Isis Pharmaceuticals (NASDAQ:ISIS) is up some 50%, since Jeff Fischer covered the company's disappointing Phase III results for cancer drug, Affinitak. Still, today's earnings announcement should remind investors that Isis is a high-risk, high-reward situation.

Anyone not familiar with the story might think Isis' risks extremely low; after all, its partners are a "Who's Who" of big biotech and pharma. From Amgen (NASDAQ:AMGN) and Pfizer (NYSE:PFE) to GlaxoSmithKline (NYSE:GSK) and Novartis (NYSE:NVS), you have the most experienced drug developers as partners. What could go wrong?

For one, drug companies can look at a promising drug, contractually tie it up, then decide it does not meet their objectives. Merck (NYSE:MRK) ended its relationship with Isis last December. Elan (NYSE:ELN) did so this year. Since Isis repurchased the rights to the drugs and continued development, the net impact has been an increase in costs. For another, promising drugs could prove ineffective.

If you are wondering, "Why own this stock," consider the potential. The company's Antisense technology differs from traditional drugs because it specifically targets disease-causing proteins before the body produces them. There is a lot of potential, especially when you consider that many of the drugs target large (high-reward) markets.

Isis' pipeline of drugs includes two in Phase III trials and five in Phase II trials. Look at the Liquidity section of the annual report and you will see that the company, since its inception, has sold $587.4 million in equity, earned $350.5 million through R&D, and borrowed $290.6 million. That is a lot of investment. The reward had better be large.

The company touts its cash and short-term investments of $289.4 million. You have to look at the balance sheet (which is provided) to see that the cash is partly the result of a $125 million convertible note and $63 million in long-term debt. The company may have cash, and the current net loss of $22.4 million could be sustained for maybe three years, but Isis is not cash rich.

Yes, Isis could reward handsomely with promising technology and great partners. But even at $6 and change, this is a very high-risk investment.

W.D. Crotty has been interested in Isis since his mother was diagnosed with lung cancer. He can be reached at HawaiiFool@hawaii.com.

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