Icos Corp (ICOS) - Description of business

 

ICOS Corporation, a biotechnology company headquartered in Bothell, Washington, is dedicated to bringing innovative therapeutic products to patients. Through Lilly ICOS LLC (Lilly ICOS), our joint venture with Eli Lilly and Company (Lilly), we are marketing Cialis ® (tadalafil) for the treatment of erectile dysfunction. Lilly ICOS also is evaluating tadalafil as a potential treatment in benign prostatic hyperplasia (BPH), hypertension and pulmonary arterial hypertension (PAH). ICOS also is working to develop and commercialize potential treatments for other serious unmet medical conditions such as cancer and inflammatory diseases.

Over the years, we have established collaborations with pharmaceutical and biotechnology companies to enhance our internal development capabilities, to acquire rights to additional product candidates, to gain access to the capabilities of our collaboration partners and to offset a substantial portion of the financial risk of developing individual product candidates. Our most significant ongoing collaboration is Lilly ICOS. We expect to establish additional collaborations with pharmaceutical and other biotechnology companies in the future.

Business Strategy

ICOS is focused on the discovery, development and commercialization of innovative drugs.

Successfully commercializing Cialis in the United States, Europe and other countries.     With the United States Food and Drug Administration’s (FDA) 2003 approval of Cialis for erectile dysfunction, and subsequent Cialis product launch in the United States, we have succeeded in bringing our first product to market on a worldwide basis. Through the sales and marketing efforts of both Lilly and ICOS, we intend to continue to increase awareness of the unique benefits of Cialis, as we expand our position in the large and growing worldwide erectile dysfunction market.

Diversifying and commercializing our portfolio of product candidates.     We have developed, and plan to continue to develop, a portfolio of product candidates encompassing a variety of therapeutic approaches to address both chronic and acute diseases and medical conditions. For example, we are currently researching and developing product candidates targeting, among others, cardiovascular diseases, urologic disorders, cancer and inflammatory diseases. To mitigate some of the risks inherent in clinical development, we plan to develop a number of product candidates concurrently. We believe this diversified approach yields the greatest opportunity for long-term commercial success.

Using our internal capabilities to discover and develop novel product candidates.     We have used our capabilities in molecular, cellular and structural biology, high throughput drug screening, medicinal chemistry and gene expression profiling to successfully identify novel product candidates. We have obtained patents, or filed patent applications, for protein-based and small molecule product candidates. We plan to continue our discovery and development efforts in these areas, emphasizing diseases and medical conditions for which current therapies are substandard or unavailable, or for which the market opportunities are large.

Identifying attractive acquisition and in-licensing candidates.     We have acquired and in-licensed product candidates and plan to continue to do so in the future. We believe that we are well positioned to attract additional product candidates as a result of our broad base of research, clinical and development capabilities, as well as our experience bringing a collaboratively developed product to market.

Forming strategic collaborations.     We have established, and intend to continue to establish, collaborations with pharmaceutical and other biotechnology companies to enhance the development of product candidates.

These collaborations enable us to retain a significant portion of the potential economic benefit, while offsetting a substantial portion of the financial risk. We believe collaborations generally enable us to develop a greater number of product candidates than otherwise would be possible and also provide us with access to a broader range of scientific and commercial capabilities through our collaborative partners.

Expanding our intellectual property portfolio.     We intend to continue to aggressively pursue protection of our proprietary technology and other intellectual property. We believe that establishing a strong proprietary position could provide an important competitive advantage in our target markets. We have applied, and are applying, for patents for Cialis, our product candidates and unique aspects of our technologies, in the United States and in other countries.

Cialis

Our first commercial product, Cialis, is being prescribed around the world as an on-demand treatment for patients with erectile dysfunction. Cialis is being manufactured and marketed by Lilly ICOS, which has rights to commercialize Cialis in North America and Europe. In the context of Lilly ICOS territories, North America includes the United States, Canada and Mexico. Europe includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. Lilly has exclusive rights to market Cialis in all other parts of the world, and pays royalties to Lilly ICOS equal to 20% of net sales in those territories. Worldwide net sales of Cialis totaled $746.6 million during the year ended December 31, 2005, including $169.9 million in Lilly territories.

Cialis is an oral inhibitor of the phosphodiesterase type 5 enzyme (PDE5), shown to be effective in relaxing smooth muscle tissue. Lilly ICOS has conducted approximately 112 clinical studies, involving more than 15,000 human subjects, in evaluating Cialis for the treatment of erectile dysfunction. Efficacy studies demonstrated that Cialis both improved a patient’s ability to attain and maintain an erection sufficient for sexual intercourse and significantly increased the percentage of successful sexual attempts. Clinical studies further demonstrated that Cialis is effective up to thirty-six hours after taking the drug and may work as early as thirty minutes after dosing. We believe that the drug’s duration and the ability to take the drug without regard to food allows men and their partners more freedom and spontaneity to choose the right moment for sexual activity.

Background.     Erectile dysfunction is a condition in which a man is unable to attain or maintain an erection sufficient for sexual intercourse. Erectile dysfunction affects an estimated 30 million men in Europe and an estimated 40 million men in North America and is increasingly recognized as a serious and treatable medical condition. Erectile dysfunction is often associated with underlying diseases such as diabetes, cardiovascular disease and depression, or may be a neurological consequence of conditions such as prostate surgery, spinal cord injury or treatment with certain medications.

Typically, sexual arousal leads to increased blood flow into penile erectile tissue, resulting in an erection. As part of this arousal process, the body produces a compound called cyclic guanosine monophosphate (cGMP) which causes penile blood vessels to dilate, allowing blood flow to increase. PDE5, an enzyme present in penile blood vessels, cleaves cGMP allowing the penile blood vessels to return to their undilated state. Inhibition of PDE5 can enhance blood flow to the penis, thus, contributing to an erection.

Current Treatment.     Until 1998, treatments for erectile dysfunction were primarily limited to the use of injectables, vacuum pumps and prostheses, which are inconvenient and unpleasant options that had limited the size of the treated population. With the introduction, in 1998, of Viagra ® (sildenafil citrate), which also inhibits PDE5, millions of men were motivated for the first time to acknowledge their affliction and seek treatment. In 2003, Levitra ® (vardenafil HC1), was introduced as an alternative treatment for erectile dysfunction. We believe that less than 10% of the world’s male population who could benefit from orally administered treatment for erectile dysfunction are currently undergoing treatment.

Research and Development Pipeline

We are studying and developing product candidates targeting a variety of serious diseases and medical conditions, as summarized in the following paragraphs.

Total research and development expenses were $88.3 million in 2005, $71.8 million in 2004 and $85.8 million in 2003.

Clinical Programs

Tadalafil

Besides erectile dysfunction, we are currently studying tadalafil in BPH, hypertension and PAH.

Benign Prostatic Hyperplasia (BPH)

Background.     BPH is a non-cancerous enlargement of the prostate gland that may cause a number of bothersome urinary tract symptoms as a man ages. The enlarging prostate gland impacts a man’s urination, by exerting pressure upon the urethra, the passageway for urine leaving the bladder. In men diagnosed with BPH, the enlarging prostate may narrow or partially block the urethra, which can result in urinary difficulties. The symptoms of BPH include having to strain to pass urine, urgency with frequent urination, repeated awakening at night to urinate, incomplete emptying of the bladder and even the inability to urinate. More than half of men over age 50 have some degree of BPH.

Current Treatment.     BPH is a competitive market with several approved drugs. Currently, alpha blockers (e.g., doxazosin (Cardura ® ), terazosin (Hytrin ® ), tamsulosin (Flomax ® ), alfuzosin (Uroxatral ® )) and 5-alpha-reductase inhibitors (e.g., finasteride (Proscar ® ), dutasteride (Avodart ® )) are used, separately or in combination, to treat the symptoms of BPH. Such treatments typically relax the smooth muscle tissue in the prostate and the opening of the bladder, reduce the size of the prostate or slow the rate of prostate enlargement, thereby allowing urine to flow more freely. Although effective, both classes of drugs can produce unwanted side effects, including sexual dysfunction, which may prompt patients to avoid or discontinue therapy and may be exacerbated with combination therapy. Additionally, certain approved therapies for BPH are associated with appreciable rates of dizziness and syncope. Other treatments of BPH include transurethral microwave heat treatment, transurethral needle ablation, stents and surgery.

Potential Treatment by Tadalafil.     Tadalafil inhibits PDE5, thereby increasing cGMP levels, which may cause relaxation of prostatic and lower urinary tract smooth muscle or provide symptomatic relief through other mechanisms in the lower urinary tract.

Development Status.     Lilly ICOS obtained positive results in a Phase 2 clinical study evaluating tadalafil for the treatment of lower urinary symptoms in men with BPH. The Phase 2 proof of concept study demonstrated significant improvement, relative to placebo, in the primary endpoint, the International Prostate Symptom Score (IPSS). The IPSS is a seven-item questionnaire that assesses the severity of symptoms of BPH and is the standard scale used for the evaluation of medications that treat the symptoms of BPH. In addition, tadalafil demonstrated significant improvement relative to placebo on most of the secondary endpoints included in the study. Lilly ICOS plans to proceed with a Phase 2b clinical study in 2006, which may serve as one of two pivotal studies, to evaluate multiple doses of tadalafil in patients with BPH. The results of the multi-dose study will be useful in the design of a Phase 3 study, expected to begin in 2008.

Hypertension

Background.     Hypertension, or high blood pressure, is a common disorder which dramatically increases the risk of cardiovascular complications. Patients with hypertension are at greater risk for heart attacks, stroke,

kidney failure and atherosclerosis. It is estimated that hypertension affects more than 71 million people in the United States. Of the estimated 50 million people who have been diagnosed with hypertension, it is estimated that approximately 45 million are using therapy (special diet or medication) to control the effects of this disorder.

Current Treatment.     Numerous agents for the treatment of hypertension exist, including diuretics, adrenergic antagonists, calcium channel blockers and angiotensin converting enzyme inhibitors. A number of these agents can negatively affect libido and sexual performance, impeding patient compliance with therapy.

Potential Treatment by Tadalafil.     Tadalafil’s inhibition of PDE5, thereby increasing cGMP levels, may cause a reduction in vascular tone and, hence, blood pressure. Preclinical data and preliminary clinical observations suggest that tadalafil administration to people with hypertension may result in a clinically meaningful reduction in blood pressure.

Development Status.     In September 2005, Lilly ICOS initiated a Phase 2 study to evaluate the efficacy and safety of tadalafil, compared to placebo, for the treatment of mild to moderate hypertension.

Pulmonary Arterial Hypertension (PAH)

Background.     PAH is a life threatening disease that is characterized by an elevation of blood pressure in the pulmonary (lung) arteries. Patients who have PAH can experience shortness of breath, fatigue and heart failure. In the United States, PAH affects an estimated 100,000 people of all ages. Left untreated, PAH is typically fatal.

Current Treatment.     PAH is a competitive market with five therapies currently approved in North America and Europe, including inhaled, intravenous, and subcutaneously administered prostacyclin and analogs; an oral endothelin receptor antagonist; and an oral PDE5 inhibitor. Such agents are designed to improve circulation in part by dilating blood vessels in the affected pulmonary artery. Patients may also be treated with supplemental oxygen, digoxin, diuretics, warfarin or calcium channel blocking medications.

Potential Treatment by Tadalafil.     Regulatory bodies in the U.S. and Europe have approved the use of sildenafil citrate (Revatio ® ), the active ingredient in Viagra ® , for the treatment of patients with PAH. Because of tadalafil’s longer half-life (17.5 hours), it may be preferable to other PDE5 inhibitors. This half-life may make it feasible for once-a-day dosing with tadalafil, which could be advantageous in the treatment of PAH.

Development Status.     In August 2005, Lilly ICOS initiated a Phase 3 study to evaluate the efficacy and safety of tadalafil, compared to placebo, for the treatment of PAH. The study is being conducted in North America and Europe.

Discovery and Preclinical Research

As part of our discovery research program, we evaluate new product candidates. We use an integrated approach in this process that incorporates our capabilities in molecular, cellular and structural biology, high throughput drug screening, medicinal chemistry and gene expression profiling. The following table summarizes our research and preclinical programs, as defined through therapeutic disease focus areas.

 
        Therapeutic Area    Indication    Status   Inflammation    Psoriasis, Asthma    Preclinical   Urology    Overactive bladder    Preclinical   Oncology    Non-small cell lung cancer/others    Preclinical, Research   Fibrotic diseases    Kidney disease    Research

In the status column of the above table: “Preclinical” indicates evaluation of lead or preferred compounds or antibodies for safety, pharmacology and proof of efficacy in non-human animal models; and “Research” indicates the identification process for compounds or antibodies for which activity in target human biological assay systems has been demonstrated in laboratory tests, but which have not yet been tested in non-human animal models of specific human diseases.

Inflammation

ICOS continues to develop small molecule antagonists potentially useful in the treatment of inflammatory diseases. One program targets adhesion proteins that are expressed on the surface of white blood cells and function as both regulators of cell movement and of cell signaling. Psoriasis is the primary disease target for this antagonist. A second program is aimed at developing a drug that might be particularly important in allergic inflammatory diseases, such as asthma.

Urology

As a result of our work on Cialis, we have developed preclinical expertise in the study of the bladder and prostate gland, which has led to the evaluation of compounds that might relieve patients’ symptoms of an overactive bladder. There are approximately 33 million patients with an overactive bladder in the United States alone. These individuals often endure severe lifestyle restrictions, inconvenience and social embarrassment. Available therapies are only partially effective and often have unattractive side effects. We have initiated a program to develop substantially improved therapies for this condition. One project is currently in preclinical testing.

Oncology

According to the American Cancer Society, cancer is a major cause of death in the U.S., second only to cardiovascular disease. Despite significant progress in researchers’ understanding of the underlying molecular changes that drive the initiation and progression of cancers, treatment of these diseases remains largely unsatisfactory. For this reason, there is tremendous opportunity to develop novel therapeutics that may have a meaningful impact on the quality of life of patients and have significant commercial potential. For example, in recent years, several monoclonal antibodies have been developed to treat cancer. ICOS has experience in the development and clinical progression of monoclonal antibodies, and we have identified several molecules that have potential as monoclonal antibody targets in life threatening cancers, including non-small cell lung cancer.

One of our more advanced oncology programs involves the evaluation of cell cycle checkpoint/DNA repair inhibitors for their potential to improve the effectiveness of radiation and chemotherapy treatments. Resistance of tumor cells to radiation or chemotherapy is due in part to cell cycle checkpoint/DNA repair enzymes. These enzymes recognize and repair potentially lethal defects in cellular DNA introduced by radiation or chemotherapeutic agents. In preclinical tests, we are currently evaluating and optimizing lead compounds that inhibit key enzymes involved in this process. We are assessing these compounds, as well as those that target lipid and protein kinases, for their ability to selectively increase the sensitivity of tumors versus normal tissue to radiation or chemotherapeutic agents. This approach may enhance the success and minimize the toxic effects of chemotherapeutic treatments for many different types of tumors.

Fibrotic Diseases

Fibrosis is a leading cause of morbidity and mortality and a key component of multiple diseases affecting millions of people worldwide. Fibrosis can best be described as an improperly regulated wound healing response and is a common reaction of tissues to injury. During chronic injury, the wound healing response is no longer controlled by the normal mechanisms, thus resulting in abnormal deposits of fibrotic, or hardened, material.

These deposits may eventually lead to tissue dysfunction and potential failure of the affected organ. Despite this large unmet medical need, there are currently no approved treatments that directly target the process of fibrosis.

There is a great deal of overlap between the cellular and chemical mediators involved in fibrosis and those controlling the immune response. In addition, the nature of myofibroblast activation and differentiation has many similarities to neoplastic transformation that occurs in cancer. Therefore, it is not surprising that drug targets exist that have overlap between cancer or inflammatory disease and fibrotic disease. We are currently leveraging our expertise in cancer and inflammatory disease research to look at applications within fibrotic disease systems with an initial focus on fibrotic kidney diseases, such as diabetic nephropathy.

Patents and Proprietary Rights

Pharmaceutical and biotechnology companies have traditionally placed considerable importance on obtaining and maintaining patent protection for significant new technologies, products and processes. We have applied, and are applying, for patents for our product candidates and aspects of our technologies both in the United States and, when appropriate, in other countries. Patents have been issued on many of these applications. We have also obtained rights to various patent applications and patents under licenses with third parties.

Irrespective of whether we own or in-license patents, there can be no assurance that our patents will provide us with significant protection, competitive advantage or commercial benefit. The validity and enforceability of patents issued to pharmaceutical and biotechnology companies has proven highly uncertain. For example, legal considerations surrounding the validity of patents in the fields of pharmaceuticals and biotechnology are in transition, and we cannot assure you that the legal standards of patent law applied historically will continue to be applied in the future. In addition, we cannot assure you as to the degree and range of protections that any of our patents may afford us or whether any patents will be issued. Furthermore, since publication of discoveries in scientific or patent literature necessarily lags behind actual discoveries, we cannot assure you that we were the first creator of inventions covered by our patents or pending patent applications, or that we were the first to file patent applications for these inventions.

Many pharmaceutical and biotechnology companies and university and research institutions may have filed patent applications or already received patents that may be relevant to our areas of product development. Many of these applications and patents may be competitive with or conflict with ours, and could prevent us from obtaining patents or could call into question the validity of our existing patents. To contend with these possibilities, we have entered into license agreements and may in the future enter into additional license agreements to obtain access to technologies that may be useful or necessary for the development or commercialization of some of our product candidates. However, we cannot assure you that these licenses, or any others that may be required, will be available on commercially reasonable terms, if at all, or that we will be able to develop alternative technologies if we cannot obtain required licenses.

To protect our rights to our patents and proprietary information, we may need to litigate against infringing third parties, or avail ourselves of the courts or administrative proceedings to determine the scope, validity or enforceability of our patent rights. These types of actions are often costly and could be very time-consuming to us, and we cannot assure you that the deciding authorities will rule in our favor. An unfavorable decision could allow third parties to use our technology without being required to pay us licensing fees or may compel us to license needed technologies to avoid infringing third party patent and proprietary rights. Likewise, we may be required to defend ourselves in patent suits brought by third parties who seek to enjoin our product development efforts or seek damages for infringement. An unfavorable decision could force us to, among other things, alter our operations, pay damages or licensing fees or discontinue developing or marketing one or more of our potential products, as well as incur significant legal expenses. See “Item 3, Legal Proceedings” for a description of our material patent litigation.

While we pursue patent protection and enforcement of our product candidates and aspects of our technologies when appropriate, we also rely on trade secrets, know-how and continuing technological

advancement to develop and maintain our competitive position. To protect this competitive position, we regularly enter into confidentiality and proprietary information agreements with third parties, including employees, suppliers and collaborators. Furthermore, our know-how that is accessed by third parties through collaborations and research and development contracts and through our relationships with scientific consultants is generally protected through confidentiality agreements and material transfer agreements with the appropriate parties. We cannot, however, assure you that these protective arrangements will be honored by all third parties, including employees, suppliers and collaborators, or that these arrangements will effectively protect our rights relating to unpatented proprietary information, trade secrets and know-how. In addition, we cannot assure you that other parties will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our proprietary information and technologies.

Cialis

We have several issued U.S. patents and numerous corresponding foreign patents covering Cialis and certain uses thereof. In the United States and Europe, our principal patents and/or applications covering Cialis or its uses expire between 2015 and 2020, subject to any patent term extensions that may be available.

In connection with the treatment of erectile dysfunction, our principal competitor, Pfizer Inc., or Pfizer, has been granted U.S. and foreign patents. See “Item 3, Legal Proceedings” for a description of our material litigation with Pfizer regarding Cialis.

Government Regulation

Regulation by government authorities in the United States, Europe and other countries is a significant consideration in our ongoing research and product development activities and in the manufacture and marketing of Cialis. Any product candidates we develop will require regulatory approval by government agencies prior to commercialization. Human therapeutic products are subject to rigorous preclinical and clinical testing and other approval requirements by the U.S. Food and Drug Administration (FDA) and comparable agencies in foreign countries. The time required for completing testing and obtaining approvals of our product candidates is uncertain, but often takes many years. Any delay in the approval of testing or in the evaluation of preclinical or clinical results by governmental authorities may hinder product development. Various federal, state and foreign statutes and regulations, including the Federal Food, Drug and Cosmetic Act, as amended, and the regulations promulgated thereunder, also regulate the manufacturing, safety, labeling, storage, record keeping, advertising, promotion and marketing of our approved product (Cialis). Failure to comply with these legal requirements may subject us to, among other things, civil penalties, criminal prosecution and restrictions on product development, production and/or distribution.

In general, the steps ordinarily required before a new therapeutic product candidate may be marketed in the United States include:

 
  •   preclinical laboratory tests, animal tests and formulation studies;

 
  •   the submission to the FDA of an Investigational New Drug Application (IND), which must become effective before clinical testing may begin in humans;

 
  •   the conduct of a series of adequate and well-controlled clinical studies, conducted in phases to first establish the safety in humans and then the efficacy of the product candidate for each indication and related patient population;

 
  •   the submission of a New Drug Application (NDA) or Biologics License Application (BLA), as the case may be, to the FDA; and

 
  •   FDA review and approval of an NDA or BLA, as the case may be, prior to any commercial sale or shipment of the product candidate.

Preclinical studies generally are conducted in the laboratory to evaluate the potential safety and efficacy of a therapeutic product candidate and are undertaken in compliance with Good Laboratory Practices regulations and FDA guidance. The results of these studies are submitted to the FDA as part of an IND, which must be reviewed by the FDA before clinical testing may begin in the United States. Once the IND becomes effective (after FDA approval or failure to comment), clinical studies on humans may begin, although the FDA may put a hold on these studies at any time. Additional studies in animals are conducted after the IND is effective, and the results are submitted to the FDA to justify continued testing of the drug in humans.

Clinical studies are conducted in accordance with Good Clinical Practices regulations and related standards at independent investigator sites under protocols that detail the objectives of the study, the parameters to be used in monitoring safety and the efficacy criteria to be evaluated. Typically, clinical evaluation involves three phases, which may overlap. During Phase 1, clinical studies are conducted with a relatively small number of subjects to determine the early safety profile of a drug, as well as the pattern of drug distribution and drug metabolism by the subject. In Phase 2, clinical studies are conducted with groups of patients afflicted by a specific target disease to determine preliminary efficacy, optimal dosages and dosage tolerance, and to gather additional safety data. In Phase 3, large-scale, multicenter comparative clinical studies are conducted with patients afflicted with a specific target disease to provide data for the statistical proof of efficacy and safety as required by the FDA and others. The FDA or a clinical study sponsor may suspend clinical studies at any time if it is believed that the participants are being exposed to an unacceptable health risk.

The results of preclinical and clinical testing of a product candidate, as well as data relating to a product candidate’s chemistry, pharmacology and manufacture, are submitted to the FDA, in the form of an NDA for small molecule products or a BLA for biological products, in order to seek FDA approval. The cost of this process may be substantial. In response to an NDA or BLA, the FDA may grant marketing approval, request additional information or deny the application if the FDA determines that the application does not satisfy its regulatory approval criteria, including the pre-approval of relevant product manufacturing facilities. No action can be taken to market any new drug or biologic product in the United States until an appropriate marketing application has been approved by the FDA. The FDA may require additional testing after approval. In addition, we must conduct surveillance programs to monitor the side effects or adverse events associated with use of a new product. The FDA may prevent or limit future marketing of a product based on the results of these post-marketing analyses. Additional testing is also required to gain approval for the use of a product as a treatment for indications other than those already approved.

In order to manufacture our potential products, a domestic drug manufacturing facility must be (i) registered with the FDA, (ii) must submit to periodic inspection (including a pre-approval inspection) by the FDA and (iii) must comply with current Good Manufacturing Practices, or GMP, regulations. In addition, to supply products for use in the United States, foreign manufacturing establishments must comply with these regulations and are subject to periodic inspection by the FDA or corresponding regulatory agencies in countries under reciprocal agreements with the FDA.

Whether or not FDA approval has been obtained, approval of a product by comparable regulatory authorities may be necessary in foreign countries prior to the commencement of marketing of a product in those countries. The approval procedures vary among countries and can involve additional testing and substantial delays. Although there are some procedures for unified filings in some countries, including some in Europe, in general each country has its own procedures and requirements.

With the approval of Cialis for sale in the United States, we are also subject to various federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback laws and false claims laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. The federal government has published regulations that identify exemptions or “safe harbors” for certain payment arrangements that do not violate the anti-kickback statutes. Due to the breadth of the statutory provisions and the

absence of guidance in the form of regulations or court decisions addressing certain practices, it is possible that our future practices might be challenged under anti-kickback or similar laws. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third party payors (including Medicare and Medicaid) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal health care programs (including Medicare and Medicaid). If the government were to allege against or convict ICOS, Lilly, or Lilly ICOS, of violating these laws, there could be a material adverse effect on us, including our stock price. Our future activities could be subject to challenge for the reasons discussed above and due to the broad scope of these laws and the increasing attention being given to them by law enforcement authorities.

Our activities relating to the marketing and promotional labeling of our products are also subject to regulation under the Food, Drug and Cosmetic Act, as amended, and the accompanying regulations and guidance. These requirements are designed to ensure that promotional communications about pharmaceutical products are balanced and accurate. Promotional materials are submitted to the FDA’s Division of Drug Marketing and Communications (DDMAC) no later than the time of first use, but in most cases advance approval is not required. Television advertisements are often sent to DDMAC for advisory comments before they are run, which may result in changes to the advertisement. If DDMAC determined that one or more of our promotional communications violated the applicable standards, we could be required to remove the advertisement from distribution and/or issue corrective communications. Any such actions might negatively impact our promotional strategy. In extreme cases, such as those involving patient safety concerns as a result of a company’s marketing activities, the FDA has the authority to issue a seizure order or to require the company to discontinue marketing of its product in the United States.

Recently, broadcast advertising for prescription drugs has been a particular focus of attention by Congress and the media. A set of principles relating to advertisements to consumers was adopted in July 2005 by the Pharmaceutical Research and Manufacturers of America, a pharmaceutical industry association. We do not currently believe that compliance with these principles will materially impair our ability to market Cialis. However, if public attention to this issue continues or intensifies, regulatory bodies or industry groups may feel pressured to impose additional limitations in this area. Future restrictions (in the form of laws, regulations or additional guidelines) on direct-to-consumer advertising of erectile dysfunction medications could impact us and our competitors; however, the relative impact on each product might be affected by other factors such as length of time on the market or current recognition of the brand.

Our research and development activities involve the controlled use of chemicals, viruses, radioactive compounds and other hazardous materials. If an accident involving these materials were to occur, we could be held liable for any resulting damages, which liability could exceed our resources. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and certain waste products. We are also subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices and the experimental use of animals.

Additionally, our present and future business is and will continue to be subject to various other forms of government regulation. The extent and character of government regulation that might result from future legislation or administrative action cannot be accurately predicted and may materially affect us.

Competition

Competition in the pharmaceutical and biotechnology industries is intense and is expected to increase over time. Cialis is encountering intense competition, and we expect that our product candidates will encounter significant competition as well, should they reach the market. A number of pharmaceutical and biotechnology

companies are currently developing products targeting many of the same diseases and medical conditions that we target, and some of our competitors’ products have entered clinical studies or are already commercially available.

Many of our competitors have substantially more experience, capital, research and development, regulatory, manufacturing, sales, marketing, human and other resources than we do. Furthermore, significant levels of biotechnology and pharmaceutical research now occur in universities, government agencies and other nonprofit research institutions. All of these entities have become increasingly active in seeking patent protection and licensing revenues for their research results, thereby providing us with additional future competition and potential costs to our operations.

We believe the principal competitive factors affecting our markets are the timing and scope of regulatory approvals, safety and efficacy of therapeutic products, cost and availability of these products, availability of alternative treatments, third party reimbursement programs and patent and proprietary rights protection. Although we believe that we are positioned to compete adequately with respect to these factors in the future, our future success is difficult to predict. Our product candidates are in various stages of development and, accordingly, subject to substantial research, development, regulatory approval and commercialization risks. The timing of market entry can be an important factor in determining a new product’s eventual success and profitability. Early entry may have important advantages in gaining product acceptance and market share. Therefore, the relative speed with which we can develop products and receive regulatory approval will likely be important to our competitive success.

The erectile dysfunction market is well established and intensely competitive. Throughout most of the world, Cialis competes against Viagra, which Pfizer has already successfully commercialized, and Levitra, which is being commercialized by Bayer AG outside the United States, and GlaxoSmithKline and Schering-Plough Corporation in the United States. Like Cialis, both Viagra and Levitra are PDE5 inhibitors for the treatment of erectile dysfunction. Our principal competitor, Pfizer, is the largest pharmaceutical company in the world and GlaxoSmithKline is the third largest. Another PDE5 inhibitor, Zydena ® (udenafil), was approved for marketing in Korea in November 2005, and an investigational new drug application related to this product has been filed with the FDA. Other erectile dysfunction treatments are in development, and any other products or technologies that are directly or indirectly successful in treating erectile dysfunction could negatively impact the market for Cialis. If a PDE5 inhibitor with a time of effectiveness comparable to or longer than that of Cialis or a generic PDE5 inhibitor is successfully commercialized, it might have a significant adverse effect on the market for Cialis.

Tadalafil, if approved for the treatment of BPH, would compete with products such as Flomax and Cardura, which are alpha one antagonists, and Proscar and Avodart, which are dihydrotestosterone inhibitors. In addition, Pfizer recently announced favorable results of its Phase 2 study of Viagra on the treatment of BPH.

If approved for the treatment of PAH, tadalafil would compete with established products such as Flolan, Ventavis, Remodulin and Tracleer, as well as Pfizer’s new product Revatio, which was approved for marketing in the United States in June 2005 and in the European Union in November 2005. The active ingredient in Revatio is sildenafil, which is also the active ingredient in Viagra.

Our other potential products, if approved and commercialized, could compete against well-established existing therapeutic products as well.

Manufacturing

Cialis is currently manufactured by Lilly under contract with Lilly ICOS. Certain aspects of the Cialis manufacturing process are only performed in one Lilly location. Lilly also depends on others for the timely supply of raw materials used to manufacture Cialis and the performance of certain manufacturing processes. There can be no assurance that Lilly ICOS will be able to accurately anticipate future demand for Cialis or maintain adequate manufacturing capacity.

We have established relationships with third party manufacturers to produce the required materials for our small molecule programs. In addition, we have a facility in Redmond, Washington, a suburb of Seattle, which gives us the ability to manufacture active pharmaceutical ingredient (API) in limited quantities to support our non-commercial needs.

We manufacture recombinant protein-based clinical materials in our production facility in Bothell, Washington, a suburb of Seattle, to support our clinical studies. Our current facility is capable of utilizing both microbial- and mammalian-based production processes and was designed to meet the FDA requirements for the production of purified recombinant protein bulk product. In the absence of a need to manufacture our own product candidates at our production facility, we are manufacturing purified recombinant protein bulk product for third parties pursuant to contractual arrangements and may enter into additional arrangements in the future.

We depend on the timely supply of raw materials used to manufacture product candidates for use in preclinical testing and clinical studies and for our contract manufacturing business. We attempt to remain apprised of our supplier’s abilities to meet our needs and the market conditions for these raw materials. Raw materials may be subject to contamination and recall. A material shortage, contamination or recall could adversely impact or disrupt the manufacturing of our product candidates. We cannot assure you that we will be able to maintain our current relationships with third party manufacturers and suppliers or establish future arrangements with third party manufacturers and suppliers on commercially reasonable terms, if at all. We participate in quality control and quality assurance processes related to the manufacture of potential products for us and our affiliates. However, there is no assurance that regulatory bodies will not raise issues regarding manufacturing and quality processes.

Marketing and Sales

Cialis

In 2003, we hired and deployed an ICOS sales force of approximately 165 experienced pharmaceutical sales representatives that, together with sales representatives from Lilly, co-promote Cialis throughout the United States on behalf of Lilly ICOS. ICOS sales representatives are focused primarily on physicians in private practice, specializing in the field of urology. We utilize typical pharmaceutical company selling and marketing techniques, including sales representatives calling on individual physicians, medical education programs, professional symposia, promotional materials and public relations. In January 2006, we added an additional 40 representatives through a third party to promote Cialis in the United States on behalf of Lilly ICOS.

Costs of marketing and selling Cialis are charged to Lilly ICOS and reported as collaboration revenue from related parties in our consolidated statements of operations. Beginning in September 2003, and continuing through December 2004, the costs of our sales force were fully reimbursed by Lilly ICOS. Beginning in January 2005, 60% of the cost of our sales force is reimbursed by Lilly ICOS. The cost of the 40 third party sales representatives managed by us and Cialis marketing activities will be fully reimbursed by Lilly ICOS.

We have limited marketing support service experience and, therefore, rely heavily on Lilly to supply these services for Cialis in the United States, including customer service, order entry, shipping and billing services. Lilly is currently responsible for all sales and marketing activities for Cialis outside the United States. Based on the terms of our marketing and sales agreement with Lilly ICOS and Lilly, beginning in 2007, we may be required to assume a portion of the sales and marketing responsibilities for Cialis in Canada, Mexico and Europe. As an alternative to deploying our own sales force, we may fulfill our sales and marketing responsibilities in those territories by contracting with Lilly or third parties. In the event we deploy our own sales force, we will be reimbursed in a manner similar to how we are reimbursed in the United States.

AndroGel ® Co-Promotion

In January 2005, we entered into an agreement with Solvay Pharmaceuticals, Inc., whereby our U.S. sales force provided promotional support and conducted sales calls for AndroGel ® (testosterone gel) 1% CIII. Under the terms of the agreement, we were paid a fee per sales call. This agreement ended in December 2005.

Product Candidates

Our marketing professionals are also focused on our product candidates under development. As development advances, marketing resource requirements will increase.

The manner in which we commercialize our product candidates, if successfully developed, will depend in large part on their market potential and our financial resources. In addition to our own marketing and sales force, we may establish co-promotion, corporate partnering, licensing or other arrangements for the marketing and sale of future products in some or all geographic markets.

We currently employ approximately 200 individuals dedicated to sales and marketing.

Human Resources

As of December 31, 2005, we employed approximately 700 individuals, all of whom are in the United States. We consider our employee relations to be good. We have never had a work stoppage, and none of our employees are represented under a collective bargaining agreement. We believe that our future success is dependent in part on our ability to attract, integrate and retain skilled scientific, sales and marketing, and other professional and senior management personnel. Competition in our industry for these skilled workers is intense, and we cannot assure you that we will be able to attract, integrate and retain these personnel.

Important Factors Regarding Forward-Looking Statements

This report contains forward-looking statements. These statements relate to future events or our future financial performance. 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 such terms or other comparable terminology. Forward-looking statements are only predictions that provide our current expectations or forecasts of future events. In particular, forward-looking statements include:

 
  •   information concerning possible or assumed future results of operations, trends in financial results and business plans;

 
  •   statements about financial guidance;

 
  •   statements about our product development schedule and the potential success of our research and development efforts;

 
  •   statements about our expectations regarding regulatory approvals for any of our product candidates;

 
  •   statements about our potential or prospects for future product sales;

 
  •   statements about the level of our costs and operating expenses, and about the expected composition of our revenues and operating expenses;

 
  •   statements about our future capital requirements and the sufficiency of our cash, cash equivalents, investments and financing proceeds to meet future capital and operating requirements;

  •   statements about the outcome of contingencies, such as legal proceedings;

 
  •   other statements about our plans, objectives, expectations and intentions; and

 
  •   other statements that are not historical fact.

From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public such as other filings with the Securities and Exchange Commission, press releases or in our communications and discussions with investors and analysts at meetings and on webcasts and telephone calls. Any or all of our forward-looking statements in this report and in any other public statements that we make may turn out to be wrong. Inaccurate assumptions we might make and known and unknown risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, based on the information available to us at the time the statements are made, we cannot guarantee future results, performance or achievements. You should not place undue reliance on these forward-looking statements.

Except as required under federal securities laws and regulations, we do not have any intention or obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Annual Reports on Form 10-K. Also note that we provide a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our business and industry under the caption “Risk Factors” in this report. These risk factors could cause our actual results to differ materially from expected or historical results.

 
Item 1A.   Risk Factors

ICOS operates in an environment that involves a number of risks and uncertainties. The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that are not considered material, and therefore not mentioned herein, may impair our business operations. If any of the following risks actually occur, our business, operating results and financial position could be harmed.

Risks Related to Our Business

We have a history of losses and may be unable to sustain profitability.

We have incurred significant operating losses since we began operations in 1990. As of December 31, 2005, we had an accumulated deficit of $862.6 million. We cannot assure you that we will be able to achieve or increase profitability. We anticipate that operating expenses will increase in the future as we continue development of our potential products, seek to obtain necessary regulatory approvals and manufacture and market these product candidates. Directly, and through Lilly ICOS, we expect to continue to incur substantial marketing and other expenses related to commercializing Cialis in the United States, Europe, Mexico and Canada. Furthermore, Lilly ICOS may incur significant expenses in demonstrating safety and efficacy in order to provide a basis for seeking regulatory approvals to market tadalafil in new indications. Lilly ICOS and/or ICOS may be unable to generate sufficient revenues from Cialis and other products to achieve and maintain profitability. Overall changes in market demand for erectile dysfunction drugs, and Lilly ICOS’ ability to capture and retain market share, will significantly affect revenues and expected profitability from Cialis and, in turn, our results of operations and cash flows. For example, in 2005, the overall U.S. market of PDE5 inhibitor prescriptions, for the treatment of erectile dysfunction, is estimated to have declined by approximately 3.2%, compared to 2004.

Our operating results are subject to fluctuations that may cause our stock price to decline.

Our operating results have fluctuated in the past and are likely to continue to do so in the future. Our revenue and other income are unpredictable and may fluctuate due to many factors, some of which we cannot control. For example, factors affecting our revenue and other income, as well as Lilly ICOS’ revenue, presently or in the future, could include:

 
  •   level of demand for our products, including changes in physician prescribing habits, and unfavorable publicity concerning our products or similar products;

 
  •   changes in wholesaler buying patterns;

 
  •   changes in reimbursement rates or policies;

 
  •   timing of non-recurring license fees and the achievement of milestones under license and collaborative agreements;

 
  •   government regulation, including regulations related to the marketing of our products;

 
  •   increased competition for new or existing products;

 
  •   timing and success of product launches;

 
  •   level of our contract manufacturing for third parties;

 
  •   fluctuations in foreign currency exchange rates;

 
  •   changes in our product marketing, selling and pricing strategies and programs; and

 
  •   inability to provide adequate supply of our products.

In addition, our expenses, including payments owed by us under licensing or collaborative arrangements, are unpredictable and may fluctuate from quarter to quarter. We believe that quarter to quarter comparisons of our operating results are not a good indicator of our future performance and should not be relied upon to predict our future performance. It is possible that, in the future, our operating results in a particular quarter or quarters will not meet the expectations of securities analysts or investors, causing the market price of our common stock to decline.

Even though Cialis has been approved for commercial sale, if we or others identify additional side effects, approval could be withdrawn or sales of Cialis could be significantly reduced.

If we or others identify additional or potential side effects, or if manufacturing problems occur:

 
  •   we may take Cialis off the market;

 
  •   regulatory approval may be withdrawn or other regulatory sanctions may be imposed;

 
  •   reformulation of the product, additional clinical studies, and/or changes in labeling of the product may be required;

 
  •   changes to or re-approvals of our or our partner’s manufacturing facilities may be required;

 
  •   our reputation in the marketplace may suffer; and

 
  •   lawsuits, including class action suits, may be brought against us.

The identification of additional or potential side effects, and subsequent consequences, could harm or prevent sales of Cialis or could increase the costs and expenses of commercializing and marketing Cialis.

General post-marketing surveillance of our product is ongoing, as well as specific studies that are required as part of our marketing approvals in various jurisdictions. Either of these sources could result in the identification of new or potential side effects. For example, in May 2005, Lilly ICOS added certain vision-related adverse events to the label for Cialis, based on reports from post-marketing surveillance. Subsequently, there was substantial media attention regarding a possible connection between use of Viagra ® (sildenafil citrate), another PDE5 inhibitor for the treatment of erectile dysfunction, and the development of non-arteritic anterior ischemic optic neuropathy (NAION), a condition that may lead to permanent visual impairment or blindness. In July 2005, the FDA issued a statement indicating that information regarding reports of NAION in patients using PDE5 inhibitors had been added to the labels of all products in the PDE5 inhibitor class, including Cialis. The FDA statement and the relevant label language state that a causal relationship between the development of NAION and use of these drugs has not been established. Such a causal relationship could be established in the future. Adverse media attention and concerns related to side effects may reduce sales of Cialis.

The success of Cialis depends, in large part, on the promotion, sales and marketing activities of our partner, Lilly. Similarly, the success of our potential products in development could depend on our ability to arrange assistance from third parties.

Through Lilly ICOS, we and Lilly have joint responsibility for the promotion and sale of Cialis in North America and Europe. Lilly has rights to Cialis for the other parts of the world, with royalties to be paid to Lilly ICOS. We believe that the efforts of a sizeable pharmaceutical sales force and experienced marketing staff are important to the continued success of the product. We have relied, and expect to continue to rely, heavily on Lilly for promotion, sales and marketing of Cialis, even with respect to our joint responsibilities. We have limited staff and experience in these areas, and we may or may not be capable of independently fulfilling our responsibilities. We and Lilly may also rely on contract sales organizations to perform sales activities for Cialis.

If Lilly fails to devote appropriate resources to promotion and sales activities, sales of Cialis could be reduced or could fail to reach their full potential. In addition, if Lilly breaches or terminates its agreement with us, or otherwise fails to conduct its activities related to Cialis in an effective or timely manner, sales of Cialis could be delayed, reduced or become substantially more costly for us to achieve. We will face similar risks with respect to new product candidates that we commercialize (i.e., without the assistance of a third party, we may be unable to establish marketing, sales and distribution capabilities necessary to successfully commercialize new products). Co-promotion or other marketing arrangements with others may be needed to commercialize our potential products. However, these arrangements could significantly limit the revenues we derive from these potential products and increase associated operating expenses. Additionally, these parties may fail to commercialize our potential products successfully.

We may be unable to compete successfully in the markets for pharmaceutical and biotechnological products.

The markets in which we compete are well established and intensely competitive. We may be unable to compete successfully against our current and future competitors. Our failure to compete successfully may result in pricing reductions, reduced gross margins, failure to achieve market acceptance for our products, and an inability to achieve or grow profitability.

Cialis and our potential products, if approved and commercialized, compete or will compete against well established existing therapeutic products or treatments. For example, Pfizer Inc. successfully commercialized Viagra ® (sildenafil citrate), a PDE5 inhibitor that competes with our product, Cialis. GlaxoSmithKline and Bayer AG, outside the United States, and GlaxoSmithKline and Schering-Plough Corporation, in the United States, are marketing Levitra ® (vardenafil HCl), a third PDE5 inhibitor. Pfizer, Bayer AG, GlaxoSmithKline and Schering-Plough have invested substantial resources in marketing their PDE5 inhibitor products, and we would anticipate

that they would continue efforts to aggressively compete in this market. In addition, a number of pharmaceutical and biotechnology companies are currently developing new products targeting the same diseases and medical conditions that we target. Another PDE5 inhibitor, Zydena, was approved for marketing in Korea in November 2005, and an investigational new drug application related to this product has been filed with the FDA. Other erectile dysfunction treatments are in development, and any other products or technologies that are directly or indirectly successful in treating erectile dysfunction could negatively impact the market for Cialis. If a PDE5 inhibitor with a time of effectiveness comparable to or longer than that of Cialis or a generic PDE5 inhibitor is successfully commercialized, it might have a significant adverse effect on the market for Cialis.

Our competitors include pharmaceutical companies, biotechnology companies, academic and research institutions and government agencies. Many of these organizations, including those who market PDE5 inhibitors that compete with Cialis, have substantially more experience and more capital, research and development, regulatory, manufacturing, sales, marketing, human and other resources than we do. As a result, our competitors may:

 
  •   develop products that are safer, more effective or less costly than any of our current or future products or that render our products obsolete;

 
  •   obtain FDA and other regulatory approvals or reach the market with their products more rapidly than we can or with labeling claims more favorable than ours, which would reduce the potential sales of our product candidates;

 
  •   obtain intellectual property rights that could increase our costs or prevent development or commercialization of our product candidates;

 
  •   devote greater resources to market or sell their products;

 
  •   adapt more quickly to new technologies and scientific advances;

 
  •   initiate or withstand substantial price competition more successfully than we can;

 
  •   have greater success in recruiting skilled workers from the limited pool of available talent;

 
  •   more effectively negotiate third-party licensing and collaborative arrangements; and

 
  •   take advantage of acquisition or other opportunities more readily than we can.

We face, and will continue to face, intense competition from other companies for collaborative arrangements with pharmaceutical and biotechnology companies, for relationships with academic and research institutions, and for licenses to products and proprietary technology. In addition, we anticipate that we will face increased competition in the future as new companies enter our markets and as scientific developments surrounding protein-based and small molecule therapeutics continue to accelerate.

The successful development of new therapeutic products is complex and takes a long time, and our efforts may not result in commercial products.

Successful development of pharmaceutical and biotechnology products is highly uncertain, and very few research and development projects produce a commercial product. Any failure or substantial delay in completing clinical trials for our product candidates may severely harm our business. We must subject our potential product candidates to extensive preclinical and clinical testing to demonstrate their safety and efficacy for humans before obtaining regulatory approval for the sale of any of such products. Clinical studies are expensive, time-consuming and may take years to complete. We may not complete preclinical tests and clinical studies of product

candidates under development, and the results of the tests and studies may fail to demonstrate the safety or efficacy of such product candidates to the extent necessary to obtain regulatory approvals or to make commercialization of the product candidates worthwhile. At any time during these clinical studies, factors such as ineffectiveness of the product candidate, discovery of unacceptable toxicities or side effects, development of disease resistance or other physiological factors, or delays in patient enrollment, could cause us to interrupt, limit, delay or abort the development of these product candidates.

In addition, success in preclinical and early clinical studies does not ensure that late-stage or large-scale studies will succeed. Many companies in the pharmaceutical and biotechnology industries, including us, have suffered significant setbacks in clinical studies, even after promising results had been obtained in earlier studies. We have stopped two late-stage, Phase 3 clinical studies of product candidates following interim analyses: a Phase 3 study of Pafase ® (rPAF-AH) for the treatment of severe sepsis was stopped in 2002; and a study of LeukArrest ™ (rovelizumab) for the treatment of ischemic stroke was stopped in 2000.

We anticipate that only some of our product candidates will show safety and efficacy in clinical studies and many may encounter difficulties or delays during clinical development. Our efforts to obtain approval for additional indications for tadalafil are subject to many of the same risks associated with new products.

Government regulatory authorities may not approve our product candidates or may delay their approval.

Any failure to receive the regulatory approvals necessary to commercialize our product candidates could severely harm our business. Human therapeutic products are subject to extensive and rigorous government regulation. For example, the FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record keeping, labeling, storage, approval, advertising, promotion, sale and distribution of pharmaceutical products. Products marketed abroad are also subject to extensive regulation by foreign governments. Except for Cialis, we have not had any product candidate approved for sale in any country. In addition, we have only limited experience in filing and pursuing applications necessary to gain regulatory approvals, which may impede our ability to obtain such approvals.

The regulatory review and approval process is lengthy, expensive and uncertain. To secure FDA approval, we must submit extensive manufacturing, preclinical and clinical data and supporting information to the FDA, for each indication for which we are seeking approval, to establish the product candidate’s safety and efficacy. The approval process may take years to complete and may involve ongoing requirements for post-marketing studies. Any FDA or other regulatory approval of our product candidates, once obtained, may be withdrawn. The effect of government regulation may be to:

 
  •   delay marketing potential products for a considerable period of time;

 
  •   limit the indicated uses for which potential products may be marketed;

 
  •   specify contraindications or other risk management requirements that may limit the use of our products;

 
  •   impose costly requirements on us as a condition of approval or continued use of our products; and

 
  •   provide competitive advantage to other pharmaceutical and biotechnology companies.

In addition, regulatory compliance may prevent us from introducing new or improved products or may require us to stop marketing products. If we fail to comply with the laws and regulations pertaining to our business, we may be subject to sanctions, including the temporary or permanent suspension of operations, product recalls, marketing restrictions and civil and criminal penalties.

We may be unable to establish or maintain the manufacturing capabilities necessary to develop and commercialize our potential products.

We do not currently have facilities to manufacture Cialis or our product candidates in quantities necessary for commercial sale. In addition, our manufacturing capacity may be inadequate to complete all clinical studies contemplated by us over time. We intend to rely significantly on contract manufacturers, including collaboration partners, to produce large quantities of drug material needed for clinical studies and commercialization of Cialis and our potential products. Cialis is currently manufactured by Lilly. We will have to depend on contract manufacturers to deliver materials on a timely basis and to comply with regulatory requirements, including Good Manufacturing Practices, or GMP, regulations enforced by the FDA through its facilities inspection program. Contract manufacturers may be unable to meet our needs with respect to timing, quantity or quality of materials, and may fail to satisfy applicable regulatory requirements with respect to the manufacture of these materials. If we are unable to contract for a sufficient supply of needed materials on acceptable terms, or if we should encounter delays or difficulties in our relationships with manufacturers, our revenues and potential profitability may be lower.

Our business may be harmed if we cannot obtain sufficient quantities of raw materials and process them reliably and timely.

We depend on others for the timely supply of raw materials used to manufacture Cialis and to conduct preclinical testing and clinical studies of product candidates. Once a supplier’s materials have been selected for use in our manufacturing process, the supplier in effect becomes a sole or limited source of that raw material due to regulatory compliance procedures. Presently, Lilly is the sole authorized provider of the active pharmaceutical ingredient (API) utilized in the manufacture of Cialis, and all API production for Cialis is conducted at a single Lilly facility. Lilly relies on a third-party vendor which has the exclusive rights to mill the API to conform the drug substance to specifications used in the manufacturing process. Once milled, the refined API is shipped to various Lilly locations, where the drug substance is manufactured into tablets, packaged and made ready for sale. At each of these stages in the manufacturing process, Lilly ICOS depends on an exclusive provider (i.e., Lilly or another vendor) for the timely supply and processing of raw materials. If any of these suppliers or processing facilities were to cease production or otherwise fail to supply Lilly ICOS with raw materials or manufacturing services in a timely manner, Lilly ICOS and ICOS could be materially adversely affected. Similar risks exist with respect to raw materials used in testing and developing our other product candidates.

If we are unable to adequately protect our intellectual property rights, the value of Cialis or of our potential products could be diminished.

Our success depends to a significant extent on our ability and the ability of our collaboration partners to obtain, maintain and enforce patents and other proprietary rights. Patent law relating to the scope of claims in the pharmaceutical and biotechnology fields in which we operate is still evolving and subject to a substantial degree of uncertainty. Accordingly, there may be third-party patents or patent applications relevant to Cialis or our potential products that might block or compete with the technologies and products covered by our patents or patent applications. We also cannot be certain that our pending patent applications will result in issued patents or that others have not filed patent applications for technology covered by our pending applications or that we were the first to invent the technology. A third party has filed a claim seeking to add three individuals as co-inventors on two ICOS patents. This lawsuit is described in Part I, Item 3, Legal Proceedings.

Additionally, although we own or control a number of patents, the issuance of a patent is not conclusive as to its validity or enforceability. Third parties may challenge the validity or enforceability of our patents. We cannot assure you regarding how much protection, if any, will be given to our patents if we attempt to enforce them and they are challenged in court or in other proceedings. It is possible that a competitor may successfully challenge our patents or that challenges will result in revocation or invalidation of the patents or in limitations of their coverage. Furthermore, the cost of litigation and administrative proceedings to uphold the validity and enforceability of patents can be substantial. If we are unsuccessful in such proceedings, third parties may be able to use our patented technologies without paying licensing fees or royalties to us.

Moreover, competitors may infringe our patents or successfully avoid them through design innovation. To prevent infringement or unauthorized use, we may need to file claims based on our patents, which are expensive and time-consuming. In such proceedings, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the ground that its technology is not covered by our patents. Policing unauthorized use of our intellectual property is difficult. We may not be able to detect and prevent misappropriation of our proprietary rights related to Cialis and our other technologies, particularly in countries where the laws may not protect such rights as fully as in the United States.

We also rely on unpatented technology, trade secrets and confidential information. We may be unable to effectively protect our rights to this technology or information. Other parties may independently develop substantially equivalent information and techniques or otherwise gain access to or disclose our technology. It is our policy to require each of our employees, consultants and corporate partners to execute a confidentiality and intellectual property agreement at the start of their relationship with us. These agreements may not, however, provide effective protection of our technology or information and, in the event of unauthorized use or disclosure, may not provide adequate remedies.

We may be subject to liability and substantial damages and costs or be prohibited from marketing Cialis or commercializing our potential products as a result of patent infringement litigation and other proceedings relating to patent rights.

Patent litigation is common in the pharmaceutical industry. Third parties may assert patent or other intellectual property infringement claims against us or our collaboration partners regarding Cialis or our potential products. For example, we are subject to a patent lawsuit filed by Pfizer in October 2002, which alleges that the use, offering for sale, selling, manufacture or importing of Cialis, into the United States, for the treatment of erectile dysfunction by any of the defendants infringes one claim of a U.S. patent held by Pfizer. This lawsuit is described in Part I, Item 3, Legal Proceedings.

Ultimately we may be unable to market Cialis or commercialize some of our potential products or may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business. Even if we were to prevail, this litigation is costly and time-consuming and could divert the attention of our management and key personnel from our business operations.

Furthermore, after seeking advice of counsel, we may undertake research and development regarding potential products, even when we are aware of third-party patents that may be relevant to these potential products, on the basis that such third-party patents may be challenged or licensed by us. We may be subject to patent infringement claims if our subsequent challenges to such patents were not to prevail. Additionally, if our subsequent attempts to license such patents were to prove unsuccessful, we may be unable to commercialize these potential products after having incurred significant expenditures.

We may be required to defend lawsuits or pay damages in connection with the alleged or actual harm caused by Cialis or our product candidates.

We face inherent exposure to product liability claims in the event that the use of Cialis or our product candidate is alleged to have resulted in harm to others. This risk exists with respect to usage in clinical studies as well as for products that we sell. We may incur significant liability if product liability or malpractice lawsuits against us are successful. Furthermore, product liability claims, regardless of their merits, could be costly and time-consuming and could divert the attention of management and key personnel from other business concerns, or adversely affect our reputation and the demand for our products. Although we maintain product liability insurance, we cannot be certain that this coverage is adequate or that it will continue to be available to us on acceptable terms.

We may be subject to product liability or other claims related to the products we manufacture for third parties.

We manufacture recombinant protein bulk product under contract for third parties who, in many cases, intend to use them in human clinical trials and distribute them to the public. Even though we do not distribute, market or sell the products to end users ourselves, we may be required to defend lawsuits or pay damages if any of the products is alleged to have harmed someone. We take steps to protect ourselves against the potential liabilities associated with these risks, including obtaining agreements from our customers to limit our liabilities and to indemnify us. However, we cannot be certain that these agreements will be adequate to protect us against potential claims relating to our contract manufacturing services. The scope of these agreements may vary from contract to contract. If we faced a claim that was not resolved by the applicable agreement, or if the customer failed to perform under its obligations, we may be inadequately protected or we may not be protected at all. Although we maintain product liability insurance, we cannot be certain that the coverage will apply, that it will be adequate for these claims, or that it will continue to be available to us on acceptable terms.

We may also be subject to claims, by our customers or others, that we committed errors during the manufacturing process. Biologics manufacturing is highly complex and new processes, in particular, can be difficult to develop and predict. Certain events could result in a contaminated product or one that did not actually perform as it was expected to perform. Although such an event may be out of our control, the customer might attempt to hold us liable for any resulting damages. We currently maintain errors and omissions insurance, but we cannot be certain that this coverage is adequate or that it will continue to be available to us on acceptable terms.

If we are unable to obtain additional funding needed to develop, market and sell our potential products, we could be required to delay, scale back or eliminate expenditures for some of our programs or grant rights to third parties to develop and market our potential products.

Our business has not historically generated the cash needed to finance our operations. We will require substantial financial resources to continue to market and sell Cialis and to conduct the time-consuming and costly research, preclinical development, clinical studies, manufacturing, regulatory, and sales and marketing activities necessary to commercialize our potential products. We may need to seek additional financing through public or private sources, including equity or debt financings, and through other alternatives, including collaborative arrangements. Poor financial results, unanticipated expenses or unanticipated opportunities that require financial commitments could give rise to additional financing requirements. Financing may, however, be unavailable when we need it or may be unavailable on acceptable terms. If we raise additional funds by issuing common stock or convertible debt securities, the percentage ownership of our existing stockholders could be reduced. Any debt or equity securities that we issue may have rights superior to those of our common stock. We may also issue debt that has rights superior to those of the holders of our convertible subordinated debt. 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 marketing and selling activities and our research and development programs and grant rights to third parties to develop and market product candidates that we would prefer to develop and market on our own. If we are required to grant such rights, the ultimate value of these product candidates to us may be reduced.

We have a significant amount of debt that may adversely affect our financial condition.

We have outstanding $278.7 million aggregate principal amount of convertible subordinated notes, bearing interest at 2%. The notes mature on July 1, 2023, although holders of the notes may require us to repurchase all or part of their notes, for cash, on certain specified dates, the first of which occurs in July 2010. This is a significant amount of debt that carries a substantial debt service obligation. Our ability to meet our debt service obligations will depend on our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control.

Even if we are able to meet our debt service obligations, the amount of debt we have could materially and adversely affect us in a number of ways, including by:

 
  •   limiting our ability to obtain financing for working capital, acquisitions or other purposes;

 
  •   limiting our flexibility in planning for, or reacting to, changes in our business; and

 
  •   making us more vulnerable to industry downturns and competitive pressures.

If we fail to negotiate or maintain successful collaborative arrangements with third parties, our research, development and marketing activities may be delayed or reduced.

We have entered into, and we expect to continue to enter into, collaborative arrangements with third parties who provide us with new products or product candidates, intellectual property, and/or funding. In addition, some third parties may perform research, development, regulatory compliance, manufacturing, or marketing activities relating to Cialis and some or all of our product candidates. The environment for collaborations relating to promising product candidates is extremely competitive. We may be unable to negotiate additional collaborative arrangements or, if necessary, modify our existing arrangements on acceptable terms. If we fail to secure or maintain successful collaborative arrangements, our research, development and marketing activities may be delayed or reduced.

Our collaborative agreements, including with Lilly, can be terminated by our partners under certain conditions. Even if our partners continue their contributions to the collaborative arrangements, they may nevertheless determine not to actively pursue the development or commercialization of any resulting products. Disputes may arise between us and our partners as to a variety of matters, including obligations under our agreements and ownership of intellectual property rights. Also, our partners may fail to perform their obligations under the collaborative arrangements or may be slow in performing their obligations. In addition, our partners may experience financial difficulties at any time that could prevent them from having available funds to contribute to these collaborations. In these circumstances, our ability to develop and market potential products or Cialis could be severely limited.

Acquisitions, mergers or investments in businesses, products or technologies could harm our business, operating results and stock price.

We may acquire, merge with or invest in other businesses, products or technologies that are intended to complement our existing business. From time to time in the ordinary course of business, we have had discussions and negotiations with companies regarding business combinations or investing in these companies’ businesses, products or technologies. Our management has limited or no prior experience in assimilating acquired or merged companies. Any acquisitions or investments we complete will likely involve some or all of the following risks:

 
  •   failure of new product candidates during the research and development stages;

 
  •   difficulty of assimilating the new operations and personnel, products or technologies;

 
  •   commercial failure of the new products;

 
  •   disruption of our ongoing business;

 
  •   diversion of resources;

 
  •   inability of management to maintain uniform standards, controls, procedures and policies;

 
  •   difficulty of managing our growth and information systems;

  •   reduction in the overall growth rate of the combined organization;

 
  •   risks of entering markets in which we have little or no prior experience; and

 
  •   impairment of relationships with employees or customers.

In addition, future acquisitions, mergers or investments could result in potentially dilutive issuances of equity securities, use of cash or incurrence of debt and assumption of direct and contingent liabilities, any of which could have an adverse effect on our business and operating results or the price of our common stock.

The failure to attract or retain key management and technical employees and consultants could harm our business.

We are highly dependent on the efforts and abilities of our current management and key technical personnel. Our success will depend in part on retaining the services of our existing management and key personnel and attracting and retaining new highly qualified personnel. Failure to retain our existing key management and technical personnel or to attract additional highly qualified personnel could, among other things:

 
  •   delay our ongoing discovery research efforts;

 
  •   delay preclinical or clinical testing of our product candidates;

 
  •   delay the regulatory approval process;

 
  •   compromise our ability to negotiate additional collaborative arrangements; or

 
  •   prevent us from successfully commercializing our product candidates.

In our field, competition for qualified management and technical personnel is intense. In addition, many of the companies with which we compete for experienced personnel have greater financial and other resources than we do. As a result of these factors, we may be unsuccessful in recruiting and retaining sufficient qualified personnel.

Risks Related to Our Industry

Rapid changes in technology and industry standards could render Cialis or our potential products unmarketable.

We are engaged in a field characterized by extensive research efforts and rapid technological development. New drug discoveries and developments in our field and other drug discovery technologies are accelerating. Our competitors may develop technologies and products that are more effective than any we develop or that render our technology, Cialis or our potential products obsolete or noncompetitive. In addition, Cialis or our potential products could become unmarketable if new industry standards emerge. To be successful, we will need to enhance our product candidates and design, develop and market new product candidates that keep pace with new technological and industry developments.

Our corporate compliance program can never guarantee that we are in compliance with all laws and regulations.

Our operations are subject to extensive government regulation. Although we have developed and implemented a corporate compliance program, we cannot assure you that we or our employees, directors or agents are or will be in compliance with all laws and regulations. The interpretation of these requirements has

evolved over time and has been unpredictable. In addition, several states are considering or have recently adopted new laws addressing various aspects of our business and pharmaceutical compliance in general. If we fail to comply with any of these laws or regulations, various negative consequences could result, including the termination of clinical studies, the failure to gain regulatory approval of a product candidate, restrictions on our products or manufacturing processes, withdrawal of Cialis from the market, significant fines or other penalties and costly litigation.

We may be required to defend lawsuits or pay damages in connection with the alleged or actual violation of fraud and abuse laws.

We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and false claims laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to offer or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. The federal government has published regulations that identify safe harbors or exemptions for types of payment arrangements that do not violate the anti-kickback statutes. We seek to comply with the safe harbors where possible. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third-party payors (including Medicare and Medicaid), claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal healthcare programs (including Medicare and Medicaid). If the government were to allege against or convict us of violating these laws, there could be a material adverse effect on our business, including our stock price. Our activities relating to the sale and marketing of our products could be subject to challenge, due to the broad scope of these laws, the absence of guidance in the form of regulations and court decisions addressing certain practices, and the increasing prosecutorial resources and attention being devoted to the sales practices of pharmaceutical companies by law enforcement authorities. During the last few years, several companies have paid multi-million dollar fines for alleged violation of fraud and abuse laws, and several other companies are under active investigation.

If we do not comply with laws regulating the protection of the environment and health and human safety, we could incur substantial liability.

Our research and development activities involve the controlled use of chemicals, viruses, radioactive compounds and other hazardous materials. If an accident involving these materials were to occur, we could be held liable for any resulting damages, which liability could exceed our resources. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and certain waste products. We cannot eliminate the risk of accidental contamination or injury from these materials. We are also subject to numerous health and workplace safety laws and regulations, including those governing laboratory procedures. We may incur substantial costs to comply with, and substantial fines and penalties if we violate, any of these laws or regulations.

New limitations may be imposed on our ability to market Cialis or other products.

Broadcast advertising for prescription drugs has recently been the focus of attention by Congress and the media. Some general objections have been raised to marketing prescription drugs directly to consumers that impact the industry as a whole. In addition, some members of Congress, and others, have focused their attention on advertising for erectile dysfunction medications like Cialis, and have proposed placing limits on the hours when television advertisements for these products may be aired. We do not know at this time whether these or other limitations on the manner in which we advertise Cialis will be implemented. Even if legislation is not adopted, regulatory bodies or industry groups may feel pressured to impose limitations on marketing that affect the industry as a whole and/or erectile dysfunction medications in particular. A set of principles relating to advertisements to consumers was adopted in July 2005 by the Pharmaceutical Research and Manufacturers of

America, a pharmaceutical industry association. The principles do not impose restrictions specifically on the advertising of erectile dysfunction medications, and we do not believe compliance with these principles will materially impair our ability to market Cialis. Future restrictions on direct-to-consumer advertising of erectile dysfunction medications could impact us and our competitors; however, the relative impact on each product might be affected by other factors such as length of time on the market or current recognition of the brand. Any such restrictions might impede our ability to implement our preferred promotional strategy or strategies, which may in turn affect sales of Cialis or other potential products that we market.

Our sales may be affected by coverage and reimbursement decisions of third-party payors.

Sales of Cialis and any new products we develop and commercialize may be affected by the availability of reimbursement from third-party payors, such as state and federal governments, under programs such as Medicare and Medicaid in the United States, private insurance plans and managed care organizations.

Because of the size of the patient population covered by managed care organizations, marketing of pharmaceuticals to them and the pharmacy benefit managers (PBMs) that serve many of these organizations is an important aspect of our business. Third-party payors and PBMs reevaluate their drug benefit plans and drug formularies from time to time, and continued access is not assured. If reimbursement levels for Cialis change adversely or if we fail to obtain reimbursement for our potential products, health care providers may limit how much or under what circumstances they will prescribe or administer them. This could result in lower product sales.

In October 2005, Congress passed a law that prohibits reimbursement for prescription drugs treating erectile dysfunction under the Medicare and Medicaid programs. Since coverage of erectile dysfunction drugs is not currently available under Medicare, and since several major states had previously suspended coverage for erectile dysfunction drugs under their Medicaid programs, we believe that the impact of this law on our business is not material. Nonetheless, the law eliminates the potential for some patients who could not otherwise afford these medications to receive coverage for them under these federal government programs.

Available Information

We were incorporated in the state of Delaware in September 1989. We reincorporated in Washington State in September 2005. The internet address of our corporate website is www.icos.com. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports available free of charge through our internet website. In addition, we will voluntarily provide paper copies of such filings, free of charge, upon request. The ICOS Corporation Code of Conduct, which is our written Code of Ethics under Section 406 of the Sarbanes-Oxley Act of 2002, is also available on our corporate website.