Isis Reports Financial Results and Highlights for Third Quarter 2012

CARLSBAD, Calif.,Nov. 6, 2012/PRNewswire/ -- Isis Pharmaceuticals, Inc. (NASDAQ:ISIS) today reported a pro forma net operating loss (NOL) of$26.0 millionand$36.0 millionfor the three and nine months endedSeptember 30, 2012, respectively, compared to a pro forma NOL of$20.0 millionand$44.9 millionfor the same periods in 2011. The Company ended the third quarter of 2012 with$343.6 millionin cash.

"We have had a very successful year. With a number of exciting events on the horizon, the remainder of 2012 promises to be equally eventful. Of course, the most notable events this year are associated with KYNAMRO™. We are pleased with the positive recommendation from the FDA's advisory committee for KYNAMRO and look forward to the FDA's decision early next year. We believe KYNAMRO could have a profound impact on the lives of patients with homozygous FH, who are at extreme cardiovascular risk and are in need of new therapeutic options. We look forward to bringing this important new medicine to these patients," saidB. Lynne Parshall, Chief Operating Officer and Chief Financial Officer at Isis.

"While KYNAMRO is the most notable of our successes, we have had many achievements across our pipeline. Most recently, we have completed key steps to move two of our severe and rare disease drugs toward commercial markets. We initiated the next clinical study in patients with spinal muscular atrophy for our drug, ISIS-SMNRx, which we partnered with Biogen Idec earlier this year. This study will be a relatively short study and will position us to initiate a registration-directed Phase 2/3 study next year. In addition, we and GSK amended the development plan for ISIS-TTRRxto employ a more efficient route to the market. We plan to initiate the Phase 2/3 study evaluating ISIS-TTRRxin patients with TTR amyloidosis later this year. Both of these drugs have the potential for substantial commercial markets within the next five years and could significantly change the lives of patients in need," continued Ms. Parshall. "We also benefit from our investments in our satellite companies, like Regulus, which recently completed an initial public offering, enabling it to be financially sustainable without the need for funding from us and increasing the value of our assets."

• Report clinical data from multiple drugs in Isis' pipeline

• Initiate a Phase 2/3 study of ISIS-TTRRxin patients with familial amyloid polyneuropathy

• Receive marketing approval of KYNAMRO inthe United StatesandEurope

• Earn a$25 millionmilestone payment from Genzyme following FDA marketing approval for KYNAMRO

Financial ResultsOn a GAAP basis, Isis reported a loss from operations of$28.0 millionand$42.8 millionfor the three and nine months endedSeptember 30, 2012, respectively, compared to a loss from operations of$22.3 millionand$52.5 millionfor the same periods in 2011.

All pro forma amounts referred to in this press release exclude non-cash compensation expense related to equity awards. Please refer to the reconciliation of pro forma and GAAP measures, which is provided later in this release.

RevenueRevenue for the three and nine months endedSeptember 30, 2012was$11.6 millionand$82.2 million, respectively, compared to$20.7 millionand$66.7 millionfor the same periods in 2011. Isis' revenue fluctuates based on the nature and timing of payments under agreements with the Company's partners, including license fees, milestone-related payments and other payments. For example, Isis' revenue in the first nine months of 2012 was significantly higher than in 2011 primarily due to the$25 millionmilestone payment the Company earned from Genzyme for FDA acceptance of the KYNAMRO NDA. Also in the first nine months of 2012, Isis sold approximately$11 millionof drug substance to Genzyme to support the planned commercial launch of KYNAMRO and began recognizing revenue from the$41 millionin upfront payments the Company received from the partnerships it entered into with Biogen Idec this year. These increases were partially offset when the amortization of the upfront payments associated with the Genzyme collaboration ended in May 2012.

Operating ExpensesOn a pro forma basis, operating expenses for the three and nine months endedSeptember 30, 2012were$37.6 millionand$118.2 million, respectively, compared to$40.7 millionand$111.6 millionfor the same periods in 2011. The moderately higher expenses in the first nine months of 2012 were primarily due to higher development costs associated with Isis' maturing pipeline of drugs offset by lower development expenses related to KYNAMRO because Genzyme is now sharing these expenses equally with Isis until KYNAMRO is profitable. Genzyme is paying all of the marketing and selling expenses until KYNAMRO is profitable.

On a GAAP basis, Isis' operating expenses for the three and nine months endedSeptember 30, 2012were$39.6 millionand$125.0 million, respectively, compared to$43.0 millionand$119.2 millionfor the same periods in 2011.

Early Retirement of DebtInAugust 2012, Isis issued$201.3 millionof 2 ¾% Convertible Senior Notes due 2019 (2 ¾% Notes). InSeptember 2012, Isis used a substantial portion of the net proceeds from the issuance of these notes to redeem the entire$162.5 millionof the Company's 2 ⅝% Convertible Subordinated Notes (2 ⅝% Notes), at a redemption price plus accrued interest of$164.0 million. The carrying value of the 2 ⅝% Notes on Isis' balance sheet included a discount based on the estimated fair value of a similar debt instrument without the conversion feature. Isis was amortizing this discount over the expected life of the debt as additional non-cash interest expense. As a result of the early redemption of the 2 ⅝% Notes, Isis recognized a$4.8 millionloss in the third quarter of 2012. A significant portion of the loss, or$3.6 million, was non-cash and related to the unamortized debt discount and debt issuance costs while the remainder of the loss was related to a$1.2 millionearly redemption premium Isis paid to the holders of the 2 ⅝% Notes.

Net LossIsis reported a net loss of$37.6 millionand$62.8 millionfor the three and nine months endedSeptember 30, 2012, respectively, compared to$26.9 millionand$64.8 millionfor the same periods in 2011. Basic and diluted net loss per share for the three and nine months endedSeptember 30, 2012was$0.37per share and$0.63per share, compared to$0.27per share and$0.65per share for the same periods in 2011. Isis' net loss for the first nine months of 2012 decreased slightly compared to the same period in 2011 primarily due to a decrease in Isis' net operating loss offset, in part, by the$4.8 millionloss on the Company's early retirement of its 2 ⅝% Notes and additional non-cash interest expense the Company recorded for the long-term liability associated with its primary research and development facility.

Balance SheetAs ofSeptember 30, 2012, Isis had cash, cash equivalents and short-term investments of$343.6 millioncompared to$343.7 millionatDecember 31, 2011and had working capital of$310.0 millionatSeptember 30, 2012compared to$284.0 millionatDecember 31, 2011. In the first nine months of 2012, Isis received$41 millionin upfront payments from Biogen Idec, a$25 millionmilestone payment from Genzyme for FDA acceptance of the KYNAMRO NDA, and approximately$30 millionin net proceeds from Isis' issuance of the 2 ¾% Notes after deducting offering fees and expenses and the redemption of the 2 ⅝% Notes. Isis recorded the 2 ¾% Notes on its balance sheet at a discount based on the estimated fair value of a similar debt instrument without the conversion feature. Isis is amortizing this discount over the life of the debt as additional non-cash interest expense.

Investment in Regulus Therapeutics Inc.InOctober 2012, Regulus Therapeutics, Inc., a company co-founded by Isis, completed an initial public offering of approximately 12.7 million shares of its common stock at$4.00per share. Isis purchased$3.0 millionof Regulus' common stock at the offering price and now owns approximately 7 million shares, or 17%, of Regulus' common stock on a fully diluted basis. Beginning in the fourth quarter, Isis will no longer use the equity method to account for its investment in Regulus because Isis now owns less than 20% of Regulus' common stock and no longer has significant influence over the operating and financial policies of Regulus. Instead, Isis will account for its investment in Regulus at fair value by adjusting the value to reflect fluctuations in Regulus' stock price each reporting period. In the fourth quarter, Isis will record a significant gain to reflect the change in its ownership percentage in Regulus.

Business Highlights"With a pipeline of more than two dozen drugs in development, we have multiple opportunities for pipeline news. A number of our drugs will complete first-in-man studies this year, and we will share that data with you as it becomes available. We also plan to advance several drugs into later-stage clinical studies. These are drugs, like our TTR drug, that could have rapid routes to the market in orphan patient populations who have limited treatment options. In addition, as we have done every year for the past several years, we plan to add three to five new drugs to our pipeline. In short, we are on track to end the year with many significant accomplishments that demonstrate the therapeutic potential of our drugs and the productivity of our technology."

"We encourage the advancement of antisense drugs and support innovation in antisense technology, in part through our satellite company strategy, which allows us to work with a consortium of smaller companies in areas outside of our core focus.  Often, the investments we make in our satellite company partners are not monetary, but rather, we provide our satellite company partners access to our intellectual property, expertise in antisense technology and manufacturing support in exchange for company equity, milestone payments and future royalties as programs advance toward the market.  Regulus is a great example of the value of this strategy," commented Ms. Parshall. "We co-founded Regulus based on our know-how and clinical advances with antisense drugs and applied this knowledge to the field of microRNAs.  Last month Regulus completed an initial public offering, which we supported, bringing our ownership in Regulus to approximately seven million shares of Regulus' common stock, which is currently valued at$35 million."

"In closing, 2012 has already been a very successful year, not just with our pipeline and with KYNAMRO, but also financially. A key goal for us this year was to refinance our existing debt on favorable terms. By taking advantage of the favorable market conditions and the considerable interest in Isis, we successfully completed a private placement of$201.3 millionof 2 ¾% Convertible Senior Notes at an excellent interest rate and conversion price. More importantly, we used the proceeds from this placement to redeem the entire$162.5 millionof our 2 ⅝% Convertible Subordinated Notes. The refinancing allowed us to take advantage of favorable market conditions to strengthen our balance sheet," continued Ms. Parshall.

• KYNAMRO continues to advance in development and move closer to the market for patients with severe forms of familial hypercholesterolemia (FH; homozygous FH and severe heterozygous FH) through regulatory approval and with the FOCUS FH study.The FDA's Endocrinologic and Metabolic Drugs Advisory Committee voted 9 to 6 that Genzyme had provided sufficient efficacy and safety data to support the marketing of KYNAMRO for the treatment of patients with homozygous FH.Dr.Klaus Parhofer, a clinical investigator, presented an analysis of data from the KYNAMRO Phase 3 study in patients with severe heterozygous FH at the European Society of Cardiology. These data highlighted the potential of KYNAMRO to reduce the need for apheresis by lowering LDL-C values below the thresholds for apheresis eligibility in patients with severe heterozygous FH.Isis received European GMP certification of its manufacturing facility for production of drug substance to support KYNAMRO commercial launch.

• Isis initiated a Phase 2 study on ISIS-FXIRxin patients undergoing total knee replacement surgery and a Phase 1b/2a study on ISIS-SMNRxin children with spinal muscular atrophy.

• Isis and GlaxoSmithKline amended the clinical development plan and financial terms relating to ISIS-TTRRxto support an accelerated development plan for the drug. As a result of the revised agreement, Isis will receive a$2.5 millionupfront payment and will receive$7.5 millionupon initiation of the Phase 2/3 study for ISIS-TTRRx. Isis is also eligible to earn an additional$50 millionin pre-licensing milestone payments to support the ISIS-TTRRxPhase 2/3 study.

• Isis reported preliminary Phase 1 data on ISIS-STAT3Rxin patients with cancer and initiated a Phase 2 study evaluating ISIS-STAT3Rxin patients with advanced lymphoma.

• Isis and collaborators published a paper in Nature demonstrating that an antisense compound selectively and rapidly reduced target RNA in skeletal muscle and alleviated disease in animal models of muscular dystrophy type 1 (DM1).

• Isis and collaborators published two papers in the journal Cell demonstrating that single-stranded RNA-like antisense technology can activate the RNAi pathway and inhibit the expression of targeted genes.

• Isis benefits from its partners as they advance RNA-based technologies and products that incorporate Isis' technology resulting in financial benefits as these assets mature.Isis earned$2.7 millionfrom Alnylam as a result of Alnylam's licenses that included Isis' patents.Regulus formed a strategic alliance with AstraZeneca for the discovery, development and commercialization of microRNA therapeutics.Regulus formed a strategic alliance with Biogen Idec to identify microRNAs as biomarkers for multiple sclerosis.Isis received a$1.25 millionpayment from Pfizer triggered by Pfizer's decision to advance EXC 001 into a Phase 2 study.

• Regulus Therapeutics completed an initial public offering and is now traded on The NASDAQ Global Market under the ticker RGLS. Isis purchased$3 millionof Regulus' common stock at the offering price and remains a significant shareholder with approximately 17% ownership on a fully diluted basis.

• Isis completed a successful offering of$201.3 millionof 2 ¾% Convertible Senior Notes.  Isis used the proceeds of this offering to redeem the entire$162.5 millionof 2 ⅝% Convertible Subordinated Notes.

• The FDA's Endocrinologic and Metabolic Drugs Advisory Committee voted 9 to 6 that Genzyme had provided sufficient efficacy and safety data to support the marketing of KYNAMRO for the treatment of patients with homozygous FH.

• Dr.Klaus Parhofer, a clinical investigator, presented an analysis of data from the KYNAMRO Phase 3 study in patients with severe heterozygous FH at the European Society of Cardiology. These data highlighted the potential of KYNAMRO to reduce the need for apheresis by lowering LDL-C values below the thresholds for apheresis eligibility in patients with severe heterozygous FH.

• Isis received European GMP certification of its manufacturing facility for production of drug substance to support KYNAMRO commercial launch.

• Isis earned$2.7 millionfrom Alnylam as a result of Alnylam's licenses that included Isis' patents.

• Regulus formed a strategic alliance with AstraZeneca for the discovery, development and commercialization of microRNA therapeutics.

• Regulus formed a strategic alliance with Biogen Idec to identify microRNAs as biomarkers for multiple sclerosis.

• Isis received a$1.25 millionpayment from Pfizer triggered by Pfizer's decision to advance EXC 001 into a Phase 2 study.

Conference CallAt11:30 a.m. Eastern Timetoday,November 6, Isis will conduct a live webcast conference call to discuss this earnings release and business highlights. Interested parties may listen to the call by dialing 800-237-9752 and refer to passcode "ISIS 2012," or access the webcast atwww.isispharm.com. A webcast replay will be available for a limited time at the same address.

About Isis Pharmaceuticals, Inc.Isis is exploiting its leadership position in antisense technology to discover and develop novel drugs for its product pipeline and for its partners. Isis' broad pipeline consists of 25 drugs to treat a wide variety of diseases with an emphasis on cardiovascular, metabolic, severe and rare diseases, and cancer. Isis' partner, Genzyme, plans to commercialize Isis' lead product, KYNAMRO, inthe United StatesandEuropefollowing regulatory approval. Isis' patents provide strong and extensive protection for its drugs and technology. Additional information about Isis is available atwww.isispharm.com.

Forward Looking StatementsThis press release includes forward-looking statements regarding Isis Pharmaceuticals' financial position and outlook, Isis' business, and the therapeutic and commercial potential of Isis' technologies and products in development. Any statement describing Isis' goals, expectations, financial or other projections, intentions or beliefs, including the planned commercialization of KYNAMRO, is a forward-looking statement and should be considered an at-risk statement.  Such statements are subject to certain risks and uncertainties, particularly those inherent in the process of discovering, developing and commercializing drugs that are safe and effective for use as human therapeutics, and in the endeavor of building a business around such drugs.  Isis' forward-looking statements also involve assumptions that, if they never materialize or prove correct, could cause its results to differ materially from those expressed or implied by such forward-looking statements.  Although Isis' forward-looking statements reflect the good faith judgment of its management, these statements are based only on facts and factors currently known by Isis.  As a result, you are cautioned not to rely on these forward-looking statements.  These and other risks concerning Isis' programs are described in additional detail in Isis' annual report on Form 10-K for the year endedDecember 31, 2011and its most recent quarterly report on Form 10-Q, which are on file with the SEC. Copies of these and other documents are available from the Company.

In this press release, unless the context requires otherwise, "Isis," "Company," "we," "our," and "us" refers to Isis Pharmaceuticals and its subsidiaries.

Isis Pharmaceuticals® is a registered trademark of Isis Pharmaceuticals, Inc. Regulus Therapeutics™ is a trademark of Regulus Therapeutics Inc. KYNAMRO™ is a trademark of Genzyme Corporation.

Three months ended,

Nine months ended,

September 30,

September 30,

2012

2011

2012

2011

Revenue:

(unaudited)

(unaudited)

Research and development revenue under collaborative agreements

$11,127

$20,189

$80,085

$64,508

Licensing and royalty revenue

474

524

2,091

2,175

Total revenue

11,601

20,713

82,176

66,683

Expenses:

Research and development

36,551

39,924

115,700

110,178

General and administrative

3,096

3,105

9,281

8,989

Total operating expenses

39,647

43,029

124,981

119,167

Loss from operations

(28,046)

(22,316)

(42,805)

(52,484)

Other income (expense):

Equity in net loss of Regulus Therapeutics Inc.

-

(386)

(1,139)

(2,275)

Investment income

408

575

1,485

1,896

Interest expense

(5,937)

(4,773)

(16,335)

(11,624)

Gain (loss) on investments, net

-

18

19

(267)

Loss on early retirement of debt

(4,770)

-

(4,770)

-

Loss before income tax benefit (expense)

(38,345)

(26,882)

(63,545)

(64,754)

Income tax benefit (expense)

706

-

704

(11)

Net loss

$(37,639)

$(26,882)

$(62,841)

$(64,765)

Basic and diluted net loss per share

$(0.37)

$(0.27)

$(0.63)

$(0.65)

Shares used in computing basic and diluted net loss per share

100,680

99,687

100,351

99,620

Three months ended,

September 30,

Nine months ended,

September 30,

2012

2011

2012

2011

(unaudited)

(unaudited)

$39,647

$43,029

$124,981

$119,167

Excluding compensation expense related to equity awards

(2,034)

(2,364)

(6,761)

(7,596)

$37,613

$40,665

$118,220

$111,571

$(28,046)

$(22,316)

$(42,805)

$(52,484)

Excluding compensation expense related to equity awards

(2,034)

(2,364)

(6,761)

(7,596)

$(26,012)

$(19,952)

$(36,044)

$(44,888)

Reconciliation of GAAP to Pro Forma BasisAs illustrated in the Selected Financial Information in this press release, pro forma operating expenses and pro forma loss from operations were adjusted from GAAP to exclude compensation expense related to equity awards, which are non-cash. Isis has regularly reported non-GAAP measures for operating expenses and loss from operations as pro forma results. These measures are provided as supplementary information and are not a substitute for financial measures calculated in accordance with GAAP. Isis reports these pro forma results to better enable financial statement users to assess and compare its historical performance and project its future operating results and cash flows. Further, the presentation of Isis' pro forma results is consistent with how Isis' management internally evaluates the performance of its operations.

September 30,

December 31,

2012

2011

(unaudited)

Assets:

Cash, cash equivalents and short-term investments

$343,573

$343,664

Other current assets

18,013

16,475

Property, plant and equipment, net

92,598

96,615

Other assets

31,497

28,140

Total assets

$485,681

$484,894

Liabilities and stockholders' equity:

Other current liabilities

$28,174

$39,528

Current portion of deferred contract revenue

23,427

36,584

2 3/4% convertible senior notes

142,500

-

2 5/8% convertible subordinated notes

-

141,448

Long-term obligations, less current portion

78,779

74,002

Investment in Regulus Therapeutics Inc.

5,563

4,424

Long-term deferred contract revenue

36,961

17,474

Stockholders' equity

170,277

171,434

Total liabilities and stockholders' equity

$485,681

$484,894