A Double-Digit Jump? For That?

Isis Pharmaceuticals' (Nasdaq: ISIS) investors are downright giddy today, sending the stock up 11% at one point after the company announced a drug-discovery partnership with GlaxoSmithKline (NYSE: GSK).

I'm sorry, but I just don't see what all the excitement is about. The headlines sound good -- a $1.5 billion deal! -- but read the fine print, and you realize it'll take a long while and a lot of luck for Isis to ever receive that kind of cash.

The deal gives Isis $35 million up front. Then Glaxo has an option to pick up compounds in six different therapeutic areas, after Isis gets them through proof-of-concept phase 2 trials. Glaxo will pay about $20 million per drug in milestone payments to get them through phase 2, and then take them the rest of the way through the clinical-trial and regulatory process. The bulk of the deal is tied to clinical and sales milestones well down the line.

If Isis was some struggling drug developer, I could understand the euphoria. But the company had $578 million in the bank at the end of the year; the up-front payment is hardly going to change that.

Glaxo's interest does help validate Isis' antisense technology, but the company already has one approved discovery, a phase 3 drug partnered with Genzyme (Nasdaq: GENZ), and plenty of earlier-stage deals with major companies including Bristol-Myers Squibb (NYSE: BMY), Eli Lilly (NYSE: LLY), and even one with generic-drug maker Teva Pharmaceutical (Nasdaq: TEVA). How much more validation do you need?

Isis could likely get a much better deal for the compounds if it developed the drugs itself, and then auctioned them off to the highest bidder once they passed the proof of concept. The deal with Genzyme, for instance, brought in $325 million up front -- including an equity investment -- and more than $1.5 billion in potential milestone payments for just one drug. Sure, Isis invested more time and risk in that drug than the ones in the Glaxo deal, but it's being rewarded for that risk.

Management did mention that Glaxo was bringing some therapeutic targets to the deal that Isis hasn't done work on, but a look at Isis' pipeline shows that there's no shortage of potential targets for its antisense technology.

At some point, drug companies have to switch from low-risk, keep-the-lights-on deals to ones that swing for the fences. For Isis, that time should be now.

Editor's note: A previous version of this article misstated the amount of cash Isis had on hand. The Fool regrets the error.

Isis didn't exactly upgrade its potential. However, my colleague Anand Chokkavelu says now's the time to upgrade your stocks.