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                                                                    EXHIBIT 10.3

THIS CONVERTIBLE PROMISSORY NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT UNDER ANY CIRCUMSTANCES BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAWS.

THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS ALSO SUBJECT
TO THE RESTRICTIONS CONTAINED IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT,
DATED JANUARY 14, 2000, BY AND BETWEEN ISIS PHARMACEUTICALS, INC. AND ELAN
INTERNATIONAL SERVICES, LTD.


                           ISIS PHARMACEUTICALS, INC.
                           CONVERTIBLE PROMISSORY NOTE


U.S. $12,015,000                                      JANUARY 14, 2000


               The undersigned, ISIS PHARMACEUTICALS, INC., a Delaware
corporation with offices at 2292 Faraday Avenue, Carlsbad, California 92008 (the
"Company"), unconditionally promises to pay to ELAN INTERNATIONAL SERVICES,
LTD., a Bermuda private limited company ("EIS"), or its permitted assigns,
transferees and successors as provided herein (collectively, the "Holder"), on
January 14, 2006 (the "Maturity Date"), at such place as may be designated by
the Holder to the Company, the principal amount outstanding hereunder (not to
exceed U.S.$12,015,000), together with interest thereon accrued at a rate per
annum equal to the lesser of (i) 12.0%, and (ii) the maximum rate of interest
permissible by applicable law, from and after the date of the initial
disbursement of funds hereunder (the "Original Issue Date"), compounded on a
semi-annual basis, the initial such compounding to commence on the date that is
180 days from and after the Original Issue Date and thereafter on each 180 day
anniversary (each such date, a "Compounding Date").

        SECTION 1.  SECURITIES PURCHASE AGREEMENT AND FUNDING AGREEMENT.

               This Note is issued pursuant to a Securities Purchase Agreement
dated as of the date hereof, by and between the Company and EIS (as amended at
any time, the "Securities Purchase Agreement"), and the Holder hereof is
intended to be afforded the benefits thereof, including the representations and
warranties set forth therein. The Company shall use the proceeds of the issuance



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and sale of this Note solely in accordance with the provisions set forth therein
and as required therein and in a certain Funding Agreement, dated as of the date
hereof (as amended at any time, the "Funding Agreement"), by and among Elan
Corporation, plc, an Irish public limited company and the parent corporation of
EIS, Elan Pharma International Limited, EIS and the Company, and as described in
Section 6 below. Capitalized terms used but not otherwise defined herein shall,
unless otherwise indicated, have the meanings given such terms in the Securities
Purchase Agreement.

        SECTION 2.  DISBURSEMENTS.

        (a) From and after the date hereof and until July 14, 2002,
disbursements shall be made by the Holder to the Company hereunder in minimum
tranches of U.S.$500,000 (except in the event that an amount less than
U.S.$500,000 shall be remaining and available for funding hereunder, in which
case such lesser amount may be funded hereunder); provided, that the Company
shall have, prior to each such disbursement, delivered a written request
therefor to the Holder in the form attached hereto as Exhibit A (the
"Disbursement Notice"), together with an Officer's Certificate confirming that
as of such date no Event of Default exists hereunder; the Holder shall, subject
to the terms and conditions hereof, fund the applicable amount within 10
business days of the receipt of the Disbursement Notice, subject to the receipt
by the Holder of any required approvals under the Mergers and Takeovers
(Control) Acts 1978-1996 and the terms of the development plan to be mutually
agreed upon by the Company and EIS. A "business day" is any day that commercial
banks are open for the transaction of business in the City of New York.

        (b) The Holder shall not be required to (i) disburse more than the
maximum principal amount hereunder, excluding accruals of interest, of
U.S.$12,015,000 or (ii) make more than five disbursements to the Company within
any 12 month period.

        (c) Each disbursement shall accrue interest at the rate set forth in
Section 1 from the date of each such disbursement through the date of payment.

        SECTION 3.  PAYMENTS AND COVENANTS.

        (a) Unless earlier converted in accordance with the terms of Section 4
below, or prepaid in accordance with the terms hereof, the entire outstanding
principal amount of this Note, together with any accrued and unpaid interest
thereon, shall be due and payable on the Maturity Date.

        (b) Accrued interest hereon shall not be paid in cash, but shall be
capitalized and added to the principal amount outstanding hereunder on each
Compounding Date and will be convertible into Common Stock pursuant to Section
4.

        (c) This Note may be prepaid by the Company at its option, in whole or
in part,

                (i) in cash, upon not less than 30 days' prior written notice to
        EIS; or

                (ii) in shares of the Company's Common Stock, par value $.001
        per share (the "Common Stock"), at any time, at a price equal to 95% of
        the average of the closing prices



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        of the Common Stock for the 60 trading days ending two business days
        prior to the date of repayment; provided that no more than 50% of any
        prepayment amount shall be payable by the Company in the Company's
        Common Stock.

        SECTION 4.  CONVERSION.

        (a) Conversion Right.

                (i) From and after the Original Issue Date and until this Note
        is repaid in full, the Holder shall have the right from time to time, in
        its sole discretion, to convert all or any portion of the outstanding
        principal amount and accrued and unpaid interest then-outstanding
        hereunder, on a per tranche basis (each, a "Conversion Right"), into
        such number of shares of Common Stock that shall be obtained by dividing
        the sum of the outstanding principal amount of such tranche and all
        accrued and unpaid interest thereon by a per share price calculated as
        140% of the average of the closing price of the Common Stock for the 60
        trading days ending two business days prior to the date of disbursement
        of such tranche (each, a "Conversion Price").

                (ii) The Holder shall be entitled to exercise a Conversion Right
        upon at least five days' prior written notice to the Company, such
        notice to be in the form attached hereto as Exhibit B. Within 10 days of
        the conversion date specified in such notice, the Company shall cause
        its transfer agent to issue stock certificates to EIS representing the
        aggregate number of shares of Common Stock due to EIS as a result of
        such conversion.

        (b) Reclassification, Etc. In case of (i) any reclassification,
reorganization, change or conversion of securities of the class issuable upon
conversion of the outstanding principal amount and accrued and unpaid interest
then-outstanding hereunder (other than a change in par value, or from par value
to no par value), or (ii) any consolidation of the Company with or into another
entity (other than a merger or consolidation with another entity in which the
Company is the surviving entity and that does not result in any reclassification
or change of the class of securities issuable upon the conversion of the
outstanding principal amount and accrued and unpaid interest then-outstanding
hereunder), or (iii) any sale of all or substantially all the assets of the
Company (excluding the transactions contemplated by the Transaction Documents),
then the Company, or such successor or purchasing entity, as the case may be,
shall duly execute and deliver to the Holder a new Note or a supplement hereto
(in form and substance reasonably satisfactory to the Holder of this Note), so
that the Holder shall have the right to receive, at a total purchase price not
to exceed the outstanding principal amount and accrued and unpaid interest
then-outstanding hereunder, and in lieu of the shares of Common Stock
theretofore issuable upon the conversion of such outstanding principal amount
and accrued and unpaid interest then-outstanding hereunder, the kind and amount
of shares of stock and other securities, money and property receivable upon such
reclassification, reorganization, change, merger, consolidation or conversion by
a holder of the number of shares of Common Stock then issuable under this Note.
Such new Note shall provide for adjustments that shall be as nearly equivalent
as may be practicable to the adjustments provided for in this Section 4. The
provisions of this Section 4(b) shall similarly attach to successive
reclassifications, reorganizations, changes, mergers, consolidations, transfers
or conversions.


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        (c) No Impairment. The Company will not, by amendment of its Certificate
of Incorporation or by-laws or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section 4 and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of EIS against
impairment. This provision shall not restrict the Company from otherwise
amending and/or restating its Certificate of Incorporation in accordance with
Delaware General Corporation Law.

        (d) Notice of Adjustments. Whenever the consideration issuable upon a
conversion hereunder shall be changed pursuant to this Section 4, the Company
shall prepare a certificate setting forth, in reasonable detail, the event
requiring the change and the kind and amount of shares of stock and other
securities, money and property subsequently issuable upon a conversion hereof.
Such certificate shall be signed by the Company's chief financial officer and
shall be delivered to EIS.

        (e) No Fractional Shares; Rounding. No fractional shares of Common Stock
will be issued in connection with any exercise hereunder, but in lieu of such
fractional shares the Company shall make a cash payment therefor based on the
applicable Conversion Price. All calculations under this Section 4 shall be made
to the nearest cent or to the nearest one-hundredth of a share, as the case may
be.

        SECTION 5.  EXCHANGE RIGHT.

        (a) In the event that EIS shall exercise the EIS Exchange Right, EIS
shall, at its option, (i) cause to be paid to the Company, within 30 days of
such exercise, an amount equal to 30.097% of the aggregate amount (but not
including any accrued and unpaid interest thereon) of the Development Funding
(as such term is defined in the Funding Agreement) through the date of such
exercise provided by each of the parties to HepaSense, in accordance with the
terms of the Funding Agreement, from and after the date hereof and until the
date of such exercise, and/or (ii) offset against the amount then outstanding
and payable under this Note an amount equal to 30.097% of the total amount (but
not including any accrued and unpaid interest in respect of any debt, including
the Note thereon) of Development Funding provided by each of the parties to
HepaSense, in accordance with the terms of the Funding Agreement, from and after
the date hereof and until the date of the exercise of the Exchange Right,
against the principal amount outstanding hereunder, if any, or (iii) effect a
combination of the provisions described in clauses (i) and (ii) above, if
applicable.

        (b)In no event shall the amount determined in accordance with subsection
(a) above exceed the aggregate principal amount issued hereunder and accrued
interest thereon.

        SECTION 6.  USE OF PROCEEDS.

               The Company shall use the proceeds of this Note solely for
developmental funding of HepaSense; provided, that the Board of Directors of
HepaSense shall have determined that such


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developmental funding is necessary (which approval shall in all events include
the consent of at least one director designated by the Company that is an
employee of the Company and at least one director designated by EIS) and that
the parties thereto are in continuing agreement as to the Business Plan.
Accordingly, total disbursements hereunder shall not in any event exceed the
amount of Development Funding funded by the Company to HepaSense pursuant to the
Funding Agreement.


        SECTION 7.  EVENTS OF DEFAULT.

               The occurrence of any of the following events shall constitute an
event of default (an "Event of Default"):

        (a) a default in the payment of the principal amount of this Note, when
and as the same shall become due and payable;

        (b) a default in the payment of any accrued and unpaid interest on this
Note, when and as the same shall become due and payable;

        (c) a material breach by the Company of its obligations under any of the
Transaction Documents, which breach remains uncured 30 days after written notice
thereof by EIS; provided, however, that (x) if the Company has proposed a course
of action to rectify the breach and is acting in good faith to rectify same but
has not cured the breach by the 30th day, such period shall be extended by such
period as is reasonably necessary to permit the breach to be rectified and (y)
if such default involves a good faith dispute regarding the amount of any
required payment, provided any undisputed amount is paid, such default shall be
stayed and the remainder may be withheld for a reasonable period during which a
good faith resolution of the amount owed is being pursued;

        (d) a distress, execution, sequestration or other process is levied or
enforced upon the Company or sued out against a material part of its property
which is not discharged or challenged within 30 days;

        (e) the Company is unable to pay its debts in the normal course of
business;


        (f) the Company ceases wholly or substantially to carry on its business,
otherwise than for the purpose of a reconstruction or amalgamation, without the
prior written consent of the EIS (such consent not to be unreasonably withheld);

        (g) the appointment of a liquidator, receiver, administrator, examiner,
trustee or similar officer of the Company or over all or substantially all of
its assets under the law; or

        (h) any other termination of the JDOA.

        SECTION 8.  REMEDIES IN THE EVENT OF DEFAULT.


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        (a) In the case of any Event of Default by the Company, the Holder, may
in its sole discretion, demand that the aggregate amount of funds advanced to
the Company under this Note and outstanding hereunder and accrued and unpaid
interest thereon shall, in addition to all other rights and remedies of the
Holder hereunder and under applicable law, be and become immediately due and
payable upon written notice delivered by the Holder to the Company.
Notwithstanding the preceding sentence, the rights of the Holder as set forth in
Sections 4 and 5 hereunder shall survive any such acceleration and payment. If
the Holder shall accelerate this Note after the occurrence of any Event of
Default set forth in Section 7(a), 7(b) or 7(c) hereof and be paid and, prior to
the earlier of (i) second anniversary of the date of such acceleration and (ii)
the Maturity Date, the Holder elects to exercise the Conversion Right, the
Holder shall reimburse to the Company an amount in respect of the shares of
Common Stock issued under such Conversion Right equal to the principal amount of
this Note attributable thereto as calculated in accordance with Section 4 above.

        (b) The Company hereby waives demand and presentment for payment, notice
of nonpayment, protest and notice of protest, diligence, filing suit, and all
other notice and promises to pay the Holder its costs of collection of all
amounts due hereunder, including reasonable attorneys' fees.

        (c) In the case of any Event of Default under this Note by the Company
this Note shall continue to bear interest after such default at the interest
rate otherwise in effect hereunder plus 3% per annum (but in any event not in
excess of the maximum rate of interest permitted by applicable law).

        SECTION 9.  VOTING RIGHTS.

               This Note shall not entitle the holder hereof to any voting
rights or other rights as a stockholder of the Company prior to its conversion.

        SECTION 10.  SENIORITY.

        (a) The Holder acknowledges and agrees that the obligations evidenced
hereby are subordinate in right to payment in full of interest and principal
relating to the Company's $40,000,000 aggregate principal amount of 14% Senior
Subordinated Discount Notes due November 2007 (the "Discount Notes") and
therefore the obligations evidenced hereby are "Subordinated Indebtedness" as
defined in that certain Purchase Agreement, dated October 24, 1997, between the
Company and the purchasers listed on Schedule I thereto (the "Purchase
Agreement"); it being understood that in the event there is any event of default
in respect of the Purchase Agreement, the Company shall not pay to the Holder
hereof in cash any amounts due hereunder until such event of default is cured or
waived pursuant to the terms of such indenture.

        (b) The Company shall not incur any indebtedness for money borrowed
which shall rank senior to this Note without the prior written consent of the
Holder; provided, however, that the Company may incur additional indebtedness
which ranks pari passu with the obligations evidenced hereby.


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        SECTION 11.  MISCELLANEOUS.

        (a) EIS may assign this Note to its affiliates and subsidiaries, as well
as any special purpose financing or similar vehicle entity established by EIS or
its affiliates. Upon any such assignment, EIS shall promptly provide the Company
with Notice in reasonable detail of such assignment and assignee (provided, that
the failure to provide such notice shall not affect the rights of EIS
hereunder). This Note and all of the provisions hereof shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns; provided, however, that EIS and the Company shall remain
liable for their respective obligations hereunder after any such assignment.

        (b) All notices, demands and requests of any kind to be delivered to any
party in connection with this Agreement shall be in writing and shall be deemed
to have been duly given if personally delivered or if sent by
nationally-recognized overnight courier or by registered or certified mail,
return receipt requested and postage prepaid, or by facsimile transmission,
addressed as follows:

                             (i) if to the Company:

                             Isis Pharmaceuticals, Inc.
                             2292 Faraday Avenue
                             Carlsbad, CA 92008
                             Attn: B. Lynne Parshall
                             Tel.: 760-603-2460
                             Fax:  760-931-9639

                             with a copy to:

                             Cooley Godward LLP
                             4365 Executive Drive
                             San Diego, CA 92121
                             Attention: Julie Robinson, Esq.
                             Tel:  619-550-6000
                             Fax:  619-453-3555

                             (ii) if to EIS, to:

                             Elan International Services, Ltd.
                             102 St. James Court
                             Flatts, Smiths Parish
                             Bermuda  SL04
                             Attention: President
                             Tel:  441-292-9169
                             Fax:  441-292-2224


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                             with a copy to:

                             Brock Silverstein LLC
                             800 Third Avenue
                             New York, New York 10022
                             Attention: Scott Rosenblatt, Esq.
                             Tel:  212-371-2000
                             Fax:  212-371-5500

Each party, by written notice given to the other in accordance with this Section
11(b) may change the address to which notices, other communication or documents
are to be sent to such party. All notices, other communications or documents
shall be deemed to have been duly given when received. Any such notice or
communication shall be deemed to have been effectively received, (a) in the case
of personal delivery, on the date of such delivery, (b) in the case of
nationally-recognized overnight courier, on the second business day after the
date when sent, (c) in the case of mailing, on the fifth business day following
that day on which the piece of mail containing such communication is posted, and
(d) in the case of facsimile transmission, on the date of transmission.

        (c) This Note may not be modified or amended, or any of the provisions
hereof waived, except by written agreement of the Company and EIS.

        (d) This Note shall be governed by and construed in accordance with the
laws of the State of New York, without giving effect to principles thereof
relating to conflicts of laws, except that all issues concerning the relative
rights of the Company and its stockholders shall be governed by the Delaware
General Corporation Law, without giving effect to the principles thereof
relating to conflicts of laws.

        (e) This Note may be executed in any number of counterparts, and each
such counterpart hereof shall be deemed to be an original instrument, but all
such counterparts together shall constitute one note. The Note may be signed and
delivered to the other party by a facsimile transmission; such transmission
shall be deemed a valid signature; provided that any signature delivered by
facsimile transmission shall be replaced by an original signature within five
days.

        (f) Each of the parties shall be responsible for its own costs and
expenses incurred in connection with the transactions contemplated hereby.


                            [Signature page follows]


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               IN WITNESS WHEREOF, the Company and EIS have executed this Note
on the date first above written.

                                            ISIS PHARMACEUTICALS, INC.


                                            By:___________________________
                                               B. Lynne Parshall
                                               Executive Vice President


                                            ELAN INTERNATIONAL SERVICES, LTD.


                                            By:___________________________
                                               Kevin Insley
                                               President



<PAGE>   10

                                    EXHIBIT A

                       NOTICE OF REQUEST FOR DISBURSEMENT



Date:


To:     Elan International Services, Ltd.

From:   Isis Pharmaceuticals, Inc.

Re:     Disbursement Request



        Pursuant to the terms of the Convertible Promissory Note (the "Note")
issued by Isis Pharmaceuticals, Inc. (the "Company") to Elan International
Services, Ltd. ("EIS"), dated January 14, 2000, the Company hereby notifies EIS
of its request for a disbursement thereunder in the amount of $_________. Please
provide funding in the requested amount to the Company in accordance with the
following wire instructions




                      [






                                                         ]






                                            Sincerely,


                                            ISIS PHARMACEUTICALS, INC.






                                            By: ___________________________
                                                Name:
                                                Title:



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                                    EXHIBIT B

                 NOTICE OF ELECTION TO EXERCISE A CONVERSION RIGHT



Date:


To:     Isis Pharmaceuticals, Inc.

From:   Elan International Services, Ltd.

Re:     Exercise of a Conversion Right

--------------------------------------------------------------------------------



        Pursuant to the terms of the Convertible Promissory Note (the "Note")
issued by Isis Pharmaceuticals, Inc. (the "Company") to Elan International
Services, Ltd. ("EIS"), dated January 14, 2000, specifically Section 4 thereof,
EIS hereby notifies the Company of its intention to exercise a right of
conversion.





        Pursuant to Section 4 of the Note, EIS hereby elects to convert
[$__________]* in aggregate principal amount and all accrued and unpaid interest
thereon for shares of the Company's Common Stock, par value $.001 per share,
effective [__________, ____]



        We have instructed our attorneys to contact the Company to discuss the
timing and documentation of the conversion.



                                            Sincerely,



                                            ELAN INTERNATIONAL SERVICES, LTD.






                                            By: ___________________________
                                                Name:
                                                Title:







-----------
* Amount must represent one or more tranches drawn down by the Company under the
Note.