n) of the Bankruptcy Code, licenses of rights to
                        "intellectual property" as defined under Section
                        101(35A) of the Bankruptcy Code. The Parties

                                       26



<PAGE>   30


                      agree that Merck, as a licensee of such rights under this
                      Agreement, shall retain and may fully exercise all of its
                      rights and elections under the Bankruptcy Code. The
                      Parties further agree that, in the event of the
                      commencement of a bankruptcy proceeding by or against Isis
                      under the Bankruptcy Code, Merck shall be entitled to a
                      complete duplicate of (or complete access to, as
                      appropriate) any such intellectual property and all
                      embodiments of such intellectual property upon written
                      request therefore by Merck. Such intellectual property and
                      all embodiments thereof shall be promptly delivered to
                      Merck (i) upon any such commencement of a bankruptcy
                      proceeding upon written request therefore by Merck, unless
                      Isis elects to continue to perform its respective
                      obligations under this Agreement or (ii) if not delivered
                      under (i) above, upon the rejection of this Agreement by
                      or on behalf of Isis, as the case may be, upon written
                      request therefor by Merck.

8.4     Effect of Expiration or Termination. Expiration or termination of this
        Agreement shall not relieve the parties of any obligation accruing prior
        to such expiration or termination, and Merck shall be obligated to pay
        and shall pay to Isis, within thirty (30) calendar days of such
        expiration or termination, all payments and royalties due or accrued
        pursuant to the terms of Article V herein. The provisions of Article IV
        shall survive the expiration or termination of this Agreement and shall
        continue in effect for ( * ) years from the date of expiration or
        termination. Any expiration or early termination of this Agreement shall
        be without prejudice to the rights of any Party against the others
        accrued or accruing under this Agreement prior to termination, including
        the obligation to pay royalties for Royalty Bearing Product(s) sold
        prior to such termination.

                                   ARTICLE IX

                                    PUBLICITY

9.1     Public Disclosure. Neither party may make a public announcement or other
        disclosure of the terms of this Agreement or its existence, except as
        may be required by law or if the text of such announcement is agreed to
        in writing by the parties.

                                    ARTICLE X

                                  MISCELLANEOUS

10.1    Force Majeure. No Party shall be held liable or responsible to the other
        Party nor be deemed to have defaulted under or breached the Agreement
        for failure or delay

                                       27

                                               *CONFIDENTIAL TREATMENT REQUESTED



<PAGE>   31


        in fulfilling or performing any term of the Agreement (except payment
        obligations) when such failure or delay is caused by or results from
        causes beyond the reasonable control of the affected Party including,
        but not limited to, fire, flood, embargo, war, acts of war (whether war
        be declared or not), insurrection, riot, civil commotion, strike,
        lockout or other labor disturbance, act of God or act, omission or delay
        in acting by any governmental authority or the other Party. The affected
        Party shall notify the other Party of such force majeure circumstances
        as soon as reasonably practical.

10.2    Assignment. The Agreement may not be assigned or otherwise transferred,
        nor, except as expressly provided hereunder, may any right or
        obligations hereunder be assigned or transferred, by a Party without the
        consent of the other Party; provided, however, that any Party may,
        without such consent, assign the Agreement and its rights and
        obligations hereunder to an Affiliate or in connection with the transfer
        or sale of all or substantially all of its assets related to a Licensed
        Product or its business, or in the event of its merger or consolidation
        or change in control or similar transaction. Any permitted assignee
        shall assume all obligations of its assignor under this Agreement.

10.3    Severability. In the event that any of the provisions contained in this
        Agreement are held invalid, illegal or unenforceable in any respect, the
        validity, legality and enforceability of the remaining provisions
        contained herein shall not in any way be affected or impaired thereby,
        unless the absence of the invalidated provision(s) adversely affect the
        substantive rights of the parties. The Parties shall replace the
        invalid, illegal or unenforceable provision(s) with valid, legal and
        enforceable provision(s) which, insofar as practical, implement the
        purposes of this Agreement.

10.4    Notices. All notices or other communications which are required or
        permitted hereunder shall be in writing and sufficient if delivered
        personally, sent by telecopier (and promptly confirmed by personal
        delivery, registered or certified mail or overnight courier), sent by
        nationally-recognized overnight courier or sent by registered or
        certified mail, postage prepaid, return receipt requested, addressed as
        follows:

               if to Isis, to:      Isis Pharmaceuticals, Inc. 
                                    2292 Faraday Avenue
                                    Carlsbad, CA 92008
                                    Attention: Chief Executive Officer
                                    Telecopier No.: 760-931-0265
               with a copy to:      Attention: General Counsel
                                    Telecopier No.: 760-431-9448

                                       28



<PAGE>   32


               if to Merck, to:     Merck & Co., Inc.
                                    One Merck Drive
                                    P.O. Box 100
                                    Whitehouse Station, NJ 08889-0100
                                    Attention: Office of Secretary
                                    Telecopier No.: 908-735-1246

               with a copy to:      Attention: Office of Assistant General 
                                    Counsel Telecopier No.: 908-735-1370

        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 shall be deemed to have been given when delivered if
        personally delivered or sent by telecopier on a business day, on the
        business day after dispatch if sent by nationally-recognized overnight
        courier and on the third business day following the date of mailing if
        sent by mail.

10.5    Applicable Law. The Agreement shall be governed by and construed in
        accordance with the laws of the State of New York and the United States
        without reference to any rules of conflict of laws or renvoi.

10.6    Dispute Resolution. The Parties agree to attempt initially to solve all
        claims, disputes, or controversies arising under, out of, or in
        connection with this Agreement by conducting good faith negotiations. If
        the Parties are unable to settle the matter between themselves, the
        matter shall thereafter be resolved by a final and binding arbitration.
        Whenever a Party shall decide to institute arbitration proceedings, it
        shall give written notice to that effect to the other Party. The Party
        giving such notice shall refrain from instituting the arbitration
        proceedings for a period of sixty (60) days following such notice.
        During such period, the Parties shall make good faith efforts to
        amicably resolve the dispute without arbitration. Any arbitration
        hereunder shall be conducted under the rules of the American Arbitration
        Association. Each such arbitration shall be conducted by a panel of
        three arbitrators: one arbitrator shall be appointed by each of Merck
        and Isis and the third shall be appointed by the American Arbitration
        Association. Any such arbitration shall be held in Dallas, Texas. The
        arbitrators shall have the authority to grant specific performance.
        Judgment upon the award so rendered may be entered in any court having
        jurisdiction or application may be made to such court for judicial
        acceptance of any award and an order of enforcement, as the case may be.
        In no event shall a demand for arbitration be made after the date when
        institution of a legal or equitable proceeding based on such claim,
        dispute or other matter in question would be barred by the applicable
        statute of limitations.

10.7    Entire Agreement. This Agreement contains the entire understanding of
        the Parties with respect to the subject matter hereof. All express or
        implied agreements and understandings, either oral or written,
        heretofore made are expressly merged in and made a part of this
        Agreement. This Agreement may be amended, or any term hereof modified,
        only by a written instrument duly executed by the Parties hereto.

                                       29



<PAGE>   33


10.8     Headings. The captions to the several Articles and Sections hereof are
         not a part of the Agreement, but are merely guides or labels to assist
         in locating and reading the several Articles and Sections hereof.

10.9     Independent Contractors. It is expressly agreed that the Parties shall
         be independent contractors and that the relationship between the
         Parties shall not constitute a partnership, joint venture or agency. No
         Party shall have the authority to make any statements, representations
         or commitments of any kind, or to take any action, which shall be
         binding on the other Parties, without the prior consent of such other
         Parties.

10.10    Waiver. The waiver by a Party hereto of any right hereunder or the
         failure to perform or of a breach by another Party shall not be deemed
         a waiver of any other right hereunder or of any other breach or failure
         by said other Party whether of a similar nature or otherwise.

10.11    Counterparts. The Agreement may be executed in two or more
         counterparts, each of which shall be deemed an original, but all of
         which together shall constitute one and the same instrument.

         IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first set forth above.

MERCK & CO., INC.                             ISIS PHARMACEUTICALS, INC.

BY: /s/ Raymond V. Gilmartin                  BY: /s/ B. Lynne Parshall
    --------------------------                    -----------------------------
Name:   Raymond V. Gilmartin                  Name:   B. Lynne Parshall
Title:  Chief Executive Officer              Title:   Executive Vice President

                                       30



<PAGE>   34


                                Research Program

                    Discovery of Inhibitors of HCV Polymerase


Isis' Activities



Isis will prepare ( * ) screening by Merck. SAR studies ( * ) will be performed
on selected compounds. Particular attention will be paid to accelerated
synthesis and purification processes. The following compounds will be
synthesized:

1.    a.   A series of ( * )
      b.   A series of ( * )

      C.   A series of ( * )
      d.   A series of ( * )

2. ( * )

3. ( * )

4. ( * )

5. ( * )

Merck's Activities

A.    Merck chemists at ( * ) will provide support to the modular syntheses at
      Isis by supplying (as agreed by Isis and Merck) pre-weighed samples, with
      structures, of various starting materials from the Merck proprietary
      Sample Collection.

B.    All biochemical and biological studies of ( * ) and its inhibition by
      ( * ) prepared by Isis, which will be directed to the
      identification and optimization of lead compounds, will be performed at
      ( * ) in the Department of Antiviral Research.


                                               *CONFIDENTIAL TREATMENT REQUESTED



<PAGE>   35


                                                       Research Program - Page 2

Biochemical analyses will include:

1. Purification of the ( * ) and any related accessory proteins deemed necessary
   during the course of this collaboration for the catalysis of ( * )

2. Characterization of the ( * ) activity to allow facile design of necessary
   assay protocols for analyses of inhibition;

3. Any kinetic studies when of interest and if necessary. For example,
   investigations of ( * )

Mechanistic studies will include:

1. Determinations of percentage (%) inhibition of ( * ) with use of selected 
   ( * )

2. Determinations of ( * ) for selected ( * ), as determined
   jointly by ( * ) and ISIS, with use of ( * )

3. Determination of mode of inhibition for selected ( * )

4. Counter-screening hits against ( * )

Biological studies will include:

1. Determination of antiviral activity using both a ( * ) (These assays are
   currently in place and can be scaled up to evaluate large numbers of
   compounds as necessary.)

2. Characterization of biological activity on ( * )

3. Optimization and characterization of the ( * )

4. Mechanistic analysis of biological activity including ( * )


                                               *CONFIDENTIAL TREATMENT REQUESTED



<PAGE>   36


                                                         Research Program Page 3

Other biological, biochemical and/or enzymatic analyses for the optimization of
lead ( * ) will also be performed as necessary.



                                               *CONFIDENTIAL TREATMENT REQUESTED




<TABLE> <S> <C>

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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE COMPANY'S
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