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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-K

Commission file number 0-19125

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

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

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

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

        The approximate aggregate market value of the voting common stock held by non-affiliates of the registrant, based upon the last sale price of the common stock reported on the National Association of Securities Dealers Automated Quotation National Market System was $227,642,048 as of June 30, 2003.*

        The number of shares of voting common stock outstanding as of March 3, 2004 was 55,883,687.

DOCUMENTS INCORPORATED BY REFERENCE
(To the extent indicated herein)

        Portions of the registrant's definitive Proxy Statement filed on or about April 15, 2004 with the Securities and Exchange Commission in connection with Registrant's annual meeting of stockholders to be held on May 26, 2004, is incorporated by reference into Part III of this Report. The Exhibit Index (Item No. 15) located on pages 59 to 63 incorporates several documents by reference as indicated therein.

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Excludes 12,762,386 shares of common stock held by directors and officers and by stockholders whose beneficial ownership is known by the Registrant to exceed 10% of the common stock outstanding at June 30, 2003. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant.

        This Form 10-K contains forward-looking statements regarding our business and the therapeutic and commercial potential of our technologies and products in development. Any statement describing our goals, expectations, intentions or beliefs is a forward-looking statement and should be considered an at-risk statement. Such statements are subject to certain risks and uncertainties, particularly those risks or uncertainties inherent in the process of developing technology and systems used to identify infectious agents, discovering, developing and commercializing drugs that can be proven to be safe and effective for use as human therapeutics, and in the endeavor of building a business around such products and services. Actual results could differ materially from those discussed in this Form 10-K. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Form 10-K including those identified in the section of Item 1 entitled "Risk Factors". As a result, you should not rely on these forward-looking statements.

        Vitravene® is a registered trademark of Novartis AG. Taxotere® is a registered trademark of Aventis Pharmaceuticals, Inc. GeneTrove® and Ibis Therapeutics® are registered trademarks of Isis Pharmaceuticals, Inc. Affinitak™ is a trademark of Eli Lilly and Company. HepaSense™ is a trademark of HepaSense Ltd. Orasense™ is a trademark of Orasense Ltd. Macugen™ is a trademark of Eyetech Pharmaceuticals, Inc. Alnylam® is a registered trademark of Alnylam Pharmaceuticals, Inc. InterfeRx™ is a trademark of Alnylam Pharmaceuticals, Inc.

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PART I

PART I

ITEM 1.    Business

Overview

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

        We used our antisense technology to commercialize our first product, Vitravene®. Vitravene demonstrates our ability to meet Food and Drug Administration, or FDA, and European regulatory requirements and to commercially manufacture antisense drugs. We currently have 11 antisense products in our development pipeline with 10 in human clinical trials designed to assess safety and efficacy. Our products in development address numerous therapeutic areas with major market potential, including inflammatory, viral, metabolic, dermatological, and cardiovascular diseases, and cancer. We are expanding the therapeutic opportunities for antisense drugs by developing a variety of formulations to enhance patient convenience and compliance. In addition, we are advancing antisense drugs using second-generation chemistry. Physicians may be able to dose our second-generation drugs, which represent over half of our drugs in development, as infrequently as once per month. We are also making progress on developing oral formulations of our second-generation drugs. Recent clinical trial data showed the potential feasibility of oral solid dosage forms for antisense drugs. This oral formulation platform may increase the commercial competitiveness of any antisense drugs we may develop and broaden their applicability.

        Affinitak™, formerly LY900003 or ISIS 3521, which we licensed to Eli Lilly and Company, or Lilly, in 2001, is our most advanced product in development. In March 2003, we announced the results of our Phase III clinical trial of Affinitak to treat patients with non-small cell lung cancer, which were not sufficient to support a single study new drug application. Lilly and we completed an analysis of the data from this trial and presented a summary of the findings at the 39th Annual Meeting of the American Society of Clinical Oncology in June 2003. In a second Phase III study, Lilly is continuing to follow enrolled patients. Lilly and we will make a decision about the future development of Affinitak pending a review upon completion of the second Phase III trial, which most likely will occur in the second half of 2004.

        We are conducting two Phase III clinical trials for another product, ISIS 2302, or alicaforsen, in an inflammatory bowel disease known as Crohn's disease. We are conducting these trials in North America and Europe. We expect to report data from these clinical trials in the second half of 2004. We also have Phase II programs ongoing for five additional products.

        Our GeneTrove® program uses our antisense technology as a tool to provide important information about the function of genes and has automated the initial steps in our antisense drug

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discovery process. Our current focus is to use GeneTrove information to direct our own drug discovery research and that of our antisense drug discovery partners, like Lilly and Amgen.

        Within our Ibis program we have invented a platform technology that has the potential to revolutionize the identification of organisms that cause infectious diseases. Through a project called Triangulation Identification for Genetic Evaluation of Risks, or TIGER, we have applied our proprietary technologies to develop a biological sensor, or biosensor, designed to rapidly and simultaneously identify a broad range of infectious organisms in a sample, including organisms that are newly-emerging, genetically altered and unculturable. We have successfully demonstrated proof-of-principle of the TIGER biosensor with the identification of a variety of bacteria and viruses in both environmental and human clinical samples. To date, we have received grants and contracts representing potential funding of up to $55 million from agencies of the U.S. Government, including the Defense Advanced Research Projects Agency, or DARPA, the Centers for Disease Control and Prevention, or CDC, the U.S. Army Medical Research Institute of Infectious Diseases, or USAMRIID, the United States Navy, and the Federal Bureau of Investigation, or FBI, among others.

        We have a broad patent portfolio covering our technologies. We have rights to more than 1,300 issued patents, which we believe represents the largest antisense and RNA-oriented patent estate in the pharmaceutical industry. Our intellectual property is a strategic asset that we are exploiting to generate near-term revenue and that we expect will also provide us with revenue in the future. The principal purpose of our intellectual property portfolio is to protect our inventions in RNA-based drug discovery. Our intellectual property estate also enables us to expand our pipeline by granting partners limited access to antisense technology through licenses we grant them. Licensing partnerships may include antisense drug discovery collaborations such as those we have with Lilly and Amgen, as well as GeneTrove functional genomics agreements like those we have with Amgen, Chiron and Pharmacia. In addition, we have licensed our functional genomics patents to companies like Chiron, Amgen, Sequitur and atugen AG. We also license our non-antisense patents, as we did to Eyetech Pharmaceuticals, Inc, or Eyetech. In December 2001, we licensed several chemistry patents to Eyetech for the development of Macugen™, a drug designed to treat age-related macular degeneration, or AMD, that Eyetech is co-developing with Pfizer. In 2003, Pfizer and Eyetech reported encouraging Phase III data for Macugen that Eyetech says will serve as the basis for a new drug application, or NDA, with commercialization of the drug expected in 2005. Assuming successful commercialization of Macugen, we have the opportunity to earn future milestone payments and royalties that could be substantial to us. To date, we have generated more than $35 million in license and royalty fees related to our patent portfolio.

        We incorporated in California in 1989, and in 1991 we reincorporated as a Delaware corporation. Our principal offices are in Carlsbad, California. In November 2003, we established Isis Pharmaceuticals Singapore Pte Ltd, a wholly-owned subsidiary in Singapore.

Drug Discovery and Development

        From our progress in antisense we have developed a robust pipeline of promising new drugs and efficient genomics tools that unlock value from gene sequence data. Our Ibis program has the potential to become an important new approach to the identification and treatment of infectious diseases.

Antisense Technology Platform

Antisense Drug Discovery

        Proteins are essential, working molecules in a cell. Almost all human diseases result from inappropriate protein production or improper protein activity. Scientists use traditional drug discovery methods to design drugs to interact with the proteins in the body that are supporting or causing a disease. Antisense technology is different from traditional drug discovery because it specifically targets

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disease-causing proteins before the body produces them. We design our antisense drugs, or antisense inhibitors, to act earlier in the disease process than traditional drugs and to interrupt the production of disease causing proteins without disrupting proteins responsible for the body's normal functioning.

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

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

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

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

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

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subcutaneous, intravitreal, aerosol and enema, of antisense drugs that further expand the potential for antisense technology.

        In our functional genomics program, GeneTrove, we use antisense technology to generate information about the function of genes and to determine the value of genes as drug discovery targets. This information forms the basis of the first step of our antisense drug discovery program. We use this information to direct our own antisense drug discovery research, and that of our antisense drug discovery partners. We have created inhibitors to thousands of genes, validated many targets and dissected numerous disease pathways. Additionally, we have created libraries of antisense inhibitors to identify novel gene function. Our GeneTrove program has enhanced our own antisense drug discovery efforts and our patent portfolio through custom target validation collaborations and intellectual property licenses while generating near-term revenue for us.

Ibis Technology Platform

        Through our Ibis program, we have expanded on our RNA-based drug discovery and development expertise to create a platform technology designed to rapidly and accurately identify a broad range of organisms in a single test, and to develop small molecule antibacterial and antiviral drugs that bind to RNA. To accomplish these tasks, our scientists integrate functional genomics, bioinformatics and RNA-focused chemistry programs with novel high-throughput, mass spectrometry-based screening methods.

        We are collaborating with San Diego-based Science Applications International Corporation, or SAIC, on a multi-year project funded by DARPA for the ongoing development of our TIGER technology and biosensor. This project combines our expertise in microbial genome sequence analysis and advanced mass spectrometry technology with SAIC's advanced signal processing capabilities. As of December 31, 2003, we had been awarded funding of $13.3 million related to this collaboration with SAIC, of which $13.3 million had been billed and $11.9 million had been collected. During 2003, we successfully demonstrated proof-of-principle of the TIGER biosensor with the identification of a variety of bacteria and viruses in both environmental and human clinical samples. In March 2004, we were awarded a two-year contract under this collaboration for additional funding of up to $19.5 million to further the ongoing development of TIGER, including the design and manufacture of a fully integrated, self-contained system, called TIGER 2.0. We are designing this instrument to perform the analysis of samples in an automated manner, and expect to initially deploy it for use by our government partners, including the CDC.

        In September 2003, we received a three-year grant for up to $6.0 million from the CDC to develop and apply our TIGER technology to the surveillance of human infectious disease in the U.S. Using the grant from the CDC, we expect to develop and provide TIGER technology for CDC projects focused on emerging human infectious diseases. We believe our work to automate the TIGER biosensor and deploy the system for specific applications for the CDC and DARPA advances our TIGER technology toward commercialization. We retain full commercial rights to the TIGER technology while our government partners have access to the technology to meet their specific needs.

        Since Ibis' inception, we have received significant financial support from government-funded grants and contracts to use Ibis' technology to assist in national defense. In March 2002, we transitioned our government-sponsored research program to discover novel broad-spectrum antibacterial drugs for biological warfare defense to USAMRIID. USAMRIID awarded us a three-year, $2.4 million contract to advance our work in this area.

        In addition to DARPA, USAMRIID and the CDC, we also have research relationships with other government entities including the United States Navy and the FBI. To date, we have received government contracts and grants representing potential funding of up to $55 million. During 2003,

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revenue generated from agencies of the U.S. Government comprised 20% of our total revenue, including approximately 16% of our total revenue from our collaboration with SAIC.

Approved Product and Products Under Development

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

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

Approved Product and Products Under Development

(1)

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

(2)

A compound in the preclinical phase of development is one in which we have initiated toxicology and pharmacokinetic studies in animals to support the filing with the FDA of an Investigational New Drug, or IND.

(3)

Novartis Ophthalmics AG has the exclusive worldwide rights to distribute Vitravene.

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Drugs based on second-generation chemistry

        The following section provides more detailed descriptions of our approved product and those products in clinical development and the disease indications they target. We also have a significant research program which we expect to yield additional development candidates in the future.

Cytomegalovirus, or CMV Retinitis

        Individuals with suppressed immune systems, such as those with AIDS resulting from the HIV virus, are susceptible to opportunistic infections caused by CMV. Among patients with AIDS, CMV

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retinitis is the primary cause of blindness. Currently approved drugs for CMV retinitis are ganciclovir, foscarnet, cidofovir and fomivirsen.

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

Cancer

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

        Affinitak—Affinitak, which we licensed to Lilly in August 2001, is our antisense compound in Phase III clinical development for non-small cell lung cancer. Affinitak inhibits the production of one particular isotype, the alpha isotype, of protein kinase C, or PKC. PKC alpha is a member of a family of proteins that are associated with both normal and abnormal cell growth. PKC alpha has been shown to be involved in cancer cell growth and maintenance. In preclinical studies, we have been able to specifically inhibit the production of the PKC-alpha isotype without inhibiting the production of other isotypes, thus allowing the inhibition of an isotype believed to be involved in abnormal cell growth without more broadly affecting all the different PKC isotypes.

        In 2003, we announced the results of our Phase III clinical trial of Affinitak in combination with traditional cancer chemotherapy drugs to treat patients with non-small cell lung cancer. In this 616-patient trial, we observed no difference in a primary log-rank analysis of overall survival, the primary endpoint of the trial, of those patients who received Affinitak plus the chemotherapy regimen of carboplatin and paclitaxel compared to those patients who received the chemotherapy alone. Further, we performed additional analysis of the data using other standard statistical methods or tests. We observed that survival of the Affinitak treated patients was greater than that of the patients who received the chemotherapy alone. Another potentially important observation from the trial was that those patients who completed the prescribed course of therapy, six cycles, experienced a survival benefit compared to those patients who did not complete therapy. This result suggests that the duration of treatment with Affinitak may contribute to improved survival. Additionally, in those patients who completed the prescribed course of therapy, results favored the Affinitak group across multiple secondary endpoints, including time to disease progression, time to treatment failure and duration of remission.

        The addition of Affinitak to carboplatin and paclitaxel was well tolerated. There were no increases in severe toxicities or toxicity related deaths in patients receiving Affinitak, compared to those receiving the chemotherapy alone. The most common side effects among patients in the study were fatigue and nausea. Patients in the study receiving Affinitak in combination with the chemotherapy had a higher rate of moderate thrombocytopenia, nausea and vomiting. Further, because clinicians administer Affinitak via continuous intravenous infusion, Affinitak treated patients had a higher incidence of catheter-related infections.

        Lilly and we completed an analysis of the data from this trial and presented a summary of the findings at the 39th Annual Meeting of the American Society of Clinical Oncology in June 2003. In a

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second Phase III study, Lilly is continuing to follow enrolled patients. Lilly and we will make a decision about the future development of Affinitak pending a review upon completion of the second Phase III trial, which most likely will occur in the second half of 2004.

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

        In preclinical animal studies, scientists from both OncoGenex and Isis, in collaboration with the Prostrate Center at Vancouver General Hospital, demonstrated OGX-011 improved the potency of traditional chemotherapies more than ten-fold in prostate cancer, without compromising safety. These studies also show that OGX-011, when combined with other cancer treatments in preclinical model systems, may significantly improve tumor reduction and delay disease progression in prostate, lung, bladder and renal cancer. These findings support the continued development of OGX-011 in combination with standard chemotherapy and other agents.

        OncoGenex and we initiated a Phase I/II program of OGX-011 in patients with prostate cancer in December 2002. This Phase I trial is evaluating OGX-011 in combination with hormone ablation therapy prior to surgical removal of the prostate. In April 2003, Oncogenex and we initiated a second Phase I/II trial to evaluate OGX-011 in combination with TAXOTERE® in various solid tumors. We expect to report data from both clinical trials in the first half of 2004. OGX-011 is our first second-generation antisense anti-cancer drug in clinical trials.

        LY2181308—We licensed our preclinical anti-cancer candidate, LY2181308, formerly ISIS 23722, to Lilly in 2002, as part of the expansion of our Lilly research collaboration into cancer. The compound targets survivin, which plays a role in cancer cell death, or apoptosis. Survivin is one of the most abundantly expressed proteins in cancers. Our researchers and collaborators have shown that inhibiting expression of survivin by LY2181308 inhibits the growth of cancer cells. Since normal cells in the body do not express survivin, we expect that this drug will have fewer side effects than traditional chemotherapy.

        In April 2003, we earned a $1.5 million milestone from Lilly in the development of LY2181308 as part of our research collaboration oncology expansion with them. LY2181308 is the first compound from this partnership that Lilly has selected for clinical development. We expect Lilly to initiate Phase I trials of LY2181308 during 2004.

        ISIS 2503—Substantial evidence exists supporting a direct role for ras gene products in the development and maintenance of human cancer. Ras proteins are involved in passing information between cells. Ras, in both normal and mutated forms, is associated with abnormal cell growth and, as such, is associated with cancer. Cell culture and animal models have shown that ISIS 2503, a potent selective inhibitor of Harvey ras, or H ras, inhibits abnormal cell growth.

        During 2002, we completed Phase I studies that demonstrated that ISIS 2503 was well tolerated and reported no serious side effects. We also observed evidence of activity. These results supported continued development of ISIS 2503 in Phase II trials for the treatment of pancreatic and breast cancer; however, during 2003 we decided to discontinue development of ISIS 2503 in order to focus our development resources on other drugs in our pipeline. We will continue to pursue partnership opportunities for ISIS 2503.

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Inflammatory Diseases

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

        Alicaforsen (ISIS 2302)—The most advanced compound in our cell adhesion program selectively inhibits ICAM-1 gene expression. ICAM-1 is a member of the adhesion molecule family. Over-expression of ICAM-1 occurs in a wide variety of inflammatory disorders, such as rheumatoid arthritis, asthma, psoriasis and inflammatory bowel diseases. Experts believe that ICAM-1 contributes to the pathology of these diseases and conditions. We are currently evaluating alicaforsen in two Phase III studies for the treatment of Crohn's disease. Additionally, we are conducting Phase II studies of alicaforsen enema formulation for the treatment of ulcerative colitis. According to the Crohn's and Colitis Foundation of America, up to one million people have inflammatory bowel disease, with occurrences evenly split between Crohn's disease and ulcerative colitis, or UC. According to the European Federation of Crohn's and UC Associations, inflammatory bowel disease affects a similar number of people in Europe.

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Crohn's disease—Crohn's disease is a serious inflammatory disease that affects the entire digestive tract. A patient with Crohn's disease suffers chronic and often severe episodes of diarrhea, abdominal pain, rectal bleeding and fever. Two Phase III trials of alicaforsen in people with active Crohn's disease are in progress. One is enrolling patients in North America and the other in Europe, with a total of 300 patients in the two studies. These studies are evaluating the safety and efficacy of alicaforsen. We expect to report results of these trials in the second half of 2004.

In October 2002, we reported results of an open-label Phase II clinical trial in patients with Crohn's disease showing that alicaforsen may produce clinical disease remissions. In late 1999, we completed a 300-patient pivotal trial of alicaforsen in Crohn's disease, which we initiated based on positive results from an earlier Phase II trial. The initial analysis of the data from the 300-patient trial did not show efficacy and the data did not support an NDA filing. However, further analysis of the data indicated that those patients who received higher exposure to alicaforsen were more likely to experience complete clinical remission of their disease, which was the primary endpoint of the pivotal trial. The current Phase III trials are in response to this additional analysis and patients are receiving higher doses of alicaforsen than previously studied in controlled trials.

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Ulcerative Colitis—UC is an inflammatory disease of the colon, a part of the large intestine. Inflammation and ulceration of the innermost lining of the colon characterize UC. Symptoms typically include diarrhea, rectal bleeding and abdominal pain. UC differs from Crohn's disease, as it affects only the colon.

In October 2001, we reported that data from a Phase II clinical trial demonstrated that alicaforsen improved symptoms of patients with UC. Patients receiving an enema formulation of alicaforsen experienced a dose-dependent reduction in disease activity index score, or DAI, and clinical activity index score, or CAI. Further, many of these patients did not require additional medical and surgical intervention during the six month study period. The DAI and CAI measure the signs and symptoms that patients with ulcerative colitis typically experience. Clinical investigators observed no serious side effects in patients in this Phase II trial. Based on these favorable results, in November 2002 we launched a multi-center Phase II trial in the U.S. We designed this 170-patient U.S. study to compare the safety and efficacy of an enema formulation of alicaforsen to mesalamine enema, a widely used medication for ulcerative colitis. We expect

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to complete enrollment in this trial in early 2004. In April 2003, we initiated a randomized, double-masked, placebo-controlled Phase II trial in 100 patients in the U.S. and Europe. The primary endpoint was to study improvement in the Disease Activity Index (DAI) upon completion of the six-week dosing period. We plan to report data from both the 170-patient and 100-patient clinical trials in the second half of 2004.

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Pouchitis—Pouchitis is an inflammation of the ileo-anal pouch and is a common complication in ulcerative colitis patients requiring surgical removal of the diseased colon. Pouchitis is a disorder without satisfactory medical therapy. Symptoms include an increased number of stools, rectal bleeding, abdominal cramping and fever. Pouchitis affects a relatively small number of individuals who have inflammatory bowel disease. We conducted a Phase II trial of an enema formulation of alicaforsen for the treatment of patients with pouchitis. We designed the 12-patient trial to evaluate the safety and efficacy of alicaforsen in patients with pouchitis. In May 2003, we reported that interim data from the first eight patients in this trial demonstrated an improvement in clinical disease symptoms after receiving treatment of an enema formulation of alicaforsen, and that clinical investigators observed no significant adverse events. In October 2003, we reported additional data from this clinical trial that demonstrated sustained improvement of up to nine months, based on endoscopic scores that measured the physical signs of inflammation in the lower bowel, and that alicaforsen was well-tolerated.

        ISIS 104838—ISIS 104838 is a second-generation antisense inhibitor of TNF-alpha and the first product from our proprietary second-generation chemistry to enter the clinic. TNF-alpha, or tumor necrosis factor alpha, is a naturally occurring cytokine that is implicated in the development and progression of many inflammatory, infectious and autoimmune diseases, including rheumatoid arthritis and psoriasis. TNF-alpha is involved in bone and cartilage absorption, facilitates inflammation and inhibits bone formation. Most patients with rheumatoid arthritis have high levels of TNF-alpha.

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Rheumatoid Arthritis—According to the Arthritis Foundation, rheumatoid arthritis affects 2.1 million Americans, mostly women. Rheumatoid arthritis is a systemic disease that affects the entire body and is one of the most common forms of arthritis. Inflammation of the membrane lining in the joint, or synovium, which causes pain, stiffness, warmth, redness and swelling, is a characteristic symptom of rheumatoid arthritis. The inflamed synovium can invade locally causing damage to bone and cartilage. Inflamed cells release enzymes that may digest bone and cartilage. The involved joint can lose its shape and alignment, resulting in pain and loss of movement.

We recently reported data from a Phase II clinical trial which demonstrate that ISIS 104838 produced disease response in patients with rheumatoid arthritis. In the randomized, placebo-controlled trial, 157 evaluable patients received subcutaneous injections of either placebo or one of the three dose regimens of 200mg of ISIS 104838. Patients receiving once- and twice-weekly treatments experienced similar responses, with 41% of evaluable patients achieving a 20% decrease in disease activity, or ACR 20, as compared to 23% of placebo-treated patients achieving ACR 20. No drug-related serious adverse events were reported from this trial. The most frequent adverse event was injection site reaction. The reactions were generally considered mild in nature and occurred principally in the first month of treatment and with similar frequency as reported for protein therapeutics.

In October 2003, we reported the final results of our first Phase II clinical trial of ISIS 104838 in 20 patients with rheumatoid arthritis. The results demonstrated that 104838 reduced TNF-alpha mRNA levels in synovial tissue and stabilized levels of TNF-alpha in blood, and that ISIS 104838 was well tolerated. We designed this clinical trial to study the ability of different concentrations of ISIS 104838 to reduce TNF-alpha levels in blood and synovial tissue. We plan

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to initiate an additional Phase II clinical trial during 2004 to further explore dose, schedule and treatment duration of ISIS 104838 in patients with rheumatoid arthritis.

As we reported in 2001, Phase I trials of intravenous infusion and subcutaneous injection of ISIS 104838 demonstrated the potential for a more convenient dosing schedule of once every two to four weeks as well as safety advantages over first-generation antisense drugs. The subcutaneous study demonstrated substantial improvement in local tolerability over first-generation antisense drugs.

We believe that the positive results from the clinical data on ISIS 104838 helps to validate the potential of second-generation antisense drugs overall, and that these results will be useful to advance the development of all our second-generation drugs, since all antisense drugs of a chemical class behave similarly.

The development of an oral formulation of ISIS 104838 had been the focus of our Orasense joint venture with Elan. At the end of 2002, Elan concluded its participation in the Orasense collaboration, in conjunction with its restructuring efforts. As a result, we regained all rights to ISIS 104838, with a potential nominal royalty due to Orasense. We are continuing to advance the development of oral formulation platform technology.

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Psoriasis—According to the National Psoriasis Foundation, more than 7 million people in the United States have psoriasis, which is a non-contagious disorder of the skin. Abnormal growth or overproduction of skin cells characterizes psoriasis. The most common type is plaque psoriasis, which accounts for 80% of psoriasis diagnosis. We have completed a Phase II clinical trial of a topical formulation of ISIS 104838 in patients with psoriasis and have concluded that the data are not sufficient to support continued development of the current topical formulation. We are planning a Phase II trial of systemically delivered ISIS 104838 for the treatment of psoriasis.

        ISIS 107248—ISIS 107248, or ATL 1102, is a second-generation antisense inhibitor of CD49d, which is a subunit of VLA-4. Studies in animal models have demonstrated that inhibition of VLA-4 has a positive effect on a number of inflammatory diseases like multiple sclerosis. In December 2001, we licensed ISIS 107248 to Antisense Therapeutics Limited, or ATL. Under our agreement with ATL, we completed the required preclinical studies for ISIS 107248 and manufactured the bulk drug for human clinical trials at ATL's expense. ATL is responsible for the future clinical development and the commercialization of the drug. In August 2003, ATL initiated a Phase I clinical trial of ISIS 107248 for the treatment of multiple sclerosis. We expect that ATL will report final data from this trial mid-year 2004, and plan to initiate a Phase II trial in patients with multiple sclerosis by the end of 2004.

Hepatitis C, or HCV

        HCV represents a major public health challenge. This potentially deadly disease affects the liver and can eventually cause liver cirrhosis and death. HCV affects an estimated four million people in the United States, and will kill 10,000 to 12,000 people in the United States each year. Physicians attempt to eradicate this virus from chronically infected individuals by using Interferon-alpha therapy, either alone or in combination with the drug ribavirin. According to data from the National Institute of Health, patients with genotypes 2 and 3 are two to three times more likely to respond to interferon based therapy than patients with genotype 1. Genotype 1 is the most common genotype in the United States. Better, safer and more effective treatments for HCV are urgently needed, as current therapies have limited efficacy and potentially serious side effects.

        ISIS 14803—Our antisense inhibitor of HCV, ISIS 14803, may represent a significant therapeutic advance in treating this serious viral epidemic. We designed ISIS 14803 to inhibit the replication of HCV.

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        Two clinical trials of ISIS 14803 have demonstrated activity in patients with HCV, and a third clinical trial is in process. Isis presented data from two single agent studies that showed ISIS 14803 is active in drug resistant, genotype 1 HCV patients, the most difficult-to-treat segment of the HCV patient population. In a four-week Phase I/II clinical trial initiated in August 2003, which we designed to evaluate both the safety and efficacy of ISIS 14803 in patients with HCV, ISIS 14803 demonstrated dose-dependent antiviral activity, decreasing the level of virus in the blood in patients with drug resistant chronic HCV. All patients in the clinical study had the most common and drug resistant form of HCV, genotype 1, and all but one patient had failed previous interferon-based therapy. Flu-like symptoms, headache and fatigue were the most common side effects observed in the trials. In October 2003, we reported the final results of a 43-patient single agent Phase II clinical trial that demonstrated promising antiviral activity by producing up to 3.8 log dose-dependent reductions in plasma virus levels in five of 17 patients with HCV.

        In May 2003, we initiated a 30-patient Phase II clinical trial to assess the benefits of adding ISIS 14803 to standard treatments for HCV. We designed the trial to explore the activity of ISIS 14803 in combination with standard HCV treatments based on cumulative experience with the drug as a single agent. We plan to announce initial results from this study in the second half of 2004.

Metabolic Diseases

        We are pursuing the discovery and development of antisense drugs for metabolic diseases such as diabetes and obesity. These chronic diseases affect millions of people and represent significant areas of unmet medical need. We believe that our second-generation antisense drugs will have properties that will make them attractive therapies.

        ISIS 113715—ISIS 113715 is our second-generation antisense inhibitor of the PTP-1B gene for type 2 diabetes. According to the American Diabetes Association, diabetes affects more than 18 million people and type 2 diabetes constitutes 90 percent of those cases. An antisense inhibitor of PTP-1B represents a new approach to the treatment of diabetes. For years, pharmaceutical companies interested in diabetes research have actively pursued phosphatases, such as PTP-1B, as part of traditional small molecule drug discovery efforts. However, due to structural similarities among closely related enzymes, it is often difficult to identify small molecule drugs with the degree of specificity that the antisense approach can obtain.

        The preclinical studies of ISIS 113715 demonstrated compelling activity in multiple diabetic animal models and suggested activity as an insulin sensitizer without causing hypoglycemia and while reducing cholesterol and weight gain.

        In May 2003, we initiated a Phase I clinical trial to assess the safety and pharmacokinetic profile of several doses of ISIS 113715 by parenteral administration in 20 healthy volunteers. In September 2003, we reported the results from this Phase I study, which demonstrated improved glucose tolerance and increased insulin sensitivity in all patients who received ISIS 113715, and that ISIS 113715 was well tolerated.

        Based on the results of the Phase I study, we are initiating a Phase II clinical trial to further evaluate the drug's ability to regulate blood sugar levels in patients with type 2 diabetes. We plan to initiate enrollment by mid-2004 and report data from this clinical trial in late 2004 or early 2005.

        ISIS 13650—ISIS 13650 is an inhibitor of c-raf kinase for the treatment of diabetic retinopathy and age-related macular degeneration. Diabetic retinopathy is an ocular complication of diabetes. The incidence of these conditions continues to grow with the advancing age of the U.S. population. In preclinical studies, antisense inhibition of c-raf kinase is associated with a reduction of neovascularization, or growth of blood vessels, which can obstruct vision. During 2002, ISIS 13650, a second-generation antisense product, was in preclinical development. During 2003, we decided not to

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invest any further in the development of ISIS 13650. This action is part of our broader decision to pursue ophthalmic research through partnerships rather than using our own resources.

Cardiovascular Diseases

        Cardiovascular disease is the leading cause of death in the United States, according to the National Institutes of Health. Researchers have shown a strong correlation between high cholesterol levels and subsequent cardiovascular diseases. Statistics from the American Heart Association show more than 100 million American adults have high cholesterol levels.

        ISIS 301012—ISIS 301012 is the newest compound that we have added to our pipeline. It targets apoB-100, a molecule that has been of great interest to the industry, yet has long been considered "undruggable" by traditional small molecule approaches. ApoB-100 is a protein that plays a pivotal role in the production of low-density lipoprotein (LDL), the "bad" cholesterol. In preclinical studies, ISIS 301012 reduced total cholesterol, very low-density lipoproteins (VLDL), low-density lipoproteins (LDL), and triglyceride levels, all of which are keys to managing heart disease. We initiated a double-blind, placebo-controlled, dose escalation Phase I study in late 2003. The goal of this trial is to assess the safety, tolerability and pharmacokinetic profile of ISIS 301012, and its ability to reduce several components of cholesterol that are important in the management and prevention of cardiovascular disease. We plan to report data from this study in the second half of 2004.

Research Programs

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

        Our core technology programs can support multiple target-based antisense research programs without significantly increasing costs. Through these programs, we can efficiently explore numerous disease targets and identify lead compounds to advance into preclinical development. We are currently pursuing antisense and small molecule drug discovery programs focused on various anti-viral and anti-bacterial targets, inflammatory disease targets, cardiovascular disease targets and other key molecular targets that might play critical roles in cancer and metabolic diseases like diabetes and obesity.

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

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

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

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        Modulation of alternative splicing seeks to control the process by which a single gene can lead to several proteins. To be converted into proteins, genes must be initially copied into a pre-mRNA. This pre-mRNA then undergoes splicing, a process where stretches of RNA are deleted and the remaining RNA strand is then linked back together. Splicing is necessary for a messenger RNA, or mRNA, to be read by the cell to produce a particular protein.

Collaborative Arrangements and Licensing Agreements

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

2003 and Recent Business Development Highlights

        We are focused on establishing new partnerships and on advancing and building upon existing relationships. We currently have agreements with more than a dozen partners. These span all four areas of our business: antisense drug discovery and development, GeneTrove, Ibis and our intellectual property estate. The following is a list of our business development highlights for 2003 and early 2004.

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We received a grant and subsequently achieved two milestones in our antisense drug discovery partnership with the Industrial Technology Research Institute, or ITRI, of Taiwan, focused on the coronavirus associated with Severe Acute Respiratory Syndrome, or SARS.



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We received a grant from the Singapore Economic Development Board, or Singapore EDB, to support the broadening of two of our RNA-based drug discovery and development programs: micro-RNA drug discovery and antisense drug discovery targeting the coronavirus associated with SARS.



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We received a grant from the CDC to develop and apply Ibis' TIGER technology to the surveillance of infectious diseases in the U.S.



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We expanded our drug discovery partnership with OncoGenex to include the development of OGX-225, a second-generation antisense anti-cancer drug that we are developing to inhibit the production of two related proteins simultaneously.



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We initiated a multi-year collaboration to discover antisense drugs that regulate alternative RNA splicing with Ercole Biotech, Inc., or Ercole. Ercole licensed Isis' Bcl-x preclinical antisense drug as its lead development compound.



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We achieved a $1.5 million milestone from Lilly for the selection of LY2181308, an inhibitor of survivin, for clinical development.



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We achieved a second milestone in our antisense drug discovery collaboration with Amgen.



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We entered into a target validation agreement with Pfizer, Inc., in which Pfizer obtained access to our antisense inhibitors and acquired a license to specific patents within our intellectual property estate for use in its internal antisense-based functional genomics program.



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We received a two-year contract from DARPA providing up to $19.5 million to further development of our TIGER biosensor under our collaboration with SAIC.



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We entered into a strategic alliance with Alnylam to develop and commercialize RNA; therapeutics, and made an equity investment in Alnylam.

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Eli Lilly and Company

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

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Lilly purchased $75 million of our common stock at $18 per share.



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We licensed to Lilly rights to Affinitak, our antisense drug which Lilly is testing in a Phase III trial for the treatment of non-small cell lung cancer.



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We initiated with Lilly a four-year antisense drug discovery collaboration in the areas of metabolic and inflammatory diseases and a related GeneTrove collaboration to determine the function of up to 1,000 genes. In 2002, Lilly and we expanded this collaboration to include oncology and the license of LY2181308, formerly ISIS 23722, our antisense inhibitor of survivin.



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Lilly committed to lend us, interest-free, up to $100.0 million over a four-year period to fund our obligations under the research collaboration. We can repay this loan at our option in either cash or our common stock, at a fixed conversion price of $40 per share.

        To date, Lilly has paid or committed to pay us more than $200.0 million in funding through 2005, including the $100.0 million loan, the $75.0 million equity investment, the $25.0 million in Affinitak up-front license fees, and amounts for the remaining Affinitak development costs. Assuming the success of multiple products from our collaboration with Lilly, we have the opportunity to earn additional future milestones and royalties from Lilly that could be substantial to us.

        In September 2002, we further expanded our relationship with Lilly by agreeing to manufacture Affinitak during the product launch period for Lilly. Through this agreement we upgraded and expanded our manufacturing facility, including the addition of a new state-of-the-art manufacturing suite. Lilly provided us with funding in the form of a $21.2 million loan to build the new suite. In June 2003, we reached a mutually beneficial renegotiation of our manufacturing relationship with Lilly. Lilly waived repayment of the $21.2 million manufacturing loan it provided us to build the new manufacturing facility. Lilly also agreed to allow us to use the facility to manufacture other drugs. In exchange, we released Lilly from its obligations to purchase additional product from us and its obligation to pay for the costs of maintaining an idle manufacturing suite.

        In April 2003, we earned a $1.5 million milestone from Lilly in the development of LY2181308, the antisense inhibitor of survivin, as part of the research collaboration oncology expansion. LY2181308 is the first compound from the partnership to be selected for clinical development by Lilly. We expect Lilly to initiate Phase I trials of LY218308 during 2004.

        In July 2003, we expanded the cancer research component of our antisense drug discovery collaboration with Lilly to include multiple antisense mechanisms, such as RNAi and alternative splicing, as well as alternative chemistries, such as Peptide Nucleic Acid, or PNA. We are currently jointly developing antisense drugs with Lilly that work through an RNAi mechanism or use our PNA chemistry as potential follow-on drugs to LY2181303.

        Our relationship with Lilly has historically provided several revenue sources, including research funding related to their $100.0 million research loan to us, development milestones, and revenue related to Affinitak. During 2003, 2002 and 2001, we generated revenue from our relationship with Lilly totaling $30.9 million, $45.4 million and $14.5 million, respectively, which comprised 62%, 57%, and 27%, respectively, of our total revenue during those same periods.

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Antisense Drug Discovery Collaborations

Amgen

        In December 2001, we entered into a three-year collaboration with Amgen to discover new antisense drugs. Amgen has the right to develop and commercialize antisense drugs resulting from the collaboration. If drugs from the collaboration are successful, we will receive milestone payments upon key clinical and commercial achievements, as well as royalties on sales of any products resulting from the collaboration. In August 2002 and February 2003, we earned progress-related research milestones under this drug discovery collaboration.

Ercole Biotech, Inc.

        In May 2003, we and Ercole Biotech, Inc. initiated a multi-year collaboration to discover antisense drugs that regulate alternative RNA splicing. As part of the collaboration, we cross-licensed our respective splicing-related intellectual property. We are combining our alternative splicing expertise with Ercole to discover antisense drugs that regulate alternative RNA splicing. As part of this collaboration, we granted Ercole a license to our Bcl-x molecule and certain of our chemistry patents. In addition, we took an equity ownership position in Ercole, with the initial funding in the form of convertible debt, which the companies anticipate will convert into securities that Ercole issues in its next venture capital financing. We also have the option to make an additional equity investment in Ercole.

Industrial and Technology Research Institutes of Taiwan

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

Singapore Economic Development Board

        In November 2003, we received a grant of up to $8.0 million over three years from the Singapore Economic Development Board which will fund, in part, the broadening of two of our RNA-based drug discovery and development programs: micro-RNA drug discovery and antisense drug discovery targeting the coronavirus associated with SARS. In connection with this grant, we established Isis Pharmaceuticals Singapore Pte Ltd, a wholly-owned subsidiary of Isis Pharmaceuticals, Inc.

Alnylam Pharmaceuticals, Inc.

        In March 2004, we entered into a strategic alliance with Alnylam to develop and commercialize RNAi therapeutics. Under the terms of the agreement, we exclusively licensed to Alnylam our patent estate relating to antisense motifs and mechanisms and oligonucleotide chemistry for double-stranded RNAi therapeutics in exchange for a $5 million technology access fee, participation in fees for Alnylam's partnering programs, as well as future milestone and royalty payments. We will retain rights to a limited number of RNAi therapeutic targets and all rights to single-stranded RNAi therapeutics. In addition, Alnylam and we will share the proceeds of any licenses Alnylam grants under its previously announced InterfeRx™ program that include sublicenses to our patents. We also made a $10 million equity investment in Alnylam and have agreed to provide Alnylam with access to our resources for development and commercialization of RNAi therapeutics, including process development, bioanalytic methods, quality control, and manufacturing.

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        In turn, Alnylam nonexclusively licensed us its patent estate relating to antisense motifs and mechanisms and oligonucleotide chemistry to research, develop and commercialize single-stranded RNAi therapeutics and to research double-stranded RNAi compounds. We also received a license to develop and commercialize double-stranded RNAi drugs targeting a limited number of therapeutic targets on either an exclusive or co-exclusive basis depending on the target. If we develop or commercialize an RNAi-based drug using Alnylam's technology, we will pay Alnylam milestones and royalties. As part of the collaboration, each party granted the other party a nonexclusive cross license to its respective patent estate relating to antisense motifs and mechanisms and oligonucleotide chemistry for microRNA therapeutics.

        We are focused primarily on discovering and commercializing single-stranded antisense drugs that work through a variety of mechanisms, including RNAi and RNase H. This alliance strengthens Alnylam's position in double-stranded RNAi and gives Isis the ability to share in Alnylam's success in this area.

Antisense Drug Development Collaborations

        An important aspect of our business model is to selectively extend our expertise and intellectual property position in antisense technology to industry partners that are interested in developing antisense therapeutics. In return for providing companies with access to our technology, we receive an ownership interest in the resulting products and/or in the companies. This provides us with the opportunity to create a much broader antisense pipeline than we could afford to develop on our own while minimizing our financial obligations. We have implemented this integral component of our strategy through our partnerships with major pharmaceutical companies and with ATL, OncoGenex and Santaris Pharma A/S, or Santaris, formerly Pantheco A/S, or Pantheco. Our partnerships with OncoGenex, ATL and Santaris represent our ability to broaden the reach of antisense technology in emerging companies globally. We believe we will have more of these opportunities that, when combined with our own antisense drug pipeline, will allow us to participate in the establishment of a new sector of the pharmaceutical industry based on antisense technology.

Antisense Therapeutics Limited

        ATL 1102, or ISIS 107248, has been demonstrated to have positive effects in animal models for the treatment of certain inflammatory diseases such as multiple sclerosis. In December 2001, we licensed ISIS 107248 to ATL, an Australian company publicly traded on the Australian Stock Exchange. We were responsible for completing the required preclinical studies for ISIS 107248 and for manufacturing the drug for human clinical trials at ATL's expense. ATL agreed to undertake the future clinical development and commercialization of the drug. In August 2003, ATL initiated a Phase I clinical trial of ISIS 107248 for the treatment of multiple sclerosis, and will report final results in mid-2004. ATL plans to initiate a Phase II study in the second half of 2004. In addition, we are participating with ATL in a five-year antisense drug discovery and development collaboration. ATL will pay us for access to our antisense expertise and for research and manufacturing services we provide them during the collaboration. Additionally, ATL is obligated to pay us royalties on any antisense drugs discovered and developed within the partnership. We currently own approximately 11% of ATL's equity and hold options for additional shares. If all of ATL's outstanding options, including ours, were exercised, our ownership in ATL would be approximately 14%.

OncoGenex Technologies Inc.

        In November 2001, we established a drug development collaboration with OncoGenex Technologies Inc., a Canadian oncology-focused research and development company, to co-develop and commercialize OGX-011, or ISIS 112989, an anti-cancer antisense drug candidate. OGX-011 combines OncoGenex's proprietary antisense position in inhibitors to the target clusterin, with our proprietary

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second-generation antisense chemistry. We conducted preclinical toxicology and pharmacokinetic studies of OGX-011 during 2002. We also manufactured OGX-011 for preclinical and Phase I/II studies. OncoGenex has responsibility to perform Phase I clinical trials to assess the safety of OGX-011 in combination with hormone ablation therapy in men with localized prostate cancer and to perform Phase I/II clinical trials in combination with standard chemotherapy in patients with solid tumors known to express clusterin, including non-small cell lung, prostate, breast, renal, and ovarian cancers. In December 2002, OncoGenex and we announced the initiation of a Phase I clinical trial of OGX-011 in patients with prostate cancer. In April 2003, OncoGenex and we initiated a second phase I clinical study of OGX-011 in combination with TAXOTERE® in patients with solid tumors. We expect to report data from both clinical trials in the first half of 2004. OGX-011 is our first second-generation antisense anti-cancer drug in human clinical trials.

        In September 2003, OncoGenex and we expanded our antisense drug development partnership to include the development of the second-generation antisense anti-cancer drug candidate, OGX-225. OncoGenex has responsibility for the preclinical and clinical development of the drug. OncoGenex issued us OncoGenex securities as payment for an upfront fee. In addition, OncoGenex agreed to provide to us milestone payments for key clinical and regulatory achievements and royalties on product sales. As of December 31, 2003, our ownership interest in OncoGenex was less than 10%.

Santaris Pharma A/S (formerly Pantheco A/S)

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

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

Antisense Commercialization

Novartis Ophthalmics AG

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

GeneTrove Collaborations

        Our GeneTrove program uses our antisense technology as a tool to provide important information about the function of genes and has automated the initial steps in our antisense drug discovery process. Our current focus is to use GeneTrove information to direct our own drug discovery research and that of our antisense drug discovery partners, like Lilly and Amgen. We also offer antisense-based gene function information and license our antisense based functional genomics patents to pharmaceutical

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company partners that are evaluating the genes as targets for their own drug discovery programs. During 2003, we entered into a target validation agreement with Pfizer, Inc., in which Pfizer obtained access to our antisense inhibitors and acquired a license to specific patents within our intellectual property estate for use in its internal antisense-based functional genomics program.

Ibis Collaborations

        We have entered into numerous contracts and grants with various government agencies to complete research and development work for defense against biological warfare attacks and threat scenarios. To date, our Ibis program has been awarded government contracts and grants representing potential funding of up to $55.0 million. The contracts and grants include a multi-year contract with DARPA, a three-year contract with USAMRIID, a three-year grant from the CDC and a one-year grant from the FBI.

Intellectual Property Licensing Agreements

In-Licensing Arrangements

Integrated DNA Technologies, Inc.

        In March 1999, we established a long-term research-scale antisense inhibitor supply agreement with Integrated DNA Technologies, Inc., or IDT. IDT is a leading supplier of antisense inhibitors used in research. Additionally, we further solidified our intellectual property leadership position in antisense technology by broadening our license to certain antisense patents from IDT. In this long-term supply agreement, IDT agreed to manufacture research-scale antisense inhibitors and research reagents to our specifications. We paid IDT $5.0 million toward our future purchase of antisense inhibitors. As of December 31, 2003, the balance of our prepayment was approximately $4.3 million. In December 2001, we expanded our existing licensing agreement with IDT on certain patents that are useful in functional genomics and in making certain antisense drugs. The expanded license allows us to exclusively sublicense this intellectual property for functional genomics purposes. We have paid IDT $4.2 million through December 31, 2003 and expect to pay IDT an aggregate of $700,000 over the next two years for the license.

Hybridon, Inc.

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

Molecular Biosystems, Inc.

        In March 2001, we amended a non-exclusive Patent License Agreement, which we entered into with Molecular Biosystems, Inc. in September 1992. The amendment provided us with a fully paid-up

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license to certain patents and patent applications in exchange for a one-time payment to Molecular Biosystems of $1.0 million.

Out-Licensing Arrangements

Eyetech Pharmaceuticals, Inc.

        In December 2001, we licensed to Eyetech Pharmaceuticals, Inc., a publicly-held company, certain of our patents necessary for Eyetech to develop, make and commercialize Macugen, a non-antisense compound intended for use in the treatment of ophthalmic diseases. Eyetech paid us a $2.0 million upfront fee and agreed to pay us milestone and royalty payments in exchange for non-exclusive, worldwide rights to the intellectual property licensed from us. In December 2002, Eyetech entered into an agreement with Pfizer to develop and commercialize Macugen. In 2003, Pfizer and Eyetech reported encouraging Phase III data for Macugen that Eyetech says will serve as the basis for an NDA, with commercialization of the drug expected in 2005. Assuming successful commercialization of Macugen, we have the opportunity to earn future milestone payments and royalties that could be substantial to us.

Roche Molecular Systems

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

Manufacturing

        In the past, except for small quantities, it was generally expensive and difficult to produce chemically modified oligonucleotides, like the antisense drugs we use in our research and development programs. As a result, we have dedicated significant resources to develop ways to improve manufacturing capacity. Since we can use variants of the same nucleotide building blocks and the same type of equipment to produce our oligonucleotide compounds, we found that the same techniques we used to efficiently manufacture one oligonucleotide drug could help improve the manufacturing processes for many other oligonucleotide drugs. By developing several proprietary chemical processes to scale up our manufacturing capabilities, we have greatly reduced the cost of producing oligonucleotide compounds. For example, we have significantly reduced the cost of raw materials through improved yield efficiency, while at the same time increasing our capacity to make the compounds. Through both our internal research and development programs and collaborations with outside vendors we may achieve even greater efficiency and further cost reductions.

        In September 2002, we expanded our relationship with Lilly by agreeing to manufacture Affinitak during the product launch period for Lilly. Through this agreement we upgraded and expanded our manufacturing facility, including the addition of a new state-of-the-art manufacturing suite. Lilly provided us with funding in the form of a $21.2 million loan to build the new suite. In June 2003, we reached a mutually beneficial renegotiation of our manufacturing relationship with Lilly. Lilly waived repayment of the $21.2 million manufacturing loan it provided us to build the new manufacturing facility. Lilly also agreed to allow us to use the facility to manufacture other drugs. In exchange, we released Lilly from its obligations contained in the supply agreement for Affinitak, including the obligation to purchase additional product from us and the obligation to pay for the costs of maintaining an idle manufacturing suite.

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

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

Patents and Proprietary Rights

        Our success will depend, in part, on our ability to obtain patent protection for our products in the United States and other countries. We file applications, as appropriate, for patents covering our products and processes. As of March 3, 2004, we owned or had exclusively licensed more than 1,300 issued patents worldwide. Patents issued to us, applied for by us or exclusively licensed by us cover the following types of inventions, processes and products:

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Method claims for the use of RNA/DNA oligonucleotides and other antisense inhibitors, in gene functionalization and target validation, including chemistries, antisense inhibitor designs called "motifs", methods of use of antisense inhibitors and mechanisms of action by which antisense inhibitors inactivate an RNA target;



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Composition of matter claims to core chemistries for chemically modifying oligonucleotides, which cover our rights to the building blocks of our compounds;



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Composition of matter claims to antisense compounds targeted to particular RNA target sequences, which cover our drugs;



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Use claims for using oligonucleotides targeted to particular disease targets, which cover our right to use oligonucleotide-based drugs to treat specific diseases or modulate expression of the target gene;



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Method and composition of matter claims for the formulation and delivery of therapeutic oligonucleotides, which cover our pharmaceutical formulations of our drugs;



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Method claims for the manufacture of oligonucleotides, which cover our new, improved and/or more cost effective ways to manufacture oligonucleotides;



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Composition of matter claims to RNA structural elements, which cover our rights for discovery of small molecules that bind to these RNA structural elements;



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Method claims for analyzing the interaction of small molecules with RNA, which cover our novel discovery methods using mass spectrometry to analyze the interaction of small molecules with RNA;



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Method claims for optimizing the interaction of drug substances with their target molecules, which cover our mass spectrometry-based structural activity relationship discovery methods, by mass spectrometer;



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Method claims for identifying unknown bioagents utilizing mass-spectrometry-based analyses; and



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Method claims for rapidly discovering antisense oligomeric compounds, which cover our rapid throughput method of discovering antisense oligonucleotides.

Government Regulation

        Extensive regulation by United States and foreign governmental authorities governs our manufacture and potential sale of therapeutics. In particular, pharmaceutical products are subject to rigorous preclinical and clinical testing and other approval requirements by the FDA in the United

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States under the Federal Food, Drug and Cosmetic Act and by comparable agencies in most foreign countries. Various federal, state and foreign statutes also govern or influence the manufacture, safety, labeling, storage, record keeping and marketing of such products. State, local, and other authorities also regulate pharmaceutical manufacturing facilities.

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

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

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

Competition

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

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

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

        We currently have two drugs in Phase III trials. We licensed Affinitak, our antisense drug for non-small cell lung cancer, to Lilly in August 2001. Under our agreement with Lilly, Lilly is responsible for the commercialization of Affinitak. If future studies support commercialization, we expect that physicians would use Affinitak in combination with current standard chemotherapy regimens for non-small cell lung cancer. As such, we expect that it will be complementary to existing drugs for the treatment of non-small cell lung cancer rather than directly competitive. Our second drug in Phase III trials is alicaforsen, which we are studying in patients with Crohn's disease. Alicaforsen will likely compete with Johnson & Johnson's drug, Remicade, which is approved for the treatment of Crohn's disease and rheumatoid arthritis.

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Employees

        As of March 3, 2004 we employed 457 individuals, of whom 174 held advanced degrees. A significant number of our management and professional employees have had prior experience with pharmaceutical, biotechnology or medical product companies. Collective bargaining agreements do not cover any of our employees, and management considers relations with its employees to be good.

Executive Officers

        The following set forth certain information regarding our executive officers as of March 3, 2004:

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

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

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

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

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

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

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

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

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

DAVID J. ECKER, Ph.D.
Isis Vice President and President, Ibis Therapeutics

        Dr. Ecker was a founder of Isis and has served as our Vice President & Managing Director of Ibis Therapeutics, a program of Isis Pharmaceuticals, since June 1995. In 2001 he assumed the role of President of the program. He served as our Vice President, Biology from July 1993 to June 1995, as our Executive