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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For The Quarterly Period Ended September 30, 2002
 
OR
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 0-19171
 
 
ICOS CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
  
91-1463450
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
22021-20th Avenue S.E., Bothell, WA
  
98021
(Address of principal executive offices)
  
(Zip code)
 
(425) 485-1900
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  x  No  ¨
 
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
 
Class
     
Outstanding at October 31, 2002
Common Stock, $0.01 par value
     
62,039,160
 

Table of Contents
ICOS CORPORATION
 
FORM 10-Q
For the Quarterly Period Ended September 30, 2002
 
TABLE OF CONTENTS
 
         
Page No.
PART I.
   
FINANCIAL INFORMATION
     
ITEM 1.
   
Financial Statements
     
       
1
       
2
       
3
       
4
ITEM 2.
      
7
ITEM 3.
      
14
ITEM 4.
      
14
PART II.
   
OTHER INFORMATION
     
ITEM 1.
      
15
ITEM 6.
      
15
  
16
  
17
 

Table of Contents
 
PART I.    FINANCIAL INFORMATION
 
ITEM 1.    Financial Statements
 
ICOS CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(in thousands, except per share data)
  
Revenue:
                                    
Collaboration revenue from related parties
   
$
17,908
 
   
$
13,884
 
   
$
55,173
 
   
$
38,009
 
Licenses of technology
   
 
1,477
 
   
 
2,294
 
   
 
3,491
 
   
 
29,209
 
Contract manufacturing
   
 
2,825
 
   
 
2,687
 
   
 
8,057
 
   
 
4,261
 
    
  
  
  
Total revenue
   
 
22,210
 
   
 
18,865
 
   
 
66,721
 
   
 
71,479
 
    
  
  
  
Operating expenses:
                                    
Research and development
   
 
34,288
 
   
 
25,620
 
   
 
104,934
 
   
 
75,363
 
Selling, general and administrative
   
 
3,864
 
   
 
2,289
 
   
 
13,698
 
   
 
5,749
 
    
  
  
  
Total operating expenses
   
 
38,152
 
   
 
27,909
 
   
 
118,632
 
   
 
81,112
 
    
  
  
  
Operating loss
   
 
(15,942
)
   
 
(9,044
)
   
 
(51,911
)
   
 
(9,633
)
    
  
  
  
Other income (expense):
                                    
Equity in losses of affiliates
   
 
(21,578
)
   
 
(18,437
)
   
 
(71,579
)
   
 
(44,885
)
Interest and other income
   
 
2,989
 
   
 
3,113
 
   
 
9,334
 
   
 
9,730
 
    
  
  
  
Total other income (expense)
   
 
(18,589
)
   
 
(15,324
)
   
 
(62,245
)
   
 
(35,155
)
    
  
  
  
Net loss
   
$
(34,531
)
   
$
(24,368
)
   
$
(114,156
)
   
$
(44,788
)
    
  
  
  
Net loss per common share—basic and diluted
   
$
(0.56
)
   
$
(0.45
)
   
$
(1.87
)
   
$
(0.84
)
    
  
  
  
Weighted average common shares outstanding—basic and diluted
   
 
61,980
 
   
 
53,715
 
   
 
61,056
 
   
 
53,110
 
    
  
  
  
 
See accompanying notes to condensed consolidated financial statements.

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Table of Contents
 
ICOS CORPORATION
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
    
September 30,
2002
     
December 31,
2001
  
    
(unaudited)
         
    
(in thousands)
  
ASSETS
Current assets:
                  
Cash and cash equivalents
   
$
49,272
 
   
$
260,905
 
Investment securities, at market value
   
 
35,634
 
   
 
143,435
 
Interest receivable
   
 
5,092
 
   
 
3,834
 
Receivables from affiliates
   
 
39,275
 
   
 
11,405
 
Other
   
 
5,120
 
   
 
5,326
 
    
  
Total current assets
   
 
134,393
 
   
 
424,905
 
Investment securities, at market value
   
 
283,701
 
   
 
62,533
 
Property and equipment, net
   
 
20,567
 
   
 
19,754
 
Other assets
   
 
806
 
   
 
395
 
    
  
    
$
439,467
 
   
$
507,587
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
                  
Payables and accruals
   
$
22,616
 
   
$
21,079
 
Due to affiliates
   
 
32,789
 
   
 
18,132
 
Deferred revenue
   
 
4,782
 
   
 
4,329
 
    
  
Total current liabilities
   
 
60,187
 
   
 
43,540
 
    
  
Deferred revenue
   
 
15,301
 
   
 
10,297
 
Stockholders’ equity:
                  
Common stock
   
 
620
 
   
 
597
 
Additional paid-in capital
   
 
777,277
 
   
 
754,674
 
Unearned equity compensation
   
 
(527
)
   
 
—  
 
Accumulated other comprehensive income
   
 
3,114
 
   
 
828
 
Accumulated deficit
   
 
(416,505
)
   
 
(302,349
)
    
  
Total stockholders’ equity
   
 
363,979
 
   
 
453,750
 
    
  
    
$
439,467
 
   
$
507,587
 
    
  
 
See accompanying notes to condensed consolidated financial statements.

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Table of Contents
 
ICOS CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
    
Nine Months Ended
September 30,
  
    
2002
     
2001
  
    
(in thousands)
  
Cash flows from operating activities:
                  
Net loss
   
$
(114,156
)
   
$
(44,788
)
Adjustments to reconcile net loss to net cash used in operating activities:
                  
Depreciation and amortization
   
 
8,601
 
   
 
4,974
 
Equity in losses of affiliates
   
 
71,579
 
   
 
44,885
 
Deferred revenue
   
 
255
 
   
 
(5,656
)
Change in operating assets and liabilities:
                  
Receivables
   
 
(27,190
)
   
 
411
 
Other assets
   
 
396
 
   
 
(1,578
)
Payables and accruals
   
 
(516
)
   
 
1,474
 
    
  
Net cash used in operating activities
   
 
(61,031
)
   
 
(278
)
    
  
Cash flows from investing activities:
                  
Purchases of investment securities
   
 
(322,443
)
   
 
(178,651
)
Maturities of investment securities
   
 
91,070
 
   
 
51,447
 
Sales of investment securities
   
 
115,434
 
   
 
14,807
 
Purchases of property and equipment
   
 
(5,137
)
   
 
(3,326
)
Investments in affiliates
   
 
(56,678
)
   
 
(52,723
)
    
  
Net cash used in investing activities
   
 
(177,754
)
   
 
(168,446
)
    
  
Cash flows from financing activities:
                  
Proceeds from stock options and warrants
   
 
21,950
 
   
 
19,793
 
Proceeds under line of credit
   
 
5,202
 
   
 
—  
 
    
  
Net cash provided by financing activities
   
 
27,152
 
   
 
19,793
 
    
  
Decrease in cash and cash equivalents
   
 
(211,633
)
   
 
(148,931
)
Cash and cash equivalents, beginning of period
   
 
260,905
 
   
 
194,708
 
    
  
Cash and cash equivalents, end of period
   
$
49,272
 
   
$
45,777
 
    
  
Supplemental disclosure of cash flow information:
                  
Debt forgiveness upon achievement of clinical milestone recorded as deferred revenue
   
$
5,202
 
   
$
—  
 
    
  
 
See accompanying notes to condensed consolidated financial statements.

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Table of Contents
 
ICOS CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, unless otherwise noted)
(unaudited)
 
1.    Summary of Significant Accounting Policies
 
The accompanying condensed consolidated financial statements present the results of operations, financial position and cash flows of ICOS Corporation and its wholly owned subsidiaries, herein collectively referred to as “ICOS”.
 
These condensed consolidated financial statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States. We believe the disclosures made are adequate to make the information presented not misleading. However, you should read these condensed consolidated financial statements in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2001.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from those estimates.
 
In our opinion, the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of September 30, 2002 and December 31, 2001, our results of operations for the three and nine month periods ended September 30, 2002 and 2001, and cash flows for the nine months ended September 30, 2002 and 2001. Interim results are not necessarily indicative of results for a full year. All material intercompany transactions and balances between entities consolidated in these financial statements have been eliminated.
 
2.    Revenue from Collaborations and Licenses of Technology, and Equity in Losses of Affiliates
 
The following tables summarize our revenue from collaborations with related parties and licenses of technology, and equity in losses of affiliates for the three and nine months ended September 30, 2002 and 2001.

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Table of Contents
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
    
2002
     
2001
     
2002
     
2001
  
Collaboration revenue from related parties:
                                    
Lilly ICOS LLC
   
$
1,239
 
   
$
2,444
 
   
$
4,179
 
   
$
8,564
 
Suncos Corporation
   
 
13,336
 
   
 
8,397
 
   
 
40,143
 
   
 
19,365
 
ICOS-Texas Biotechnology L.P.
   
 
3,333
 
   
 
3,043
 
   
 
10,851
 
   
 
8,340
 
ICOS Clinical Partners, L.P.
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
1,740
 
    
  
  
  
    
$
17,908
 
   
$
13,884
 
   
$
55,173
 
   
$
38,009
 
    
  
  
  
Licenses of technology*:
                                    
Lilly ICOS LLC
   
$
243
 
   
$
2,011
 
   
$
949
 
   
$
28,442
 
ICOS Clinical Partners, L.P.
   
 
323
 
   
 
183
 
   
 
1,065
 
   
 
667
 
Biogen, Inc.
   
 
911
 
   
 
100
 
   
 
1,477
 
   
 
100
 
    
  
  
  
    
$
1,477
 
   
$
2,294
 
   
$
3,491
 
   
$
29,209
 
    
  
  
  
Equity in losses of affiliates:
                                    
Lilly ICOS LLC
   
$
(13,255
)
   
$
(9,894
)
   
$
(44,488
)
   
$
(26,304
)
Suncos Corporation
   
 
(6,485
)
   
 
(4,198
)
   
 
(20,786
)
   
 
(9,704
)
ICOS-Texas Biotechnology L.P.
   
 
(1,838
)
   
 
(4,345
)
   
 
(6,305
)
   
 
(8,855
)
ICOS Clinical Partners, L.P.
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(22
)
    
  
  
  
    
$
(21,578
)
   
$
(18,437
)
   
$
(71,579
)
   
$
(44,885
)
    
  
  
  
*
 
In the fourth quarter of 2000, we adopted the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 101, as amended, “Revenue Recognition in Financial Statements.” For the three and nine months ended September 30, 2002, we recognized $533 and $1,885, respectively, of the $63,075 of revenue deferred in 2000 as a result of this change in accounting. For the three and nine months ended September 30, 2001, we recognized $2,037 and $14,412, respectively, of revenue previously deferred upon the accounting change.
 
3.    Affiliate Operating Results
 
The following tables summarize the operating results of our affiliates for the three and nine months ended September 30, 2002 and 2001.
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
    
2002
     
2001
     
2002
     
2001
  
Lilly ICOS LLC:
                                    
Research and development expenses
   
$
(11,897
)
   
$
(9,609
)
   
$
(36,307
)
   
$
(32,999
)
Contributed technology license**
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(30,000
)
Selling, general and administrative expenses
   
 
(14,613
)
   
 
(10,179
)
   
 
(52,669
)
   
 
(19,609
)
    
  
  
  
    
$
(26,510
)
   
$
(19,788
)
   
$
(88,976
)
   
$
(82,608
)
    
  
  
  
Suncos Corporation:
                                    
Research and development expenses
   
$
(12,675
)
   
$
(8,405
)
   
$
(41,005
)
   
$
(19,393
)
General and administrative expenses
   
 
(299
)
   
 
(35
)
   
 
(605
)
   
 
(128
)
Interest income
   
 
4
 
   
 
44
 
   
 
37
 
   
 
113
 
    
  
  
  
    
$
(12,970
)
   
$
(8,396
)
   
$
(41,573
)
   
$
(19,408
)
    
  
  
  
ICOS-Texas Biotechnology L.P.:
                                    
Research and development expenses
   
$
(3,659
)
   
$
(4,687
)
   
$
(12,494
)
   
$
(13,679
)
Contributed technology license
   
 
—  
 
   
 
(4,000
)
   
 
—  
 
   
 
(4,000
)
General and administrative expenses
   
 
(17
)
   
 
(3
)
   
 
(117
)
   
 
(31
)
    
  
  
  
    
$
(3,676
)
   
$
(8,690
)
   
$
(12,611
)
   
$
(17,710
)
    
  
  
  
**
 
ICOS does not recognize any Lilly ICOS LLC expenses associated with the valuation of contributed technology, as those expenses are solely applicable to Eli Lilly and Company.

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Table of Contents
 
4.     Comprehensive Loss
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
    
2002
     
2001
     
2002
     
2001
  
Net loss
   
$
(34,531
)
   
$
(24,368
)
   
$
(114,156
)
   
$
(44,788
)
Net unrealized gains on investment securities
   
 
1,987
 
   
 
798
 
   
 
2,286
 
   
 
910
 
    
  
  
  
Comprehensive loss
   
$
(32,544
)
   
$
(23,570
)
   
$
(111,870
)
   
$
(43,878
)
    
  
  
  
 
5.    Net Loss Per Common Share
 
Net loss per common share is calculated using the weighted-average number of common shares outstanding during the period. For the three and nine months ended September 30, 2002, options to acquire 9.0 million shares of common stock and warrants to acquire 7.4 million shares of common stock were excluded from the computation of net loss per common share because their impact would be antidilutive. For the three and nine months ended September 30, 2001, options to acquire 8.1 million shares of common stock and warrants to acquire 9.4 million shares of common stock were excluded from the computation of net loss per common share because their impact would be antidilutive.
 
6.    Stockholder Rights Plan
 
On August 9, 2002, we implemented a Stockholder Rights Plan (the “Rights Plan”) under which the Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of our common stock. The dividend is payable to stockholders of record at the close of business on August 27, 2002. In addition, our Board of Directors authorized the issuance of one Right for each additional share of common stock that becomes outstanding between August 27, 2002, and the earliest of 1) the distribution date as defined in the Rights Plan, 2) the date on which the Rights expire, or 3) the date, if any, on which our Board of Directors redeems the Rights. Each Right entitles its registered holder, under certain circumstances and upon the occurrence of certain events, to purchase from us one one-hundredth of a share of our Series A Junior Participating Preferred Stock, at a price of $250.00 per one one-hundredth of a preferred share, subject to adjustment. The Rights are not exercisable until the distribution date. Until the distribution date, or earlier redemption or expiration of the Rights, the Rights may only be transferred with the shares of our common stock.
 
If a person or group (collectively, an “Acquiring Person”) acquires beneficial ownership of 15% or more of our outstanding shares of common stock, then each Right (other than those held by an Acquiring Person, an affiliate, or an associate of that person) will entitle the holder to purchase, for the purchase price, the number of shares of common stock which at the time of the transaction would have a market value of twice the purchase price. Any Rights owned by an Acquiring Person, an affiliate, or an associate of that person, will be void and non-transferable. The Board of Directors may also elect to exchange each Right, other than those which become void and nontransferable as described above, for shares of common stock, without payment of the purchase price. Should the Board of Directors make this election, the exchange rate would be one-half of the number of shares of common stock that would otherwise be issuable at that time upon the exercise of one Right.
 

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To preserve the economic value of the Rights, the number of preferred shares or securities issuable upon exercise of a Right, the purchase price, the redemption price and the number of Rights associated with each outstanding common share are all subject to adjustment by the Board of Directors. The Board of Directors may redeem the Rights, in whole, at a price of $0.01 per share, at any time prior to announcement of the existence of an Acquiring Person. The Rights will expire on August 9, 2012, unless redeemed or exchanged prior thereto.
 
7.    Event Subsequent to September 30, 2002
 
On October 22, 2002, Pfizer Inc., Pfizer Limited, and Pfizer Ireland Pharmaceuticals filed a patent infringement lawsuit against ICOS, Lilly ICOS LLC (“Lilly ICOS”), and Eli Lilly and Company (“Lilly”) in the United States District Court for the District of Delaware. The complaint alleges that the intended and imminent manufacture, use, offering for sale, selling, or importing into the United States upon U.S. Food and Drug Administration (“FDA”) approval of Cialis™ for the treatment of erectile dysfunction by ICOS, Lilly ICOS, and Lilly will constitute infringement of plaintiffs’ U.S. Patent No. 6,469,012, which issued on October 22, 2002. The plaintiffs seek a judgment declaring that ICOS, Lilly ICOS, and Lilly’s making, using, selling, offering for sale, or importing of Cialis™ for the treatment of erectile dysfunction will infringe this patent. The plaintiffs also seek a permanent injunction, attorneys’ fees, costs, and expenses. ICOS, Lilly ICOS, and Lilly intend to vigorously defend against the lawsuit.
 
ITEM 2.     Management’s Discussion and Analysis of Results of Operations and Financial Condition
 
Risks and Uncertainties
 
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements based on current expectations that are subject to risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “should” or “will” or the negative of those terms or comparable terminology. Our actual results and the timing of events could differ materially from those anticipated or implied by the forward-looking statements discussed herein as a result of various factors. Factors that could cause or contribute to such differences include risks associated with clinical development, manufacturing, collaboration arrangements with affiliates and third parties, regulatory approvals, product commercialization, intellectual property claims, litigation and other risks discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2001. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

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Overview
 
ICOS Corporation is a product-driven company that has expertise in both protein-based and small molecule therapeutics. We combine our capabilities in molecular, cellular and structural biology, high throughput drug screening, medicinal chemistry and gene expression profiling, to develop highly innovative products expected to have significant commercial potential. To enhance our internal development efforts, we have established collaborations with other pharmaceutical and biotechnology companies, including Lilly, Suntory Limited (“Suntory”), Texas Biotechnology Corporation (“Texas Biotechnology”) and Biogen, Inc. (“Biogen”).
 
We and our collaboration partners currently have the following product candidates in later-stage clinical development: Cialis™ (tadalafil), for the treatment of erectile dysfunction; Pafase®, which is being evaluated in a Phase 3 clinical trial for the treatment of severe sepsis; and, sitaxsentan, which is being evaluated for the treatment of pulmonary hypertension. Recent activities related to each of the foregoing product candidates are summarized below.
 
Cialis™
 
On July 25, 2002, we announced that Lilly ICOS, our collaboration with Lilly, had received a positive opinion from the European Committee for Proprietary Medicinal Products (“CPMP”) for Cialis™. The CPMP, comprised of regulators from the European Union countries, based its opinion on its review of the data package for Cialis™ submitted in June 2001. The submission was comprised of more than 60 studies in more than 4,000 subjects to characterize the safety and efficacy profile of Cialis™. Based on the CPMP’s positive opinion, the application will be reviewed by the European Commission, which has authority to grant marketing authorization for the European Union. We anticipate this authorization will occur by the end of 2002 and, accordingly, expect to launch Cialis™ in Europe in the first half of 2003.
 
In April 2002, Lilly ICOS received an approvable letter from the FDA for Cialis™ for the treatment of erectile dysfunction. An approvable letter indicates that the FDA is prepared to approve an application upon the satisfaction of conditions specified in the letter. Conditions specified in the approvable letter for Cialis™ were completion of additional confirmatory clinical pharmacology studies, successful resolution of certain issues regarding Lilly’s manufacturing operations and labeling discussions. The additional clinical pharmacology activities have been proceeding since shortly after receipt of the approvable letter, and Lilly continues to work to resolve issues related to their manufacturing operations. Currently, U.S. regulatory approval for Cialis™ is projected to occur in the second half of 2003, with product launch anticipated to occur shortly thereafter.
 
Pafase®
 
In April 2002, we completed the first of three possible interim analyses in the Phase 3 clinical trial with Pafase® for the treatment of severe sepsis. An independent data monitoring committee evaluated the clinical data and, based on the committee’s recommendation, the study is continuing. A second interim analysis is expected by early 2003.

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Clinical data from the interim analyses are available only to the independent data monitoring committee and are not shared with us until study cessation.
 
Sitaxsentan
 
Patient enrollment in the twelve-week sitaxsentan Phase 2b/3 clinical trial for pulmonary hypertension was completed during the second quarter of 2002. On October 21, 2002, ICOS-Texas Biotechnology L.P. (“ICOS-TBC”) announced results from the Phase 2b/3 clinical trial to assess the safety and efficacy of sitaxsentan in patients with New York Heart Association (“NYHA”) class II, III and IV pulmonary arterial hypertension. Results related to the primary endpoint, change in percent of predicted peak VO2 from baseline to week 12, showed a statistically significant improvement for only the 300 mg dose group compared to placebo treatment. Results related to a secondary endpoint, change in 6-minute walk distance from baseline to week 12, showed equivalent statistically significant improvement for both the sitaxsentan 100 mg and 300 mg groups, compared to placebo treatment. NYHA class improvement, another important measure that reflects limitations in physical activity, was also statistically significant for the sitaxsentan 100 mg and 300 mg dose groups compared to placebo treatment.
 
The most frequent adverse events that occurred in patients receiving sitaxsentan, and that were more common than the placebo group, were headache, peripheral edema, nausea, nasal congestion and prolonged clotting time. Additionally, when data from the Phase 2b/3 clinical trial are combined with data from an extension trial, the incidences of liver abnormalities, which were shown to be reversible, were 5% for the sitaxsentan 100 mg dose group and 21% for the sitaxsentan 300 mg dose group. We expect to review these results with our medical advisors and the FDA before deciding upon the appropriate next steps in the development of sitaxsentan.
 
Other Clinical Product Candidates
 
We also continue to develop our earlier-stage clinical product candidates. In August 2002, we initiated Phase 2 clinical trials with IC747, a compound being developed with Biogen as a potential treatment for psoriasis, and IC14, a compound being developed as a potential treatment for patients with community-acquired pneumonia which has progressed to sepsis. During the third quarter of 2002, we completed two Phase 1 clinical trials with IC485, an inhibitor of the phosphodiesterase type 4 enzyme. During 2003, we expect to initiate a Phase 2 program with IC485. In addition, we are in the planning stages for a Phase 2 program with RTX™, a compound being developed for the potential treatment of interstitial cystitis.
 
Critical Accounting Policies
 
Our critical accounting policies and estimates are substantially the same as those identified and discussed in our Annual Report on Form 10-K for the year ended December 31, 2001. These items include revenue recognition, recognition of our share of the operating results of our unconsolidated affiliates and recognition of expenses from contracted research and clinical trial activities conducted by various third parties.

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Results of Operations
 
Revenue
 
Revenue for the third quarter of 2002 was $22.2 million, compared to $18.9 million for the third quarter of 2001. Revenue for the first nine months of 2002 was $66.7 million, compared to $71.5 million for the first nine months of 2001.
 
Third quarter 2002 collaboration revenue from related parties (“cost reimbursement revenue”) increased $4.0 million, to $17.9 million, compared to $13.9 million for the third quarter of 2001. For the first nine months of 2002, cost reimbursement revenue increased $17.2 million, to $55.2 million, compared to $38.0 million in the first nine months of 2001. The increases in cost reimbursement revenue, for both the third quarter and year-to-date, were primarily due to the progression of development related to Pafase®, including increased patient enrollment in the Phase 3 clinical trial for severe sepsis and manufacturing activities. These increases were partially offset by decreases in cost reimbursement revenue related to Cialis™, reflecting completion of development activities related to the submission of the New Drug Application (“NDA”) to the FDA in June 2001 and lower European patent opposition costs in 2002.
 
Revenue from licenses of technology was $1.5 million in the third quarter of 2002, compared to $2.3 million in the third quarter of 2001. For the first nine months of 2002, revenue from licenses of technology was $3.5 million, compared to $29.2 million in the first nine months of 2001. Results for the first nine months of 2001 include $14.7 million in license fees recognized upon the NDA submission for Cialis™ in June 2001. For the three and nine months ended September 30, 2002, we recognized $0.5 million and $1.9 million, respectively, of the $63.1 million deferred in 2000 as a result of a change in accounting for certain revenues. For the three and nine months ended September 30, 2001, we recognized $2.0 million and $14.4 million, respectively, of revenue previously deferred upon the accounting change. The decreases, for both the three and nine month periods, were primarily due to the completion of Cialis™ development activities required to file the NDA in June 2001.
 
During the three and nine months ended September 30, 2002, we recognized $2.8 million and $8.1 million, respectively, in revenue related to the development and manufacture of third party clinical materials, compared to $2.7 million and $4.3 million, respectively, for the three and nine months ended September 30, 2001. The year-to-date increase reflects the growth of our contract manufacturing program since it began in the fourth quarter of 2000.
 
Operating Expenses
 
Total operating expenses were $38.2 million in the third quarter of 2002, compared to $27.9 million in the third quarter of 2001. Total operating expenses were $118.6 million in the first nine months of 2002, compared to $81.1 million in the first nine months of 2001.

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Research and development expenses were $34.3 million in the third quarter of 2002, compared to $25.6 million in the third quarter of 2001. Research and development expenses were $104.9 million in the first nine months of 2002, compared to $75.4 million in the first nine months of 2001. These increases are largely due to the progression of development activities for Pafase® and sitaxsentan, as well as increased costs associated with our earlier-stage clinical product candidates—IC747, IC485, IC14 and RTX™—and discovery research activities. Pafase® development expenses increased, for both the third quarter and year-to-date, primarily due to higher patient enrollment in the Phase 3 clinical trial for severe sepsis and the initiation of certain third-party manufacturing activities earlier this year. Sitaxsentan development expenses increased during 2002, primarily due to increased patient enrollment and site initiation costs in comparison to the prior year. Program costs for Cialis™ decreased, for both the third quarter and year-to-date, primarily due to completion of certain development activities related to the NDA filing in 2001 and lower European patent opposition costs in 2002.
 
Selling, general and administrative expenses increased $1.6 million, to $3.9 million in the third quarter of 2002, and increased $7.9 million, to $13.7 million in the first nine months of 2002, compared to the same periods in 2001. These increases primarily reflect certain start-up expenses necessary to establish our first sales force in anticipation of the U.S. commercial launch of Cialis™, as well as overall growth in our sales and marketing capabilities. Following receipt of the approvable letter from the FDA in April 2002, many sales and marketing activities for Cialis™ in the U.S. have been postponed.
 
Equity in Losses of Affiliates
 
During the third quarter of 2002, we recognized $21.6 million in losses related to our equity interests in affiliates, compared to $18.4 million in the third quarter of 2001. For the first nine months of 2002, we recognized $71.6 million in affiliate losses, compared to $44.9 million in the first nine months of 2001. These increases primarily reflect higher Lilly ICOS sales and marketing costs in anticipation of the commercial launch of Cialis™ in the U.S. and Europe. In addition, operating losses of Suncos Corporation (“Suncos”), our collaboration with Suntory, increased due to the progression of the Phase 3 clinical trial and manufacturing activities for Pafase®. Our share of the 2002 operating losses of ICOS-TBC decreased, on both a quarter and year-to-date basis, compared to the same periods in the prior year, primarily because we recognized $2.0 million in losses in the third quarter of 2001 associated with a success-based milestone obligation to Texas Biotechnology.
 
Net Loss
 
We reported a net loss of $34.5 million ($0.56 per share) for the third quarter of 2002, compared to a net loss of $24.4 million ($0.45 per share) for the third quarter of 2001. For the nine months ended September 30, 2002, we reported a net loss of $114.2 million ($1.87 per share) compared to a net loss of $44.8 million ($0.84 per share) for the first nine months of 2001.

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Our results of operations may vary significantly from period to period. Operating results will depend on, among other factors, the timing of expenses, continued funding from our collaboration partners, and the timing and progress of our research, development, marketing and sales activities. We may experience significant fluctuations in cost reimbursement revenue, revenue from licenses of technology and contract manufacturing revenue. Revenue from licenses of technology will vary as a result of the timing of milestone payments and changes in estimated total development costs, which depend on the success of clinical trials and other development efforts. Contract manufacturing revenue may fluctuate depending upon our needs to manufacture our own internal product candidates and our ability to attract third parties to utilize any remaining manufacturing capacity. In addition, significant changes in joint venture collaboration activities could cause the amount of affiliate losses to fluctuate from period to period. Our joint venture and collaboration activities are subject to the oversight of both parties. Accordingly, the clinical, development, marketing and sales activities of our affiliates are not entirely within our control.
 
We have incurred significant operating losses since we began operations in September 1990 and, as of September 30, 2002, we had an accumulated deficit of $416.5 million. We expect that our operating expenses will increase during 2002 and subsequent years as we attempt to complete development of our product candidates, obtain necessary regulatory approvals, and manufacture and market any approved products. In particular, we expect to incur substantial sales, marketing and other costs related to commercializing Cialis™ before and after regulatory approvals for this product candidate in the U.S., Europe and elsewhere. In the future, we may pursue our internal research, development, marketing and sales activities more aggressively and, when beneficial to do so, establish additional collaborations. As a result of these factors, we do not expect to be profitable for at least three years.
 
Liquidity and Capital Resources
 
At September 30, 2002, we had cash, cash equivalents, investment securities and associated interest receivable of $373.7 million, compared to $470.7 million at December 31, 2001.
 
We used $61.0 million in cash for operating activities during the first nine months of 2002, compared to $0.3 million in the first nine months of 2001. The change in operating cash flow primarily reflects receipt of a $15.0 million license fee from Lilly ICOS in June 2001, receipt of an $8.0 million upfront payment from Biogen in July 2001, timing of cost reimbursements from our affiliates and the overall increase in research and development spending in 2002.
 
We used $177.8 million in cash for investing activities during the first nine months of 2002, compared to $168.4 million during the same period in 2001. Cash used in investing activities in the first nine months of 2002 included a $115.9 million net increase in our investment portfolio, compared to a $112.4 million net increase in our investment portfolio in the first nine months of 2001. The increase in our investment portfolio in both years primarily reflects our conversion of cash equivalents held at the end of the prior year into investments with slightly longer maturities. Investing outflows during the first nine months of 2002 also included $56.7 million of affiliate capital contributions, compared to $52.7 million in the same period of the prior year. None of our affiliates have any third-party indebtedness. Each affiliates’ liabilities are principally payable to its owners for reimbursable research, development and other expenses.

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We generated $27.2 million in cash from financing activities during the first nine months of 2002, compared to $19.8 million during the first nine months of 2001. Proceeds from stock options and warrants totaled $22.0 million during the first nine months of 2002, for 2.3 million shares of our common stock, compared to $19.8 million during the first nine months of 2001, for 1.5 million shares of our common stock. The 2002 and 2001 proceeds included $17.4 million and $6.0 million, respectively, from the exercise of Series A warrants to purchase 1.8 million and 0.6 million shares, respectively, of our common stock. The Series A warrants were issued in 1997, exercisable at $9.13 and $10.35 per share and, if unexercised, expired on May 31, 2002. Financing cash inflows during 2002 also included $5.2 million in borrowings under our line of credit with Biogen. The debt was forgiven and recorded as deferred revenue in the third quarter of 2002, upon the achievement of a clinical milestone.
 
Our future cash requirements will depend on various factors, many of which are beyond our control, including:
 
 
•
 
obtaining regulatory approval for, and continued progress in, commercializing Cialis™ in the U.S., Europe and elsewhere;
 
 
•
 
funding levels for research and development programs, including continued funding from our collaboration partners;
 
 
•
 
the results of clinical trials and preclinical studies;
 
 
•
 
the time and costs involved in filing and prosecuting patents and enforcing and defending patent claims;
 
 
•
 
the regulatory process in the United States and other countries;
 
 
•
 
acquisitions of products or technologies, if any;
 
 
•
 
relationships with research and development collaborators;
 
 
•
 
capital contributions to our affiliates;
 
 
•
 
royalty payments to ICOS Clinical Partners in the event of commercialization of Pafase®;
 
 
•
 
competing technological and market development activities; and
 
 
•
 
the time and costs of manufacturing, scale-up and commercialization activities.
 
We have engaged in collaborations and joint development agreements with other parties where the capabilities and strategies of the other parties complement ours. Although corporate collaborations, partnerships and joint ventures have provided cost reimbursement revenue to us in the past, we cannot assure that this type of revenue will be available to us in the future.
 
We intend to expand our operations and hire the additional personnel necessary to continue development of our current portfolio of product candidates in clinical trials, as well as to continue discovery and preclinical research to identify additional product candidates. We also intend to continue to engage in pre-marketing activities necessary to bring our product candidates to market and to establish marketing and selling capabilities for product candidates ready for commercialization. We anticipate that expansion of these activities will increase operating expenses in the future. Furthermore, we will need to make incremental expenditures for additional laboratory, production and office facilities to accommodate the activities and personnel associated with these increased development and commercialization efforts.

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We anticipate that our existing cash and cash equivalents, investment securities, interest income from our investments, cash flow from other operating activities, including anticipated payments from Lilly ICOS, Suncos and ICOS-TBC, cash flow from potential future collaborations, and the line of credit available to us under an agreement with Biogen, will be sufficient to fund operations at least until mid-2004. Given our product development and marketing and sales efforts, including those associated with the anticipated commercialization of Cialis™, there is a reasonable likelihood that we will seek additional financing within the next twelve to eighteen months. Additional financing may not be available when we need it or may be unavailable on acceptable terms. If we are unable to raise additional funds when we need them, we may be required to delay, scale back or eliminate expenditures for some of our development programs or grant rights to third parties to develop and market product candidates that we would prefer to develop and market internally.
 
ITEM 3.    Quantitative and Qualitative Disclosure about Market Risk
 
At September 30, 2002, our financial instruments consisted of cash, cash equivalents and marketable investment securities. We do not use derivative financial instruments in our investment portfolio. Because of the relatively short maturities of our investments, we do not expect interest rate fluctuations to materially affect the aggregate value of our financial instruments.
 
ITEM 4.    Controls and Procedures
 
 
(a)
 
Evaluation of disclosure controls and procedures.    Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date (the “Evaluation Date”) within 90 days prior to the filing date of this quarterly report, have concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate to ensure that material information relating to the registrant and its consolidated subsidiaries would be made known to them by others within those entities.
 
 
(b)
 
Changes in internal controls.    To our knowledge, there were no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date.

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PART II.    OTHER INFORMATION
 
ITEM 1.    Legal Proceedings
 
On October 22, 2002, Pfizer Inc., Pfizer Limited, and Pfizer Ireland Pharmaceuticals filed a patent infringement lawsuit against ICOS, Lilly ICOS LLC, and Eli Lilly and Company in the United States District Court for the District of Delaware. The complaint alleges that the intended and imminent manufacture, use, offering for sale, selling, or importing into the United States upon FDA approval of Cialis™ for the treatment of erectile dysfunction by ICOS, Lilly ICOS LLC, and Eli Lilly and Company will constitute infringement of plaintiffs’ U.S. Patent No. 6,469,012, which issued on October 22, 2002. The plaintiffs seek a judgment declaring that ICOS, Lilly ICOS LLC, and Eli and Company’s making, using, selling, offering for sale, or importing of Cialis™ for the treatment of erectile dysfunction will infringe this patent. The plaintiffs also seek a permanent injunction, attorneys’ fees, costs, and expenses. ICOS, Lilly ICOS LLC, and Eli Lilly and Company intend to vigorously defend against the lawsuit.
 
ITEM 6.    Exhibits and Reports on Form 8-K
 
(a)  Exhibits
 
Exhibit 99.1
   
Certification of Paul N. Clark Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2
   
Certification of Michael A. Stein Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
(b)  Reports on Form 8-K
 
On August 9, 2002, the Company filed a report announcing the adoption of a Stockholder Rights Plan and declaration of a dividend of one preferred share purchase right for each outstanding share of its common stock.

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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
       
ICOS CORPORATION
Date:
  
November 5, 2002
      
By:
  
/s/    MICHAEL A. STEIN        
               
Michael A. Stein
Vice President and Chief Financial Officer
(Principal Financial Officer)

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CERTIFICATIONS
 
I, Paul N. Clark, Chief Executive Officer of the Company, certify that:
 
(1)
 
I have reviewed this quarterly report on Form 10-Q of ICOS Corporation;
 
(2)
 
Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
(3)
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
(4)
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
(a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
(b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
(c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
(5)
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
(b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
(6)
 
The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date:
  
November 5, 2002
      
By:
  
/s/    PAUL N. CLARK        
               
Paul N. Clark
Chief Executive Officer

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CERTIFICATIONS
 
I, Michael A. Stein, Chief Financial Officer of the Company, certify that:
 
(1)
 
I have reviewed this quarterly report on Form 10-Q of ICOS Corporation;
 
(2)
 
Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
(3)
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
(4)
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
(a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
(b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
(c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
(5)
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
(b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
(6)
 
The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date:
  
November 5, 2002
      
By:
  
/s/    MICHAEL A. STEIN        
               
Michael A. Stein
Chief Financial Officer

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