Ionis Pharmaceuticals Inc (IONS) 2002 Q2 法說會逐字稿

Thanks everyone for joining us on today's conference call to discuss the financial results for the second quarter 2002.

Participating with me today is the usual: B. Lynne Parshall, Executive Vice President and CFO; Beth Haugen, Vice President, Finance; and Karen Lundstedt, Vice President, Corporate Communications.

As always, we are pleased to take this opportunity to review our progress and accomplishments during the quarter as well as to describe the financials. During the call Lynne will discuss our financial results as prescribed in the press release issued earlier today. I will follow with just a summary of some of the strategic highlights of the past quarter and update you on the goals we have for the remainder of 2002. We will, of course, be happy to answer any questions that you have at the conclusion of our prepared remarks.

Before we begin Karen, will you review our policy on forward-looking statements?

This conference call includes forward-looking statements concerning the financial position of Isis Pharmaceuticals, the therapeutic and commercial potential of the compounds developed by the company and the potential value of the company's functional genomics and drug discovery technology platform. Any statement describing a goal, expectation, intention or belief of the company is a forward-looking statement and should be considered an at-risk statement, including those statements that are described as Isis 2002 clinical goals. Such statements are subject to certain risks and uncertainties, particularly those inherent in the process of discovering, developing and commercialising drugs that are safe and effective for use as human therapeutics and financing such activities. Actual results could differ materially from those projected in this conference call. As a result, you are cautioned not to rely on these forward-looking statements. These and other risks concerning Isis's research and development programs are described in additional detail in Isis's Annual Report on Form 10-K, for the year ended December 31, 2001, which is on file with the U.S. Securities and Exchange Commission. Copies of this and other documents are available from the company.

Now, here is Lynne.

Thanks, Karen. My comments today will be based on the financial press release that we issued earlier today. We made excellent progress in the past quarter and further enhanced our financial strength. I plan to discuss the following highlights for the quarter. First I will talk about our revenues, operating expenses, net loss and our balance sheet. Then I will summarise the key financial transactions for the quarter.

Beginning with revenues our revenues for the second quarter of 2002 totalled $20.1 million. This represented a 164% increase over revenues for the same period last year. The increased revenue was due to numerous partnerships that we initiated in the second half of 2001 and earlier this year. These partnerships include the licensing of AffinitacTM to Eli Lilly. We are responding with ongoing clinical development activities for this drug. The recent broadening of our antisense drug discovery collaboration with Lilly to include the discovery of the anticancer treatment. The envisioning of new GeneTrove partnerships with Celera Genomics, Pharmacia, Merck, Chiron and Amgen. The initiation of new antisense drug discovery programme with Amgen. The initiation of the collaboration and licensing of the company's pre-clinical inflammatory disease antisense candidate, ISIS 107248.

The second extension and chief medical milestone in our Hepatitis B drug discovery collaboration with Merck, and the initiation of two new biological warfare defence research programmes, the first with DARPA, the Defense Advanced Research Projects Agency, which is a department with the US Department of Defense, to develop the biological sensors. The second is with the US Army Medical Research Institute of Infectious Diseases, USAMRIID, to discover novel antibacterial drugs.

We are pleased that our collaborations are generating increasing revenue. Equally important is the progress we are making in our partnerships. We plan to continue to execute our business strategy, which is to exploit the opportunity of antisense technology, to generate revenue from a variety of sources, while reducing risk and offsetting our cash needs [?].

Now I will turn to operating expenses. Our operating expenses for the second quarter of 2002 totalled $32.4 million. This was up from $24 million in the second quarter of 2001, a 35% increase. The increase was due to added extra activities on behalf of our partners, particularly Lilly. In addition, we continued to use the instrument of the clinical development of the 13 products in our pipeline, including the initiation of our Phase 3 of alicaforsen (ISIS 2302) in Crohn's disease in Europe, and continued progress in the ongoing US Phase 3 Crohn's trial as well as the continued development of our GeneTrove database offering.

The increased expense was partially offset by capitalising the costs related to the production of our drugs, which we began last quarter. We are expensing manufacturing costs when we ship drug inventories for the use in clinical supplies to a partner, and we use shipped drug inventories for our own trials. In the second quarter we manufactured an increased volume of drugs compared to the amount produced in the same period last year. Much of this production was for the ongoing AffinitacTM clinical trials and will likely be shipped through the third quarter. As a result, expenses related to manufacturing for the quarter were lower than those of last year's second quarter.

In terms of net operating loss, the strong revenues in the second quarter of 2002 supported a 25% decrease in net operating loss to $12 million compared to the same period last year. Our net operating loss for the first six months of 2002 was $22 million, which is in line with our previous guidance for the year. Our goal for net operating loss for the full year 2002 is in the mid-$40 million range, excluding non-cash compensation expenses related to stock options. We are committed to the advancement and growth of our pipeline while managing our losses at an appropriate level. We believe we can accomplish this objective by exploiting multiple RNA-based business initiatives to generate revenue that supports our activities.

In terms of cash, the company is very well positioned as evidenced by the continued strength of our balance sheet. We ended the second quarter of 2002 with a cash balance of $325 million in cash and short-term investments and working capital of $301 million. This compares very favourably to our position at the end of 2001 when we had $312 million in cash and short-term investments and working capital of $281 million. Our present cash balance, adding the nearly $70 million in additional committed funding from a research collaboration with Lilly and about $50 million in committed funding from other partners, takes our total cash and committed cash to nearly $445 million over the next few year.

Several transactions in the past quarter contributed to the strength of our balance sheet. In April we raised $121 million in net proceeds from a private placement of 5.5% Convertible Notes. This financing was strategically important to us for three primary reasons. First, it allowed us to retire high-interest debt well ahead of schedule. Secondly, it enabled a significant savings in future interest payment. Thirdly, the additional cash has given the financial flexibility to restructure our two joint ventures with Elan. If you recall, we have prepaid over $70 million in 14% debt held by our lawyers [?] and nearly $20 million in 12% Convertible debt held by Elan at a 25% discounted clearing [?] value.

The early retirement of these notes eliminated a significant interest for the company. The accumulated interest and maturity for the prepaid debt would have been approximately $16 million, and we would realise a net savings of nearly $40 million in future interest expense by using the capital rate of 5.5% interest to fund our ongoing activities. Our financial flexibility has been used opportunistically moving forward. On the Elan front we believe our financial strength enhances our opportunity to negotiate favourable outcomes to both the HepaSenseTM and Orasense joint ventures as we and Elan determine the appropriate and most advantageous next step for our joint ventures, Orasense and HepaSenseTM.

As I have mentioned, we are in discussions with Elan about the joint ventures and related matters. At this time we cannot project the outcome of our discussions, but based on the requirement of convertible debt we just completed with Elan, where we repurchased their Isis notes at a 25% discount, we are optimistic that Elan and we will come to conclusions that are favourable to both parties.

The other joint ventures of financial strength gives us added security in today's difficult market environment. In biotech, cash is king, and we are currently in a very good position. We will continue to maintain financial flexibility in order to retain valuable product rights, and to rapidly advance and grow our broad product pipeline.

In conclusion, we believe our financial strength is a key asset for the company. It is providing flexibility to be opportunistic in the near term and a comfortable level of security as we advance our pipeline in the clinic.

Stan, I will turn it back to you.

Thanks, Lynne. I think we are in a very good financial position and we are pleased about that. We are pleased about it because our primary goal remains, as it has always been, to establish antisense technology at some broadly applicable platform and use it to create a stream of important new drugs for patients, as well as to generate a new sector of the pharmaceutical industry that we own. We believe that this will in long term generate extraordinary shareholder value. With nearly $400 million in cash and committed cash we have the resources to aggressively pursue this goal and to finish it.

It has also been a good year in the company as a whole. I am very pleased with the progress in clinical development and drug discovery during the last quarter. We actually made several key advances in clinical development. Together with Lilly we announced encouraging data from ongoing Phase 2 trials of AffinitacTM in patients with non-small cell lung cancer, as presented at the annual meeting of the American Society of Clinical Oncology. These preliminary data demonstrated activity of AffinitacTM when combined with chemotherapy in both chemotherapy naïve and extensively pre-treated patients.

In addition, we summarised all the evidence of activity of AffinitacTM as a single agent in non-Hodgkin's lymphoma, which is certainly encouraging data. Also, Lilly initiated, on schedule, a second planned Phase 3 trial of AffinitacTM in combination with GemzarTM and cisplatin in patients with non-small cell lung cancer. Again, as we have said, this Phase 3 trial is very strategically important and has the potential to support the filing of a new drug application with the FDA in 2004, for which two Phase 3 trials are required. Obviously, if the first Phase 3 trial is sufficiently positive we will file the NDA in 2003 as we have planned.

We initiated a second planned Phase 3 trial of alicaforsen (ISIS 2302) in patients with Crohn's disease. This is a European-based trial that complements the ongoing North American Phase 3 trial. Each of these trials is planned to enrol 150 patients, so we are on schedule for 2000 towards 2005 in NDA for that drug with Crohn's if these trials prove to be positive.

We reported encouraging data from a planned interim analysis of a Phase 2 trial of ISIS 2503 in combination with gemzitabine in pancreatic cancer. The clinical investigators have had a 20% response rate, including a complete remission [?] and a 25% response rate in terms of looking at just patient evaluable [?] per response, and also survival of six months or longer, surpassing the primary endpoint of the study's defined criteria for success. These are actually quite encouraging early data from this 48-patient trial, which is now fully enrolled in pancreatic cancer.

We also achieved a development milestone in our HepaSenseTM joint venture with Elan, which triggered Elan's purchase of $3.75 million of Isis common stock at $29.74 per share. The milestone was related to HepaSense's successful completion of a nine-month toxicology study and the demonstration of acceptable safety and reduction of Hepatitis C viral titer, or level of the virus in blood, in an initial Phase 1 / 2 clinical trial. So, that product is moving along well.

The bottom line in the quarter is that we announced, I think, only positive news with regards to the drugs in clinical development, and some encouraging news from drugs. Perhaps we were not expecting such encouraging news, like 2503.

Moving to the discovery arena, we have also made solid progress. We and Eli Lilly announced the expansion of our antisense drug discovery collaboration beyond the original areas of inflammation and metabolic diseases to include the discovery of antisense drugs to inhibit specific gene targets associated with cancer. The expanded collaboration will focus initially on several antisense preclinical compounds, including ISIS 23722, which is directed at cellular regulators of cancer cell death, or apoptosis. That is a very exciting compound to both us and Lilly.

We also presented data on the first antisense drug candidate from our new cardiovascular drug discovery programme. That programme is going gangbusters in demonstrating the expanding therapeutic potential of antisense technology, expanding it into cardiovascular disease.

These accomplishments all met our year-to-date performance. As we have announced, we completed the enrolment of the 600 patients in our Phase 3 trial of AffinitacTM in combination with carboplatin and paclitaxel - more or less on schedule. We reported further evidence of activity of ISIS 2302 Topical cream in psoriasis earlier in the year, and we are continuing to evaluate the development opportunity for this drug in psoriasis and other dermatological diseases. We initiated the next Phase 2 trials for both our Hepatitis C and rheumatoid arthritis drugs. We have continued to build our GeneTrove in this by adding two new collaborations this year, Pharmacia and Merck. We extended our Hepatitis C research collaboration with Merck for the second time and we received a research milestone payment as well as research support from Merck for an additional year and clinical development milestones for compounds that arise from the collaboration and royalties from product sales.

Finally, Isis Therapeutics division has successfully transitioned its government-sponsored programme to discover novel antibacterial drugs for biological warfare defence to the US Army Medical Research Institute of Infectious Diseases, or USAMRIID. Through this transition, Ibis has been awarded a new three-year contract valued at up to $2.4 million from USAMRIID to advance the division's work in developing therapeutic countermeasures to biological warfare.

We believe we will have a continuing flow of medical activity and news throughout the year as we work to advance our most valuable asset, which of course is our product pipeline. Our clinical goals for the remainder of 2002 are to report the results of ISIS 2503 Phase 3 trials in pancreatic cancer. Remember that we have reported the first 20 patients for all 48 patients that are enrolled in that trial, and we expect to be able to announce the results for that trial later this year. Obviously, we are hoping that the results will continue to be positive. If they are that certainly would support a Phase 3 decision for that drug. We will report the results for ISIS 14803 - the one-month study in hepatitis C. We will report the results of our TNF-a inhibitor, ISIS 104838, in a Phase 2 study in which we are looking at rheumatoid arthritis and its ability to reduce some key pile [?] markers of rheumatoid arthritis. We will initiate the Phase 2 trial of ISIS 2302 in ulcerative colitis, a real opportunity for that drug in addition to Crohn's disease. We will initiate a Phase 2 trial of our TNF-a inhibitor, 104838, delivered systemically for the treatment of psoriasis. We will complete the regulatory filing to advance at least one new product into the clinic within this year. Of course, we are continuing to make advances in clinical trials and looking at the oral formulation for a second-generation antisense drugs

Our most anticipated news will, of course, be the results of our Phase 3 trial with AffinitacTM in combination with carboplatin and paclitaxel. The endpoint of that study is survival, so we can only estimate that the results of that trial will be available in late 2002 or early 2003, because the analysis of that trial was triggered by a defined number of deaths. Clearly, the results of the trial are of tremendous interest to us, to Lilly and to investors, and we look forward to that. We are also pleased to point out that in addition to those Phase 3 data our upcoming news will be spread across a number of products and a variety of therapeutic carriers and formulations. Our portfolio approach helps us to diversify risk by giving us more shots on goal. We are optimistic that our investments in this pipeline will be rewarded as programmes mature.

In addition to the advancement of our pipeline we are focused on making our partnerships successful. We completed an extraordinary number of important new partnerships last year, and we are working very hard to ensure that those partnerships are successful. I think there is evidence, such as the expansion of the Lilly agreement, which demonstrates that we are doing the job.

We are also growing our GeneTrove business, defending our intellectual property and advancing both therapeutic and diagnostic opportunities at Ibis. We look forward to keeping you abreast of our progress and we appreciate the support that you have given our company and which, I hope, you will continue to give as we accomplish these goals.

We are also going to continue to advance the technology in our ownership [?]. This is perhaps best illustrated by the fact that we are rapidly approaching the issuance of our 1000th patent. We are proud of that. We think it is a tremendous record of innovation, and we believe that our patent estate represents extraordinary future value for our shareholders.

With those prepared comments I will now stop and look forward to answering your questions. If, Daniella, you can review the procedure for people we will get on our way.

Thank you. Ladies and Gentlemen, if you would like to register a question, please press the '1' followed by the '4' on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the '1' followed by the '3'. If you are using a speakerphone, please lift up your handset entering your request. One moment please for the first question. George Sacket with Dominic & Dominic, please proceed with your question.

The question is: what is the organisation feature, or the ingredient needed to round up Isis as an operating, full-fledged commercial entity? Are you to become a future discovery group, a drug manufacturer or a collaborator for other major companies? What are your plans for the outcome?

Thank you George. Our strategy really has not changed from inception. You will recall that when I founded the company I said that my hope was that we would create the first fully disintegrated pharmaceutical company. That is because I feel that the fully integrated pharmaceutical company was a great model for the industry for a long time - but I think new models need to be considered. Our goal has been to invest in R&D and to maintain the maximum ownership in products, but not to plan on having our own large sales organisation. If we are to have a marketing organisation it would be a very small, highly focused strategic marketing organisation that would deal with the realities of the modern commercialisation of pharmaceutical products, which really boils down to a set of decision makers that are really quite different from what they were even ten years ago - decision makers that make decisions about formularies, pricing and a whole bunch of things that just did not exist ten or twenty years ago. We also do not wish to be long-term manufacturers, although we are certainly the leading manufacturer of all of the nuclear type RNAs and are likely to remain so. We are quite encouraged, however, that Lilly and other third party manufacturers will be coming online over the next several years, so that we will be able to eventually not be long-term manufacturers. Now, why is that? We believe that we own antisense. We have the patents to control the technology, so we do not need to control manufacturing to exercise control. We think it a much better choice of investment to invest a dollar in the extraordinary productivity of antisense R&D and generate $10 or $20 as opposed to invest a dollar in manufacturing and make a dollar. We also think that the culture in manufacturing and sales is really quite different from the culture that we think is going to be most productive for Isis.

So, we have a very clear strategy and it has not changed. We intend to have a portfolio of drugs as large as possible with significant ownership of many, with minor ownership of some, and to control those products through major stages as we have cheaper sources of cash, but ultimately build relationships with sales and marketing organisations rather than build a large organisation of our own. I would remind everyone that the senior team at Isis is actually quite stable. Our turnover over the 13 years that Isis has been in business has been four percent. We have had one goal this year in terms of senior recruitment, which is to add a senior leader of regulatory affairs, since, given the scale of our pipeline, we felt that is something we need to strengthen. We believe that we will have accomplished that very shortly. So, that is the only significant addition to the management team that we have planned and the only significant change that we have planned in the near term.

Recently, I think it was Genentec that said that of all the biotech companies prices, stock prices are down, and therefore this is an opportune time for the large, established biotech to cast about and acquire small specialties. In light of this prospect, do you think you will still stick to your plan?

This is a buying opportunity, that is for sure. We are always on the lookout for opportunities to add value. Overall, over all the years that we have been at this, we have always concluded that our best investment for shareholders was an investment in antisense and the technology we are creating.

So, that remains our focus, but of course we are going to be opportunistic and take advantage of any good things that come along.

Thank you.

The next question comes from Serena Garcian with Ross Capital. Please proceed with your question.

Good morning. I have a couple of question. One relates to the revenues - do you expect the revenues to remain roughly around $20 million in third quarter for the remainder of the year?

Also, regarding the AffinitacTM data, can you take us through as to what may be the scenario in terms of the survival benefit you may see that may prompt you to file in 2003 for approval, and what may be the scenario that would prompt you to file based on the second phase trial in 2004?

I am going to ask Lynne to answer the revenues question. She takes all the hard questions.

We do not use separate projections on revenue and expenses. Every year, we do anticipate that as our collaborations grow and mature, as well as if we meet our goals for potentially adding new partnerships, our revenue has historically increased from early in the year to later in the year. But we do not have any separate, specific projection for quarter-to-quarter revenues for this year.

What I will do is to provide some guidance about our prudent developments. If you look at the development of AffinitacTM, I think we have a solid Phase 2 programme, and we have a Phase 3 study and 600 patients that are first line patients. So they are a homogeneous group of patients irrelevant [?] previously treated. We have an end point of the clinical trial, which is unassailable - which is, unfortunately, death. So, that trial will be a definitive statement about the value of AffinitacTM plus carboplatin and paclitaxel.

In the Phase 2 programme, we observed a 16 months linear survival compared to recent historical control of eight months. Clearly, if we are able to replicate that, that would be an extraordinary result and we would expect, given the powering of this trial, that would be statistically significant by several decimal points.

The trial itself is powered so that we can detect statistically significant difference at one and a half to two months' survival. So, somewhere in between a positive result, a very positive result, and an extraordinary result, decisions will need to be made about whether a single study NDA is appropriate. Those we will make in concert with our partner Lilly and with appropriate conversations with the FDA.

I think the key point is that we have a prudent clinical development strategy, which will give us a definitive result and we have backed up the study with the Phase 3 trial. That is the second Phase 3 trial. So, we will have the wherewithal to file a single study NDA if the studies are appropriate. We will back that up with an NDA based on two studies, if necessary, with Lilly later in the year.

That is really all the guidance I can give. I do not think it would be wise to do more.

Thank you very much.

Alan Schmitt with NorthGate Partners. Please proceed with your question.

Good morning, Stan. I have been amazed, and even dumbfounded a couple of times by the position the FDA has taken on different issues. A few weeks ago, a PhD researcher who has had some experience with the FDA commented that the various trials underway using a candidate agent, let us say in combination with the standard care side of toxic agents, carry an extra burden of proof with the FDA as compared with a single agent kind of study. I wonder if you could comment on that. What is that all about?

I think it is true, first, that a combination study has some extra burden of proof because you are not comparing to placebo, you have to compare to the active combination that you are adding to. Remember that in cancer, the standard of practice is combination. So at least in today's environment, there is almost no way around, as a first line therapy, something in combination.

I think the key to managing that regulatory risk is a prudent, well-designed Phase 3 trial. So what we have done in response - and if you look around, you will see very different approaches, but our approach was that first, we pick a disease that is lethal in 100% of the patients; and where treatment has made some minor advances, but where treatment desperately needs to improve.

We then designed an appropriately powered Phase 3 trial, in which we compared 300 patients treated with carboplatin paclitaxel with 300 patients treated with carboplatin paclitaxel AffinitacTM. I think if one were to attempt to compare to historical control, there would be a failed clinical trial, or a failed clinical strategy; or if one were to attempt to do a smaller study that would be under-powered, it would be a very imprudent clinical strategy. Then, finally, we picked as the primary end point something that is absolutely definitive survival. We base all that on solid Phase 2 experimental data.

So, I think you are absolutely correct in that any combination study demands a larger programme because you have to look for differences between an active treatment and an active treatment plus your drug. Our response to that has been the 600-patient trial in very carefully selected patients with an end point that is clear, and in a patient group where improved therapy is desperately needed.

Does that answer your question?

Yes, I appreciate that and I would like to follow up with another question, if I may. I have forgotten what the phrase is, but obviously, I think that you announced that the enrolment was completed sometime in January in the 600-patient trial. The longer it takes for you to be able to be in a position to analyse the median survival, the better for all concerned. Can you say something about the median time in the study? Again, I do not remember exactly what the right term is, but in concept, the median number of patients that have been in the study from the time enrolment began. Is there something you can say about that at this point?

All I can tell you is the study enrolled fairly linearly, and we have completed 600-patient enrolment, actually 616 patients enrolled as of January 15th, so that you could easily, if you thought about a well-knit linear enrolment over 12 months, you could do the calculations. I am afraid that I cannot provide any more insight into the trial other than to say that it remains blinded. We do not expect to analyse the data till later this year, and we do not expect the data to be available for discussion until very late this year or early next year. That is really as much as I can say. It is all that I know, by the way.

I understand. When did you begin the Phase 3 trial? I assume that all that Lilly had to evaluate was the data that you had from the Phase 2 study. Is that...?

That is correct. We presented the Phase 2 data at ASCO in 2001 and there were six companies that actually wanted the license as the drug based on the Phase 2 data. That is all the data that we had.

The Phase 3 trial was initiated in November of 1999. It took about 12.5 to 13 months to enrol - it may be 13 to 14 months. Remember that in any large clinical trial, the first month is always very slow. So most of that enrolment took place over about a 12-month period.

Thank you very much.

Darin Matt for Fulcrum Global Partners. Please proceed with your question.

Hi guys, I had a couple of questions here. The first one is on AffinitacTM and the Phase 2 Gemsis [?] study. Can we expect to see updated data, median time progression and actually survival data at the conventions [?] in the fall?

Second, can you update the status with Merck on the PTP-1B inhibitor for diabetes?

Finally, what are some of the next steps we could expect with the litigation list secutor [?]? Thanks.

Thanks, Darin. First, the Gemsis [?] AffinitacTM study was presented early in the study, and we were very encouraged by the response data in the way the survival curve was looking, though it was obviously too early to talk survival. It is likely, it seems to me, that we will present an updated data either late this year or at ASCO next year. It just depends on when all the enrolment is in, and when we have sufficient data. We have not made a decision about that. Of course, it is not entirely up to us. We have to have an abstract accepted and a whole bunch of other things, so it is a little difficult to predict.

Second was PTP-1B?

That is right.

We are making great progress on PTP-1B. We been fleshing out the pharmacology package and doing a lot of additional work on the PTP-1B drug. I actually feel great about the drug personally.

That is all I can say, obviously, because the conversation we need to have is a Merck-Isis conversation, and we are not prepared to have that yet. But the drug is progressing nicely, and we feel very good about the pharmacology and the toxicology package that we have.

Would you still expect to have IND by year-end?

I think I have said all that I can say, Darren. I think we have made a number of projections about that drug, and I said I feel very good about the drug. But I cannot say more that is not in the context of the joint release by us and Merck.

The third question was on secutor [?] - our litigation. I will just make a couple of points. I think the key thing that has been going on is that we keep adding patents. Our patents estate in RNAs continues to expand and strengthen, and we are progressing in the litigation in a way that we feel will lead to a successful outcome. I will let Lynne provide many more details about that, if she wants.

I can give you a little bit more detail. Right now, we have secutor [?] for impeaching [?] three of our patents. Two of those are consolidated, and the other one is separate. In the consolidated action we have actually gone through a market [?] hearing and came out very successfully. We are pleased with the results. Now, we are in a discovery motion, so, there really is no particular highlight in the short term coming up in the litigation we can point to, but we are optimistic that we are going to bring this to a successful conclusion.

The goal here is to enforce our patents and encourage other companies to rule that we now are entrenching to behave appropriately. Our goal is not to do harm to anyone, but to enforce our patents, because our shareholders have paid for this position.

We expect to win this.

Ok, thanks a lot, guys.

Mark Monee with Needham & Company. Please proceed with your question.

Thank you. Good morning. A couple of questions please - some specific, some general. The specific questions first. Can you update us again on the filing of the Crohn's disease product? I know that you started two Phase 3 trials, which is terrific. But what would you expect to be the timeline for this compound?

We have not changed the timeline. It is 2004/2005, and the precise timing, whether it is mid to late 2004 or sometime in 2005 will be just a question of enrolment and what data we need.

That will be the filing of the NDA.

Yes, assuming that the data are positive.

A follow up question on the collaboration revenues, especially the revenues referring to the powerful Lilly agreement. Could you go over how you are recognising these revenues, especially the reimbursement of clinical trials performed by Isis?

I will be happy to. As you remember, Mark, there are two different areas to the Lilly collaboration. One of them is research collaboration, and the other one is the license of AffinitacTM. With regards to the license of AffinitacTM, we received a $25 million upfront license fee, which we are amortising over the period in which we were actively collaborating with Lilly, I think that is two and a half years.

In addition, Lilly is reimbursing us for all of the expenses associated with the clinical trial work that we are doing, and they are also buying drugs from us.

So, all of those are recognised - the expenses associated with the clinical trials are recognised as we do the work and we invoice Lilly and Lilly pays us. Drug is expensed when we ship it to Lilly and they then pay us for the drug that they are buying from us. So there are three different components in the P&L analysis associated with AffinitacTM.

The research collaboration, as you will remember, is funded through a 0% interest loan that is convertible at $40 a share in the stock market at our option when we can choose to pay it back at the end of the research collaboration. So we do not book revenue for the research effort that we are doing on that collaboration. Now, we do book a bit of revenue associated with that loan, because it is a 0% interest loan, and you have to, if you treat it as if it were to have interest associated with it. So, there is revenue associated with this research, the collaboration, but it is a usual type of revenue.

Remember that that it is a $100 million collaboration over four years, and it is roughly spread out evenly over four years.

The other point I would make, and this is something where we tried to be cautious and accurate in the numbers we provide, is that we never included in those numbers all of the value that Lilly brings us. Remember that Lilly is investing a very sizeable amount on their own P&L in their 700-patient Phase 3 trial on the Phase 2 work that they are doing. So, the real value to Isis's shareholders is significantly larger than the combination of the research relationship and the revenues that we will receive from Lilly for the work that we are doing.

That is great. Thanks for that clarification. One more general question. I am having some challenges with the different generation. There is generation X, generation Y, the Meed generation, first and second, and now I read about your new collaboration on how the third generation PNP technology... Can you go over that in more detail for us?

Let me explain that and just describe the strategy. The strategy was to exploit first-generation drugs for what they could do, and our approach to that was prudent. We first began with local disease - that is how we ended up with Vitravene. Then we moved to systemic when we had enough information, and that is how we have ended up with drugs for cancer, for severe inflammation and for Hepatitis C.

Along the way, we learned that we could give first-generation drugs by aerosol and topically and by enema, and that is how we ended up with 2302-topical, and 2302-enema.

The second phase of the strategy was to build the largest medicinal chemistry programme in antisense by far, and use that over the years to identify to a quantum advance, which we would call second-generation chemistry. It was to be a quantum advance because the shift to second-generation should mean that we would stop making first generation drugs after the initial spate to first-generation drugs.

That second-generation chemistry is primatoxy-ethel [?]. It gives us about a tenfold increase to 15-fold increase in potency. It provides much improved stability and these drugs are clear by nucleus metabolism, so it allows dosing as frequently as once a month. It improves the safety of the drugs and local tolerability so that we can dose much better secontaneously [?]. It is the chemistry that supports oral viability and reduces cost of therapy by 100 to 120 folds, which means that at least secontaneously [?] we can compete with virtually any small molecule. It is the chemistry that is the basis of the relationships that we created last year with Lilly, Merck and Amgen because all of those relationships were focused on diseases where first-generation drugs would not be attractive.

Our plan for second-generation drugs is to create 40 or 50, maybe more, second-generation drugs based on this chemistry for all kinds of indications various formulations. Then spend the next number of years before we move to third-generation chemistry, or several third-generation chemistries. The third-generation chemistries might alter the distribution proposition of the drugs, so that we could either pick a second-generation or a third if we wanted the drug to go to an organ where second-generations do not go at a low doses; or it might be chemistry such as PMA, in which we get rid of the sugar and phosphate, and make synthesis much simpler and much less expensive, and those drugs have totally different properties.

So, we are still in the research phase creating the third-generation drug. The approach, of course, is to listen to the data that first the second-generation drugs give us, and then focus on the areas where we would like to enhance and broaden the utility of antisense drugs as we create the third-generation drugs.

For example, we know first and second-generation drugs do not get into the brain - they do not cross the brain membrane barrier. Can we create a third-generation antisense class that could get into the brain? Or do a better job of getting in the skull or muscles.

So those are the strategies, and that is what we are doing. Just because we do not talk about third-generation dose not mean we are not doing a lot. It is a research stage, and given the properties of second-generation, we have a quite a number of years free to experiment to create the next generation antisense chemistry because second-generation is such a quantum advance and is going to support so many drugs.

Thanks very much for that detailed outline.

Thank you.

Joy Michelle with CCL Partners. Please proceed with your question.

Thanks for taking my call. Just a quick question. What is the current portion of your long-term obligations?

I am going to ask Elizabeth Haugen to answer that. She has her answers at hand.

Actually, the current portion of those liabilities in the press release was grouped with a number of our current liabilities. But I think you could probably draw some inferences that they stayed relatively consistent quarter-to-quarter.

Ok, thanks very much.

Ladies and gentlemen, as a reminder, to register for a question, please press the '1', '4' at this time. Serena Garcian, please proceed with your follow-up question.

Yes, two follow-up questions. One is regarding your Hepatitis C data. Can you take us through whether the recent announcement of the seven to two week data or would you have a 12 week 24 week data on that as well?

Also, you mentioned that you have one IND filing later this year. Could you tell us for which drug, which indication it has?

Let me answer the second question first. What we have set at the minimum of one.

Why?

I do not want to be more specific, so that is about all I can tell you. We will leave it at that.

As you know, we have several drugs approaching the clinic, and most of them are partnered now. So it is also a little difficult for us to predict which one will get to the clinic first, because in contrast to previous years we are not in full control of the decision making about those drugs such as PTP-1B or the VLA-4, or 13650, or the Survivin drug. So, all of those are moving along at about the same pace. I will leave it at that.

The other question is on Hepatitis C data, and what we certainly will do is summarise all the one-month Phase 2 data. We just do not know yet what investigators will want to do and we will want to do with the full presentation of the three months data. We are accruing patients and generating information, but exactly when we will make that available and what part of that we will make available this year is something to be determined.

Ok, thank you.

I would say we continue to be encouraged by the drug.

Once again, ladies and gentlemen, to register for a question, please press the '1', '4' at this time. Dr. Crooke, I am showing no additional question. Please proceed with your presentation or any closing remarks.

If there are no additional questions I want to thank everyone for your time and interest, and the opportunity to answer your questions. We will continue to execute and put our scores on the board and be talking to you. Thanks very much.

Ladies and Gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.