UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.)

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Filed by a Party other than the Registrant  o
 
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Preliminary Proxy Statement
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o
Definitive Proxy Statement
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Soliciting Material Pursuant to §240.14a-12

Isis Pharmaceuticals, Inc.
(Name of Registrant as Specified In Its Charter)
 
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
 
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o
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Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.
 


ISIS PHARMACEUTICALS, INC.
2855 Gazelle Court
Carlsbad, CA 92010

NOTICE OF
 
2014 ANNUAL MEETING OF STOCKHOLDERS

Dear Stockholders,

I am pleased to invite you to Isis Pharmaceuticals, Inc.’s 2014 Annual Meeting of Stockholders.  We will host the meeting at our offices in Carlsbad, California on Tuesday, June 10, 2014, at 2:00 p.m. Pacific Time.  This booklet includes the agenda for this year’s Annual Meeting and the Proxy Statement. We will cover the formal items on the agenda during the Annual Meeting. Following the formal Annual Meeting, we will review the major developments of the past year and our plans for 2014, and answer your questions.  The Proxy Statement explains the matters we will discuss in the meeting and provides additional information about us.

Your vote is very important.  Whether or not you plan to attend the meeting, please be sure to vote your shares as soon as possible to ensure your representation at the meeting.  We are distributing our proxy materials under a Securities and Exchange Commission rule that allows us to furnish such material to our stockholders over the Internet rather than in paper form.  We believe this method of distribution reduces our environmental impact and costs without hindering our stockholders’ timely access to such important material. As a result, if you are a stockholder of record (that is, if your stock is registered with us in your own name) you will receive a Notice Regarding the Availability of Proxy Materials in the mail, which contains a control number and instructions that allow you to access our proxy materials and vote electronically through the Internet or to request printed proxy materials so you may vote by telephone or mail.

If your shares are registered in the name of a broker or other nominee, that nominee will forward the Notice Regarding the Availability of Proxy Materials to you and you can direct that nominee to vote your shares. Alternatively, if your nominee participates in a program provided through Broadridge Financial Solutions, Inc. that allows you to vote by telephone or through the Internet, your nominee will send you a voting form with telephone and Internet voting instructions.

If you plan to attend the meeting and prefer to vote in person, you may still do so even if you have already returned your proxy.  In this document, unless the context requires otherwise, the words “Isis,” “Company,” “we,” “our” and “us” refer only to Isis Pharmaceuticals, Inc. and its subsidiaries and not any other person or entity.

PLEASE NOTE, HOWEVER, THAT IF A BROKER, BANK OR OTHER NOMINEE HOLDS YOUR SHARES OF RECORD AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN A PROXY ISSUED IN YOUR NAME FROM THE BROKER, BANK OR OTHER NOMINEE.

We look forward to seeing you at the meeting.
 
 
Sincerely,
 
 
 
B. Lynne Parshall
 
Secretary

ISIS PHARMACEUTICALS, INC.
2855 Gazelle Court
Carlsbad, CA 92010

NOTICE OF 2014 ANNUAL MEETING OF STOCKHOLDERS
 
Date:
Tuesday, June 10, 2014
Time:
2:00 p.m., Pacific Time
Place:
Isis Pharmaceuticals, Inc.
 
2855 Gazelle Court
 
Carlsbad, CA 92010
 
Dear Stockholders,

At our 2014 Annual Meeting, we will ask you to:
 
·
Proposal 1:
elect Spencer R. Berthelsen, B. Lynne Parshall and Joseph H. Wender to serve as Directors for a three-year term;
 
·
Proposal 2:
make an advisory vote, ratifying the appointment of Breaux B. Castleman to fill a vacancy on our Board of Directors for a one-year term;
 
·
Proposal 3:
make an advisory vote, ratifying the appointment of Joseph Loscalzo to fill a vacancy on our Board of Directors for a two-year term;
 
·
Proposal 4:
approve an amendment to the Company’s Restated Certificate of Incorporation to increase the authorized number of shares of Common Stock from 200,000,000 to 300,000,000 shares;
 
·
Proposal 5:
approve an amendment and restatement of our 2002 Non-Employee Directors’ Stock Option Plan to (i) increase the non-discretionary stock option grants for new Directors to 32,000 shares and non-discretionary annual grants to all non-employee Directors to 16,000 shares, with a corresponding RSU award, and (ii) update the provision prohibiting our Board of Directors from repricing or cancelling outstanding options in exchange for cash or other stock awards without obtaining the approval of our stockholders;
 
·
Proposal 6:
make an advisory vote on executive compensation;
 
·
Proposal 7:
ratify the Audit Committee’s selection of Ernst & Young LLP as independent auditors for our 2014 fiscal year; and
 
·
Transact any other business that may be properly presented at the Annual Meeting.
 
The foregoing items of business are more fully described in the enclosed Proxy Statement. If you were an Isis stockholder of record at the close of business on April 11, 2014 you may vote at the Annual Meeting.

 
By order of the Board of Directors,
 
 
 
B. Lynne Parshall
 
Secretary
 
Carlsbad, California
April 29, 2014

ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE VOTE BY TELEPHONE OR INTERNET BY FOLLOWING THE INSTRUCTIONS INCLUDED IN THIS PROXY STATEMENT AND YOUR NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS OR PROXY CARD.  ALTERNATIVELY, YOU MAY REQUEST A WRITTEN PROXY STATEMENT, AND COMPLETE, DATE, SIGN AND RETURN YOUR PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING.  IF YOU RECEIVE YOUR PROXY MATERIALS BY MAIL, WE WILL INCLUDE A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES) FOR THAT PURPOSE.  EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING.  PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE BROKER, BANK OR OTHER NOMINEE A PROXY ISSUED IN YOUR NAME.

ISIS PHARMACEUTICALS, INC.
2855 Gazelle Court
Carlsbad, CA  92010

PROXY STATEMENT

QUESTIONS AND ANSWERS ABOUT THESE PROXY MATERIALS AND VOTING

Why did I receive a Notice Regarding the Availability of Proxy Materials on the Internet?
 
Isis’ Board of Directors (the “Board”) is soliciting your proxy to vote at the 2014 Annual Meeting of Stockholders, including at any adjournments or postponements of the meeting.  We are distributing our Notice of Annual Meeting and Proxy Materials using the Notice and Access procedures established by the United States Securities and Exchange Commission (the “SEC”).  As a result, you received in the mail the Notice Regarding the Availability of Proxy Materials (the “Notice”).  This Notice is important because it contains a control number and instructions that will allow you to access our proxy materials and vote electronically through the Internet or to request printed proxy materials so you may vote by telephone or mail.  Your vote is very important.  Whether or not you plan to attend the meeting, please be sure to vote your shares as soon as possible to ensure your representation at the meeting.
 
We intend to mail the Notice on or about April 29, 2014 to all stockholders of record entitled to vote at the Annual Meeting.
 
Will I receive any other proxy materials by mail?
 
We may choose to send you a proxy card, along with a second Notice, on or after May 9, 2014.
 
Where and when is the Annual Meeting and how do I attend?
 
We will hold the meeting on Tuesday, June 10, 2014, at 2:00 p.m. Pacific Time at our offices located at 2855 Gazelle Court, Carlsbad, California 92010.  You may find directions to the Annual Meeting at www.isispharm.com.1  We discuss below information on how to vote in person at the Annual Meeting.
 
If you cannot attend, please note that we will make a webcast of the presentation that follows the Annual Meeting available on the day of the meeting and for a limited time following the meeting at www.isispharm.com.1
 
If you plan to attend the meeting and prefer to vote in person, you may still do so even if you have already returned your proxy. 
 
Who can vote at the Annual Meeting?
 
Only stockholders of record at the close of business on April 11, 2014 may vote at the Annual Meeting.  On this record date, there were 117,555,909 shares of common stock outstanding and entitled to vote.
 
Stockholder of Record:  Shares Registered in Your Name
 
If on April 11, 2014 your shares were registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, then you are a stockholder of record.  As a stockholder of record, you may vote in person at the meeting or vote by proxy over the telephone or the Internet as instructed under the section below titled “How do I vote?”  Whether or not you plan to attend the meeting, we urge you to fill out and return the proxy card or vote over the telephone or Internet to ensure your vote is counted.
 

1 Any information that is included on or linked to our website is not part of this Proxy Statement or any registration statement or report that incorporates this Proxy Statement by reference.
1

Beneficial Owner: Shares Registered in the Name of a Broker or Bank
 
If on April 11, 2014 your shares were not held in your name, but rather in an account at a brokerage firm, bank, dealer or other similar organization, then you are the beneficial owner of shares held in “street name” and that organization is forwarding the Notice to you.  The organization holding your account is considered to be the stockholder of record for purposes of voting at the Annual Meeting.  As a beneficial owner, you may direct your broker or other agent regarding how to vote the shares in your account.  If your shares are registered in the name of a broker or other nominee, your nominee may be participating in a program provided through Broadridge Financial Solutions, Inc. (“Broadridge”) that also allows you to vote by telephone or through the Internet.  If so, the voting form your nominee sends you will provide telephone and Internet instructions.  You are also invited to attend the Annual Meeting in person.
 
PLEASE NOTE, HOWEVER, THAT IF A BROKER, BANK OR OTHER NOMINEE HOLDS YOUR SHARES OF RECORD AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN A PROXY ISSUED IN YOUR NAME FROM THE BROKER, BANK OR OTHER NOMINEE.
 
What am I voting on?
 
There are seven matters scheduled for a vote:
 
 
·
Proposal 1:
elect Spencer R. Berthelsen, B. Lynne Parshall and Joseph H. Wender to serve as Directors for a three-year term;
 
 
·
Proposal 2:
make an advisory vote, ratifying the appointment of Breaux B. Castleman to fill a vacancy on our Board of Directors for a one-year term;
 
 
·
Proposal 3:
make an advisory vote, ratifying the appointment of Joseph Loscalzo to fill a vacancy on our Board of Directors for a two-year term;
 
 
·
Proposal 4:
approve an amendment to the Company’s Restated Certificate of Incorporate to increase the authorized number of shares of Common Stock from 200,000,000 to 300,000,000 shares;
 
 
·
Proposal 5:
approve an amendment and restatement of our 2002 Non-Employee Directors’ Stock Option Plan to (i) increase the non-discretionary stock option grants for new Directors to 32,000 shares and non-discretionary annual grants to all non-employee Directors to 16,000 shares, with a corresponding RSU award, and (ii) update the provision prohibiting our Board from repricing or cancelling outstanding options in exchange for cash or other stock awards without obtaining the approval of our stockholders;
 
 
·
Proposal 6:
make an advisory vote on executive compensation; and
 
 
·
Proposal 7:
ratify the Audit Committee’s selection of Ernst & Young LLP as independent auditors for our 2014 fiscal year.
 
What if another matter is properly brought before the meeting?
 
The Board knows of no other matters that will be presented for consideration at the Annual Meeting.  If any other matters are properly brought before the meeting, the persons named in the accompanying proxy intend to vote on those matters in accordance with their best judgment.
 
How do I vote?
 
You may vote in one of the following ways:
 
· vote through the Internet by following the instructions included with your Notice or proxy card;
 
· if you have received proxy materials electronically or by mail, you may vote by telephone by following the instructions included with your proxy card;
 
· complete, sign, date and return your proxy card in the postage paid envelope provided; or
 
· attend the 2014 Annual Meeting and vote in person.
2

The procedures for voting are fairly simple:
 
For Shares Registered in Your Name:
 
If you are a stockholder of record, you may go to www.proxyvote.com to vote your shares through the Internet.  The votes represented by your proxy will be displayed on the computer screen and you will be prompted to submit or revise your votes as desired.
 
To vote your shares by telephone, you must first request that we send proxy materials to you by following the instructions included in your Notice.  Once you have received your proxy materials, you may vote using a touch-tone telephone by calling 1-800-690-6903 and following the recorded instructions.  Please have your proxy card available at the time you vote.
 
For Shares Registered in the Name of a Broker or Bank:
 
If your broker or bank holds your shares in “street name,” you will need to obtain a proxy form from the institution that holds your shares and follow the instructions included on that form regarding how to instruct your broker to vote your shares.  If you do not give instructions to your broker, your broker can vote your shares with respect to “discretionary” items, but not with respect to “non-discretionary” items.  Discretionary items are proposals considered routine under the rules of the New York Stock Exchange on which a broker may vote shares held in street name in the absence of your voting instructions.  The proposal to ratify Ernst & Young LLP as independent auditors is a discretionary item.  Proposals 1-6 regarding the election of Directors, ratification, on an advisory basis, of the appointment of each of Mr. Castleman and Dr. Loscalzo to fill vacancies on the Board, approval of an amendment to our Restated Certificate of Incorporation to increase the authorized number of shares of Common Stock, approval of an amendment and restatement of the 2002 Non-Employee Directors’ Stock Option Plan and approval, on an advisory basis, of our executive compensation are non-discretionary items.  If you do not give your broker instructions for a non-discretionary item, the inspector of elections will treat your shares as broker non-votes.
 
A number of brokers and banks are participating in a program provided by Broadridge which allows proxies to vote shares by means of the telephone and Internet.  If your shares are held in an account with a broker or bank participating in the Broadridge program, you may vote your shares by telephone or through the Internet by having the voting form in hand and calling the number or going to the website indicated on the form and following the instructions.
 
What if I return a proxy card or otherwise vote but do not make specific choices?
 
If you return a signed and dated proxy card or otherwise vote without marking voting selections, your proxyholder (one of the individuals named on your proxy card) will vote your shares as follows:
 
· “For” the election of the nominees for Director named in the Proxy Statement;
 
· “For” the ratification, on an advisory basis, of the appointment of Mr. Castleman to fill a vacancy on our Board for a one-year term;
 
· “For” the ratification, on an advisory basis, of the appointment of Dr. Loscalzo to fill a vacancy on our Board for a two-year term;
 
· “For” the approval of the amendment to our Restated Certificate of Incorporation to increase the authorized number of shares of Common Stock;
 
· “For” the approval of the amendment and restatement of the 2002 Non-Employee Directors’ Stock Option Plan;
 
· “For” the approval, on an advisory basis, of executive compensation; and
 
· “For” the ratification of the Audit Committee’s selection of Ernst & Young LLP as independent auditors for our 2014 fiscal year.
 
If any other matter is properly presented at the meeting, your proxyholder (one of the individuals named on your proxy card) will vote your shares using his or her best judgment.
3

Who is paying for this proxy solicitation?
 
Our Board is soliciting your proxy to vote at the Annual Meeting.  We will bear the entire cost of soliciting proxies, including preparing, assembling, making available on the Internet and printing and mailing this Proxy Statement, the proxy card and any additional information furnished to stockholders.  We will furnish copies of solicitation materials to banks, brokerage houses, fiduciaries and custodians holding our common stock in “street name” on behalf of beneficial owners of such shares.  We may reimburse persons representing beneficial owners of our common stock for their costs of forwarding solicitation materials to such beneficial owners.  Our Directors, officers or other employees may supplement original solicitation of proxies by telephone, electronic mail or personal solicitation.  We will not pay our Directors, officers or employees any additional compensation for soliciting proxies.  We have engaged Alliance Advisors LLC to render solicitation services, and will pay Alliance its customary fee, which we estimate to be about $14,000.  However, please be aware that you must bear any costs associated with your Internet service, such as usage charges from Internet access providers or telephone companies.
 
What does it mean if I receive more than one Notice?
 
If you receive more than one Notice or proxy card, your shares are registered in more than one name or are registered in different accounts.  Please complete, sign, date and return each separate proxy card or vote by telephone or through the Internet by following the instructions included with each Notice or proxy card to properly vote your shares.
 
Can I change my vote after submitting my proxy?
 
Yes.  Once you have submitted your proxy by mail, Internet or telephone, you may revoke it at any time before we exercise it at the Annual Meeting.  You may revoke your proxy by any one of the following four ways:
 
· you may mail another proxy marked with a later date;
 
· you may revoke it through the Internet;
 
· you may notify our Secretary in writing sent to 2855 Gazelle Court, Carlsbad, California 92010 that you wish to revoke your proxy before the Annual Meeting takes place; or
 
· you may vote in person at the Annual Meeting.  Attendance at the meeting will not, by itself, revoke a proxy.
 
When are stockholder proposals due for next year’s Annual Meeting?
 
If you have a proposal or Director nomination that you would like us to include in our Proxy Statement and form of proxy for, or to present at the 2015 Annual Meeting of Stockholders, you must send the proposal to us by no later than December 30, 2014.  Stockholders wishing to submit proposals or Director nominations that are not to be included in such Proxy Statement and form of proxy must do so no later than the close of business on February 10, 2015.  Stockholders should also review our bylaws, which contain additional requirements with respect to advance notice of stockholder proposals and Director nominations.
 
What is the quorum requirement?
 
A quorum of stockholders is necessary to hold a valid meeting.  A quorum will be present at the meeting if at least a majority of the outstanding shares are represented in person or by proxy.  We will count your shares towards the quorum only if you submit a valid proxy vote or vote at the meeting.  We will count abstentions and broker non-votes towards the quorum requirement.
 
If there is no quorum, the holders of a majority of shares present at the meeting in person or represented by proxy may adjourn the meeting to another date.
4

How are votes counted?
 
Each share of our common stock that you own entitles you to one vote.  Your Notice and proxy card indicates the number of shares of our common stock that you owned at the close of business on April 11, 2014.  The inspector of elections will count votes for the meeting, and will separately count “For” and “Against” votes, abstentions, and broker non-votes.  With respect to Proposal 1, the election of Directors, stockholders do not affirmatively vote “Against” nominees.  Instead, if you do not want to elect a particular nominee, you may simply withhold your “For” vote.  Abstentions will have no effect on Proposal 1. Abstentions will count towards the vote total for Proposals 2-7 and, in each case, will have the same effect as “Against” votes.  Broker non-votes have no effect and the inspector of elections will not count them towards the vote total for any proposal, except for Proposal 4, the amendment to our Restated Certificate of Incorporation, in which case broker non-votes will have the same effect as an “Against” vote.
 
What are “broker non-votes”?
 
Broker non-votes occur when a beneficial owner of shares held in “street name” does not give instructions to the broker or nominee holding the shares as to how to vote on matters deemed “non-routine.”  If your broker holds your shares in “street name,” and you do not give instructions to your broker, your broker can vote your shares with respect to “discretionary” items, but not with respect to “non-discretionary” items.  Discretionary items are proposals considered routine under the rules of the New York Stock Exchange on which a broker may vote shares held in street name in the absence of your voting instructions.  The proposal to ratify Ernst & Young LLP as independent auditors is a discretionary item.  Proposals 1-6 regarding the election of Directors, ratification, on an advisory basis, of the appointment of each of Mr. Castleman and Dr. Loscalzo to fill vacancies on the Board, approval of an amendment to our Restated Certificate of Incorporation to increase the authorized number of shares of Common Stock, approval of an amendment and restatement of the 2002 Non-Employee Directors’ Stock Option Plan and approval, on an advisory basis, of our executive compensation are non-discretionary items. If you do not give your broker instructions for a non-discretionary item, the inspector of elections will treat your shares as broker non-votes.
 
How many votes are needed to approve each proposal?
 
· Proposal 1: For the election of Directors in an uncontested election, a Director nominee must receive a majority of the votes cast in person or by proxy in the election such that the number of shares voted “For” the nominee must exceed 50% of the votes cast with respect to that Director.  Only “For” and “Withhold” votes will affect the outcome.  Abstentions and broker non-votes will have no effect.
 
· Proposal 2: We will consider the advisory vote on the ratification of the appointment of Mr. Castleman to fill a vacancy on the Board to be approved if such ratification receives “For” votes from the holders of a majority of shares either present in person or represented by proxy and entitled to vote. If you “Abstain” from voting, it will have the same effect as an “Against” vote.  Broker non-votes will have no effect.
 
· Proposal 3: We will consider the advisory vote on the ratification of the appointment of Dr. Loscalzo to fill a vacancy on the Board to be approved if such ratification receives “For” votes from the holders of a majority of shares either present in person or represented by proxy and entitled to vote. If you “Abstain” from voting, it will have the same effect as an “Against” vote.  Broker non-votes will have no effect.
 
· Proposal 4: To be approved, the amendment to our Restated Certificate of Incorporation to increase the authorized number of shares of Common Stock must receive “For” votes from the holders of a majority of our shares outstanding as of the record date.  If you mark your proxy to “Abstain” from voting, it will have the same effect as an “Against” vote.  Broker non-votes will also have the same effect as “Against” votes.
 
· Proposal 5: To be approved, the amendment of our 2002 Non-Employee Directors’ Stock Option Plan must receive “For” votes from the holders of a majority of shares either present in person or represented by proxy and entitled to vote.  If you mark your proxy to “Abstain” from voting, it will have the same effect as an “Against” vote.  Broker non-votes will have no effect.
 
· Proposal 6: We will consider the advisory approval of the compensation of our executive officers to be approved if it receives “For” votes from the holders of a majority of shares either present in person or represented by proxy and entitled to vote. If you “Abstain” from voting, it will have the same effect as an “Against” vote.  Broker non-votes will have no effect.
 
· Proposal 7: To be approved, the ratification of the selection of Ernst & Young LLP as our independent auditors for our 2014 fiscal year, must receive “For” votes from the holders of a majority of shares present in person or by proxy and entitled to vote.  If you “Abstain” from voting, it will have the same effect as an “Against” vote.  Broker non-votes will have no effect.
5

How can I find out the results of the voting at the Annual Meeting?
 
We will announce preliminary voting results at the Annual Meeting.  In addition, we will publish final voting results in a current report on Form 8-K that we expect to file within four business days after the Annual Meeting.  If final voting results are not available to us in time to file with a Form 8-K within four business days after the Annual Meeting, we intend to file a Form 8-K to publish preliminary results and, within four business days after we know the final results, file an additional Form 8-K to publish final results.
 
How can I elect to receive materials for future Annual Meetings electronically?
 
We are pleased to offer to our stockholders the benefits and convenience of electronic delivery of Annual Meeting materials, including:
 
· delivering the Proxy Statement, Annual Report and related materials by email to our stockholders;
 
· stockholder voting online;
 
· helping the environment by decreasing the use of paper documents;
 
· reducing the amount of bulky documents stockholders receive; and
 
· reducing our printing and mailing costs associated with more traditional delivery methods.
 
We encourage you to conserve natural resources and to reduce printing and mailing costs by signing up for electronic delivery of our stockholder communications after you place your current vote at www.proxyvote.com.
6

PROPOSAL 1

ELECTION OF DIRECTORS
 
Information about our Board

The Board is divided into three classes.  Presently, the Board has eight members with two classes consisting of three Directors each and one class consisting of two Directors.  Each class serves a three-year term and we hold elections each year at the Annual Meeting to elect the Directors whose terms are expiring.

In addition, the Board may elect a new Director to fill any vacant spot, including a vacancy caused by an increase in the size of the Board.  However, the Board believes it is important for our stockholders to ratify any member of the Board who the Board appoints.  As a result, whenever the Board appoints a new member, the Board will submit such new member’s directorship for ratification at the next regularly scheduled Annual Meeting of Stockholders.
 
The Board represents the interests of our stockholders by overseeing the Chief Executive Officer and other members of senior management in our operation.  The Board’s goal is to optimize long-term value by providing guidance and strategic oversight to Isis’ management on our stockholders’ behalf.

Information about the 2014 Elections

The Board has nominated three individuals for election at the 2014 Annual Meeting.  Each of the nominees currently serves as one of our Directors.  Dr. Berthelsen, Ms. Parshall and Mr. Wender have served as a Director since May 2002, September 2000 and January 1994, respectively, and have been re-elected by our stockholders each successive term.  If re-elected, Dr. Berthelsen, Ms. Parshall and Mr. Wender will serve until the 2017 Annual Meeting or, in each case, until his or her successor is elected and has qualified, or until his or her earlier death, resignation or removal. 

On December 13, 2011, the Board, upon recommendation of the Nominating, Governance and Review Committee, adopted our Amended and Restated Bylaws to, among other things, adopt a majority vote standard for the election of directors in uncontested elections.  The majority vote standard provides that to be elected, in an uncontested election, a director nominee must receive a majority of the votes cast in the election such that the number of shares voted “for” the nominee must exceed 50% of the votes cast with respect to that Director.  The number of votes cast with respect to a Director’s election excludes abstentions and broker non-votes with respect to that Director’s election.  In contested elections where the number of nominees exceeds the number of Directors to be elected, the vote standard will be a plurality of the shares present in person or by proxy and entitled to vote.

If a nominee who already serves as a Director is not elected, and no successor is elected, the Director will offer to tender his or her resignation to the Board. The Nominating, Governance and Review Committee will make a recommendation to the Board on whether to accept or reject the resignation, or whether to take other action. The Board will act on the Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date of the certification of the election results. The Director who tenders his or her resignation will not participate in the recommendation of the Nominating, Governance and Review Committee or in the Board’s decision. If a nominee’s failure to be elected at the Annual Meeting results in a vacancy on the Board, then the Board can fill the vacancy.

The Nominating, Governance and Review Committee delivered its report to the Board on February 11, 2014.  Following that report, the Board determined it would be in the best interests of Isis and its stockholders to nominate Dr. Berthelsen, Ms. Parshall, and Mr. Wender to be elected as Directors at the Annual Meeting.  We provide below a short biography for each nominee.  Dr. Berthelsen, Ms. Parshall, and Mr. Wender have agreed to serve if elected, and we have no reason to believe that they cannot serve.  However, if they cannot serve, we may vote your proxy for another nominee proposed by the Board, or the Board may reduce the number of authorized Directors.

7

Biographies of the Nominees for Election for a Three-Year Term Expiring at the 2017 Annual Meeting

Spencer R. Berthelsen, M.D., age 62, has served as a Director of Isis since May 2002.  Since 1980, he has practiced Internal Medicine with the Kelsey Seybold Clinic, a 370 physician medical group based in the Texas Medical Center in Houston.  Dr. Berthelsen has served in various senior leadership positions at Kelsey Seybold, including Chairman of the Department of Internal Medicine, Medical Director and Managing Director.  He has been Chairman of their Board of Directors since October 2001.  He has served as a Clinical Professor of Medicine at Baylor College of Medicine and the University of Texas Health Science Center of Houston.  Dr. Berthelsen served on the board of the Texas Academy of Internal Medicine in the past and the Caremark National Pharmacy and Therapeutics Committee from 1999 through 2005.

The Board believes Dr. Berthelsen is uniquely suited to serve on the Board because of his current position managing a large multi-specialty group practice and 32 years of experience as a practicing physician.

B. Lynne Parshall, age 59, has served as a Director of Isis since September 2000.  She has been our Chief Operating Officer since December 2007 and previously served as our Chief Financial Officer from June 1994 through December 31, 2012.  She also serves as our Corporate Secretary, and has served with the Company in various executive roles since November 1991.  Prior to joining Isis, Ms. Parshall practiced law at Cooley LLP, outside counsel to Isis, where she was a partner from 1986 to 1991.  Ms. Parshall is a member of the American, California and San Diego bar associations.  Ms. Parshall serves on the board of directors of Regulus Therapeutics, Inc. and Cytokinetcs Inc., two biopharmaceutical companies.  Within the last five years, Ms. Parshall formerly served as a Director of CardioDynamics International Corporation and Corautus Genetics Inc., both biopharmaceutical companies.

The Board believes Ms. Parshall is uniquely suited to serve on the Board primarily because, as the Chief Operating Officer and an executive of the Company for nearly 20 years, she has valuable Company-specific experience and expertise.  In addition, Ms. Parshall has over 25 years of experience structuring and negotiating strategic licensing and financing transactions in the life sciences field.

Joseph H. Wender, age 69, has served as a Director of Isis since January 1994.  Mr. Wender began with Goldman, Sachs & Co. in 1971 and became a General Partner of that firm in 1982, where he headed the Financial Institutions Group for over a decade.  Since January 2008, he has been a Senior Consultant to Goldman Sachs & Co.  He is also an Independent Trustee of the Schwab Family of Funds and Director of Grandpoint Capital, a bank holding company.  Mr. Wender also is a managing partner and owns, with his wife, Colgin Cellars. As of March 2014, Mr. Wender is a director of CBS Outdoors America Inc., lessors of advertising space on out-of-home advertising structures.

The Board believes Mr. Wender is uniquely suited to serve on the Board primarily because, with over 35 years of experience as an investment banker with Goldman, Sachs & Co., he provides Isis important advice regarding our financial reporting, corporate finance matters, strategic transactions, and compensation matters.  Mr. Wender is also highly qualified to serve on the Audit Committee.
 
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION OF THE ABOVE NOMINEES.

Biographies of the Directors Whose Terms Expire at the 2015 Annual Meeting

Frederick T. Muto, age 60, has served as a Director of Isis since March 2001.  Mr. Muto joined the law firm of Cooley LLP, outside counsel to Isis, in 1980 and became a partner in 1986.  He is Chair of the firm’s Business Department and a founding partner of Cooley LLP’s San Diego office.

The Board believes Mr. Muto is uniquely suited to serve on the Board primarily because, with nearly 35 years of experience at one of the country’s leading law firms focused on life sciences and technology companies, he provides us important advice regarding our strategic transactions, corporate governance and compensation matters.

8

Breaux B. Castleman, age 73, has served as a Director of Isis since June 2013.  Since August 2001, Mr. Castleman has been president and chief executive officer of Syntiro Healthcare Services, Inc., a health care investment company, which recently sold its operations as a service provider of integrated care management and disease management.  Mr. Castleman has been a director of USMD Holdings, Inc., a physician-led integrated healthcare system, since September 2009 and was a director of MELA Sciences, Inc., a medical device company,  from 2003 until 2011.

The Board believes that Mr. Castleman is uniquely suited to serve on the Board and the Audit Committee because he has significant experience in strategic planning and financial engineering for Fortune 1000 companies and has financial advisory expertise in the life sciences industry.

Biographies of the Directors Whose Terms Expire at the 2016 Annual Meeting

Stanley T. Crooke, M.D., Ph.D., age 69, is a founder of Isis and has been Chief Executive Officer and a Director since January 1989.  He was elected Chairman of the Board in February 1991.  Prior to founding Isis, from 1980 until January 1989, Dr. Crooke worked for SmithKline Beckman Corporation, a pharmaceutical company, where his titles included President of Research and Development of SmithKline and French Laboratories.

The Board believes Dr. Crooke is uniquely suited to serve on the Board primarily because as the Chief Executive Officer and founder of Isis he has dedicated nearly 25 years to the discovery and development of antisense, our technology platform.  He is the named inventor on some of the key patents in the field of RNA-targeted therapeutics, and has over 30 years of drug discovery and development experience.

Joseph Klein, III, age 53, has served as a Director of Isis since December 2005.  Mr. Klein is currently Managing Director of Gauss Capital Advisors, LLC, a financial consulting and investment advisory firm focused on biopharmaceuticals, which he founded in March 1998.  From September 2003 to December 2008, Mr. Klein also served as a Venture Partner of Red Abbey Venture Partners, L.P., a life science private equity fund.  From September 2001 to September 2002, Mr. Klein was a Venture Partner of MPM Capital, a healthcare venture capital firm.  From June 1999 to September 2000 when it merged with WebMD Corporation, Mr. Klein served as Vice President, Strategy, for Medical Manager Corporation, a leading developer of physician office management information systems.  For over nine years from 1989 to 1998, Mr. Klein was a health care investment analyst at T. Rowe Price Associates, Inc., where he was the founding portfolio manager of the T. Rowe Price Health Sciences Fund, Inc.  Mr. Klein serves on the board of directors of The Prospector Funds, Inc., an SEC Registered Investment Company that manages two no-load mutual funds.  Mr. Klein also serves on the boards of private and non-profit entities.  Within the last five years, Mr. Klein formerly served on the board of directors of five publicly held biotechnology companies:  BioMarin Pharmaceutical Inc., NPS Pharmaceuticals, Inc., OSI Pharmaceuticals, Inc., PDL BioPharma, Inc. and Savient Pharmaceuticals, Inc.

The Board believes that Mr. Klein is uniquely suited to serve on the Board and the Audit Committee because he is a Chartered Financial Analyst, and because he has extensive public company, venture investment, board, and financial advisory expertise in the life sciences industry.

Joseph Loscalzo, age 62, is Hersey Professor of the Theory and Practice of Medicine at Harvard Medical School, Chairman of the Department of Medicine, and Physician-in-Chief at Brigham and Women’s Hospital. Dr. Loscalzo received his A.B. degree, summa cum laude, his Ph.D. in biochemistry, and his M.D. from the University of Pennsylvania. His clinical training was completed at Brigham and Women’s Hospital and Harvard Medical School, where he served as Resident and Chief Resident in medicine and Fellow in cardiovascular medicine. Post-training, Dr. Loscalzo joined the Harvard faculty and staff at Brigham and Women’s Hospital in 1984. He rose to the rank of Associate Professor of Medicine, Chief of Cardiology at the West Roxbury Veterans Administration Medical Center, and Director of the Center for Research in Thrombolysis at Brigham and Women’s Hospital. He joined the faculty of Boston University in 1994, first as Chief of Cardiology and, in 1997, Wade Professor and Chair of Medicine, Professor of Biochemistry, and Director of the Whitaker Cardiovascular Institute. He returned to Harvard and Brigham and Women’s Hospital in 2005.

The Board believes Dr. Loscalzo is uniquely suited to serve on the Board primarily because of his extensive scientific expertise, including 25 years of research in the areas of vascular biology, thrombosis, and atherosclerosis, and practical knowledge as a practicing physician. Dr. Loscalzo’s expertise and role as a leading cardiologist is particularly valuable as we mature and grow our cardiovascular franchise.
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PROPOSAL 2

ADVISORY VOTE TO RATIFY THE APPOINTMENT OF MR. CASTLEMAN

This Proposal 2 vote is to ratify the appointment of Mr. Castleman to the Board. Mr. Castleman was nominated to join the Board by our Nominating, Governance and Review Committee and was unanimously appointed to the Board on June 25, 2013.  Mr. Castleman was appointed to fill a vacancy in a class of Directors whose term expires at the 2015 Annual Meeting because our Certificate of Incorporation requires that as nearly as possible, each class is to consist of one third of the number of Directors. However, the Board believes that, in keeping with our commitment to good corporate governance practices, it is important for our stockholders to ratify, on an advisory basis, any member of the Board who the Board appoints.  As a result, the Board submitted Mr. Castleman’s directorship for ratification, on an advisory basis, at the Annual Meeting.

This Proposal 2 vote is advisory and therefore is not binding on Isis or the Board. However, the Board and Nominating, Governance and Review Committee value the opinions of the stockholders.  As such, if less than a majority of shares either present in person or represented by proxy and entitled to vote at the Annual Meeting approve the ratification of Mr. Castleman’s appointment to the Board, then the Nominating, Governance and Review Committee will make a recommendation to the Board on whether to request Mr. Castleman to tender his resignation or take other action. The Board will act on the Nominating, Governance and Review Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date of the certification of the election results. If the Nominating, Governance and Review Committee recommends that the Board request Mr. Castleman’s resignation, Mr. Castleman will not participate in the recommendation of the Nominating, Governance and Review Committee or in the Board’s decision.

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF MR. CASTLEMAN.

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PROPOSAL 3

ADVISORY VOTE TO RATIFY THE APPOINTMENT OF DR. LOSCALZO

This Proposal 3 vote is to ratify the appointment of Dr. Loscalzo to the Board. Dr. Loscalzo was nominated to join the Board by our Nominating, Governance and Review Committee and was unanimously appointed to the Board on February 3, 2014.  Dr. Loscalzo was appointed to fill a vacancy in a class of Directors whose term expires at the 2016 Annual Meeting because our Certificate of Incorporation requires that as nearly as possible, each class is to consist of one third of the number of Directors. However, the Board believes that, in keeping with our commitment to good corporate governance practices, it is important for our stockholders to ratify, on an advisory basis, any member of the Board who the Board appoints.  As a result, the Board submitted Dr. Loscalzo’s directorship for ratification, on an advisory basis, at the Annual Meeting.

This Proposal 3 vote is advisory and therefore is not binding on Isis or the Board. However, the Board and Nominating, Governance and Review Committee value the opinions of the stockholders.  As such, if less than a majority of shares either present in person or represented by proxy and entitled to vote at the Annual Meeting approve the ratification of Dr. Loscalzo’s appointment to the Board, then the Nominating, Governance and Review Committee will make a recommendation to the Board on whether to request Dr. Loscalzo to tender his resignation or take other action. The Board will act on the Nominating, Governance and Review Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date of the certification of the election results. If the Nominating, Governance and Review Committee recommends that the Board request Dr. Loscalzo’s resignation, Dr. Loscalzo will not participate in the recommendation of the Nominating, Governance and Review Committee or in the Board’s decision.

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF DR. LOSCALZO.

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INFORMATION REGARDING THE BOARD AND CORPORATE GOVERNANCE

Independence of the Board

As required under The NASDAQ Stock Market (“NASDAQ”) listing standards, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by our Nominating, Governance and Review Committee of the Board.  Our Nominating, Governance and Review Committee consults with our legal counsel to ensure that the Board’s determinations are consistent with all relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in the applicable NASDAQ listing standards and applicable SEC rules and regulations, as in effect from time to time.

Consistent with these considerations, after review of all relevant transactions or relationships between each Director, or any of his or her family members, and Isis, its senior management and its independent auditors, the Board affirmatively has determined that all of our Directors are independent Directors within the meaning of the applicable NASDAQ listing standards and SEC rules and regulations, except for Dr. Crooke and Ms. Parshall, our Chief Executive Officer and Chief Operating Officer, respectively.  In making this determination, the Board found that none of these Directors or nominees for Director has a material or other disqualifying relationship with us.  With respect to Mr. Muto who is a partner of Cooley LLP, our outside legal counsel, he is independent for purposes other than serving on the Audit Committee or Compensation Committee, of which he is not a member.

Information Regarding the Board and its Committees

Leadership Structure

Our Chief Executive Officer is the Chairman of the Board.  The Board believes that Isis’ CEO is best suited to serve as Chairman because he has served as CEO since Isis was formed 25 years ago and he is the Director most familiar with our science, business and industry.  Because of that experience, he is the Director most capable of effectively identifying strategic priorities and leading the discussion and execution of strategy.  Our independent Directors bring experience, oversight and expertise from outside Isis and industry, while the CEO brings Company-specific experience and expertise.  The Board believes that the combined role of Chairman and CEO promotes strategy development and execution, and facilitates information flow between management and the Board, which are essential to effective governance.

One of the key responsibilities of the Board is to develop strategic direction and hold management accountable for executing the established strategy.  As part of each Board meeting, our independent Directors meet in executive session without the presence of our employee Directors.  We do not formally have a single “lead independent director.”  Instead the Chairpersons of the Audit Committee, the Compensation Committee, and the Nominating, Governance and Review Committee on a rotating basis preside over the executive sessions.  This rotating approach provides added balance to the process, thereby ensuring healthy discussion since the same individual does not continuously lead each executive session.  In addition, Dr. Loscalzo and Mr. Muto (who are both independent Board members) are part of the Agenda Committee, which sets the agenda for each Board meeting.  The Board believes the combined role of Chairman and CEO, together with the executive sessions and agenda setting described above, is in the best interest of stockholders because it provides the appropriate balance between developing strategy and independently overseeing management.

Risk Oversight

Our Board administers its risk oversight function directly and through both its Audit Committee and its Nominating, Governance and Review Committee.  The Audit Committee oversees management of financial risks and related party transactions.  The Nominating, Governance and Review Committee manages risks associated with the independence of the Board and potential conflicts of interests at the Board level, and periodically reviews our policies and procedures, and makes recommendations when appropriate.  We provide a complete description of each of these committees and its respective roles and responsibilities on pages 13 through 18 of this Proxy Statement.  While each of these committees is responsible for evaluating certain risks and overseeing the management of such risks, these committees regularly inform the entire Board about such risks through committee reports.

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In addition to the formal compliance program, the Board, the Audit Committee and the Nominating, Governance and Review Committee encourage management to promote a corporate culture that understands risk management and incorporates it into the overall corporate strategy and day-to-day business operations.  Our risk management structure also includes an ongoing effort to assess and analyze the most likely areas of future risk for Isis.  As a result, the Board, the Audit Committee, the Nominating, Governance and Review Committee and the Scientific/Medical Committee periodically ask our executives to discuss the most likely sources of material future risks and how we are addressing any significant potential vulnerability.

Board Committees

The Board has five committees:  an Audit Committee, a Compensation Committee, a Nominating, Governance and Review Committee, an Agenda Committee and a Scientific/Medical Committee.  Below is a description of each committee of our Board.  Each of the committees has authority to engage legal counsel or other experts or consultants as it deems appropriate to carry out its responsibilities.  The Board has determined that each member of our Audit Committee, Compensation Committee, and Nominating, Governance and Review Committee:
 
· meets the applicable rules and regulations regarding “independence,” including, but not limited to, Rule 5605(a)(2) of the NASDAQ listing standards and applicable SEC rules and regulations;
 
· is not an officer or employee of Isis; and
 
· is free of any relationship that would interfere with his individual exercise of independent judgment with regard to Isis.

Meetings and Attendance; Committee Members

The Board met five times in 2013.  During 2013, all Directors attended 100% of the meetings of the Board except Dr. Berthelsen and Mr. Klein who attended 80% of the meetings.  In addition, all Directors attended 100% of the meetings of the Board committees on which they served.  We encourage each member of the Board to attend the Annual Meeting of Stockholders.
 
Board Committee Members

The table below provides membership and meeting information for fiscal 2013 for each of the Board committees. Our Scientific/Medical Committee was formally established in 2014 and, therefore, did not meet during fiscal 2013.
 
Name
Audit
Compensation
Nominating, Governance and Review
Agenda
Attended 2013 Annual Meeting
Dr. Spencer R. Berthelsen
--
X*
X*
--
X
Mr. Breaux B. Castleman
X(1)
--
--
--
X
Dr. Stanley T. Crooke
--
--
--
X
X
Mr. Joseph Klein
X
--
--
--
X
Dr. Joseph Loscalzo(2)
--
--
--
--
N/A
Mr. Frederick T. Muto(3)
--
--
--
X
--
Ms. B. Lynne Parshall
--
--
--
X
X
Dr. John C. Reed(4)
--
X
--
--
--
Mr. Joseph H. Wender
X*
X
X
X
--
Total meetings in fiscal year 2013
4
5(5)
3
4
 
                                                      

*    Committee Chairperson
 
(1) Mr. Castleman was appointed to the Audit Committee, replacing Dr. Berthelsen, at the September 2013 Board meeting.
(2) Dr. Loscalzo was appointed to the Board on February 3, 2014.
(3) Mr. Muto serves as counsel, in a non-voting capacity, to the Nominating, Governance and Review Committee and as an advisor to the Compensation Committee.
(4) On February 12, 2013, Dr. Reed resigned as a member of the Board due to his commitments as Head of Roche Pharma Research and Early Development and as a member of Roche’s Corporate Executive Committee.  Mr. Wender replaced Dr. Reed as a member of the Nominating, Governance and Review Committee.
(5) The Compensation Committee also acted by written consent 12 times.  Our Compensation Committee acts by unanimous written consent each month to confirm stock options and RSUs granted in connection with new hires and promotions.
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The table below identifies our current Board and committee members.
 
Name
Audit
Compensation
Nominating, Governance and Review
Agenda
Science/ Medical
Dr. Spencer R. Berthelsen
--
X*
X*
--
X
Mr. Breaux B. Castleman
X
--
X
--
--
Dr. Stanley T. Crooke
--
--
--
X
X*
Mr. Joseph Klein
X
--
--
--
--
Dr. Joseph Loscalzo
--
--
--
X
X
Mr. Frederick T. Muto
--
--
--
X
--
Ms. B. Lynne Parshall
--
--
--
X
--
Mr. Joseph H. Wender
X*
X
X
--
--
                                                      

*    Committee Chairperson
 
Audit Committee

The Audit Committee of the Board oversees our corporate accounting and financial reporting process.  For this purpose, the Audit Committee performs several functions.
 
The Audit Committee:
 
· reviews the annual and quarterly financial statements and oversees the annual and quarterly financial reporting processes, including sessions with the auditors in which Isis’ employees and management are not present;
 
· selects and hires our independent auditors;
 
· oversees the independence of our independent auditors;
 
· evaluates our independent auditors’ performance; and
 
· has the authority to hire its own outside consultants and advisors, if necessary.
 
In addition to the responsibilities listed above, the Audit Committee has the following functions:
 
· reviewing our annual budget with management and, if acceptable, recommending the budget to the Board for approval;
 
· setting and approving changes to our investment policy;
 
· receiving and considering our independent auditors’ comments as to the audit of the financial statements and internal controls, adequacy of staff and management performance and procedures in connection with internal controls;
 
· reviewing and, if appropriate, approving related party transactions;
 
· establishing and enforcing procedures for the receipt, retention and treatment of complaints regarding accounting or auditing improprieties; and
 
· pre-approving all audit and non-audit services provided by our independent auditors that are not prohibited by law.
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Our Audit Committee charter requires that each member must be independent.  We consider the members to be independent as long as they:
 
· do not accept any consulting, advisory or other compensatory fee from us, except in connection with their service as a Director;
 
· are not an affiliate of Isis or one of its subsidiaries; and
 
· meet all of the other NASDAQ independence requirements.
 
In addition, all Audit Committee members must be financially literate and at least one member must be a “financial expert,” as defined by SEC regulations.  Our Board has determined that the Audit Committee’s financial expert is Mr. Wender based on, among other things, his over 35 years of experience as an investment banker with Goldman, Sachs & Co.  We provide the Audit Committee with the funding it needs to perform its duties.

In 2013, the Audit Committee met four times.  You can find the Audit Committee charter on our corporate website at www.isispharm.com.2  Each member meets the membership criteria set forth in the Audit Committee charter and as stated above.

Compensation Committee

The primary function of the Compensation Committee of the Board is to review, modify (as needed) and approve our overall compensation strategy and policies and approve the compensation and other terms of employment of our executive officers, including our Chief Executive Officer.  We include a full list of the Compensation Committee’s responsibilities as part of the Compensation Discussion and Analysis (“CD&A”) set forth on pages 40 through 60 of this Proxy Statement.  The charter of the Compensation Committee grants the Compensation Committee full access to all of our books, records, facilities and personnel, as well as authority to obtain, at our expense, advice and assistance from internal and external legal, accounting or other advisors and consultants and other external resources that the Compensation Committee considers necessary or appropriate in the performance of its duties.  In particular, the Compensation Committee has the sole authority to retain independent compensation consultants to assist in its evaluation of executive and Director compensation, including the authority to approve the consultants’ reasonable fees and other retention terms.

We also have a Non-Management Stock Option Committee that, as delegated by the Compensation Committee, may award stock options and RSUs to employees who are below director level in accordance with guidelines adopted by the Compensation Committee.  The Non-Management Stock Option Committee has one member, Dr. Crooke.

The Compensation Committee met five times in 2013 and acted by unanimous written consent 12 times.  You can find our Compensation Committee charter on our corporate website at www.isispharm.com.2

The Compensation Committee reviews with management Isis’ CD&A to consider whether to recommend that we include the CD&A in our Proxy Statements and other filings.

Compensation Committee Interlocks and Insider Participation

As noted above, during the fiscal year ended December 31, 2013, our Compensation Committee was composed of Drs. Berthelsen and Reed and Mr. Wender.  On February 12, 2013, Dr. Reed resigned as a member of the Board due to his commitments as Head of Roche Pharma Research and Early Development and as a member of Roche’s Corporate Executive Committee.  None of the members of the Compensation Committee has ever been an employee or officer of Isis.  None of our executive officers serves as a member of the board of directors or compensation committee of any other entity that has one or more executive officers serving as a member of our Board or Compensation Committee.
 

2
Any information that is included on or linked to our website is not part of this Proxy Statement or any registration statement or report that incorporates this Proxy Statement by reference.
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Nominating, Governance and Review Committee

The Nominating, Governance and Review Committee of the Board is responsible for:
 
· interviewing, evaluating, nominating and recommending individuals for membership on our Board, and as part of this process, the Nominating, Governance and Review Committee will consider nominees recommended by our stockholders;
 
· on an annual basis, reviewing the performance of the Board and its committees, including evaluating the Board’s ability to function as a group and the integrity, independence and competency of the individual Board members;
 
· periodically reviewing our policies and procedures and recommending appropriate changes, if any;
 
· annually reviewing and assessing the adequacy of our corporate governance guidelines and recommending any proposed changes to the Board for approval; and
 
· performing such other functions as may be necessary or convenient for the efficient discharge of the foregoing.
 
The Nominating, Governance and Review Committee met three times during 2013.  You can find our Nominating, Governance and Review Committee charter on our corporate website at www.isispharm.com.3

Director Nominations - Quality Standards

The Nominating, Governance and Review Committee believes that candidates for Director should have certain minimum qualifications.  As a result, the Board adopted membership standards and believes that the Board members should meet the minimum membership requirements listed below.

The minimum membership requirements are as follows:
 
· members must be able to read and understand basic financial statements;
 
· members must demonstrate high personal integrity and ethics;
 
· members cannot serve as a director on the board of more than seven other publicly traded companies;
 
· members cannot serve more than ten consecutive terms on the Board; and
 
· members cannot run for re-election or serve on the Board once they have reached the age of 80.
 
In addition to these minimum standards, the Nominating, Governance and Review Committee will consider such factors as:
 
· possessing relevant expertise to offer advice and guidance to management;
 
· having sufficient time to devote to Isis’ affairs;
 
· demonstrating excellence in his or her field;
 
· having sound business judgment; and
 
· being committed to rigorously represent the long-term interests of our stockholders.
 

3
Any information that is included on or linked to our website is not part of this Proxy Statement or any registration statement or report that incorporates this Proxy Statement by reference.
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Director Nominations - Diversity Discussion

In considering Director nominations, the Nominating, Governance and Review Committee evaluates and considers the total mix of competencies represented on the Board as a whole, as well as the competencies each member, or nominee brings to the Board.  In general, the constitution of the Board is diversified across three large categories: (1) investment banking, financial accounting and corporate governance experience; (2) medical and scientific expertise; and (3) employee versus non-employee directors.  By selecting individuals who have investment banking, financial accounting and corporate governance backgrounds, we gain valuable experience that ensures we are managing our financial resources appropriately, reporting our financial results fairly and accurately, and generally running our business consistent with current good corporate practices.  As a cutting edge drug discovery and development company, we also greatly benefit from Board members who themselves are scientists and medical doctors.  This way we can set and adjust our strategy and objectives based on the results we generate from our research and development efforts.  In different ways, these first two categories allow us to effectively manage our cash and make prudent investments in our technology to achieve the greatest likelihood of success.  As a general rule, we try to evenly balance the Board members across these first two categories.

Regarding the third category, a mix of employee and non-employee directors offers different perspectives for the Board to consider when making decisions.  Employee directors can provide the Board valuable insight regarding our day-to-day operations, which can help the Board make important management and compensation decisions.  Non-employee directors can compare the opportunities and challenges presented to Isis against the facts and circumstances these Directors are experiencing outside Isis.  As a rule, we have a significantly higher number of non-employee directors vs. employee directors.  Finally, we do not discriminate against nominees on the basis of gender, race, religion, national origin, sexual orientation, disability or any other basis prohibited by applicable law.

Director Nominations - Process

The Nominating, Governance and Review Committee will consider Director candidates our stockholders recommend.  The Committee does not intend to alter the manner in which it evaluates candidates, including the minimum criteria set forth above, based on whether or not a stockholder recommended the candidate.

The Committee reviews new candidates for Director in the context of the Board’s composition, our operating requirements and our stockholders’ long-term interests.  In conducting this assessment, the Committee considers diversity, maturity, skills, the minimum membership requirements discussed above, and such other factors as it deems appropriate given the current needs of the Board and Isis, to maintain a balance of knowledge, experience and capability.  The Committee then uses its network of contacts to compile a list of potential candidates, but may also engage, if it deems appropriate, a paid professional search firm.  The Committee conducts any appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates after considering the function and needs of the Board. In the case of incumbent Directors whose terms of office are set to expire, the Nominating, Governance and Review Committee reviews such Directors’ overall service to Isis during their term, including the number of meetings attended, level of participation, quality of performance, and any other relationships and transactions that might impair such Directors’ independence.

The Committee meets to discuss and consider the candidates’ qualifications and determines whether each candidate is independent, which determination is based upon applicable NASDAQ listing standards, applicable SEC rules and regulations and the advice of counsel, if necessary.  Finally, the Committee then selects a nominee for recommendation to the Board by majority vote.  During the fiscal year ended December 31, 2013, the Nominating, Governance and Review Committee engaged the services of a third party search firm to help it identify, screen, interview and check the references of potential director candidates.

Stockholder Recommendations for Directors

Stockholders who wish to recommend individuals for consideration by the Nominating, Governance and Review Committee to become nominees for election to the Board to include in our Proxy Statement for our 2015 Annual Meeting of Stockholders may do so by delivering a written recommendation to the Secretary of Isis at the following address: 2855 Gazelle Court, Carlsbad, CA 92010, by December 30, 2014.  Submissions must include:
 
· the name, age, business address and residence address of the nominee;
 
· the principal occupation or employment of the nominee;
 
· the stock ownership in Isis of the nominee;
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· the stock ownership in Isis of the stockholder making the nomination, including any trading in derivative securities that may disguise ownership occurring within the last 12 months;
 
· the information relating to the nominee that is required to be disclosed in solicitations of proxies under applicable securities laws;
 
· the nominee’s written consent to being named in the Proxy Statement as a nominee and to serving as a Director if elected;
 
· other information as we may reasonably require to determine the eligibility of the proposed nominee to serve as an independent Director or that could be material to a reasonable stockholder’s understanding of the independence of the proposed nominee; and
 
· any voting commitments the nominee has to third parties.

In addition, the nominee will need to complete a written questionnaire regarding the background and qualifications of the nominee, and the background of any other person or entity on whose behalf the nomination is being made.  The nominee must also agree to comply with all of our applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines.  The description of the requirements for Director nomination set forth above is qualified in its entirety by reference to our full and complete Amended and Restated Bylaws, which is an exhibit to our Current Report on Form 8-K filed with the SEC on December 14, 2011 a copy of which is available by contacting our Corporate Secretary.  To date, the Board has not received or rejected a timely Director nominee for election at the upcoming stockholder meeting from a stockholder or stockholders holding more than 5% of our voting stock.

Agenda Committee

The primary function of the Agenda Committee of the Board is to determine the matters to be considered by the Board at each of its meetings and prepare an agenda accordingly. The Agenda Committee met four times in 2013.

Scientific/Medical Committee

The Scientific/Medical Committee was formally established in 2014 and primarily focuses on the key scientific and development issues facing our technology and drugs in development, and help set our strategy in such areas.

Stockholder Communications with the Board

We make every effort to ensure that our Board or individual Directors, as applicable, hear the views of stockholders, and provide appropriate responses to stockholders in a timely manner.  Stockholders who wish to communicate with the Board, or individual Directors, may do so by sending written communications addressed to the Secretary of Isis at 2855 Gazelle Court, Carlsbad, CA 92010.  If you wish to communicate with the independent Directors about your concerns or issues, you may address correspondence to a particular Director or to the independent Directors generally.  If you do not name a particular Director, depending on the subject matter, we will forward the letter to the Chair of the Audit, Compensation, or Nominating, Governance and Review Committee.  One or more of our employees designated by the Board will review these communications and will determine whether to present the materials to the Board.  The purpose of this screening is to allow the Board to avoid having to consider irrelevant or inappropriate communications, such as advertisements, commercial solicitations and hostile communications.  All communications directed to the Audit Committee in accordance with our Code of Ethics policy that relate to questionable accounting or auditing matters involving Isis will be promptly and directly forwarded to the Audit Committee.  Other than the processes described above, our Board has not adopted a formal written process for stockholder communications with the Board.  We believe our Board’s responsiveness to stockholder communications has been excellent.
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Code of Ethics and Business Conduct

We have adopted a Code of Ethics that applies to all officers, Directors and employees.  We have posted our Code of Ethics on our website.  If we make any substantive amendments to the Code of Ethics or grant any waiver from a provision of the Code of Ethics to any executive officer or Director, we will promptly disclose the nature of the amendment or waiver on our website at www.isispharm.com.4

Corporate Governance Guidelines

In 2003, the Board documented the governance practices we follow by adopting corporate governance guidelines to ensure that the Board will have the necessary authority and practices in place to review and evaluate our business operations as needed and to make decisions that are independent of our management.  The guidelines are also intended to align our Directors’ and management’s interests with those of our stockholders.  The corporate governance guidelines set forth the practices the Board intends to follow with respect to board composition and selection, board meetings and involvement of senior management, Chief Executive Officer performance evaluation and succession planning for Board committees and compensation, “clawbacks” of executive compensation, and share retention guidelines for our executive officers and Directors.  The Board adopted the corporate governance guidelines to, among other things, reflect changes to the NASDAQ listing standards and SEC rules adopted to implement provisions of the Sarbanes-Oxley Act of 2002.  You may view our corporate governance guidelines, as well as the charters for the Audit, Compensation and Nominating, Governance and Review committees at www.isispharm.com. 4
 

4
Any information that is included on or linked to our website is not part of this Proxy Statement or any registration statement or report that incorporates this Proxy Statement by reference.
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PROPOSAL 4

APPROVAL OF AN AMENDMENT TO THE COMPANY’S RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK

The Board has adopted, subject to stockholder approval, an amendment to Isis' Restated Certificate of Incorporation to increase the authorized number of shares of our Common Stock from 200,000,000 shares to 300,000,000 shares.  To maintain Isis’ flexibility to structure future strategic transactions, which may include a significant equity component, we believe it is in the interests of Isis’ stockholders to increase the authorized number of shares of Common Stock now.

The additional Common Stock to be authorized by adoption of the amendment would have rights identical to our currently outstanding Common Stock.  Adoption of the proposed amendment and issuance of the Common Stock would not affect the rights of the holders of our Common Stock, except for effects incidental to increasing the number of shares of our Common Stock outstanding, such as dilution of the earnings per share and voting rights of current holders of our Common Stock.  If the amendment is adopted, it will become effective upon filing of a Certificate of Amendment of our Restated Certificate of Incorporation with the Secretary of State of the State of Delaware.  The complete text of the Certificate of Amendment to the Restated Certificate that would be filed with the Secretary of State of the State of Delaware is set forth in Appendix A to this Proxy Statement.  However, the text of the Certificate of Amendment is subject to revision to include such changes as may be required by the Secretary of State of the State of Delaware and as the Board deems necessary and advisable to effect the proposed amendment of our Restated Certificate of Incorporation.

In addition to the 117,541,860 shares of Common Stock outstanding on March 31, 2014, there were 8,554,745 shares of Common Stock issuable upon exercise of outstanding options or subject to vesting of outstanding RSUs granted under our equity plans and 3,954,656 shares of Common Stock available for future grants under our equity plans. Additionally, the Board has reserved 12,102,531 shares of Common Stock for issuance under our convertible notes. This means Isis currently has approximately 58 million shares available for future use (i.e. shares that are not already outstanding or reserved for future issuance under our convertible notes or equity plans).

Although the Board has no present plans to issue the additional shares of common stock, it believes that it is important that we maintain the flexibility to issue additional shares of Common Stock in connection with raising capital, acquisitions and other strategic transactions, equity incentives to employees and other proper corporate purposes, should our Board deem any of those actions to be in the best interests of our company and our stockholders. For example, in May 2013, we successfully completed a public offering of approximately 9.6 million shares of our Common Stock, raising $173.2 million in net proceeds, which we are using to support Phase 3 development of ISIS-APOCIIIRx, retain other drugs longer in development and advance the rest of our pipeline. If our stockholders do not approve this Proposal 4, we may not be able to complete strategic transactions, access the capital markets, retain employees and pursue other business opportunities important to our success.

If the Board determines that a hostile takeover attempt or a change in Isis’ control or management is not in the best interest of Isis’ stockholders, Isis could use the additional shares of Common Stock that would become available for issuance if this Proposal 4 is approved to oppose, delay or prevent such attempted takeover or change, which could discourage certain transactions in which our stockholders might otherwise receive a premium for their shares over the then current market prices.

  The affirmative vote of the holders of a majority of the outstanding shares of the Common Stock on the record date will be required to approve this amendment to our Restated Certificate of Incorporation.  As a result, abstentions and broker non-votes will have the same effect as negative votes.

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF PROPOSAL 4
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PROPOSAL 5

APPROVAL OF AN AMENDMENT AND RESTATEMENT OF OUR 2002 NON-EMPLOYEE DIRECTORS’ STOCK OPTION PLAN

In this Proposal 5, we are requesting our stockholders approve an amendment and restatement of our 2002 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”) which the Board adopted on February 11, 2014, subject to stockholder approval.  The primary purpose of the amendment and restatement is to (i) increase the non-discretionary stock option grants for new Directors to 32,000 shares and non-discretionary annual grants to all non-employee Directors to 16,000 shares, with a corresponding RSU award based on a ratio determined by our Compensation Committee, which the Directors’ Plan refers to as the RSU/Option Factor, and (ii) update the provision prohibiting the Board from repricing any outstanding options by reducing the exercise price of the stock award or cancelling any outstanding options in exchange for cash or other stock awards without obtaining the approval of our stockholders within 12 months prior to the repricing or cancellation and re-grant event.

Background for the Current Request and Expected Future Grant Practices

We believe increasing the non-discretionary stock option grants for new Directors to 32,000 shares and non-discretionary annual grants to all non-employee Directors to 16,000 shares, with a corresponding RSU award based on a then current RSU/Option Factor will improve our ability to attract and retain unique and highly qualified talent. Additionally, we believe updating the prohibitions against repricing outstanding options or cancelling any outstanding options in exchange for cash or other stock awards better aligns the Directors’ Plan with the most current accepted best practices related to equity compensation.

The affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting is required to approve the proposed amendment and restatement of the Directors’ Plan discussed above.  If you hold your shares through a broker and you do not instruct the broker on how to vote on this Proposal 5, your broker will not have the authority to vote your shares.  Abstentions and broker non-votes will each be counted as present for purposes of determining the presence of a quorum.  If you indicate on your proxy to “Abstain” from voting, it will have the same effect as an “Against” vote for this Proposal 5.  Broker non-votes will not have any effect on the outcome of this Proposal 5.

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF PROPOSAL 5.

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The following description of the Directors’ Plan is qualified in all respects by the specific terms of the Directors’ Plan, a copy of which was filed with this Proxy Statement.

Purpose

The purpose of the Directors’ Plan is to:
 
· retain the services of persons now serving as our non-employee Directors;
 
· attract and retain the services of persons capable of serving on our Board; and
 
· incentivize our non-employee Directors to exert maximum efforts to promote our success.

Administration

Our Board administers the Directors’ Plan.  Our Board may not delegate administration of the Directors’ Plan to a committee.  The Board has the power to construe and interpret the Directors’ Plan and stock awards granted under it, and to establish, amend and revoke rules and regulations for its administration.

Stock Subject To The Directors’ Plan

An aggregate of 1,200,000 shares of common stock were authorized by the Board for issuance under the Directors’ Plan and was approved by the stockholders at the June 7, 2012 Annual Meeting.  As of March 31, 2014, there were RSUs and options to purchase 465,310 shares of common stock issued and outstanding under the Directors’ Plan, our Directors had exercised options to purchase 449,563 shares and 283,875 shares were available for future grants, which we expect to last until at least the 2015 Annual Meeting of Stockholders.  Assuming stockholder approval of this Proposal 5, we expect to grant options to purchase a total of 96,000 shares and RSUs worth 16,002 shares under the Directors’ Plan on July 1, 2014.

On March 31, 2014 the last reported sales price of our common stock on the NASDAQ Global Select Market was $43.21 per share.

If options granted under the Directors’ Plan expire or otherwise terminate without being exercised, the shares of common stock not acquired pursuant to such options again become available for issuance under the Directors’ Plan.

Eligibility, Option Grants, RSU Awards

The Directors’ Plan provides that we may only grant options and RSU awards to a non-employee Director.  Under the Directors’ Plan a “non-employee Director” is a Director of Isis or one of our affiliates who is not otherwise an employee of Isis or any affiliate.  Six of our eight current Directors, all except Dr. Crooke and Ms. Parshall, are eligible to participate in the Directors’ Plan.

Options granted under the Directors’ Plan are nonstatutory stock options, meaning they are not intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).

The Directors’ Plan currently provides for nondiscretionary grants of stock options and RSU awards to the non-employee Directors as follows:
 
· Initial Grants
 
o an initial grant of a stock option to purchase shares of common stock to each person when he or she first becomes a non-employee Director of Isis equal to 30,000 multiplied by the Option Allocation Percentage, and
 
o an initial grant of an RSU award to each person when he or she first becomes a non-employee Director of Isis in an amount equal to 30,000 multiplied by the RSU Allocation Percentage, as further adjusted by multiplying by the RSU:Option Value Ratio.
 
o For example, using the Option Allocation Percentage of 75%, RSU Allocation Percentage of 25%, and the RSU:Option Value Ratio of 50% that were approved for 2013 by the Compensation Committee, a new non-employee Director who joined the Board in 2013 received an initial stock option to purchase 22,500 shares of common stock (i.e. 30,000 x 75%) and an RSU award worth 3,750 shares of common stock (i.e. 30,000 x 25% x 50%).
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· Annual Grants
 
o an annual grant, on July 1, or the next business day should such date be on a Saturday, Sunday or holiday, of a stock option to purchase shares of common stock to each non-employee Director equal to 15,000 multiplied by the Option Allocation Percentage, and
 
o an annual grant, on July 1, or the next business day should such date be on a Saturday, Sunday or holiday, of an RSU award to each non-employee Director in an amount equal to 15,000 multiplied by the RSU Allocation Percentage, as further adjusted by multiplying by the RSU:Option Value Ratio.
 
o For example, using the Option Allocation Percentage of 75%, RSU Allocation Percentage of 25%, and the RSU:Option Value Ratio of 50% that were approved for 2013 by the Compensation Committee, on July 1, 2013, each non-employee Director received a stock option to purchase 11,250 shares of common stock (i.e. 15,000 x 75%) and an RSU award worth 1,875 shares of common stock (i.e. 15,000 x 25% x 50%).

Under the proposed amendments to the Directors’ Plan under this Proposal 5, the initial nondiscretionary grants are for options to purchase 32,000 shares with an RSU award equal to 32,000 multiplied by the then applicable RSU/Option Factor and the annual nondiscretionary grants are for options to purchase 16,000 shares with an RSU award equal to 16,000 multiplied by the then RSU/Option Factor.

The RSU/Option Factor is a ratio, represented by a fraction, as approved by the Compensation Committee when it sets the allocation of equity compensation for our employees between Options and RSU awards. The RSU/Option Factor can be as low as zero and as high as one. The RSU/Option Factor approved by the Compensation Committee as of the date the Board approved the amendment and restatement of the Directors’ Plan was 1/6.

Therefore, if our stockholders approve this Proposal 5, the Directors’ Plan will provide for nondiscretionary grants of stock options and RSU awards to the non-employee Directors as follows:

· Initial Grants
 
o an initial grant of a stock option to purchase 32,000 shares of common stock to each person when he or she first becomes a non-employee Director, and
 
o an initial grant of an RSU award to each person when he or she first becomes a non-employee Director in an amount equal to 32,000 multiplied by the then applicable RSU/Option Factor.
 
o For example, using the RSU/Option Factor of 1/6 that was approved by the Compensation Committee and is currently in place, a new non-employee Director joining the Board after the 2014 Annual Meeting of Stockholders would receive an initial stock option to purchase 32,000 shares of common stock and an RSU award worth 5,333 shares of common stock (i.e. 32,000 x 1/6).

· Annual Grants
 
o an annual grant, on July 1, or the next business day should such date be on a Saturday, Sunday or holiday, of a stock option to purchase 16,000 shares of common stock to each non-employee Director, and
 
o an annual grant, on July 1, or the next business day should such date be on a Saturday, Sunday or holiday, of an RSU award to each non-employee Director in an amount equal to 16,000 multiplied by the then applicable RSU/Option Factor.
 
o For example, using the RSU/Option Factor of 1/6 that was approved by the Compensation Committee and is currently in place, on July 1, 2014, each non-employee Director would receive a stock option to purchase 16,000 shares of common stock and an RSU award worth 2,667 shares of common stock (i.e. 16,000 x 1/6).
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Terms of Options

Each option under the Directors’ Plan is subject to the following terms and conditions:

Vesting Schedule and Option Exercise.  Options granted under the Directors’ Plan vest in four equal annual installments beginning on the first anniversary of the grant of the option.  Vesting is conditioned upon continued service as a Director or as an employee or consultant of Isis or one of our affiliates.

The Board has the power to accelerate the time during which an option may vest or be exercised.  Options granted under the Directors’ Plan do not permit exercise prior to vesting.

A Director may exercise an option under the Directors’ Plan by written notice to us, specifying the number of full shares of common stock to be purchased accompanied by payment of the purchase price.

Exercise Price; Payment.  The exercise price of options granted under the Directors’ Plan is equal to 100% of the fair market value of the common stock on the date granted; however, an option may be granted with a lower exercise price if the option is granted pursuant to an assumption or substitution for another option in a manner which satisfies the provision of Section 424(a) of the Code.  Optionholders must pay the exercise price of options granted under the Directors’ Plan in cash, or pursuant to a “same-day-sale” under Regulation T.  To the extent provided by the terms of an option, an optionholder may satisfy any federal, state or local tax withholding obligation relating to the exercise of such option by a cash payment upon exercise.

Transferability; Term.  Under the Directors’ Plan, an optionholder may not transfer an option, except as determined by the Board and as set forth in the option agreement.  Currently, the Board has determined, and Director option agreements provide, that in addition to the ability to transfer an option by will or the laws of descent and distribution, a Director may transfer part or all of an option to any of the following:
 
· an optionholders’ spouse, children (by birth or adoption), stepchildren, grandchildren, or parents;
 
· a trust or other entity established solely for the optionholders’ benefit or the benefit of the optionholders’ spouse, children (by birth or adoption), stepchildren, grandchildren, or parents for estate planning purposes; or
 
· an organization which is exempt from taxation under Section 501(c)(3) of the Code or to which tax-deductible charitable contributions may be made under Section 170 of the Code.

Furthermore, an optionholder may, by delivering written notice to us, in a form satisfactory to us, designate a third party who, in the event of the optionholder’s death, will thereafter be entitled to exercise the option.

No option granted under the Directors’ Plan is exercisable by any person after the expiration of 10 years from the date the option is granted.

Other Provisions.  The option agreement may contain such other terms, provisions and conditions not inconsistent with the Directors’ Plan as may be determined by the Board.

Terms of Restricted Stock Unit Awards

Each RSU award under the Directors’ Plan is subject to the following terms and conditions:

Consideration.  At the time of grant of an RSU award, the Board will determine the consideration, if any, to be paid by the Participant upon delivery of each share of common stock subject to the RSU award. The consideration to be paid (if any) by the Participant for each share of common stock subject to an RSU award may be paid in any form of legal consideration that may be acceptable to the Board, in its sole discretion, and permissible under applicable law.

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Vesting.  Each RSU award will vest as follows:  one-fourth of the shares subject to the RSU award shall vest on each annual anniversary of the date of grant provided that the RSU award recipient has, during the entire year prior to such vesting date, continuously served as a non-employee Director or as an employee of or consultant to Isis or one of our affiliates.

Payment.  An RSU award may be settled by the delivery of shares of common stock, their cash equivalent, any combination thereof or in any other form of consideration, as determined by the Board and contained in the RSU award agreement.

Additional Restrictions.  At the time of the grant of an RSU award, the Board, as it deems appropriate, may impose such restrictions or conditions that delay the delivery of the shares of common stock (or their cash equivalent) subject to an RSU award to a time after the vesting of such RSU award.

Dividend Equivalents.  Dividend equivalents may be credited in respect of shares of common stock covered by an RSU award, as determined by the Board and contained in the RSU award agreement.  At the sole discretion of the Board, such dividend equivalents may be converted into additional shares of common stock covered by the RSU award in such manner as determined by the Board.  Any additional shares covered by the RSU award credited by reason of such dividend equivalents will be subject to all of the same terms and conditions of the underlying RSU award agreement to which they relate.

Termination of Continuous Service.  Except as otherwise provided in the applicable award agreement, such portion of the RSU award that has not vested will be forfeited upon the RSU award recipient’s termination of continuous service as a non-employee Director, or as an employee of or consultant to Isis or one of our affiliates.

Adjustment Provisions

If any change is made in, or other event occurs with respect to, the common stock subject to the Directors’ Plan, or subject to any stock award, without the receipt of consideration by Isis (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by Isis) (each, a “Capitalization Adjustment”), the Directors’ Plan will be appropriately adjusted in the class(es) and maximum number of securities subject both to the Directors’ Plan pursuant to the shares reserve and to the nondiscretionary stock awards, and the outstanding stock awards will be appropriately adjusted in the class(es) and number of securities and price per share, if applicable, of common stock subject to such outstanding stock awards.  The Board will make such adjustments, and its determination will be final, binding and conclusive.  The conversion of any convertible securities of Isis will not be treated as a transaction “without receipt of consideration” by Isis.

If there is (i) a sale or other disposition of all or substantially all of our assets, (ii) a sale or other disposition of at least 90% of our outstanding securities, or (iii) certain specified types of merger, consolidation or similar transactions (each, a “Corporate Transaction” as defined more specifically in the Directors’ Plan), any surviving or acquiring corporation may assume stock awards outstanding under the Directors’ Plan or may substitute similar stock awards.  If any surviving or acquiring corporation does not assume the stock awards or substitute similar stock awards, then with respect to stock awards held by optionholders whose service with Isis or an affiliate of Isis has not terminated as of the effective date of the Corporate Transaction, the vesting of such stock awards (and, if applicable, the time during which such stock awards may be exercised) will be accelerated in full and the stock awards will terminate if not exercised (if applicable) at or prior to such effective date.  With respect to stock awards outstanding under the Directors’ Plan that have been neither assumed nor substituted and that are held by award holders whose continuous service has terminated prior to the effective time of the Corporate Transaction, the vesting of the stock awards, and, if applicable, the time at which such stock awards may be exercised will not be accelerated unless otherwise provided in a written agreement between Isis or any affiliate and the holder of the stock award, and such stock awards will terminate if not vested and exercised, as applicable, prior to the effective time of the Corporate Transaction.

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If there is a dissolution or liquidation of Isis, then all outstanding stock awards under the Directors’ Plan will terminate immediately prior to the completion of the dissolution or liquidation.

In the event of (i) a qualifying merger or consolidation or similar transaction, as described in the Directors’ Plan, whereby following such transaction the stockholders of Isis immediately prior to such transaction do not own outstanding voting securities representing more than 50% of the combined voting power of the entity (or parent of the entity) surviving such transaction, (ii) a qualifying sale, lease, license or other disposition of all or substantially all of our assets, (iii) certain entities reporting under Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) acquire more than 50% of our voting power under certain qualifying circumstances, or (iv) a majority of our Board is replaced by individuals who are not nominated by members of our current Board or members nominated by our current Board or their nominees (each such event, a “Change of Control” for purposes of the Directors’ Plan), the vesting of any outstanding stock awards under the Directors’ Plan held by persons whose continuous service with Isis or an affiliate of Isis has not terminated prior to the effective date of the Change of Control will accelerate in full, and the stock awards will terminate on the earlier of 12 months following the date of the Change of Control or the expiration date set forth in the stock award grant.

The acceleration of an option in the event of a Corporate Transaction or a Change in Control event may be viewed as an anti-takeover provision, which may have the effect of discouraging a proposal to acquire or otherwise obtain control of Isis.

No Repricing, “Cash-Out,” or Cancellation and Re-Grant of Options without Stockholder Approval

Under the Directors’ Plan, as amended by this Proposal 5, the Board cannot reprice any outstanding options by reducing the exercise price of the stock award or cancel any outstanding options in exchange for cash or other stock awards without obtaining the approval of our stockholders within 12 months prior to the repricing or cancellation and re-grant event. Without the amendment proposed in this Proposal 5, the Directors’ Plan currently does not expressly prohibit the cancellation of outstanding stock options in exchange for cash or other stock awards.

Duration, Amendment and Termination

The Board at any time, and from time to time, may amend the Directors’ Plan.  However, except as relating to Capitalization Adjustments (described above), no amendment will be effective unless approved by our stockholders to the extent stockholder approval is necessary to satisfy the requirements of SEC Rule 16b-3 or any NASDAQ or securities exchange listing requirements or such amendment seeks to amend the prohibition on option repricing/ “cashing-out”.  The Board, in its sole discretion, may submit any other amendment to the Directors’ Plan for stockholder approval.  Rights under any outstanding stock award granted before amendment of the Directors’ Plan will not be impaired by any amendment of the Directors’ Plan unless we request the consent of the award holder and the award holder consents in writing.

Unless sooner terminated, the Directors’ Plan will terminate on June 1, 2020.

Federal Income Tax Information

Nonstatutory Stock Options

Nonstatutory stock options granted under the Directors’ Plan generally have the following federal income tax consequences.

There are no tax consequences to the optionholder or us by reason of the grant of a nonstatutory stock option.  Upon exercise of a nonstatutory stock option, the optionholder normally will recognize taxable ordinary income equal to the excess of the stock’s fair market value on the date of exercise over the option exercise price.  In the unlikely event the optionholder becomes an employee, we are required to withhold from regular wages or supplemental wage payments an amount based on the ordinary income recognized.  Subject to the requirement of reasonableness and the satisfaction of a tax reporting obligation, we will generally be entitled to a business expense deduction equal to the taxable ordinary income realized by the optionholder.

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Upon disposition of the stock, the optionholder will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon exercise of the option.  Such gain or loss will be long-term or short-term depending on whether the stock was held for more than one year.

Restricted Stock Unit Awards

Generally, the recipient of a stock unit structured to conform to the requirements of Section 409A of the Code or an exception to Section 409A of the Code will recognize ordinary income at the time the stock is delivered equal to the excess, if any, of the fair market value of the shares of our common stock received over any amount paid by the recipient in exchange for the shares of our common stock. To conform to the requirements of Section 409A of the Code, the shares of our common stock subject to a stock unit award may generally be delivered only upon one of the following events: a fixed calendar date (or dates), separation from service, death, disability or a change in control. If delivery occurs on another date, unless the stock units otherwise comply with or qualify for an exception to the requirements of Section 409A of the Code, in addition to the tax treatment described above, the recipient will owe an additional 20% federal tax and interest on any taxes owed.

The recipient’s basis for the determination of gain or loss upon the subsequent disposition of shares acquired from stock units will be the amount paid for such shares plus any ordinary income recognized when the stock is delivered.

Subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax reporting obligation, we will generally be entitled to a tax deduction equal to the taxable ordinary income realized by the recipient of the stock award.

New Plan Benefits Table

The following table presents certain information with respect to stock options and RSU awards we expect to grant under the Directors’ Plan for services rendered during the fiscal year ending December 31, 2014 to our non-employee Directors, assuming stockholder approval of this Proposal 5.  This table assumes that each non-employee Director continues as one of our Directors throughout the year and that we do not elect any additional non-employee Directors.  This information is for illustration only and may not be indicative of grants that are made in the future under the Directors’ Plan.

NEW PLAN BENEFITS
AMENDED AND RESTATED 2002 NON-EMPLOYEE DIRECTORS’ STOCK OPTION PLAN
Name of Non-Employee Director
Number of Option Shares
(16,000)
Number of Restricted Stock Unit Awards
(16,000 x 1/6)
Spencer R. Berthelsen
16,000
2,667
Breaux B. Castleman
16,000
2,667
Joseph Klein, III
16,000
2,667
Joseph Loscalzo
16,000
2,667
Frederick T. Muto
16,000
2,667
Joseph H. Wender
16,000
2,667
Non-Employee Directors as a Group
96,000
16,002

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information regarding outstanding options and shares reserved for future issuance under our equity compensation plans as of December 31, 2013.

Plan Category
 
Number of Shares
to be Issued
Upon Exercise of
Outstanding Options
   
Weighted Average
Exercise Price of
Outstanding Options
   
Number of Shares
Remaining
Available for
Future Issuance
 
Equity compensation plans approved by stockholders(a)
   
7,078,280
   
 
$12.11
     
5,715,176
(c)
Equity compensation plans not approved by stockholders(b)
   
630,086
   
 
$14.84
     
 
 
                       
Total
   
7,708,366
   
 
$12.33
     
5,715,176
 
 

(a) Consists of four Isis plans: 1989 Stock Option Plan, Amended and Restated 2002 Non-Employee Directors’ Stock Option Plan, 2011 Equity Incentive Plan and ESPP.

(b) Consists of the 2000 Broad-Based Equity Incentive Plan, more fully described below.  The 2000 Broad-Based Equity Incentive Plan expired on January 5, 2010.

(c) Of these shares, 264,275 remained available for purchase under the ESPP as of December 31, 2013. The ESPP incorporates an evergreen formula pursuant to which on January 1 of each year, we automatically increase the aggregate number of shares reserved for issuance under the plan by 150,000 shares.

Description of 2000 Broad-Based Equity Incentive Plan

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

As of December 31, 2013, the 2000 Plan had 5,990,000 shares authorized for issuance, options to purchase an aggregate of 630,086 shares were granted and outstanding under the 2000 Plan, option holders had exercised options to purchase an aggregate of 4,906,111 shares under the 2000 Plan, and no shares remained available for grant thereunder. The 2000 Plan expired on January 5, 2010, so we may no longer grant new options under the 2000 Plan.

Options granted under the 2000 Plan generally have a term of seven or ten years, have an exercise price equal to the fair market value at the time of grant, can only be exercised with a cash payment and vest at the rate of 25 percent per year after the first year and then at the rate of 2.08 percent per month thereafter during the option holder’s employment or service as a consultant, employee or Director. If any change is made in the common stock subject to the 2000 Plan, or subject to any stock award, without the receipt of consideration by us (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by us), we will adjust the outstanding stock awards appropriately in the class(es) and number of securities and price per share of common stock subject to such outstanding stock awards. Our board of Directors will make such adjustments, and its determination will be final, binding and conclusive. We will not treat the conversion of any of our convertible securities as a transaction without receipt of consideration.

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

In the event of:

· a sale, lease or other disposition of all or substantially all of our assets;

· a merger or consolidation in which we are not the surviving corporation; or

· reverse merger in which we are the surviving corporation but the shares of common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise;

then any surviving corporation or acquiring corporation will assume any stock awards outstanding under the 2000 Plan or will substitute similar stock awards (including an award to acquire the same consideration paid to the stockholders in the transaction for those outstanding under the 2000 Plan). In the event any surviving corporation or acquiring corporation refuses to assume such stock awards or to substitute similar stock awards for those outstanding under the 2000 Plan, then with respect to stock awards held by participants whose continuous service has not terminated, we will accelerate the vesting of such stock awards in full and the stock awards will terminate if not exercised (if applicable) at or prior to such event.
29

PROPOSAL 6

ADVISORY VOTE ON EXECUTIVE COMPENSATION

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, called the “Dodd-Frank Act,” entitles Isis’ stockholders to vote to approve, on an advisory (nonbinding) basis, the compensation of our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers (at December 31, 2013), called our “named executive officers” as disclosed in this Proxy Statement in accordance with the SEC’s rules.

We are asking our stockholders to indicate their support for our named executive officer compensation as described in this Proxy Statement.  This Proposal 6, commonly known as a “say on pay” proposal, gives our stockholders the opportunity to express their views on the compensation paid to our named executive officers.  This vote is not intended to address any specific item of compensation, but rather the overall compensation of our named executive officers and the philosophy, policies and practices described in this Proxy Statement.  Accordingly, we are asking our stockholders to vote “FOR” the following resolution at the Annual Meeting:

“RESOLVED, that Isis’ stockholders approve, on an advisory basis, the compensation of the named executive officers, as disclosed in this Proxy Statement for the 2014 Annual Meeting of Stockholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission.”

We recommend you carefully review the EXECUTIVE COMPENSATION section of this Proxy Statement located on pages 40 through 60.  Below is a high-level summary of some of our compensation practices.  This summary is qualified by the detailed disclosure contained in the EXECUTIVE COMPENSATION section of this Proxy Statement.

30

The table below summarizes some of our executive compensation practices, both the practices we implement because we believe they are consistent with our vision and long-term stockholder value (see “What We Do” below), and those that we choose not to implement as we believe they are counter to our vision and long-term stockholder value (see “What We Don’t Do” below):
What We Do
 
 What We Don't Do
ü
Demand more of every employee: more commitment, more knowledge, more intensity, more innovation
 
û
Do not guarantee a cash bonus – cash bonuses can, and have been, zero
ü
Reward productivity and performance
 
û
Do not provide perquisites for any employees
ü
Recognize the value of long-term employees and low turnover
 
û
Do not provide “gross-up” payments, other than for relocation
ü
Use a balanced mix of fixed and variable cash incentives and long-term equity
 
û
Do not allow shorting and hedging against our stock
ü
Evaluate compensation compared to the 50th percentile of our peer group
 
û
Do not reprice or “cash-out” stock options without stockholder approval
ü
Design our compensation philosophy and objectives to mitigate unnecessary or imprudent business risk taking
 
 
 
ü
Set explicit and demanding objectives at thebeginning of each year from which we measure performance for the year
 
 
 
ü
Place a maximum limit on Performance MBOs
   
ü
Set a strict budget for equity awards and salary increases
 
 
 
ü
Set the size of equity awards based on individual and company performance
 
 
 
ü
Require minimum vesting periods for equity awards
 
 
 
ü
 
Require our executive officers and non-employee Board members to hold shares received from their RSUs until they meet certain ownership thresholds or no longer serve the company
 
 
 
ü
Require our employees to hold ESPP shares for a minimum of six months
 
 
 
ü
Require our executive officers, VPs and many other employees to trade Isis’ stock through Rule 10b5-1 trading plans
 
 
 
ü
Use a “double trigger” for cash payments for change of control
 
 
 
ü
Use an executive “claw-back” policy
 
 
 
ü
Use an independent compensation consultant engaged by the Compensation Committee
 
 
 
31

CEO Compensation vs. Total Return
(Over Five Years)

The following graphs show the relationship of our Chief Executive Officer’s compensation ($ in thousands) as calculated pursuant to SEC rules compared to the total return (TSR) on $100 invested on December 31, 2009 in our common stock through December 31, 2013.  Although stock price is only one of the measures of Isis’ performance we use to set the compensation for our executive officers, including our CEO, as illustrated below, our CEO’s compensation is generally in alignment with our stock performance over the period shown.5
 
 
The affirmative vote of a majority of the holders of shares present or represented by proxy at the Annual Meeting and entitled to vote on the matter is required to adopt the resolution.  If you indicate on your proxy to “Abstain” from voting, it will have the same effect as a vote “Against” this Proposal 6.  Brokers do not have discretion to vote uninstructed shares with respect to this Proposal 6.  Accordingly, if brokers do not receive voting instructions from beneficial owners of the shares, they cannot vote the shares.  However, broker non-votes will not affect the outcome of the voting on this Proposal 6.

The “say on pay” vote is advisory, and therefore is not binding on Isis, the Compensation Committee or the Board.  However, Isis’ management, the Board and the Compensation Committee value the opinions of the stockholders.  As such, if there is any significant vote against the named executive officers’ compensation as disclosed in this Proxy Statement, the Board will consider the stockholders’ concerns and the Board and Compensation Committee will evaluate whether any actions are necessary to address those concerns.
 
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF PROPOSAL 6.
 

5 This graph is not “soliciting material,” is not deemed “filed” with the SEC, is not subject to the liabilities of Section 18 of the Exchange Act and is not to be incorporated by reference in any of our filings under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
32

PROPOSAL 7

RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS

The Audit Committee of the Board has selected Ernst & Young LLP as our independent registered public accounting firm for our 2014 fiscal year, and has requested management to ask for stockholder ratification at the Annual Meeting.  Ernst & Young LLP has audited our financial statements since we were founded in 1989.  Representatives of Ernst & Young LLP will be at the 2014 Annual Meeting to answer any questions and make a statement should they desire to do so.

Although our bylaws do not require stockholders to ratify our independent registered public accounting firm, the Audit Committee of the Board would like our stockholders’ opinion as a matter of good corporate practice.  If the stockholders do not ratify the selection of Ernst & Young LLP, the Audit Committee of the Board will reconsider whether to keep the firm.  However, even if the stockholders ratify the selection, the Audit Committee of the Board may choose to appoint a different independent accounting firm at any time during the year if it believes that a change would be in the best interests of our stockholders and Isis.

The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the 2014 Annual Meeting will be required to ratify the selection of Ernst & Young LLP.  If you indicate on your proxy to “Abstain” from voting, it will have the same effect as an “Against” vote for this Proposal 7.

As of December 31, 2013, none of our finance or accounting employees had been employed by Ernst & Young LLP during the past six years.

Independent Auditors’ Fees

The Audit Committee has adopted a policy and procedure for the pre-approval of audit and permissible non-audit services rendered by our independent registered public accounting firm, Ernst & Young LLP.  The policy generally pre-approves specific services in the defined categories of audit services, audit-related services, and tax services up to pre-determined amounts.  The Audit Committee may pre-approve services as part of its approval of the scope of the engagement of the independent auditor or on an individual explicit case-by-case basis before the Audit Committee engages the independent registered public accounting firm to provide each service.  As an additional measure to ensure auditor independence, we do not use Ernst & Young LLP as our primary tax advisor.  The Audit Committee pre-approved the fees described below.

Audit Fees

For the fiscal years ended December 31, 2013 and 2012, the fees billed by Ernst & Young LLP related primarily to the integrated audit of our financial statements and reviews of our interim financial statements for such fiscal years were $552,000 and $480,000, respectively.  The increase in audit fees was primarily due to additional audit procedures that Ernst & Young LLP performed for the 2013 audit based on new guidance from the Public Company Accounting Oversight Board. In addition, Ernst & Young LLP billed us $87,000 in 2012 for audit fees related to our partnership activities.  Furthermore, Ernst & Young LLP billed us $96,000 in 2013 in connection with our public offering of Common Stock in May 2013 and $135,000 in 2012 related to our convertible debt offering in August 2012.

Audit Related Fees

For the years ended December 31, 2012 Ernst & Young LLP billed us $10,000 for accounting consultations for our partnership activities that were reasonably related to the performance of the audit or review of our financial statements that are not included under “Audit Fees” above. For the year ended December 31, 2013, there were no audit related fees billed by Ernst & Young.

33

Tax Fees

For the years ended December 31, 2013 and 2012, there were no tax fees billed by Ernst & Young LLP for tax related matters that were not part of the integrated audit fees.  In 2013 and 2012, we utilized Deloitte Tax LLP for our tax services.

All Other Fees

During the fiscal years ended December 31, 2013 and 2012, all other fees billed by Ernst & Young LLP were $2,000 in each year.  These fees were for a subscription to an online accounting and tax information service.

The Audit Committee has determined that the rendering of all non-audit services by Ernst & Young LLP is compatible with maintaining the auditor’s independence.

During the fiscal year ended December 31, 2013, none of the total hours expended on our financial audit by Ernst & Young LLP were provided by persons other than Ernst & Young LLP’s employees.
 
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF PROPOSAL 7.

34

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

This table outlines the ownership of our common stock as of March 31, 2014 by:
 
· each Director and nominee for Director;
 
· each executive officer named in the Summary Compensation Table under “Executive Compensation--Compensation of Executive Officers”;
 
· all Directors and executive officers as a group; and
 
· every entity that we know beneficially owns more than five percent of our common stock.

 
 
Beneficial Ownership(1)
 
Beneficial Owner
 
Number of Shares
   
Percent of Total(2)
 
FMR LLC(3)
   
17,679,361
     
15.0
 
245 Summer Street
               
Boston, MA  02210
               
 
               
Artisan Partners Holdings LP(4)
   
9,778,160
     
8.3
 
875 East Wisconsin Avenue, Suite 800
               
Milwaukee, WI  53202
               
 
               
BlackRock, Inc.(5)
   
8,844,551
     
7.5
 
40 East 52nd Street
               
New York, NY  10022
               
 
               
The Vanguard Group(6)
   
7,681,946
     
6.5
 
100 Vanguard Boulevard
               
Malvern, PA  19355
               
 
               
ClearBridge Investment, LLC(7)
   
7,197,661
     
6.1
 
620 8th Avenue
               
New York, NY  10018
               
 
               
BB Biotech AG(8)
   
6,417,548
     
5.5
 
Vordergasse 3
               
CH-8200 Schaffhausen, Switzerland
               
 
               
Spencer R. Berthelsen(9)
   
136,246
     
*
 
Breaux B. Castleman
   
0
     
*
 
Stanley T. Crooke(10)
   
1,220,849
     
1.0
 
Joseph Klein, III(11)
   
2,413
     
*
 
Joseph Loscalzo
   
0
     
*
 
Frederick T. Muto(12)
   
98,376
     
*
 
B. Lynne Parshall(13)
   
36,000
     
*
 
Joseph H. Wender(14)
   
107,998
     
*
 
C. Frank Bennett(15)
   
129,882
     
*
 
Richard S. Geary(16)
   
13,163
     
*
 
Elizabeth L. Hougen(17)
   
71,330
     
*
 
All Directors and executive officers as a group (thirteen persons)(18)
   
1,892,647
     
1.6
 
                                                      

*Less than one percent
35

(1) We base this table upon information supplied by officers, Directors, principal stockholders and Form 3s, Form 4s, Form 5s, Schedules 13D and 13G filed with the SEC.  Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.
 
(2) Applicable percentages are based on 117,541,860 shares of common stock outstanding on March 31, 2014, adjusted as required by rules promulgated by the SEC.
 
(3) Fidelity Management & Research Company ("Fidelity"), a wholly- owned subsidiary of FMR LLC and an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is the beneficial owner of 14,704,780 shares or 12.590% of the Common Stock outstanding of Isis as a result of acting as investment adviser to various investment companies registered under Section 8 of the Investment Company Act of 1940. The number of shares of Common Stock of Isis owned by the investment companies at December 31, 2013 included 481,095 shares of Common Stock resulting from the assumed conversion of $8,000,000 principal amount of ISIS PHARMA CV 2.75% 10/01/19 (60.1368 shares of Common Stock for each $1,000 principal amount of debenture).
 
Edward C. Johnson 3d and FMR LLC, through its control of Fidelity, and the funds each has sole power to dispose of the 14,704,780 shares owned by the Funds.
 
Fidelity SelectCo, LLC ("SelectCo"), 1225 17th Street, Suite 1100, Denver, Colorado 80202, a wholly-owned subsidiary of FMR LLC and an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is the beneficial owner of 2,651,034 shares or 2.270% of the Common Stock outstanding of Isis as a result of acting as investment adviser to various investment companies registered under Section 8 of the Investment Company Act of 1940 (the "SelectCo Funds").
 
Edward C. Johnson 3d and FMR LLC, through its control of SelectCo, and the SelectCo Funds each has sole power to dispose of the 2,651,034 owned by the SelectCo Funds.
 
The ownership of one investment company, Fidelity Growth Company Fund, amounted to 9,613,220 shares or 8.231% of the Common Stock outstanding. Fidelity Growth Company Fund has its principal business office at 245 Summer Street, Boston, Massachusetts 02210.
 
Members of the family of Edward C. Johnson 3d, Chairman of FMR LLC, are the predominant owners, directly or through trusts, of Series B voting common shares of FMR LLC, representing 49% of the voting power of FMR LLC. The Johnson family group and all other Series B shareholders have entered into a shareholders' voting agreement under which all Series B voting common shares will be voted in accordance with the majority vote of Series B voting common shares. Accordingly, through their ownership of voting common shares and the execution of the shareholders' voting agreement, members of the Johnson family may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR LLC.
 
Neither FMR LLC nor Edward C. Johnson 3d, Chairman of FMR LLC, has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds' Boards of Trustees. Fidelity carries out the voting of the shares under written guidelines established by the Funds' Boards of Trustees.
 
Pyramis Global Advisors, LLC ("PGALLC"), 900 Salem Street, Smithfield, Rhode Island, 02917, an indirect wholly-owned subsidiary of FMR LLC and an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is the beneficial owner of 240,547 shares or 0.206% of the outstanding Common Stock of Isis as a result of its serving as investment adviser to institutional accounts, non-U.S. mutual funds, or investment companies registered under Section 8 of the Investment Company Act of 1940 owning such shares. The number of shares of Common Stock of Isis owned by the institutional account(s) at December 31, 2013 included 240,547 shares of Common Stock resulting from the assumed conversion of $4,000,000 principal amount of ISIS PHARMA CV 2.75% 10/01/19 (60.1368 shares of Common Stock for each $1,000 principal amount of debenture).
36

Edward C. Johnson 3d and FMR LLC, through its control of PGALLC, each has sole dispositive power over 240,547 shares and sole power to vote or to direct the voting of 240,547 shares of Common Stock owned by the institutional accounts or funds advised by PGALLC as reported above.
 
Pyramis Global Advisors Trust Company ("PGATC"), 900 Salem Street, Smithfield, Rhode Island, 02917, an indirect wholly-owned subsidiary of FMR LLC and a bank as defined in Section 3(a)(6) of the Exchange Act, is the beneficial owner of 83,000 shares or 0.071% of the outstanding Common Stock of the Isis as a result of its serving as investment manager of institutional accounts owning such shares.
 
Edward C. Johnson 3d and FMR LLC, through its control of PGATC, each has sole dispositive power over 83,000 shares and sole power to vote or to direct the voting of 83,000 shares of Common Stock owned by the institutional accounts managed by PGATC as reported above.
 
(4) The shares reported herein have been acquired on behalf of discretionary clients of Artisan Partners Limited Partnership ("APLP"), Artisan Investments GP LLC ("Artisan Investments") Artisan Partners Holdings LP ("Artisan Holdings") Artisan Partners Asset Management Inc. ("APAM") Artisan Partners Funds, Inc. ("Artisan Funds").  Artisan Holdings is the sole limited partner of APLP and the sole member of Artisan Investments; Artisan Investments is the general partner of APLP;  APAM is the general partner of Artisan Holdings.  APLP holds 9,778,160 shares, including 5,597,870 shares on behalf of Artisan Funds. Persons other than APLP are entitled to receive all dividends from, and proceeds from the sale of, those shares.
 
(5) Various persons at BlackRock, Inc. have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of shares of our common stock.
 
(6) The Vanguard Group has sole voting power to direct the vote of 159,970 shares, sole power to dispose or direct the disposition of 7,529,476 shares, shared dispositive power for 152,470 shares. Vanguard Fiduciary Trust Company , a wholly-owned subsidiary of The Vanguard Group, Inc., is the beneficial owner of 152,470 shares or 0.13% of the Common Stock outstanding of Isis as a result of its serving as investment manager of collective trust accounts.  Vanguard Investments Australia, Ltd., a wholly-owned subsidiary of The Vanguard Group, Inc., is the beneficial owner of 7,500 shares of Isis’ Common Stock outstanding as a result of its serving as investment manager of Australian investment offerings.
 
(7)
ClearBridge Advisors, LLC, is an investment adviser registered under the Investment Advisers ActClearBridge Advisors has sole voting power to direct the vote of 7,005,575 shares and sole power to dispose or direct the disposition of 7,197,661 shares.
 
(8) BB Biotech shares voting and dispositive powers for its shares with Biotech Target N.V., a wholly-owned subsidiary of BB Biotech AG.
 
(9) Includes 70 shares owned by Dr. Berthelsen’s daughter for which he disclaims beneficial ownership.  Includes 96,563 shares of common stock issuable upon exercise of options held by Dr. Berthelsen that are exercisable on or before May 30, 2014.
 
(10) Includes shares of common stock held by Dr. Crooke and 437,837 shares of common stock issuable upon exercise of options held by Dr. Crooke that are exercisable on or before May 30, 2014.  Also includes 50,053 shares of common stock issuable upon exercise of options held by Rosanne Crooke, Dr. Crooke’s wife, which are exercisable on or before May 30, 2014.  Dr. Crooke disclaims beneficial ownership of the shares of common stock owned and issuable upon exercise of options held by his wife.
 
(11) Includes 100 shares of common stock beneficially owned by Mr. Klein’s son.
 
(12) Includes 1,500 shares of common stock beneficially owned through the Cooley LLP Salary Deferral and Profit Sharing Plan and 96,563 shares of common stock issuable upon exercise of options held by Mr. Muto that are exercisable on or before May 30, 2014.
 
(13) Includes 31,978 shares of common stock issuable upon exercise of options held by Ms. Parshall that are exercisable on or before May 30, 2014.
37

(14) Includes 71,563 shares of common stock issuable upon exercise of options held by Mr. Wender that are exercisable on or before May 30, 2014.
 
(15) Includes 125,546 shares of common stock issuable upon exercise of options held by Dr. Bennett that are exercisable on or before May 30, 2014.
 
(16) Includes 8,208 shares of common stock issuable upon exercise of options held by Dr. Geary that are exercisable on or before May 30, 2014.
 
(17) Includes 70,098 shares of common stock issuable upon exercise of options held by Ms. Hougen that are exercisable on or before May 30, 2014.
 
(18) Includes an aggregate of 1,059,633 shares issuable upon exercise of options held by all current Directors and executive officers as a group that are exercisable on or before May 30, 2014.
 
Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our Directors, executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities.  Officers, Directors and greater than ten percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.

To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, 2013, all Section 16(a) filing requirements applicable to our officers, Directors and greater than ten percent beneficial owners were complied with.
38

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Overview
 
Since inception, the Isis mission has been to create a new, more efficient technology for drug discovery and development, antisense technology, and exploit that technology to create a pipeline of first-in-class medicines to treat a wide range of diseases. Today, thanks to the innovation and perseverance of Isis, we believe antisense technology is taking its place as the third platform for drug discovery alongside small molecules and protein therapeutics.

Isis is focused on innovation. Based on the efficiency of antisense technology, Isis has implemented a unique business strategy that is intended to assure long-term innovation.  Isis has created a unique innovation-focused, science–driven, culture that couples with its technology and business model to assure long-term productivity and a commitment to the patients we serve.
 
 
Through the efficiency of our technology platform and business strategy we have built a pipeline of 31 drugs in development with fewer than 370 employees, representing a ratio of 1 drug : 12 employees.
 
 
Antisense technology exists today primarily because of the innovation at Isis. Isis has more than 1,200 issued patents and approximately 690 patent applications that should assure substantial control of key elements of the technology for many years to come.  This intellectual property has been critical in the completion of partnerships that have resulted in over $2 billion in cash to date and the development of a consortium of companies who advance the technology alongside us, and thereby increase our reach. We should continue to realize the value of the partnerships and the consortium of companies for many years to come in the form of milestone payments, license fees and royalties. Isis has been recognized as one of the top ten most innovative companies in the Biotechnology industry, based on number of granted patents, scientific strength, industry impact, technology strength and research intensity. Our nearly 1,900 issued patents and applications are all the more remarkable given that Isis has fewer than 370 employees.  This means Isis has produced more than five issued patents and applications per employee.

A key component of our business and organizational strategy is to maintain an optimal size to foster innovation. We believe the optimal size is 350-400 employees. To maintain this optimal size we license our medicines at key value inflection points during development, thus avoiding the need to build the large, complex, inefficient organizations associated with fully integrated pharmaceutical companies. We also demand more of every employee at Isis and do not tolerate mediocrity. We have been remarkably successful in achieving these goals. Today we have 31 new medicines in development; one medicine in development per 12 employees. And we believe this productivity is sustainable. We plan to add three to five new medicines to the pipeline every year without significant increases in the number of employees.

By design, Isis demands more of every employee, particularly the middle and senior level leaders. This requires us to design our compensation system to recruit, motivate and retain outstanding individuals. Here too, we have been successful. Our average employee voluntary turnover rate over the last five years has been 3.2% per year, while the average voluntary turnover in the United States for biotech/pharmaceutical companies during the same period was 9.7%. Given the uniqueness and complexity of our technology, it is critical to retain the knowledge and experience of outstanding long service employees. The experience and seniority of our employees is as critical to our future success as it has been to the success we have enjoyed to date.

In summary, at Isis, our vision is clear and is designed to promote long-term creation of value through innovation, and bring benefit to generations of patients with many diseases.  Our vision is to:
 
 
create and constantly advance a new more efficient drug discovery platform, antisense technology;
 
 
create a unique business model and culture committed to creating long-term value through innovation;
 
 
broaden, deepen and advance our pipeline of antisense drugs;
 
 
demand more of every employee - more commitment, more knowledge, more intensity, more innovation;
 
 
aggressively manage average and below average performance so every employee produces more; and
 
 
demand great performance and pay for that performance.
39

Summary of Compensation Practices
 
Below we summarize some of our compensation practices, both the practices we implement because we believe they are consistent with our vision and long-term stockholder value (see “What We Do” below), and those we choose not to implement as we believe they are counter to our vision and long-term stockholder value (see “What We Don’t Do” below):
 
What We Do   What We Don’t Do
ü
Demand more of every employee: more commitment, more knowledge, more intensity, more innovation
 
û
Do not guarantee a cash bonus – cash bonuses can, and have been, zero
ü
Reward productivity and performance
 
û
Do not provide perquisites for any employees
ü
Recognize the value of long-term employees and low turnover
 
û
Do not provide “gross-up” payments, other than for relocation
ü
Use a balanced mix of fixed and variable cash incentives and long-term equity
 
û
Do not allow shorting and hedging against our stock
ü
Evaluate compensation compared to the 50th percentile of our peer group
 
û
Do not reprice or “cash-out” stock options without stockholder approval
ü
Design our compensation philosophy and objectives to mitigate unnecessary or imprudent business risk taking
 
 
 
ü
Set explicit and demanding objectives at the beginning of each year from which we measure performance for the year
 
 
 
ü
Place a maximum limit on Performance MBOs
 
 
 
ü
Set a strict budget for equity awards and salary increases
 
 
 
ü
Set the size of equity awards based on individual and company performance
 
 
 
ü
Require minimum vesting periods for equity awards
 
 
 
ü
Require our executive officers and non- employee Board members to hold shares received from their RSUs until they meet certain ownership thresholds or no longer serve the company
 
 
 
ü
Require our employees to hold ESPP shares for a minimum of six months
 
 
 
ü
Require our executive officers, VPs and many other employees to trade Isis’ stock through Rule 10b5-1 trading plans
 
 
 
ü
Use a “double trigger” for cash payments for change of control
 
 
 
ü
Use an executive “claw-back” policy
 
 
 
ü
Use an independent compensation consultant engaged by the Compensation Committee
 
 
 

40

Compensation Overview and the Role of the Compensation Committee

We have designed our executive compensation program to attract and retain executives who can help us meet our business objectives and will motivate our executives to enhance long-term stockholder value.  The Compensation Committee of the Board, with input from an independent compensation consultant, manages and oversees our executive compensation program.  At the end of each year, and as otherwise required, the Compensation Committee approves the total compensation for each of our executive officers.  In addition, the full Board reviews and ratifies the Compensation Committee’s decisions regarding the compensation of executive officers.

The Compensation Committee’s responsibilities include:
 
· reviewing and approving overall compensation strategy;
 
· reviewing and approving corporate performance goals and objectives relevant to the compensation of our executive officers;
 
· evaluating and recommending to the Board the compensation plans and programs advisable for Isis, as well as modifying or terminating existing plans and programs;
 
· establishing policies with respect to stock compensation arrangements;
 
· reviewing and approving compensation arrangements for our executive officers, including our Chief Executive Officer;
 
· reviewing and approving compensation arrangements for our Directors;
 
· administering our stock-based awards and ESPP;
 
· evaluating risks associated with our compensation policies and practices and assessing whether these risks are reasonably likely to have a material adverse effect on us;
 
· selecting and retaining a qualified, independent compensation consultant;
 
· performing other functions as may be necessary or convenient in the efficient discharge of the foregoing; and
 
· reporting to the Board from time to time, or whenever it shall be called upon to do so.

As the SEC continues to adopt the final rules implementing and defining the Dodd-Frank legislation, Isis’ management and the Compensation Committee will:
 
· monitor the SEC’s adoption of the final rules and definitions; and
 
· adjust Isis’ compensation policies as necessary to satisfy the new rules.

Independent Compensation Consultant

The Compensation Committee has the authority and budget to hire an independent compensation consultant as it deems necessary.  The Compensation Committee has retained Barney & Barney LLC as its independent compensation consultant.  Barney & Barney LLC primarily provided the Compensation Committee advice in the following areas:

· selecting the 2013 Executive Peer Group;
 
· evaluating the pay mix for our executive officers;
 
· evaluating short-term and long-term incentives for our executive officers; and
 
· evaluating non-employee Director compensation.

Barney & Barney LLC did not provide any additional services to us or our affiliates.
41

Compensation Philosophy
 
Our compensation philosophy supports and rewards the characteristics and behaviors we believe will make us successful:
 
 
We incorporate a number of features into our compensation structure to mitigate the risk that our compensation policies and practices could encourage unnecessary or imprudent business risk taking.  We use a combination of compensation vehicles that provide a balanced mix of fixed and variable cash incentives, and long-term stock incentives.  Our Performance MBOs are not guaranteed (i.e. are 100% at risk) and include a multiplier, or performance factor, based on Isis’ and the employee’s performance.  Therefore, if either Isis or the employee does not perform well, the Performance MBO can be, and has been, zero.

An executive officer’s salary plus bonus represents the officer’s total cash compensation.  Our philosophy has been to have the CEO’s total cash compensation be between 20-30 times the lowest level of compensation received by an employee.  Dr. Crooke’s total cash compensation is on average 20.06 times that of the average cash compensation for our lowest level employees and 1.76 times greater than the average of our other executive officers.  Stockholder advocacy organizations consider 3 times and lower an appropriate ratio when measuring CEO compensation against all executive officers.  We cover the specific elements of our compensation structure in more detail below.

Objectives

As noted above, our vision is clear and is designed to promote long-term creation of value through innovation, and bring benefit to generations of patients with many diseases.  Our vision is to:
 
 
create and constantly advance a new more efficient drug discovery platform, antisense technology;
 
 
create a unique business model and culture committed to creating long-term value through innovation;
 
 
broaden, deepen and advance our pipeline of antisense drugs;
 
 
demand more of every employee - more commitment, more knowledge, more intensity, more innovation;
 
 
aggressively manage average and below average performance so that every employee produces more; and
 
 
demand great performance and pay for that performance.

Drug discovery and development across a portfolio of many drugs (currently 31 for Isis) is a long process that spans many years, where decisions we make today can have a positive or negative consequence five years, ten years, and even further into the future.  As such, it is essential that we set goals that incentivize our employees to execute our long-term strategy, because we believe our long-term strategy should continue to reward our stockholders into the future.

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For us to retain our technology leadership and effectively manage the technical complexity and broad scope of our development pipeline, our most senior executives must advance multiple drug strategies and collaborative partnerships in parallel and consistently over many years, versus emphasizing one or two at the expense of others that deserve attention.  As a result, other than stock price, we do not use metric-based objectives such as earnings per share because metrics typically overly emphasize two or three annual business metrics and ignore the complexity of the tasks we are undertaking.  By taking this approach, we avoid the temptation to deviate from creating fundamental long-term value to meet a short-term metric.

We structure our objectives so they are results driven rather than task driven.  We typically include a number of objectives that are based on achieving positive data in the clinic.  For example, in 2013 we had a corporate objective to mature our pipeline and as a measure to achieve positive data from seven Phase 2 studies.  This type of objective only rewards our executives if the data are positive - we do this to encourage the prudent spending of stockholder money on development decisions.  In other words, we want to structure our objectives to reward success based on judgment, rather than the making of “bad bets.”

At the beginning of each year, we set aggressive corporate objectives that our Board approves.  On at least a quarterly basis, the Board evaluates our progress in achieving these objectives.  We define excellent performance as a year in which we have met most of our objectives.
 
Importance of Tenure; Our Investment in Knowledge-Rich Employees
 
It takes a significant period of time and a substantial investment to recruit and develop executives who possess the experience and talent necessary to lead at Isis given our innovative technology, innovative business strategy and complex drug development pipeline. Senior executives must have experience with all aspects of our business to be effective leaders.  Our drug technology is a “platform technology”, which means the more knowledge and experience an employee has with our technology platform, the better equipped he or she is to create value at Isis.  Given the uniqueness and complexity of our technology, it is critical to retain the knowledge and experience of outstanding long service employees. The experience and seniority of our employees is critical to our future success.  For these reasons, it is our objective to attract and retain the best talent available, and to invest in those individuals who deliver long-term productivity.
 
 
Given the uniqueness and complexity of our technology, it is critical to retain the knowledge and experience of outstanding long service employees.
 
 
· Long tenure among a dedicated and highly skilled workforce, combined with the highest performance standards, contributes to our leadership in the industry and serves the interests of stockholders.

· Our focus on retention is coupled to a strong belief that executive talent most often should be developed and promoted from within Isis.

· The long tenure of high-performing executive officers reflects this strategy at all levels of the organization.
 
o Our executive officers have tenures at Isis ranging from 13 years to more than 25 years.

· Each of the executive officers has been carefully evaluated and selected through a rigorous performance assessment process over a long career. In their current assignments, they remain subject to a challenging annual performance assessment in which they must continue to meet the highest standards or be reassigned or separated from the Company.
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Elements of Executive Compensation
 
Employees in our organization do not share either accountability or responsibility equally for strategic and/or tactical decisions.  It is well ingrained in our culture that not everyone should share the same level of risk/reward for the consequences of these decisions.  As a result, we have structured the various components of our compensation system to reflect accountability both for the successes and failures (both long-term and short-term) of Isis and our employees.  We pay our senior management team for results and their use of judgment in executing the strategies they have established.  Therefore, the more senior a person becomes within Isis, the more the person’s cash compensation will be “at risk.”  We compensate the more junior employees for accomplishing their work well and, therefore, a lower portion of their cash compensation is “at risk.”
 
 
The more senior role a person plays, the more that person’s cash compensation will be “at risk.”
 

Our executive officers’ total direct compensation consists of three elements:
 
(1) base salary,
 
(2) MBO – Performance Based – At Risk Cash Compensation, no portion of which is guaranteed, and
 
(3) stock-based compensation.
 
We have historically awarded stock-based compensation through stock option grants.  Beginning in 2012, we broadened our stock-based compensation vehicles to include RSUs.  The MBO – Performance Based – At Risk Cash Compensation is the only element that does not apply to all employees.  Individual Performance MBOs are available only to employees at the director level and above.  We provide all other benefits, including 401(k) matching, to all employees.  We describe these benefits in more detail later.

We consider many factors in determining the amounts we grant to our executives for each of the above three compensation elements.  These factors include:
 
· Company-wide performance, including achievement of corporate objectives;
 
· the Compensation Committee’s assessment of our CEO’s and executive officers’ individual performance;
 
· competitive compensation practices;
 
· increased efficiencies and process improvements;
 
· effective collaboration and teamwork;
 
· individual expertise, skills and knowledge;
 
· the need to retain and motivate;
 
· the impact an individual’s judgment has on our success or failure; and
 
· the advice of our independent compensation consultant.

The Compensation Committee relies on these and other factors such as general economic conditions, industry conditions, and the Compensation Committee’s collective business judgment in setting and/or approving the appropriate increases.    We do not have specific weightings assigned to these performance factors, as the importance of each factor can vary among the executive officers and from year to year.

Peer Group

The Compensation Committee considers relevant market pay practices when setting executive compensation to ensure our ability to recruit and retain high performing talent.

As part of setting the 2013 compensation, the Compensation Committee, in consultation with the independent compensation consultant, evaluated and selected a peer group of 24 life science companies (the “Executive Peer Group”).  The Compensation Committee reviews the compensation of our executive officers against the Executive Peer Group’s executive compensation to ensure that our compensation is competitive and to inform and shape its decision-making when setting compensation.  However, the Compensation Committee does not strictly adhere to quantitative benchmarks.

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The Executive Peer Group, which the Compensation Committee will review on an annual basis, consists of companies that generally:
 
· are similar to Isis in terms of certain factors, including one or more of the following: size (i.e., revenue, market capitalization), industry, and stage of development;
 
· have named executive officer positions that are comparable to ours in terms of breadth, complexity and scope of responsibilities; and
 
· compete with us for executive talent.
 
The Executive Peer Group does not include companies headquartered outside the United States (because compensation and benefit practices are generally different outside the United States, the comparable compensation data for the executive officers is not available and cost of living is different) or companies in industries whose compensation programs are not comparable to our programs, such as non-life science companies.

In June of 2013, the Compensation Committee reviewed the Executive Peer Group using the criteria listed above, noting that Isis’ market capitalization was approximately $2.5 billion and had more than doubled since the Compensation Committee last set the Executive Peer Group.  As part of this process, the Compensation Committee looked at companies in Isis’ industry with market capitalizations of between $500 million and $5 billion, including looking at companies that themselves identified Isis as a peer, so called “reverse peers”.  Based on this evaluation, the Compensation Committee added Ariad Pharmaceuticals, InterMune, Immunogen, Medivation, Seattle Genetics, United Therapeutics and ViroPharma to the Executive Peer Group, as these companies fell within the market capitalization range, were in Isis’ sector, and many were reverse peers.  Additionally, the Compensation Committee removed Affimax, Dynavax Technologies, and Spectrum Pharmaceuticals because they were below the market capitalization range, and removed Genomic Health because it is a laboratory testing services company rather than a drug discovery and development company like Isis.
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The following table lists the companies in the 2013 Executive Peer Group, along with Isis’ rankings among these companies, based on market capitalization, and financial data reported by each company for the most recently-reported fiscal year at the time the Compensation Committee selected the Executive Peer Group, June 2013.

 
Company (ticker)
 
Annual Revenues
(in milions)
   
Market Capitalization
(in millions)
 
Stage of Lead
Drug
Accorda Therapeutics (ACOR)
 
 
$305.8
   
 
$1,378.0
 
Market
Alkermes (ALKS)
 
 
$390.0
   
 
$4,513.9
 
Market
Alnylam Pharmaceuticals (ALNY)
 
 
$66.7
   
 
$1,873.8
 
Phase II
Arena Pharmaceuticals (ARNA)
 
 
$27.6
   
 
$1,938.2
 
Market
Ariad Pharmaceuticals (ARIA)
 
 
$0.6
   
 
$3,501.7
 
Market
Array BioPharma (ARRY)
 
 
$85.1
   
 
$699.5
 
Phase II
Auxilium Pharmaceuticals (AUXL)
 
 
$395.3
   
 
$749.0
 
Market
Exelixis (EXEL)
 
 
$47.5
   
 
$885.9
 
Market
Halozyme Therapeutics (HALO)
 
 
$42.3
   
 
$812.2
 
Market
ImmunoGen (IMGN)
 
 
$16.4
   
 
$1,554.6
 
Market
Incyte Corporation (INCY)
 
 
$297.1
   
 
$3,086.9
 
Market
Infinity Pharmaceuticals (INFI)
 
 
$47.1
   
 
$1,427.1
 
Phase II
InterMune (ITMN)
 
 
$26.2
   
 
$815.4
 
Phase III
Jazz Pharmaceuticals (JAZZ)
 
 
$586.0
   
 
$4,027.7
 
Market
Lexicon Pharmaceuticals (LXRX)
 
 
$1.1
   
 
$1,221.0
 
Phase III
MannKind (MNKD)
 
 
$0.4
   
 
$1,914.0
 
Phase III
Medivation (MDVN)
 
 
$181.7
   
 
$3,728.6
 
FDA Approved
Momenta Pharmaceuticals (MNTA)
 
 
$63.9
   
 
$695.8
 
FDA Approved
Nektar Therapeutics (NKTR)
 
 
$81.2
   
 
$1,094.0
 
FDA Approved
Seattle Genetics (SGEN)
 
 
$210.8
   
 
$4,326.8
 
Market
The Medicines Company (MDCO)
 
 
$558.6
   
 
$1,855.1
 
Market
Theravance (THRX)
 
 
$135.8
   
 
$3,582.3
 
NDA
United Therapeutics (UTHR)
 
 
$916.1
   
 
$3,442.6
 
Market
ViroPharma (VPHM)
 
 
$427.9
   
 
$1,817.6
 
Market
 
               
    
Isis Pharmaceuticals, Inc. (ISIS)
 
 
$102.1
   
 
$2,433.8
*
Market
Isis’ Ranking
   
12
     
9
 
1
Isis’ Percentile Rank
   
54%
 
   
67%
 
42%
* Isis’ market capitalization at March 31, 2014 was approximately $5.08 billion.

The table below compares total cash compensation and the total direct compensation of our named executive officer’s against that of the 50th percentile of the Executive Peer Group.
 
     
 
2013 Total Cash Compensation
   
2013 Total Direct Compensation
 
Name
 
Named Executive Officer
   
50th Percentile of Executive Peer Group
   
Named Executive Officer
   
50th Percentile of Executive Peer Group
 
Stanley T. Crooke
 
 
$1,539,076
   
 
$1,238,100
   
 
$2,758,536
   
 
$3,366,400
 
Elizabeth L. Hougen
 
 
$581,367
   
 
$575,900
   
 
$769,865
   
 
$1,373,000
 
B. Lynne Parshall
 
 
$1,167,745
   
 
$760,100
   
 
$1,751,326
   
 
$2,084,400
 
C. Frank Bennett
 
 
$631,601
   
 
$477,400
   
 
$958,865
   
 
$884,500  
Richard S. Geary
 
 
$624,362
   
 
$380,400    
 
$942,223
   
 
$655,100
 

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Our Productivity vs. Executive Peer Group

All companies in all industries strive to be more productive than their peers.  Leadership management and compensation systems are all focused on enhancing long term productivity.  However, measurement of productivity is challenging, particularly in biotechnology.

Even for established R&D based pharmaceutical companies for which the comparator group is obvious, comparisons of productivity are challenging.  While revenues and profits per employee may be good measures for a portion of the equation, they are inadequate because they provide little insight into potential for topline sales growth and no insight into innovation, which is the foundation for long-term sustainable growth.  To provide insight into these attributes, measures of the size, maturity and potential value of the drug pipeline are necessary.  Additionally, measures of innovation such as numbers of issued patents and patent applications per employee can be used.

Because biotechnology companies’ business models vary, ranging from companies repurposing a single in-licensed commercial drug, to companies developing in-licensed novel drugs, to true research-based companies and a few companies pioneering broad new technology platforms, comparisons of productivity within the biotechnology industry are even more challenging.  Such comparisons are even more difficult for development stage pre-commercial companies.

Nevertheless, it is as important to develop productivity metrics and compare productivity for biotechnology companies as it is for any other industry.  As Isis matures and achieves revenues from the commercial sale of its products, we will use revenue and profit per employee as metrics, supplemented by metrics that measure the value of our drug pipeline and innovation.  We analyze our productivity against the Executive Peer Group and other leaders in drug development using, among other measures, number of drugs in clinical development per employee and number of patents per employee.  The table below measures Isis on these productivity metrics against the median for the Executive Peer Group, and the leading company in the peer group for each productivity metric (based on the most recent Annual Report of the companies in June 2013, when the Compensation Committee selected the Executive Peer Group):
 
 
Total direct compensation for each of our CEO, CFO and COO was below the 50th percentile range of the Executive Peer Group.
 
 
 
Drugs in Clinical
Development per Employee
 
Patents per Employee
Isis’ Ranking
2nd
3rd
Executive Peer Group Median
1 drug for every 61 employees
0.02 patents per employee
Peer Leader for Drugs in Clinical Development per Employee (Exelixis)
1 drug for every 6 employees
NA
Peer Leader for Patents per Employee (Theravance)
NA
6 patents per employee
Isis Pharmaceuticals, Inc. (ISIS)
1 drug for every 12 employees
3 patents per employee

As illustrated, Isis’ innovative culture and business strategy have made Isis incredibly productive in terms of the number of drugs in development per employee and patents per employee.

Compensation Allocation/Pay Mix

A key element of our compensation philosophy is to monitor and adjust our pay mix so the pay mix is weighted less heavily on fixed compensation (salary) with more weight on long-term incentive compensation (equity compensation).  As part of the Compensation Committee’s review of our total pay mix for executive officers, the Compensation Committee implemented the following:
 
· Salaries were frozen for named executive officers from 2011-2013.  The Compensation Committee did not increase salaries for the CEO and applicable named executive officers for each of 2011, 2012 and 2013;
 
· More cash compensation is at risk.  The Compensation Committee increased the proportion of our CEO’s, COO’s and other named executive officer’s cash compensation that is at risk for 2013 and going forward; and
 
· More of total compensation is long-term equityThe Compensation Committee adjusted the total pay mix for our CEO and other executive officers such that more of their compensation is in the form of long-term equity compensation.

An annual review of our total pay mix helps Isis compete for talent in the competitive marketplace and maintain compensation equity and balance among positions with similar responsibilities.  The target pay mix for our executive officers is a result of the compensation targets which emphasize long-term compensation versus short-term compensation. Actual salary levels, annual Performance MBO awards and long-term incentive awards will vary based on an individual’s responsibilities, tenure in a particular position, experience, individual performance and Company performance.
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The following chart illustrates the portions of actual total direct compensation for the named executive officers that are composed of base salary, annual MBO and long-term equity for 2012 and 2013:
 
 
Name
Year
 
Base
Salary
   
Annual
MBO
   
Long-Term Equity
   
Base Salary
%
   
Annual MBO
%
   
Long-Term Equity
%
 
Stanley T. Crooke
2012
 
 
$735,169
   
 
$367,585
   
 
$435,437
     
48
%
   
24
%
   
28
%
CEO & COB
2013
 
 
$735,169
   
 
$803,907
   
 
$1,203,708
     
27
%
   
29
%
   
44
%
Elizabeth L. Hougen
2012
 
 
$337,036
   
 
$131,444
   
 
$79,203
     
62
%
   
24
%
   
14
%
CFO
2013
 
 
$365,496
   
 
$215,871
   
 
$167,880
     
49
%
   
29
%
   
22
%
B. Lynne Parshall
2012
 
 
$641,574
   
 
$256,630
   
 
$250,811
     
56
%
   
22
%
   
22
%
COO
2013
 
 
$641,574
   
 
$526,171
   
 
$562,945
     
37
%
   
30
%
   
33
%
C. Frank Bennett
2012
 
 
$397,077
   
 
$148,904
   
 
$101,591
     
61
%
   
23
%
   
16
%
SVP, Research
2013
 
 
$397,077
   
 
$234,524
   
 
$307,226
     
42
%
   
25
%
   
33
%
Richard S. Geary
2012
 
 
$398,444
   
 
$143,440
   
 
$113,462
     
61
%
   
22
%
   
17
%
SVP, Development
2013
 
 
$398,444
   
 
$225,918
   
 
$303,166
     
43
%
   
24
%
   
33
%
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Base Salary

The fixed component of our compensation structure is base salary.  We categorize our jobs in a system called broad-banding.  That is to say that there are relatively few job levels within Isis, specifically ten levels, but the scope of responsibility and accountability an employee may assume is broad.  We do not have salary ranges, and therefore we do not set salary minimums or maximums.  It is therefore possible that someone may be in a lower job level, but his/her salary may reach levels which exceed those of someone in a higher job level.  We have chosen not to have salary ranges because years of experience have shown that this approach often creates unnecessary bureaucracy and a loss of talented individuals.  Our aim is to attract and retain the most highly qualified employees in an extremely competitive market.
 
We determine base compensation levels for all our employees primarily by market forces.  Accordingly, the Compensation Committee believes that it is important when making its compensation decisions to be informed as to the current practices of comparable publicly held companies with which we compete for top talent.  To this end, the Compensation Committee reviews market and peer company data, which includes competitive information relating to the mix and levels of compensation for executives in the life sciences industry.  We obtain this information for the Executive Peer Group based on recent public filings with the SEC.  In addition, we also review data from the Radford Global Life Sciences Survey, which is a summary of compensation data submitted by over 500 life sciences companies.  The Committee uses these data to inform and shape its decision-making but does not strictly adhere to quantitative benchmarks.  In addition, we assess whether the scope of job responsibilities and internal equity warrant a given base salary.
 
 
Base salaries for CEO and COO were frozen for 2011-2013.
 
 
Base salary is guaranteed to all employees as wages for hours worked.  It represents consideration for the performance of job responsibilities.  This portion of total cash compensation is not at risk and may increase as a result of how well an individual performs his/her job responsibilities.

Each year our employees are eligible to receive an appropriate merit salary increase.  The Compensation Committee sets a Company-wide merit increase budget percentage based on Isis’ performance and external factors such as the average merit budget of comparable companies.  The actual merit increase award for each employee, including our executive officers, will vary depending upon the respective employee’s contributions to Isis.  For example, for 2013 performance the Company-wide merit increase budget was 3.3%, with a range of individual merit award increases of 0% to 5.0%.  However, regardless of individual employee variances, we do not exceed the Company-wide approved merit budget.

The Compensation Committee evaluates each executive officer’s performance to set his or her annual merit increase.  As part of this process, the Compensation Committee reviews the written reports prepared by the CEO or COO evaluating the performance of each individual executive officer.  The Compensation Committee carefully considers these reports since our CEO and COO are in the best position to evaluate our executive officers’ day-to-day and overall performance.  The Compensation Committee then meets in executive session and evaluates the CEO’s performance, primarily based upon the CEO’s achievement of our company’s objectives for the year.  At the end of this process, the Compensation Committee determines the CEO’s merit increase and approves or recommends changes to the merit increases for the remaining executive officers.  Our CEO has no role in determining his own compensation.
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The executive officers’ new salaries for each year are calculated as follows:
 
·  Current Base Salary (x) Merit Increase = Increase to Base Salary
 
·  Current Base Salary (+) Increase to Base Salary = New Base Salary
 
For example, Dr. Crooke’s 2014 salary of $768,252 was calculated as follows:
 
 
Performance MBOs can be, and have in the past been, zero.
 
Performance MBOs have a maximum limit.
 
 
2013 Base Salary
(x)
Merit Increase
=
Increase to Base Salary
$735,169
(x)
4.5%
=
$33,083

Current Base Salary
(+)
Increase to Base Salary
=
New Base Salary in 2014
$735,169
(+)
$33,083
=
$768,252

When reviewing salaries, the Compensation Committee noted that our CEO’s salary, and the salary for our other named executive officers, was greater than the 50th percentile of the Executive Peer Group.  The Compensation Committee also noted its desired target mix of compensation is less weighted on salary and therefore did not increase base salaries for the CEO, COO and most of the other named executive officers for the previous three years (2011-2013).  Given Isis’ outstanding 2013 performance, and given that most salaries were fixed over the prior three years, the Compensation Committee approved merit increases to each of the named executive officer’s salaries for 2014.

MBO-Performance Based-At Risk Cash Compensation (Performance MBO)

The next component of an executive officer’s compensation, as well as the compensation of our employees at the director level and above, is a performance based cash payment through our Performance MBO program.  Our Performance MBO rewards employees for reaching specific objectives and for the judgment they use in making decisions, while an employee’s base salary compensates the employee for his or her continued service and performance.  We do not guarantee a Performance MBO as compensation.  It is totally at risk.  As such, a Performance MBO represents an opportunity for reward based upon the individual’s level of accountability and depends on the relative success of both Isis and the individual.  Our approach for awarding MBO bonuses differs from salary increases because, unlike salary increases, market forces do not impact bonus amounts.

We calculate the actual amount of each executive officer’s respective Performance MBO based on the following formula:

Base Salary (x) Target MBO % (x) Company Performance Factor (x) Individual Performance Factor = Performance MBO Amount

Performance MBOs can be zeroThe multipliers in this formula ensure we award Performance MBOs based on both Isis’ performance and individual performance.  This means an employee may not receive a Performance MBO even if he or she performed well in a year in which the Company does not meet its corporate objectives.  Similarly, if an employee performed poorly in a year in which the Company met its corporate objectives, he or she may not receive a Performance MBO.

For example, in 1999 no Performance MBOs for executive officers were paid due to the failures Isis faced at the time.  In 2004 our CEO’s Performance MBO was 64% of the Performance MBO he received in 2003 because of disappointing clinical trial results; the Company Performance Factor was 50% that year.  Conversely, in 2007 Isis had a seminal year and we rewarded our executive officers consistent with Isis’ success.

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Performance MBOs have a maximum limit.  Performance MBOs are limited by a maximum Company Performance Factor, maximum Individual Performance Factor and Target MBO Percentage:
 
· We have a maximum Company Performance Factor of 200% and a maximum Individual Performance Factor of 160%.  This range represents the boundary conditions for our Performance Factors and ensures we reward our employees consistent with Isis’ success.
 
· We base Target MBO Percentages on position levels within Isis.  The Target MBO percentages for 2013 were:   Directors 15%; Executive Directors 20%; Vice Presidents 25% or 30%; Senior Vice Presidents 35%, COO 45%; and CEO 60%.
 
· An individual’s Target MBO percentage does not change unless he or she changes position level or the Compensation Committee sets a new target for that level.

The table below summarizes the minimum and maximum MBO for 2013 as a percentage of salary:

Name
Minimum MBO
Percentage of Salary
Maximum MBO
Percentage of Salary
Stanley T. Crooke
0%
192%
Elizabeth L. Hougen
0%
112%
B. Lynne Parshall
0%
144%
C. Frank Bennett
0%
112%
Richard S. Geary
0%
112%

The Compensation Committee sets the Company Performance Factor based on the following process:
 
· Isis’ achievement of the approved corporate objectives for the year.  At the end of each year, the Compensation Committee meets to evaluate Isis’ overall performance.  The Compensation Committee measures Isis’ performance based upon the achievement of goals that were set at the beginning of the year and agreed upon by our Board and upper management (Please see chart below);
 
· In addition, the Compensation Committee considers our one-, three- and five-year total stockholder returns, and based on these returns may reduce the Individual Performance Factors for our executive officers;
 
· The Compensation Committee then reviews the Company Performance Factor history from the prior 10 years to form a comparison for our current year’s successes and/or failures; and
 
· Finally, the Compensation Committee approves each executive officer’s Individual Performance Factor based on the individual’s performance.
 
Once the Compensation Committee has determined the elements of the formula above, we use that formula to calculate each executive officer’s Performance MBO.

  Evaluation of 2013 Corporate Objectives.  On December 5, 2013, the Compensation Committee completed its evaluation of the Company’s performance against the 2013 Corporate Objectives.

The Compensation Committee also evaluated the Company’s achievement of two unplanned accomplishments: (1) the completion of a successful equity offering and (2) the Company demonstrated ISIS-APOCIIIRx efficacy in patients with familial chylomicronemia syndrome, or FCS.  The Compensation Committee considers significant unplanned accomplishments when setting MBO awards.  Unplanned accomplishments are not in exchange for, or replacements for, missed Corporate Objectives.  Rather, because Isis has a long-term strategy of discovering and developing drugs, and then licensing those drugs to corporate partners, we want to encourage our employees to capitalize on unplanned opportunities based on emerging scientific data, unplanned or accelerated interest from a corporate partner or favorable market conditions, even if such opportunities could not have been anticipated and as such were not part of the Corporate Objectives set at the beginning of the year.
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The Compensation Committee set the Company Performance Factor for the 2013 MBO at 135% due to our strong achievements for the year across drug discovery, development and corporate development, including the significant increase in the stock price, advancing key programs into or towards Phase 3 studies, and seven positive efficacy studies for drugs in our pipeline, with only one significant disappointment; the failure to achieve marketing approval for Kynamro in Europe.  The table below provides a detailed evaluation of each objective:

Evaluation of 2013 Corporate Objectives
 
Objective & Pre-Approved Measures
Evaluation
1
Successfully advance Kynamro:
·    Approval and launch of Kynamro in the United States; and
·    Approval of Kynamro in Europe.
 
Isis met substantial portions of this objective:
·    Isis achieved the approval and launch for Kynamro in the US.
·    Isis did not achieve approval and launch of Kynamro in Europe.
2
Enhance corporate value:
·    End 2013 with greater than $300 million in cash, cash equivalents and short-term investments;
·    Stock price increase greater than ten percentage points over percentage change in NASDAQ Biotechnology Index;
·    Meet net operating loss and cash guidance; and
·    Meet budget.
 
 
Isis exceeded this objective:
·    Isis ended 2013 with over $655 million in cash, cash equivalents and short-term investments.
·    Isis’ stock closed at $39.84 per share on December 31, 2013, representing a nearly 270% increase from January 2, 2013 and over a 200 percentage point increase over the increase in the NASDAQ Biotechnology Index.
·    Isis greatly exceeded its guidance.
·    Isis met its budget.
 
3
Advance Pipeline:
·    Positive data from seven efficacy studies;
·    Initiate two Phase 3 studies;
·    Open specified sites and enroll target number of patients in TTR study;
·    Initiate Phase 2 studies on two new drugs;
·    Complete one positive Phase 1 study; and
·    Identify three new development candidates.
 
Isis met this objective:
·    Isis achieved positive data from seven efficacy studies.
·    Isis initiated the Phase 3 study for ISIS-TTRRx, and made significant progress towards starting the Phase 3 studies for ISIS-SMNRx and ISIS-ApoC-IIIRx.
·    Isis exceeded opening the specified sites and made significant progress towards meeting the enrollment targets for the TTR study.
·    Isis initiated Phase 2 studies on four new drugs.
·    Isis completed a positive Phase 1 study on one drug.
·    Isis identified three new development candidates.
52

 
Objective & Pre-Approved Measures
Evaluation
4
Make corporate partnerships successful:
 
Isis exceeded this objective:
 
GlaxoSmithKline
·    Initiate Phase 3 Study ISIS-TTRRx
·    Identify at least one new Development Candidate
·    Initiate Phase 1 study for ISIS-GSK3Rx
 
GlaxoSmithKline
·    Isis initiated the Phase 3 study for ISIS-TTRRx.
·    Isis identified ISIS-GSK4Rx earning a $5 million milestone payment.
·    Isis initiated a Phase 1 study for ISIS-GSK3Rx earning $10 million in milestone payments.
 
  
Biogen Idec
·    Initiate infant study for ISIS-SMNRx and meet enrollment
·    Complete enrollment in multi-dose in children with SMA and open-label studies for ISIS-SMNRx
·    Achieve breakthrough therapy status for ISIS-SMNRx
·    Identify DMPK Development Candidate (achieve milestone)
·    Expand relationship strategically
Biogen Idec
·    Isis initiated the Phase 2 open-label, multiple-dose, dose-escalation pilot study of ISIS-SMNRx in infants who have been diagnosed with Type I SMA and exceeded enrollment.
·    Isis completed enrollment for the multi-dose study in children with SMA and open-label studies for ISIS-SMNRx.
·    ISIS-SMNRx did not achieve breakthrough therapy.
·    Isis identified ISIS-DMPKRx and received a $10 million milestone payment in connection with the selection and advancement of ISIS-DMPKRx.
·    Isis formed a broad strategic alliance with Biogen Idec to discover and develop antisense drugs to treat neurological disorders, which included a $100 million upfront payment to Isis and the potential for Isis to receive substantial milestone payments, license fees and royalty payments for all treatments developed through the collaboration.
 
 
AstraZeneca
·    Complete enrollment of lymphoma study for ISIS-STAT3Rx
·    Complete studies required for AstraZeneca to select second development candidate
·    Initiate a second study in patients for STAT3 (AstraZeneca to initiate).
 
AstraZeneca
·    Isis made substantial progress towards enrolling the lymphoma study for ISIS-STAT3Rx.
·    AstraZeneca selected ISIS-ARRx as a development candidate and paid Isis a $10 million milestone payment.
·    AstraZeneca initiated a Phase 1b/2a clinical study of ISIS-STAT3Rx in patients with advanced metastatic hepatocellular carcinoma.
 
53

 
Objective & Pre-Approved Measures
Evaluation
Unplanned Accomplishments
5
Complete successful equity financing
Isis successfully completed a public offering of common stock raising $173.3 million in net proceeds.
 
6
Demonstrate ISIS-APOCIIIRx efficacy in patients with familial chylomicronemia syndrome, or FCS.
Isis reported Phase 2 data on ISIS-APOCIIIRx demonstrating that ISIS-APOCIIIRx reduced triglycerides in patients with FCS.  Treatment with ISIS-APOCIIIRx resulted in significant reductions of ApoC-III, triglycerides, and ApoC-III-associated very low-density lipoprotein particles.
 

Once the Committee establishes the Company Performance Factor, the Committee next reviews individual performance and sets each executive officer’s Performance MBO.  The following table illustrates the Performance MBOs approved for 2013 performance:

Name
 
Base Salary
   
Target MBO %
   
Company Performance Factor
   
Individual Performance Factor
   
Resulting Performance MBO
   
Results Considered When Setting Individual Performance Factor(1)
 
Stanley T. Crooke(2)
 
 
$735,169
     
60
%
   
135
%
   
135
%
 
 
$803,907
     
1-6
 
Elizabeth L. Hougen
 
 
$365,496
     
35
%
   
135
%
   
125
%
 
 
$215,871
     
1,2,4 & 5
 
B. Lynne Parshall(2)
 
 
$641,574
     
45
%
   
135
%
   
135
%
 
 
$526,171
     
1-6
 
C. Frank Bennett
 
 
$397,077
     
35
%
   
135
%
   
125
%
 
 
$234,524
     
2, 3, & 4
 
Richard S. Geary
 
 
$398,444
     
35
%
   
135
%
   
120
%
 
 
$225,918
     
1,2,3,4 & 6
 
 
(1) The numbers correspond to the enumerated objectives in the table entitled “Evaluation of 2013 Corporate Objectives” on pages 54 through 56.  The Compensation Committee reviews the individual’s contribution towards the corporate objective when setting the Individual Performance Factor.
 
(2) Since our CEO and COO are ultimately responsible for the Company’s performance, their Individual Performance Factors are usually the same as the Company Performance Factor.

The Company Performance Factor reflects an increase of 35 percentage points from the 2012 Company Performance Factor of 100%.  The Committee agreed that this increase was a fair reflection of a very strong year, with nearly all corporate objectives exceeded and a percentage increase to its stock price that exceeded all other companies in the Executive Peer Group, except one.  The only disappointment was our failure to achieve marketing approval for Kynamro in Europe.  As noted earlier, the corporate objectives are set and approved by our Board at the beginning of each year.  We ensure these objectives are aggressive and we define excellent performance as a year in which we have met most of the objectives.

Stock Compensation

We use stock options and RSUs to give all employees, including Isis’ executive officers, an economic interest in the long-term appreciation of our common stock.  We believe awarding a combination of stock options and RSUs provides a number of benefits.  Stock options provide a way to align employee interests with those of upper management and the stockholders because as our stock price increases, so too does the employee’s compensation.  In 2011 our stockholders approved our 2011 Equity Incentive Plan which allowed us to provide RSU awards to our employees and Directors.  In 2012, we started granting RSUs as part of the annual merit equity awards.  RSUs are a strong retention vehicle for employees as the RSUs vest in annual installments over four years and have value upon vesting, but at the same time, require fewer shares than option awards.

54

Some of our largest institutional stockholders agree our stock options are performance-based and the best vehicle for our long-term compensation.  Our independent compensation consultant did not recommend we change our equity vehicles.  Over the past several years we discussed our use of time-vested stock options and RSU awards with our institutional stockholders.  The results of this process were that one of our largest institutional stockholders agreed that time-vested options are the best long-term incentive compensation vehicle for a biopharmaceutical company at our stage, and others agreed that our time-vested stock options are performance-based compensation.  Our independent compensation consultant also believes time-vested stock options are performance-based compensation and an appropriate equity vehicle for Isis.  Also we would be disadvantaged if we did not offer time-vested equity awards since most of the companies we compete with for talent (including most companies in the Executive Peer Group) do not use event-based vesting for equity compensation.
 
 
Our Stock Awards reward performance and incentivize long-term stock appreciation and increased stockholder returns.
 

We grant existing employees new options and RSUs annually to provide a continuing financial incentive in Isis’ long-term success.  We set the size of the equity awards based on individual and Company performance during the previous year.

Vesting schedules reward long-term performance and incentivize long-term stock appreciation and increased stockholder returns.  For each stock option and RSU granted, the Compensation Committee sets a vesting schedule over four years, with no vesting during the first year.  Therefore, the stock options and RSUs granted to our executive officers directly align the interests of our executive officers with the interests of our stockholders and Isis’ long-term success.  The actual economic value of stock option awards depends directly on the performance of our stock price over the period during which the awards vest and the period in which the options may be exercised.  In other words, the stock options are not worth anything if our stock price does not increase above the exercise price.  Our employees will only realize economic value when our stock price, and consequently stockholder value, increases.  Similarly, in the same way our stockholder returns increase and decrease based on our stock’s performance, the value to our employees of the RSUs increases and decreases based on our stock’s performance.

We do not tie vesting to the achievement of specific events, such as annual metrics, because we do not want to encourage our employees to deviate from our Company objectives, which we believe optimizes sustained stockholder value; nor do we want our employees to take unnecessary risks just to meet a short-term metric.

The stock option vesting schedule is typically over a 4-year period at the rate of 25% at the end of the first year and then at the rate of 2.08% per month for 36 months thereafter during the optionee’s employment.  The RSU vesting schedule is typically over a 4-year period at the rate of 25% per year.  In addition, as further described below, our executive officers must hold shares received upon vesting of their RSUs until they meet certain ownership thresholds or no longer serve the Company.  These practices align our employee compensation with our stockholders’ interests because if stockholder value declines over time, so too will the value of the equity compensation provided to all employees.  We have historically had low employee turnover, particularly in our management team, and the members of our management have traditionally held their options for a long period of time before exercise.  Our low turnover is indicative of our employees’ commitment to Isis and its technology, and reflects our officers’ belief in the long-term value of our stock.
55

Our stock compensation budget minimizes dilution.   Each year the Compensation Committee approves a budget that sets the number of stock options and RSUs we can grant our employees for annual merit awards.  We do not grant options or RSUs that exceed this budget without the Compensation Committee’s approval.  Over the past five years, the average merit award stock budget set by the Compensation Committee has been approximately 1.6% of our outstanding common stock on an issued and outstanding basis.  This stock compensation budget, and therefore our equity compensation burn rate, is well below the Executive Peer Group average of 4.3%.  We believe this stock budget is an important tool to balance our compensation objectives with stockholder interests.  For 2013, the Compensation Committee set the merit stock option budget at 1.35 million shares, and the RSU budget at 150,000 shares, which together represented 1.3% of our outstanding common stock on an issued and outstanding basis for that year.  This budget, as well as each employee’s position level and performance in the previous year, ultimately determines the size of the individual annual stock grant.

Our executive officers and members of our Board must hold the shares issued under their RSUs until they have met an ownership guideline and all employees must hold shares purchased under our ESPP for six months.

In February 2013, our Compensation Committee and our Board approved stock ownership and holding guidelines for our executive officers and members of the Board.  These guidelines require our executive officers and non-employee Board members to hold the shares they receive under their RSU awards until they achieve the guidelines or no longer serve the Company.  Shares sold or surrendered to pay for withholding taxes associated with the RSU awards are exempt from these holding requirements.

The table below indicates the stock ownership guidelines for our executive officers and Board members:

Executive Officer/Director
Stock Ownership Guideline
(as a multiple of base salary/annual cash retainer)
CEO(1)
3 times Base Salary
COO
2 times Base Salary
All other executive officers
1 times Base Salary
Non-employee Directors
3 times Annual Cash Retainer
 
(1) Dr. Crooke currently meets these ownership guidelines.
 
In addition, our ESPP has a six month minimum holding period for shares purchased under the ESPP.

Dr. Crooke currently holds approximately 725,000 shares of our common stock and has held these shares throughout his 25-year tenure.  As of March 31, 2014, Dr. Crooke’s holding represented approximately 66 times his Base Salary.

We have a recoupment/“clawback” policy. If we are required to prepare an accounting restatement due to the material noncompliance of Isis, as a result of misconduct, with any financial reporting requirement under the securities laws, Isis’ Chief Executive Officer and Chief Financial Officer will reimburse Isis for:
 
· any bonus or other incentive-based or equity-based compensation received by that person from Isis during the 12-month period following the first public issuance or filing with the SEC (whichever first occurs) of the financial document embodying such financial reporting requirement; and
 
· any profits realized from such executive’s sale of Isis’ securities during that 12-month period.
 
 The SEC may exempt any person from the application of this executive recoupment policy, as it deems necessary and appropriate.

In addition, if and when the SEC adopts implementing regulations under Section 954, “Recovery of Erroneously Awarded Compensation” under The Dodd-Frank Wall Street Reform and Consumer Protection Act, our Nominating, Governance and Review Committee will promptly adopt appropriate updates to this policy to comport with such implementing regulations.

We explicitly prohibit employees from “shorting” and hedging against our stock.  To help avoid situations in which our employees may benefit from transactions that harm our stockholders, our policies specifically prohibit all employees, including our executive officers, from taking a “short” position in our stock and otherwise hedging their position in our stock against a future drop in our stock price.  In addition, we specifically prohibit all of our employees from trading derivative instruments based on our common stock (e.g. put or call options for our stock).

56

 10b5-1 plan required for executive officers, all vice presidents and many other employees.  We have a Rule10b5-1 trading program.  Our Rule 10b5-1 trading program allows our executive officers, all vice presidents and many other employees, to establish plans that permit prearranged future sales of his or her stock when there is no material non-public information available.  We do not allow our executive officers to buy or sell our stock outside of the Rule 10b5-1 trading program except for purchases of our stock under our ESPP (but not subsequent sales of the stock).

Perquisites

Isis is committed to using stockholder money responsibly, to building stockholder value and ensuring our processes are entirely transparent.  As a result, Isis’ policies do not provide for perquisites for any employees, including our executive officers.

Retirement & Other Benefits

Isis maintains a highly competitive position with regard to the benefits offered to all regular employees, including our executive officers.  These benefits include medical, dental and vision insurance, EAP/WorkLife, basic life insurance, short-term disability/sick pay, long-term disability, vacation, holidays, a 401(k) plan with employer match, an ESPP and Accidental Death & Dismemberment (AD&D) insurance.

Recognizing that health care costs constitute a greater fraction of disposable income for lower paid employees, we have a progressive contribution premium for our health care benefits, which means the more money an Isis employee makes, the more he or she contributes to the costs of his/her family’s health care.

Retention and Change of Control Agreements

We designed our retention agreements for our CEO and COO and the related severance compensation provisions to meet the following objectives:

Change in Control.   As part of our normal course of business and as a result of our business strategy, we engage in discussions with other biotechnology and pharmaceutical companies about possible collaborations, licensing and/or other ways in which the companies may work together to further our respective long-term objectives.  In addition, many larger established pharmaceutical companies consider companies at similar stages of development to ours as potential acquisition targets.  Occasionally, a transaction in the biotech/biopharmaceutical industry may start as a licensing transaction, but ultimately result in an acquisition.  In certain scenarios, the potential for merger or being acquired may be in the best interests of our stockholders.  As further described on pages 67 and 68 of this Proxy Statement, we provide a component of severance compensation for our CEO and COO to promote their ability to act in the best interests of our stockholders even though they could be terminated as a result of the transaction.

Termination without Cause.  If we terminate the employment of our COO “without cause” we will pay her the benefits described under “Post-Employment Compensation – Retention and Change of Control Agreements” of this Proxy Statement.  This agreement provides us with more flexibility to make a change in senior management if such a change is in our and our stockholders’ best interests.

2013 Say-on-Pay Vote

We value the feedback our stockholders provide regarding executive compensation.  As such, we are committed to providing our stockholders the opportunity for a “Say-on-Pay” vote annually.

In 2013 we asked our stockholders to provide a non-binding approval regarding our executive officer compensation for the previous year.  This proposal, commonly known as a “Say-on-Pay” proposal, gave our stockholders the opportunity to express their views on the compensation paid to our named executive officers.  At our 2013 Annual Meeting of Stockholders, we received an advisory vote in favor of our executive compensation by over 97% of the shares voted at the meeting.
57

Compensation of Executive Officers

The following table shows for the fiscal years ended December 31, 2013, 2012 and 2011 compensation awarded to or paid to, or earned by, our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers at December 31, 2013, called our “named executive officers.”
 
In 2011, we did not grant any stock awards or non-equity incentive plan compensation and we do not currently offer pension or non-qualified deferred compensation plans.
Summary Compensation Table

Name and Principal
Position
Year
 
Salary
($)
   
Bonus(1)
($)
   
Stock Awards(2)(3)
($)
   
Option Awards(3)
($)
   
All Other Compensation(4)
($)
   
Total
($)
 
Stanley T. Crooke
Chairman, President, Chief Executive Officer
2013
 
 
$735,169
   
 
$803,907
   
 
$325,971
   
 
$877,737
   
 
$15,752
   
 
$2,758,536
 
2012
 
 
$735,169
   
 
$367,585
   
 
$90,516
   
 
$344,921
   
 
$17,815
   
 
$1,556,006
 
2011
 
 
$735,169
   
 
$535,938
     
--
   
 
$611,305
   
 
$14,920
   
 
$1,897,332
 
Elizabeth L. Hougen(5)
Senior Vice President, Finance and Chief Financial Officer
2013
2012
  
 
 
$365,496
$337,036
     
 
 
$215,871
$131,444
       
 
(6)$54,419
$16,462
       
 
(6)$113,461
$62,741
      
 
 
$20,618
$21,148
     
 
 
$769,865
$568,831
  
B. Lynne Parshall
Director, Chief Operating Officer
2013
 
 
$641,574
   
 
$526,171
   
 
$152,482
   
 
$410,463
   
 
$20,636
   
 
$1,751,326
 
2012
 
 
$641,574
   
 
$256,630
   
 
$52,136
   
 
$198,675
   
 
$22,600
   
 
$1,171,615
 
2011
 
 
$641,574
   
 
$409,244
     
--
   
 
$364,913
   
 
$19,088
   
 
$1,434,819
 
C. Frank Bennett
Senior Vice President, Antisense Research
2013
 
 
$397,077
   
 
$234,524
   
 
$83,145
   
 
$224,081
   
 
$20,038
   
 
$958,865
 
2012
 
 
$397,077
   
 
$148,904
   
 
$21,113
   
 
$80,478
   
 
$21,074
   
 
$668,646
 
2011
 
 
$397,077
   
 
$201,020
     
--
   
 
$136,434
   
 
$17,398
   
 
$751,929
 
Richard S. Geary
Senior Vice President, Development
2013
 
 
$398,444
   
 
$225,918
   
 
$82,117
   
 
$221,049
   
 
$14,695
   
 
$942,223
 
2012
 
 
$398,444
   
 
$143,440
   
 
$23,583
   
 
$89,879
   
 
$17,048
   
 
$672,394
 
2011
 
 
$398,444
   
 
$225,918
     
--
   
 
$167,446
   
 
$14,125
   
 
$805,933
 
 
(1) We present bonuses in the years they were earned, not in the year paid.  Bonuses represent compensation for achievements and are not necessarily paid in the year they are earned; for example, in January 2014 we paid bonuses for 2013 performance.
 
(2) The Company began granting restricted stock units in January 2012.
 
(3) Amounts represent the aggregate expense recognized for financial statement reporting purposes in accordance with FASB Topic ASC 718 (“ASC 718”) for stock and option awards granted to our named executive officers.  ASC 718 expense for the option awards is based on the fair value of the awards on the date of grant using an option-pricing model. The fair value of RSUs is based on the market price of our common stock on the date of grant.  For more information, please see Note 5 of the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013 regarding assumptions underlying valuation of equity awards.
 
 
(4)
Includes AD&D, Basic Life, Medical, Dental, Vision, and 401(k) matching contributions which are available to all employees.
 
(5) Ms. Hougen was not a named executive officer in 2011 or 2012 and did not become an executive officer until January 2013. We are not disclosing compensation for 2011 as permitted by SEC regulations.
 
(6) Ms. Hougen received additional stock options and stock awards due to her promotion to Chief Financial Officer in January 2013.
58

Grants of Plan-Based Awards

The following table shows for the fiscal year ended December 31, 2013, certain information regarding grants of plan-based awards to our named executive officers:
 
Grants of Plan-Based Awards in Fiscal 2013

Name
Grant Date
 
All Other Stock Awards: Number of Shares of Stock or Units
(#)
   
All Other Option Awards: Number of Securities Underlying Options
(#)
   
Exercise or Base Price of Option Awards
($/Sh)
   
Grant Date Fair Value of Stock and Option Awards(1)
($)
 
Stanley T. Crooke
1/30/13
 
 
     
133,180
   
 
$14.69
   
 
$877,737
 
1/30/13
   
22,190
                   
 
$325,971
 
Elizabeth L. Hougen
(2)1/2/13
           
7,500
   
 
$10.82
   
 
$36,679
 
1/2/13
           
15,700
   
 
$10.82
   
 
$76,782
 
(2)1/2/13
   
1,250
                   
 
$17,600
 
1/2/13
   
2,615
                   
 
$36,819
 
B. Lynne Parshall
1/30/13
           
62,280
   
 
$14.69
   
 
$410,463
 
1/30/13
   
10,380
                   
 
$152,482
 
C. Frank Bennett
1/30/13
           
34,000
   
 
$14.69
   
 
$224,081
 
1/30/13
   
5,660
                   
 
$83,145
 
Richard S. Geary
1/30/13
           
33,540
   
 
$14.69
   
 
$221,049
 
1/30/13
   
5,590
                   
 
$82,117
 
 
(1) Amounts represent the aggregate expense recognized for financial statement reporting purposes in accordance with FASB Topic ASC 718 (“ASC 718”) for stock and option awards granted to our named executive Officers.  ASC 718 expense for the option awards is based on the fair value of the awards on the date of grant using an option-pricing model. The fair value of RSUs is based on the market price of our common stock on the date of grant.  For more information, please see Note 5 of the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013 regarding assumptions underlying valuation of equity awards.
 
(2) Granted as a result of Ms. Hougen’s promotion to Chief Financial Officer in January 2013.
 
Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table

The Compensation Committee granted merit non-statutory stock options to the executive officers on January 30, 2013, except that Ms. Hougen’s were granted on January 2, 2013.  All of these stock options were granted out of our 1989 Stock Option Plan.  The options have a term of seven years and vest at the rate of 25% for the first year and then at the rate of 2.08% per month for 36 months thereafter during the optionee’s employment.

The Compensation Committee granted RSUs to the executive officers on January 30, 2013, except that Ms. Hougen’s were granted on January 2, 2013.  All of these RSUs were granted out of our 2011 Equity Incentive Plan.  The RSUs vest at the rate of 25% per year over four years with a vesting commencement date of January 15, 2013.

Outstanding Equity Awards at Fiscal Year-End  –  Executive Officers.

The following table shows for the fiscal year ended December 31, 2013, certain information regarding outstanding equity awards at fiscal year-end for our named executive officers.

Other than the equity awards described in the table below, there were no equity incentive plan awards outstanding for our named executive officers at December 31, 2013.

59

Outstanding Equity Awards At December 31, 2013

  
     
 
Option Awards
   
Stock Awards
 
Name
 
 
 
 
 
Grant
Date
 
Number of Securities Underlying Unexercised Options
(#)
Exercisable(1)
   
Number of Securities Underlying Unexercised Options
(#)
Unexercisable
   
Option Exercise Price
($)
   
Option Expiration Date
   
Number of Shares or Units of Stock that Have Not Vested(2)
   
Market Value of Shares or Units of Stock that Have Not Vested(3)
($)
 
Stanley T. Crooke
01/02/2009
   
150,000
     
0
   
 
$14.47
   
1/1/16
     
--
     
--
 
01/04/2010
   
116,680
     
2,483
   
 
$11.27
   
1/3/17
     
--
     
--
 
01/03/2011
   
89,028
     
33,068
   
 
$10.29
   
1/2/18
     
--
     
--
 
01/03/2012
   
51,368
     
55,835
   
 
$7.25
   
1/2/19
     
--
     
--
 
01/30/2013
   
0
     
133,180
   
 
$14.69
   
1/29/20
     
--
     
--
 
01/15/2012
   
--
     
--
     
--
     
--
     
8,932
   
 
$355,851
 
01/30/2013
   
--
     
--
     
--
     
--
     
22,190
   
 
$884,050