Document:

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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.<PAGE>   1
                                                                    EXHIBIT 10.4

                                      Exhibit F to Securities Purchase Agreement

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE 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.

                                                              [__________], 2000

                           ISIS PHARMACEUTICALS, INC.

                           WARRANT TO PURCHASE SHARES
                                 OF COMMON STOCK

THIS CERTIFIES THAT for value received, Elan International Services, Ltd., a
Bermuda exempted limited liability company ("EIS"), or its permitted transferees
and successors as provided herein (each, a "Holder"), is entitled to subscribe
for and purchase the Determined Number (as defined below) of shares (the
"Shares") of the fully paid and nonassessable common stock, par value $.001 per
share (the "Common Stock"), of Isis Pharmaceuticals, Inc., a Delaware
corporation (the "Company"), with offices located at 2292 Faraday Avenue,
Carlsbad, CA 92008, at the price per share equal to 200% of the price per share
paid by EIS to purchase shares of Common Stock on the First Subsequent Purchase
Date (such price, and such other prices that shall result from time to time,
from the adjustments specified in Section 4, the "Warrant Price"), subject to
the provisions and upon the terms and conditions hereinafter set forth.
"Determined Number" shall mean 5% of the aggregate number of shares of Common
Stock purchased by EIS, or its successors or permitted assigns, on the First
Subsequent Purchase Date, pursuant to Section 1(b)(ii) of the Securities
Purchase Agreement, dated as of January 14, 2000, by and between the Company and
EIS (the "Securities Purchase Agreement"). Capitalized terms used but not
otherwise defined herein shall, unless otherwise indicated, have the meanings
given such terms in the Securities Purchase Agreement.

<PAGE>   2

        1. Term. The purchase right represented by this Warrant is exercisable,
in whole or in part, at any time, and from time to time, from and after the date
hereof and until 5:00 p.m. Eastern Standard Time on [________], 2005 (the fifth
anniversary of the First Subsequent Purchase Date). To the extent not exercised
at 5:00 p.m. Eastern Standard Time on [________], 2005, (the fifth anniversary
of the First Subsequent Purchase Date) this Warrant shall completely and
automatically terminate and expire, and thereafter it shall be of no force or
effect.

        2. Method of Exercise; Payment; Issuance of New Warrant.

               (a) The purchase right represented by this Warrant may be
exercised by the Holder, in whole or in part and from time to time, by the
surrender of this Warrant (with the notice of exercise form attached hereto as
Annex A duly executed) at the principal office of the Company and by the payment
to the Company of an amount, in cash or other immediately available funds, equal
to the then-applicable Warrant Price per Share multiplied by the number of
Shares then being purchased or pursuant to the cashless exercise procedure
described below.

               (b) In lieu of delivering cash or other immediately available
funds, the Holder may instruct the Company in writing to deduct from the number
of Shares that would otherwise be issued upon such exercise, a number of shares
of Common Stock equal to the quotient obtained from dividing (x) the product
obtained by multiplying (A) the number of Shares for which the Warrant is being
exercised and (B) the Warrant Price then in effect by (y) a price equal to the
average of the closing price of the Common Stock for the 60 trading days ending
two business days prior to the date of exercise.

               (c) The persons or entities in whose name(s) any certificate(s)
representing Shares shall be issuable upon exercise of this Warrant shall be
deemed to have become the holder(s) of record of, and shall be treated for all
purposes as the record holder(s) of, the Shares represented thereby (and such
Shares shall be deemed to have been issued) immediately prior to the close of
business on the date or dates upon which this Warrant is properly exercised and
full payment for the Shares acquired pursuant to such exercise is made. Upon any
exercise of the rights represented by this Warrant, certificates for the Shares
purchased shall be delivered to the Holder hereof as soon as possible and in any
event within 15 days of receipt of such notice and payment, and unless this
Warrant has been fully exercised or expired, a new Warrant representing the
portion of Shares, if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof as soon as
possible and in any event within such 15-day period.

        3. Stock Fully Paid, Reservation of Shares. All Shares that may be
issued upon the exercise of this Warrant shall, upon issuance, be duly and
validly authorized and issued, fully paid and nonassessable, and will not be
subject to any liens or charges imposed on the Company or issued in violation of
any preemptive or similar rights. During the period within which this Warrant
may be exercised, the Company will at all times have authorized and reserved for
the purpose of the issue upon the exercise of the purchase rights evidenced by
this Warrant a sufficient number of shares of its Common Stock to provide for
the exercise of the rights represented by this Warrant.

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        4. Adjustment of Warrant Price and Number of Shares. The number and kind
of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:

               (a) Reclassification, Etc. In case of (i) any reclassification,
reorganization, change or conversion of securities of the class issuable upon
exercise of this Warrant (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 outstanding securities issuable upon exercise of this Warrant), or
(iii) any sale of all or substantially all the assets of the Company, then, in
any event, (x) the Company, or such successor or purchasing entity, as the case
may be, shall duly execute and deliver to the Holder of this Warrant a new
Warrant or a supplement hereto (in form and substance reasonably satisfactory to
the Holder of this Warrant), and (y) the Holder shall have the right to receive,
at a total purchase price not to exceed that payable upon the exercise of the
unexercised portion of this Warrant, and in lieu of the shares of Common Stock
theretofore issuable upon the exercise of this Warrant, the kind and amount of
shares of stock and other securities, receivable upon such reclassification,
reorganization, change or conversion by a holder of the number of shares of
Common Stock then purchasable under this Warrant. Such new Warrant 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(a)
shall similarly attach to successive reclassifications, reorganizations,
changes, and conversions.

               (b) Subdivision or Combination of Shares. If the Company at any
time during which this Warrant remains outstanding and unexpired shall subdivide
or combine its Common Stock, (i) in the case of a subdivision, the Warrant Price
shall be proportionately decreased and the number of Shares purchasable
hereunder shall be proportionately increased, and (ii) in the case of a
combination, the Warrant Price shall be proportionately increased and the number
of Shares purchasable hereunder shall be proportionately decreased.

               (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
the Holder against impairment.

               (d) Notice of Adjustments. Whenever the Warrant Price or the
number of Shares purchasable hereunder shall be adjusted pursuant to this
Section 4, the Company shall prepare a certificate setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated. Such certificate shall be signed
by the Company's chief financial officer and shall be delivered to the Holder.

               (e) Fractional Shares. No fractional shares of Common Stock will
be issued in connection with any exercise hereunder, but in lieu of such
fractional shares the Company

                                       3
<PAGE>   4

shall make a cash payment therefor based on the average of the closing price of
the Common Stock for the 60 trading days ending two business days prior to date
of exercise.

               (f) Cumulative Adjustments. No adjustment in the Warrant Price or
the number of Shares purchasable hereunder shall be required under this Section
4 until cumulative adjustments result in a concomitant change of 1% or more of
the Warrant Price or in the number of shares of Common Stock purchasable upon
exercise of this Warrant as in effect prior to the last such adjustment;
provided, however, that any adjustments that by reason of this Section 4 are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. 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.

        5. Compliance with Securities Act; Disposition of Warrant or Shares of
Common Stock.

               (a) The Holder, by acceptance hereof, agrees that this Warrant
and the Shares to be issued upon exercise hereof and, without limiting the
foregoing, agrees that this Warrant and the Shares to be issued upon exercise
hereof are being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Warrant or any Shares to be issued upon
exercise hereof except under circumstances which will not result in a violation
of applicable securities laws. Upon exercise of this Warrant, unless the Shares
being acquired are registered under the Securities Act of 1933, as amended (the
"Act"), or an exemption from the registration requirements of such Act is
available, the Holder shall confirm in writing, by executing an instrument in
form reasonably satisfactory to the Company, that the Shares so purchased are
being acquired for investment and not with a view toward distribution or resale.
This Warrant and all Shares issued upon exercise of this Warrant (unless
registered under the Securities Act) shall be stamped or imprinted with legends
in substantially the following forms:

               THE SECURITIES REPRESENTED HEREBY 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

                                       4
<PAGE>   5

               PHARMACEUTICALS, INC. AND ELAN INTERNATIONAL SERVICES, LTD.

                (b) (i) This Warrant may be transferred or assigned, in whole or
        in part, by EIS to its affiliates and/or subsidiaries, as well as any
        special purpose financing or similar vehicle established by EIS or its
        affiliates; provided, that the transferor shall continue to be liable
        and obligated for its obligations hereunder. Subject to the foregoing,
        this Warrant 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. Other than as set forth above, this
        Warrant may not be transferred or assigned by either party without the
        prior written consent of the other; provided, however, that no consent
        shall be required in connection with any transfer or assignment by a
        party pursuant to a sale of all or substantially all of the business of
        such party to which the Transaction Documents relate, whether by merger,
        sale of stock, sale of assets or otherwise.

                (ii) With respect to any offer, sale or other disposition of
        this Warrant or any Shares acquired pursuant to the exercise of this
        Warrant prior to registration of such Shares, the Holder shall give
        written notice to the Company prior thereto, describing briefly the
        manner thereof, together with a written opinion of such Holder's
        counsel, if requested by the Company, to the effect that such offer,
        sale or other disposition may be effected without registration or
        qualification (under the Securities Act as then in effect or any other
        applicable federal or state securities law then in effect) of this
        Warrant or such Shares and indicating whether or not under the
        Securities Act certificates for this Warrant or such Shares to be sold
        or otherwise disposed of require any restrictive legend as to applicable
        restrictions on transferability in order to ensure compliance with the
        Securities Act. Promptly upon receiving such written notice and
        reasonably satisfactory opinion, if so requested, the Company, as
        promptly as practicable, shall notify such Holder that such Holder may
        sell or otherwise dispose of this Warrant or such Shares, all in
        accordance with the terms of the notice delivered to the Company. Each
        certificate representing this Warrant or the Shares thus transferred
        shall bear a legend as to the applicable restrictions on transferability
        in order to insure compliance with the Securities Act, unless in the
        aforesaid opinion of counsel for the Holder such legend is not required
        in order to insure compliance with the Securities Act. The Company may
        issue stop transfer instructions to its transfer agent in connection
        with such restrictions.

                (iii) The shares of Common Stock underlying this Warrant are
        entitled to the benefit of certain registration rights as set forth in a
        Registration Rights Agreement dated as of the date hereof between the
        Company and the initial Holder named herein.

        6. No Rights as Stockholders. No Holder, as such, shall be entitled to
vote or receive dividends or be deemed the holder of Shares or any other
securities of the Company which may at any time be issuable upon the exercise
hereof for any purpose, nor shall anything contained herein be construed to
confer upon the Holder, as such, any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise until this

                                       5
<PAGE>   6

Warrant is exercised and the Shares purchasable upon the exercise hereof shall
have become deliverable, as provided herein.

        7. Representations and Warranties. The Company represents and warrants
to the Holder as follows:

               (a) The Company has all requisite corporate power and authority
to authorize and execute this Warrant and the certificates evidencing the Shares
and to perform all obligations and undertakings under this Warrant and the
certificates evidencing the Shares;

               (b) This Warrant has been duly authorized and executed by the
Company and is a valid and binding obligation of the Company enforceable in
accordance with its terms; except that enforcement may be limited by (i)
applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or
other similar laws affecting creditors' rights, and (ii) general equity
principles and limitations on the availability of equitable relief, including
specific performance.

               (c) The Shares have been duly authorized and reserved for
issuance by the Company and, when issued in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable; and

               (d) The execution and delivery of this Warrant are not, and the
issuance of the Shares upon exercise of this Warrant in accordance with the
terms hereof will not be, inconsistent with the Company's Certificate of
Incorporation or bylaws, as amended, and do not and will not constitute a
default under, any indenture, mortgage, material contract or other material
instrument to which the Company is a party or by which it is bound.

        8. Miscellaneous.

               (a) This Warrant may not be modified or amended, or any
provisions hereof waived, except by written agreement of the Company and the
Holder.

               (b) Any notice, request or other document required or permitted
to be given or delivered to the Holder or the Company shall (i) be in writing,
(ii) be delivered personally or sent by mail or overnight courier to the
intended recipient to Holder at its address as shown on the books of the
Company, or to the Company at the address indicated therefor on the signature
page of this Warrant, and (iii) be effective on receipt if delivered personally,
two business days after dispatch if mailed, and one business day after dispatch
if sent by overnight courier service.

               (c) The Company covenants to the Holder that upon receipt of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Warrant and, in the case of any such loss, theft or
destruction, upon receipt of a bond or indemnity reasonably satisfactory to the
Company, or in the case of any such mutilation upon surrender and cancellation
of such Warrant, the Company will prepare and deliver a new Warrant, of like
tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant.

                                       6
<PAGE>   7

               (d) The descriptive headings of the several sections and
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.

               (e) This Warrant shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to the 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.

               (f) This Warrant 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 Warrant. This Warrant
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.

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

                            [Signature page follows]

                                       7
<PAGE>   8

               IN WITNESS WHEREOF, Isis Pharmaceuticals, Inc. has caused this
Warrant to be executed and delivered by its duly authorized corporate officers
on the date first above written.

                                             ISIS PHARMACEUTICALS, INC.

                                             By:___________________________
                                                B. Lynne Parshall
                                                Executive Vice President

Attest:

By:___________________________
   Name:
   Title:

Agreed and accepted by:

ELAN INTERNATIONAL SERVICES, LTD.

By:___________________________
   Kevin Insley
   President

<PAGE>   9

                                                                         ANNEX A

                               NOTICE OF EXERCISE

To:     Isis Pharmaceuticals, Inc.

1.      The undersigned hereby elects to purchase __________ shares of Common
        Stock of Isis Pharmaceuticals, Inc. pursuant to the terms of the
        attached Warrant, and

        [ ]     (a) tenders herewith full payment of the purchase price of such
                shares, in cash or other immediately available funds.

        [ ]     (b) instructs and agrees that pursuant to paragraph 2(b) of the
                attached Warrant, __________ shares of Common Stock be withheld
                in payment therefor.

2.      Please issue a certificate or certificates representing said shares in
        the name of the undersigned or in such other name or names as are
        specified below:

_____________________________________(Name)

_____________________________________(Address)

3.      The undersigned represents that the aforesaid shares are being acquired
        for the account of the undersigned for investment and not with a view
        to, or for resale in connection with, the distribution thereof and that
        the undersigned has no present intention of distributing or reselling
        such shares and otherwise confirms the investment representations made
        in Section 5 of the Warrant with regard to the shares of Common Stock
        being acquired.

Signature:__________________________

Name:_____________________________

Address:___________________________

Social Security or taxpayer identification number:

___________________________________

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