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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-15190
OSI PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 13-3159796
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
106 CHARLES LINDBERGH BLVD., UNIONDALE, N.Y. 11553
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (516) 222-0023
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No []
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. []
As of November 30, 1999, the aggregate market value of the registrant's
voting stock held by non-affiliates was $88,829,908. For purposes of this
calculation, shares of common stock held by directors, officers and stockholders
whose ownership exceeds five percent of the common stock outstanding at November
30, 1999 were excluded. Exclusion of shares held by any person should not be
construed to indicate that the person possesses the power, direct or indirect,
to direct or cause the direction of the management or policies of the
registrant, or that the person is controlled by or under common control with the
registrant.
As of November 30, 1999, there were 21,557,110 shares of the registrant's
common stock, par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2000 annual
meeting of stockholders are incorporated by reference into Part III of this Form
10-K.
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PART I
ITEM 1. BUSINESS
OSI Pharmaceuticals, Inc. (OSI or the Company) is a Pharmaceutical Research
and Development Organization (PRDO) that utilizes a comprehensive drug discovery
and development capability to rapidly and cost effectively discover and develop
novel, small-molecule drug candidates for commercialization by major
pharmaceutical companies.
OSI conducts its drug discovery and product development programs
independently and in collaboration with major pharmaceutical companies. The
Company derives revenues from funded collaborative alliances, milestone and
success payments and, upon the successful development and marketing of
out-licensed drug candidates, royalties on sales of these products. Using this
business model, OSI is able to leverage the research, development and financial
resources of its corporate partners to help build and sustain a large pipeline
of product opportunities. OSI's major corporate partners include Pfizer Inc.,
Tanabe Seiyaku Co. Ltd., Sankyo Company, Ltd., Solvay Pharmaceuticals, B.V.,
Novartis Pharma AG, and Hoechst Marion Roussel, Inc. Independently and in
collaboration with its various partners, OSI is involved in the discovery and
development of drugs for 45 targets. The Company has drug candidates in clinical
trials and pre-clinical development. These drug discovery efforts are primarily
focused in the areas of cancer, diabetes, cosmeceuticals, and G-protein coupled
receptor, or GPCR, directed drug discovery. OSI believes its research and
development capabilities together with its ongoing drug discovery and
development programs have positioned it as a leader in the field of drug
discovery and development. OSI was incorporated in 1983. Its NASDAQ stock symbol
is OSIP.
BACKGROUND
Drug discovery is an expensive and high risk process involving significant
attrition. Only about 1-in-16 research and development, or R&D, programs
actually results in a successful drug, and the process from concept to market
typically takes over a decade. On average, it costs more than $400 million in
research and development (including failures) to bring a drug from initial lead
identification to market.
During the 1990s, the rising cost of health care and changes in health care
management policies have fundamentally altered the pharmaceutical landscape,
putting increasing competitive pressure on the pharmaceutical industry. As
organizations strive to enhance market share and improve profit margins, major
pharmaceutical company mergers have occurred. These mergers are expected to
continue. These organizations face the challenge of consolidating and
efficiently managing large research and development organizations while striving
to meet aggressive new product requirements. In addition, many of the major
pharmaceutical companies are also facing the expiration of patent protection on
significant drug products in the next few years.
These new pressures have led to a growing emphasis on product pipeline
enhancement through the cost-effective discovery and development of novel
classes of pharmaceuticals that will meet large, unmet medical needs, can more
rapidly be brought to the marketplace, and have the potential to command premium
prices. This, in turn, has created an increased need for pharmaceutical
companies to look outside their organizations for new product candidates.
Advances in molecular biology, automation, and computing and the understanding
of the human genome have revolutionized the ways in which drug discovery is
conducted, creating the potential for accelerated discovery and development of
new generations of drugs. OSI believes that the deployment and integration of
these technologies in smaller and more nimble pharmaceutical research and
development organizations offers a rapid and cost effective vehicle for the
discovery and early development of high quality drug candidates to meet the
growing needs of the pharmaceutical industry.
Pharmaceutical companies have typically formed collaborations with
biotechnology companies in order to access new types of technologies in the
pursuit of novel drug development. OSI believes that the competitive pressures
described above have caused pharmaceutical companies to greatly reduce the
royalty rates they are willing to pay to biotechnology companies for
technological contributions to their own product development efforts. On the
other hand, OSI believes that these pressures are making pharmaceutical
companies more
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willing to pay premiums for high quality drug candidate products that have
already undergone optimization and have proven activity in development. OSI
believes that, as a prototypical PRDO, it is well-positioned to compete for this
emerging opportunity.
STRATEGY
OSI's mission is the discovery and early development of novel
pharmaceutical products that improve the human condition. Its strategy is to
build and sustain a pipeline of pharmaceutical product opportunities for
commercialization by the pharmaceutical industry thereby diversifying risk while
maintaining significant potential upside and fully capitalizing on the Company's
strengths in drug discovery. OSI's plan for accomplishing this goal consists of
the following elements:
Exploitation of the Full Range of Discovery and Early Development
Capabilities in Selected Disease Areas. OSI has built a fully integrated drug
discovery platform. This platform includes every major aspect of drug discovery
and development, from the identification of a validated drug discovery target to
the emergence of a clinically proven drug candidate. The integrated management
of these technologies is designed to accelerate the process of identifying and
optimizing high quality, small molecule drug candidates for clinical development
and then to progress these candidates through Phase II clinical trials.
In order to more independently progress product candidates to advanced
pre-clinical and clinical development, OSI intends to focus its own R&D
investments on a smaller number of targets in fewer disease areas to provide the
critical mass and expertise to effectively move these programs forward. OSI is
focused primarily on the areas of cancer, diabetes, cosmeceuticals and
GPCR-directed drug discovery. It believes that these areas represent large
market opportunities with significant, unmet medical needs and fully leverage
OSI's strengths and R&D assets. To further focus on its core drug discovery and
development programs, OSI recently completed the sale of its diagnostics
business in November 1999, including the assets of its wholly-owned subsidiary,
Oncogene Science Diagnostics, Inc., or OSDI, to Bayer Corporation. OSI's
decision to sell its diagnostics business was based on its belief that the
development of diagnostic products would require significant continued
investment that could otherwise be directed to the development of therapeutic
products.
Commercialization Strategy. In order for OSI to sustain its critical mass
and manage its cash resources through to the time when significant royalty and
milestone revenues are able to drive the growth and profitability of the
business, OSI has developed a three-pronged strategy. This strategy will provide
for a sustained revenue stream and allow OSI to retain sufficient ownership of
selected drug discovery and development assets to ultimately effect a
substantial return.
- Pharmaceutical partner-funded discovery programs. These fully-funded,
royalty bearing discovery alliances with major pharmaceutical partners
significantly support OSI's strategy. These collaborations provide risk
diversification and revenue streams that allow OSI to both sustain
critical mass and also anchor its discovery and development efforts in
the focused disease areas. In addition to funded research at OSI, the
collaborators provide significant R&D resources to support the
development of products in these programs and will, generally, fund and
manage clinical development, manufacturing and launch of successfully
developed drug candidates.
- Out-Licensing of Early Development Candidates. OSI intends to create a
business of selling drug candidate compounds as opposed to selling its
R&D capability. Over the next several years, however, OSI believes that
it is likely to create more opportunities at the IND-track stage than it
can progress into the clinical stage. OSI may license early drug
candidates that it chooses not to develop independently to third parties
(out-licensing), by exploring cash/milestone rich deal structures with
the intent of providing near-term revenue growth.
- Further Clinical Development of Selected Candidates. OSI intends to
develop selected candidates through clinical development. By focusing on
selected candidates, OSI expects to maximize the commercial value of the
resulting products. If successful, OSI intends to partner these products
with pharmaceutical companies prior to marketing in order to maximize
their full commercial potential.
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OSI is, and will remain, dependent on its collaborative partners and third
parties for the manufacture, marketing and sales of all pharmaceutical products.
RESEARCH AND DEVELOPMENT PROGRAMS
OSI utilizes its broad-based drug discovery capability in multiple drug
discovery programs encompassing a variety of major human diseases. OSI's major
programs in R&D are as follows:
Cancer
During the 1980s, cancer researchers developed a sophisticated
understanding of the role played by certain genes in the transformation of
normal cells into a cancerous state, and thus were able to identify novel
targets for drug intervention. As the decade of the 1990s comes to a close, this
new knowledge of the molecular basis of cancer has started to move from the
laboratory into the clinical arena, promising new hope for patients with many
types of cancers, including breast, colon, head and neck, and ovarian. In the
next decade, novel anticancer therapies are expected to be commercialized,
creating a new paradigm for cancer treatment, with the potential that cancer can
either be cured or managed safely over the long term. OSI believes that it is
positioned at the forefront of this unfolding revolution in the treatment of
cancer.
With Pfizer, OSI has focused since 1986 on the discovery and development of
novel classes of orally active, molecularly targeted, small molecule anticancer
drugs based on oncogenes and tumor suppressor genes and the fundamental
mechanisms underlying tumor growth. The first of these programs has yielded a
clinical candidate CP-358,774 which is a potent, selective and orally active
inhibitor of the epidermal growth factor receptor, or EGFR, a key oncogene in a
variety of cancers including ovarian, pancreatic, non-small cell lung, breast
and head and neck. Following a successful Phase I program which demonstrated
that the drug could be safely administered to patients over extended (6 month)
periods at doses that achieved the blood concentration of drug required for
anti-tumor activity in animal models, the Company entered large-scale,
multi-center Phase II clinical trials in the United States in the spring of
1999. The program includes trials in ovarian, head and neck and non-small cell
lung cancer. There are over a million new cases of solid tumors in the U.S.
every year, approximately 30% of which have a aberrant EGFR gene. The program is
designed to assess CP-358,774 both as a single agent and in combination with
existing chemotherapy regimens. CP-358,774 is representative of an emerging new
class of anti-cancer drugs that target the underlying molecular changes
involving oncogenes and tumor suppressor genes that play critical roles in the
conversion of normal cells into a cancerous state.
The OSI/Pfizer alliance has identified two other compounds, CP-609,754 and
CP-663,427, as orally active inhibitors of an enzyme termed farnesyl
transferase. CP-609,754 has advanced to Phase I clinical trials in the United
States and CP-663-427 is in advanced pre-clinical development. These compounds
may target the ras oncogene, an important target in many tumors including colon
and bladder. In addition, another compound, CP-547,632, is in advanced
pre-clinical development and is being developed as an orally available, potent
and selective inhibitor of a key protein tyrosine kinase receptor involved in
angiogenesis. Angiogenesis is the process of blood vessel growth and is induced
by solid tumors which require nutrients that will enable growth. OSI believes
that the ability to safely and effectively inhibit this process represents one
of the most exciting areas of cancer drug development. An additional 12 targets
are in active research and development in the OSI/Pfizer collaboration. The
types of novel anticancer drugs being developed in the OSI/Pfizer collaboration
are expected to be safer and more effective than standard chemotherapeutic
agents. OSI has also begun lead seeking activities in an OSI-funded cancer
research program.
Diabetes
Diabetes mellitus is a chronic, progressively debilitating disease
affecting more than 143 million people worldwide. Approximately 90-95% of the
people affected have Type II diabetes which usually develops in adults over age
40 and is most common among adults over age 55. The prevalence of diabetes is
likely to continue to grow as this age group continues to increase in size.
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Effective October 1, 1999, OSI entered into a fully-funded collaboration,
including milestone and success payment and royalties, with Tanabe to discover
and develop small molecule drugs for the treatment of Type II diabetes. OSI also
received an upfront fee upon initiation of this program. The Company is also
independently researching selected targets in this area. This collaboration is
built upon the comprehensive drug discovery alliance between OSI and Vanderbilt
University Diabetes Center, with which OSI has been collaborating since April,
1998. The targets of this collaboration will focus on the normalization of the
elevated plasma glucose levels seen in Type II diabetes.
Cosmeceuticals
Every year, consumers in the United States, Europe and Asia spend billions
of dollars on cosmetic products and services that promise to provide a youthful,
healthy or culturally desirable appearance. Some of these products are marketed
on the basis of ostensible pharmaceutical effects, such as the reduction of skin
wrinkles and pigmentation or the promotion of hair growth. OSI believes that
most of these products are not optimally effective and may have undesirable side
effects.
In 1996, OSI entered into a joint venture with Pfizer (the majority owner)
and New York University to form Anaderm Research Corporation, a company
dedicated to the application of modern tools for the discovery and development
of safe, effective, pharmacologically active agents for certain cosmetic and
quality-of-life indications, such as skin pigmentation, hair loss and skin
wrinkling. Pfizer recently financed an extensive renewal and expansion of the
Anaderm venture effective April, 1999. Under this new agreement, Anaderm will
provide up to $50 million in R&D funding to OSI over the next four to six years.
OSI will remain the sole drug discovery arm of Anaderm during this period
providing discovery biology, medicinal chemistry and pharmaceutical development
resources.
GPCR -- Directed Drug Discovery
In August, 1999, OSI purchased certain assets of Cadus Pharmaceuticals
Corporation. In this acquisition, OSI acquired Cadus' drug discovery programs
focused on G-protein coupled receptors or GPCRs. These receptors are one of the
most important families of targets for drug discovery in the pharmaceutical
industry. Approximately, forty percent of the currently marketed pharmaceutical
products target GPCRs. The acquired programs include Cadus' discovery program in
adenosine receptors, an important family of GPCR's. These programs will form the
core of OSI-owned and funded candidate development programs in the coming year.
The improved understanding of the physiology, pharmacology and molecular
biology of adenosine and adenosine receptors in recent years has provided a
solid foundation for active research and development in this field. Currently,
four adenosine receptor subtypes, A(1), A(2A), A(2B) and A(3), have been
characterized and R&D efforts have led to high quality proprietary lead
compounds for each.
Several adenosine receptor compounds are under development by OSI.
Promising adenosine A(1) and adenosine A(2B) receptor targeted compounds will
undergo evaluation as candidates for asthma, with the dual goals of identifying
an IND-track candidate against both targets and simultaneously assessing and
executing the best commercialization strategy. The A(1) compound is targeted for
the treatment of the bronchoconstriction associated with the acute phase of an
asthma attack while the A(2B) compound is directed toward blocking the
inflammatory components produced by mast cells and associated with the longer
term damage caused by the disease. OSI also has potent and selective A(2A)
targeted compounds that have potential for development as both anti-angiogenesis
agents and for the treatment of Parkinson's disease. Additionally, OSI has a
selective adenosine A(3) targeted compound that is undergoing extensive
evaluation in animal models for glaucoma. The targets of Parkinson's disease and
glaucoma are examples of programs outside OSI's disease area focus and may be
out-licensed or earlier partnered in the development process.
In addition, an A(1) targeted compound, CDS-096370, has potential for use
in the treatment of congestive heart failure and renal failure. This candidate
has been licensed to Solvay for advanced pre-clinical and clinical development.
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Cholesterol Lowering
As part of OSI's long-term alliance with Hoechst Marion Roussel, or HMRI,
in gene transcription drug discovery, the parties have focused on cholesterol
lowering. The cholesterol lowering market is dominated by a class of drugs
including Lipitor and Zocor which target a key enzyme involved in the body's
metabolism of fats and cholesterol (HMG-CoA reductose inhibitors), which sell,
in total, over $12 billion a year worldwide. Three to five percent of patients
on these drugs have an elevation of certain liver enzymes which indicates some
low level of liver damage as a side effect. The OSI/HMRI program was designed to
target a new class of compounds that would avoid these complications. A compound
is in advanced pre-clinical development that operates through a novel mechanism.
This compound enhances the expression of the Low Density Lipoprotein Receptor
(LDLR), the principal mechanism by which liver cells bind LDL-cholesterol
(so-called bad cholesterol) for clearance by the body. In pre-clinical models,
this candidate is very efficacious in lowering LDL-cholesterol and are
apparently well tolerated in pre-clinical safety studies.
Psoriasis
During the last year, OSI executed an in-license agreement with Pfizer that
enabled OSI to take advantage of the extensive joint technology for
protein-tyrosine kinases that exist in the OSI/Pfizer cancer alliance and to
apply this to the treatment of mild-to-moderate psoriasis. Mild-to-moderate
psoriasis is an autoimmune disease affecting 3-6 million Americans. The disease
manifests itself in the form of scaly, thickened and reddened skin lesions.
These lesions arise as a result of hyper-proliferation of the skin and local
angiogenesis. OSI licensed a family of compounds from Pfizer that are
co-inhibitors of both EGFR, which is a key regulator of skin cell growth, and
vascular endothelial growth factor receptor, or VEGFR, which is the key mediator
of angiogenesis. OSI is currently attempting to identify a candidate for
development of a topically applied formulation for this indication. As part of
the license agreement, Pfizer has an option to recover full development and
marketing rights for this program past Phase II trials. If Pfizer executes its
option, it will reimburse OSI's clinical development costs, and pay milestone
and royalty payments on successful product development and marketing.
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The progress of these and other drug candidates as of December 1, 1999 is
summarized in the following table:
TABLE I. CURRENT PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS
This table is qualified in its entirety by reference to the more detailed
descriptions elsewhere in this report.
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DISEASE FIELD DESCRIPTION
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CANCER OSI/PFIZER FUNDED COLLABORATION WITH ROYALTIES: CLINICAL
CANDIDATES/TARGETS:
- CP 358,774 -- EGFR -- Phase II
- CP 609,754 -- Farnesylation -- Phase I
ADVANCED PRE-CLINICAL CANDIDATES/TARGETS:
- CP 663,427 -- Farnesylation -- IND Track
- CP 547,632 -- Angiogenesis -- IND Track
PRE-CLINICAL:
- 4 targets in Lead Optimization
- 8 targets in Lead Seeking
OSI OWNED:
- 1 target in Lead Seeking
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DIABETES & OBESITY OSI/TANABE FUNDED COLLABORATION WITH MILESTONES & ROYALTIES:
- 4 targets in Lead Seeking
OSI OWNED:
- 1 target in Lead Seeking
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COSMECEUTICALS OSI/PFIZER/ANADERM FUNDED COLLABORATION WITH ROYALTIES:
- 1 target in IND track
- 2 targets in Lead Optimization
- 3 targets in Lead Seeking
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GPCR DIRECTED OSI OWNED:
(ADENOSINE RECEPTORS): - 1 target in IND track
- Heart Disease - 3 targets in Lead Optimization
- Asthma/Inflammation
- Glaucoma OSI/SOLVAY FUNDED COLLABORATION WITH MILESTONES & ROYALTIES:
- Parkinson's Disease - 1 target in IND track (licensed to Solvay with milestones
& royalties)
- multiple targets in Lead Seeking
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HYPERCHOLESTEROLEMIA/ OSI/HMRI FUNDED COLLABORATION WITH ROYALTIES:
TRANSCRIPTION - 1 candidate on IND track
- 2 targets in Lead Optimization
- 4 targets in Lead Seeking
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PSORIASIS OSI OWNED WITH PFIZER OPTION:
- 1 target in Lead Optimization
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WOUND HEALING (TGF SS-3): OSI OWNED:
- Anti-Scarring CLINICAL:
- Bone & Cartilage Repair - 1 target at the end of Phase I
OSI/NOVARTIS FUNDED COLLABORATION WITH MILESTONES &
ROYALTIES:
- 1 candidate on IND track
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INFLUENZA OSI/SANKYO FUNDED COLLABORATION WITH MILESTONES & ROYALTIES:
- 2 targets in Lead Optimization
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OSI'S DRUG DISCOVERY PLATFORM
OSI's drug discovery platform constitutes an integrated set of technologies
and capabilities covering every aspect of pre-clinical drug development. The
drug discovery approach pursued by OSI is focused on the discovery and
development of small molecule pharmaceutical products which, typically, would be
taken orally by a patient as a pill, capsule or suspension. The process begins
with a lead seeking phase. In this phase, which can take up to two years, a
combination of modern molecular biology, robotics and computational science is
used to build "assay" or test systems in which large libraries of diverse small
molecules and natural products are tested to see if any possess activity against
a drug target. Drug targets are usually genes or gene products that are shown to
be relevant to various disease states. After this initial testing, active
compounds are tested in a variety of secondary assays designed to determine
their potency and selectivity and to obtain early information on their toxicity
and mechanism of action. Active compounds surviving this selection process are
considered leads and progressed into lead optimization. During lead
optimization, which can also take up to two years, medicinal chemists synthesize
new molecules and combinatorial libraries which are structurally related to the
lead compound. These are tested extensively in order to produce a drug candidate
which has greatly improved drug like qualities, is active and well tolerated in
animal models and can be patented as a novel pharmaceutical. Having identified a
suitable drug candidate the molecule is advanced toward clinical trials, the
so-called "IND-track" phase, in which toxicological, scale-up synthesis and
clinical trial design issues are addressed. This phase usually takes one to one
and one-half years. Upon entering clinical trials (usually with an
Investigational New Drug (IND) approval from the Food and Drug Administration,
or FDA) a drug is first assessed for its safety, usually in healthy volunteers
(except for life-threatening diseases such as cancer where patient volunteers
are used). After these Phase I trials, drugs are tested in efficacy studies
(Phase II) to demonstrate activity in humans prior to extensive Phase III trials
designed to collect the data necessary to support a New Drug Application (NDA)
filing with the FDA. The entire process typically takes over a decade and is
subject to significant risk and attrition. Only approximately 1 in 16 drug
discovery projects results in a successful product and approximately seven
million compounds are tested for every successful product. The Company, has,
therefore, adopted a research strategy that manages a portfolio of product
opportunities and has integrated a platform of technologies designed to rapidly
and cost-effectively enhance the overall process.
OSI's platform includes a variety of cell-free and live-cell assays,
molecular biology capabilities, high throughput robotic screening, diverse
compound libraries and combinatorial, medicinal and natural products chemistry
capabilities, together with significant pre-clinical expertise in pharmaceutics,
and pharmacokinetics. OSI's technologies are designed to accelerate the process
of identifying and optimizing high quality, small molecule drug candidates for
clinical development. OSI pioneered the development of (i) genetically
engineered live-cell assays targeting gene transcription and (ii) robotic high
throughput screening. OSI has, through acquisition and internal technology
development, added extensively to these core capabilities including, via its
Cadus asset acquisition, significant expertise in GPCR discovery and information
technology tools to support research and development. The addition of large
diverse libraries of small molecules and a broadened expertise in assay biology
and medicinal, combinatorial and pharmaceutical chemistry capabilities have
created a comprehensive drug discovery platform enabling OSI to progress leads
all the way through the discovery and pre-clinical development stages. OSI's
drug discovery platform is widely applicable to the identification and
optimization of small molecule drug candidates to treat many different diseases.
Utilizing this platform, OSI has been able to identify and optimize lead
compounds that are potent and selective, possess minimal or no cellular
toxicity, have activity in live-cells and animal models, and have progressed to
clinical trials in humans.
Assay Biology
OSI specializes in the development of a variety of drug screens that
capitalize on recent advances in understanding the human genome and its
correlation to disease. Various assay biology techniques are used to target
selected and validated gene products for drug discovery. The Company pioneered
the use of genetically engineered human cells to identify compounds that affect
transcription of target genes. These assay systems, which employ reporter gene
technology, can be utilized to discover drugs that affect the expression of
proteins
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encoded by the target genes. There are multiple sites within a cell where a drug
can act to exert a specific effect. This broadly enabling technology allows OSI
to discover compounds that exert their effects on signal transduction proteins,
transcription factors and other sites. This technology has resulted in the
issuance of five patents in its gene transcription patent estate. These patents
cover methods of modulating transcription in-vivo, the use of reporter genes in
many cell-based transcription assays used for drug discovery and the modulation
of genes associated with cardiovascular disease. OSI anticipates that future
issuances will further broaden its patent estate in this area. This technology
has been widely adopted in the biotechnology and pharmaceutical industry, and
OSI believes that the claims covered by this patent estate can be licensed for
certain monetary and technology considerations. Over the last several years OSI
broadened its assay expertise extensively. Currently, OSI is able to conduct
screens on a wide variety of different assay platforms, including enzyme assays,
immunoassays, scintillation proximity assays, protein-protein interaction assays
and receptor-ligand screens. OSI believes that this breadth of expertise enables
it to select the most appropriate assay with which to pursue drug discovery
against a novel biological target. OSI has 74 scientists involved in assay
biology as support for both drug discovery and development programs.
High Throughput Robotic Screening
OSI has been a pioneer and remains a leader in high throughput screening.
The Company has developed software and automation that enables it to manage
large compound libraries and prepare test substances for screening. OSI has
developed proprietary hardware and software systems to automate the entire drug
screening process, from the addition of the test substances to assay systems to
the analysis of the data generated from the tests. The technology has been
developed to accommodate a high degree of flexibility allowing the Company to
conduct a wide variety of assay formats in screening. In its proprietary robotic
screening facility, OSI can analyze up to 300,000 different test samples each
week, depending on the complexity of the assays. OSI's robotic systems are not
limited to any particular assay format and can be rapidly reconfigured to run a
wide variety of assays.
Diverse Compound Libraries
Access to large libraries of diverse, small molecule compounds is a key
asset in OSI's drug discovery efforts. Leads discovered from these libraries
become the proprietary starting materials from which drugs are optimized. OSI
manages over 1.5 million compounds in its compound libraries facility from its
own and several of its partners' compound libraries for high throughput
screening. OSI's proprietary libraries include its focused libraries of small
molecule compounds derived from its high-speed combinatorial analoging,
libraries of diverse, high quality small-molecule compounds that it has acquired
and its natural products library derived from its unique collection of over
70,000 fungal organisms. As part of the acquisition of assets from Cadus in
July, 1999, OSI obtained a library of 150,000 diverse, high quality small
molecule compounds directed toward GPCR discovery. In March, 1997, OSI acquired
from the Dow Chemical an exclusive worldwide license to a library of 140,000
compounds for the purposes of discovery and development of small molecular
weight pharmaceuticals and cosmeceuticals. In addition, certain collaborative
partners have made their compound libraries available for additional research
and development by OSI outside of their existing collaborative programs. For any
compound from OSI's collaborative partners' libraries that emerges as a lead in
a proprietary program, the partner typically will have the right of first
refusal to develop the compound or terminate its further development or to allow
OSI to commercialize the compound independently or with a third party in
exchange for royalty payments from OSI on product sales. OSI also continues to
expand its libraries through OSI high speed combinatorial analoging activities.
OSI employs approximately 20 scientists and research associates in its combined
screening and library management operations.
Chemistry and Lead Optimization
The pharmaceutical properties of a lead compound must be optimized before
clinical development of that compound begins. In 1996 OSI acquired Aston
Molecules Ltd., a private British company with expertise in medicinal and
combinatorial chemistry and pharmaceutical development, which are critical
elements in the lead optimization and development process. With subsequent
investments in combinatorial chemistry, an
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expansion of the Aston facility and the addition of the Cadus chemistry team in
Tarrytown, New York, this group has grown to a high quality medicinal chemistry
team of over 35 medicinal, combinatorial, computational and natural product
chemists. The group has integrated various computational techniques for
molecular modeling and diversity analysis into its lead optimization and
development activities to further enhance the speed and quality of drug
discovery at OSI.
Pre-Clinical Development
The Aston group has expertise in pharmacokinetics and pharmaceutical
chemistry and the management and generation of good laboratory practices, or
GLP, accredited data required for regulatory dossier submissions to agencies
such as the FDA. Thus, OSI is able to support the development of a drug
candidate for clinical testing. OSI has invested significant resources in
expanding this capability and in technological enhancements in this area. In
addition, OSI is implementing approaches that allow it to generate information
on the metabolic liability of lead compounds together with their physical and
chemical properties. OSI is in the process of establishing this integrated
platform of automated and semi-automated technologies in an effort to support
decision making regarding the quality of lead candidates earlier in the drug
discovery process.
Through the Cadus asset acquisition and quality hires, OSI has added to its
depth in expanding its pre-clinical development capabilities. These include the
characterization of lead compounds with respect to pharmacokinetics, potency,
efficiency and selectivity. This combined group manages the necessary studies,
including toxicology, that ultimately lead to IND applications and clinical
trials.
OSI believes that its drug discovery and lead optimization capabilities
will continue to generate high quality pre-clinical candidates. Additionally,
OSI will seek quality pre-clinical candidates to license-in for further
development. OSI has over 24 pharmaceutical chemists and pharmacologists
employed in this area.
MAJOR COLLABORATIVE PROGRAMS
OSI pursues collaborations with pharmaceutical companies to combine its
drug discovery and development capabilities with the collaborators' development
and financial resources. The collaborations provide for OSI's partners to fund
its collaborative research and development programs which are jointly managed
and pay for clinical development, manufacturing, marketing and launch costs for
any product developed. OSI receives royalties, generally in the five to eight
percent range, on sales of any resulting products. Certain collaborative
programs involve milestone payments by the partners. The collaborative partners
generally retain manufacturing and marketing rights worldwide. Generally, each
collaborative research agreement prohibits OSI from pursuing with any third
party drug discovery research relating to the drug targets being covered by
research under the collaboration, but do not block research activity in the
fields.
Pfizer Inc.
In April, 1986, Pfizer and OSI entered into a collaborative research
agreement and several other related agreements. During the first five years of
the collaboration, OSI and Pfizer focused principally on understanding the
molecular biology of oncogenes. In 1991, Pfizer and OSI renewed the
collaboration for a second five-year term and expanded the resources and scope
of the collaboration to focus on the discovery and development of cancer
therapeutic products based on mechanisms-of-action that target oncogenes and
anti-oncogenes and fundamental mechanisms underlying tumor growth. Oncogenes
play a key role in the conversion of normal cells to a cancerous state and can
cause cancer when they mutate or over express. Anti-oncogenes, or tumor
suppressor genes, encode proteins that generally function to block the
proliferative growth of particular cell types. A loss of function of certain
tumor suppressor genes can result in uncontrolled cell growth. Tumor induced
angiogenesis is a process whereby solid tumors develop the blood supply
necessary to sustain tumor growth. Effective April 1, 1996, OSI and Pfizer
renewed their collaboration for a new five-year term by entering into new
collaborative research and license agreements. All patent rights and patentable
inventions derived from the research under this collaboration are owned jointly
by OSI and Pfizer. OSI has granted Pfizer an exclusive, worldwide license to
make, use, and sell the therapeutic products resulting from
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this collaboration in exchange for royalty payments. This license terminates on
the date of the last to expire of OSI's relevant patent rights.
Pfizer is responsible for the clinical development, regulatory approval,
manufacturing and marketing of any products derived from the collaborative
research program. Generally, OSI and Pfizer are prohibited during the term of
the contract from independently pursuing or sponsoring research aimed at the
compounds or products against specific targets in the program. The collaborative
research agreement will expire on April 1, 2001. It may be terminated earlier by
either party only upon the occurrence of certain defaults by the other party.
Any termination of the collaboration resulting from a Pfizer default will cause
a termination of Pfizer's license rights. Pfizer will retain its license rights
if it terminates the agreement in response to a default by OSI. Under this
collaborative research agreement, Pfizer has committed to provide research
funding to OSI in an aggregate amount of approximately $18.8 million. Pursuant
to a schedule set forth in the collaborative research agreement, Pfizer will
make annual research funding payments to OSI, which will gradually increase from
a maximum of approximately $3.5 million in the first year of the five-year term
to approximately $4 million in the fifth year.
Effective as of April 1, 1999, OSI entered into a Development Agreement
with Pfizer for the development of certain compounds derived from the
collaborative research agreement described above for the treatment of psoriasis.
Under the development agreement, OSI will conduct a development program which
includes pre-clinical and clinical research and development through and
including Phase II clinical trials for compounds to assess their safety and
efficacy to be developed as therapeutic agents for the treatment of psoriasis
and other related dermal pathologies. Pursuant to the terms of the development
agreement, Pfizer has granted to OSI an exclusive, with the exception of Pfizer,
license to make and use the compounds for all research and development purposes
in the development program other than the sale or manufacture for sale of
products or processes. At the end of the development program, Pfizer must notify
OSI of its intention to continue development and commercialization of a compound
within three months following receipt of the data package from the clinical
studies. If Pfizer notifies OSI of such intention, it will have an exclusive,
world-wide license, with the right to grant sublicenses, to make, use, sell,
offer for sale and import products developed in the course of the development
program subject to the reimbursement of clinical development costs. If Pfizer
fails to notify OSI of such intention, OSI will receive an exclusive,
world-wide, royalty-bearing license, including the right to grant sublicenses,
to manufacture, use, sell, offer for sale and import products developed in the
course of the development program. OSI, however, has the right to refuse to
accept this license. The party receiving the license must pay milestone and
royalty payments as consideration therefor. The duration of the licenses is
coextensive with the lives of patents related to the licensed compounds. Each of
the parties has rights and obligations to prosecute and maintain patent rights
related to specified areas of the research under the development agreement. The
development agreement is subject to early termination in the event of certain
defaults by the parties.
From 1986 to September 30, 1999, Pfizer paid an aggregate amount of $44.1
million to OSI in research funding. In 1986, Pfizer purchased 587,500 shares of
OSI's common stock, which constitutes approximately 2.7% of OSI's outstanding
common stock, for an aggregate purchase price of $3,525,000.
Anaderm Research Corporation
On April 23, 1996, in connection with the formation of Anaderm, OSI entered
into a Stockholders' Agreement with Pfizer, Anaderm, NYU and certain NYU faculty
members, and a Collaborative Research Agreement with Pfizer and Anaderm for the
discovery and development of novel compounds to treat conditions such as
baldness, wrinkles and pigmentation disorders. Anaderm issued common stock to
Pfizer and OSI and options to purchase common stock to NYU and the faculty
members. NYU and the faculty members exercised their options fully. In exchange
for its 14% of the outstanding shares of Anaderm's common stock, OSI provided
formatting for high throughput screens and conducted compound screening for 18
months at its own expense under the research agreement.
The term of the research agreement was three years. During the initial
phase of the agreement (the first 18 months), OSI was required to provide at its
own cost formatting for high throughput screens and perform
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screening of its own compounds and those compounds provided by Pfizer. Upon the
termination of the initial phase, the Board of Directors of Anaderm made a
determination that the initial phase was successfully completed. With Pfizer's
approval, the funded phase commenced as of October 1, 1997. During this phase,
Anaderm made payments to OSI equal to its research costs, including overhead,
plus 10%. Anaderm or Pfizer will pay royalties to OSI on the sales of products
resulting from this collaboration.
In December, 1997, OSI and Pfizer entered into an agreement for a second
round of equity financing for Anaderm. The agreement called for an equity
contribution of $14 million by OSI and Pfizer, of which OSI was to contribute $2
million in drug discovery resources, including assay biology, high throughput
screening, lead optimization and chemistry, through 1999. The amount to be
contributed by Pfizer included amounts which were to be used to support OSI in
its ongoing drug discovery activities under this program.
In April, 1999, OSI, Pfizer and Anaderm amended the research agreement to
expand the collaborative program. The new research agreement is for a term of
three years. Pfizer may terminate the new research agreement, however, after the
first or second year of the term in its sole discretion after consultation with
Anaderm and OSI to determine whether satisfactory progress has been made in the
research program during the previous year. The new research agreement provides
for funding by Pfizer of up to $35 million in total payments to Anaderm to fund
OSI's research and development activities during the three-year term and up to
$15 million in phase-down funding following expiration of the three-year term or
earlier termination by Pfizer. In the expanded program, OSI will continue to
provide a full range of capabilities including assay biology, high throughput
screening, compound libraries, combinatorial, medicinal, and natural product
chemistry, as well as pharmaceutics, pharmacokinetics and molecular biology. OSI
anticipates a significant increase in its staffing of the program to conduct its
drug discovery efforts during the term of the new research agreement. Anaderm or
Pfizer will pay royalties to OSI on the sales of products resulting from the
collaboration.
In April, 1999, the parties also amended the stockholders' agreement. The
amendment provided for the addition of a right on the part of each of OSI, NYU
and each of the faculty members, exercisable at any time prior to December 31,
1999, to require Anaderm or Pfizer to purchase all, but not less than all, of
the shares of common stock of Anaderm held by each such stockholder for a fixed
price. The stockholders continue to have the right, exercisable at any time
subsequent to April 23, 2000, to require Anaderm or Pfizer to purchase all, but
not less than all, of the shares of common stock of Anaderm held by each such
stockholder at a defined value. In addition, Anaderm or Pfizer had the right,
exercisable at any time subsequent to April 23, 2002, to require OSI, NYU or any
faculty member to sell to Anaderm all, but not less than all, of the shares of
common stock of Anaderm held by such stockholder at a defined value of such
shares. In the prior stockholders' agreement, this call right was exercisable by
Anaderm only with respect to the shares owned by NYU and the faculty members. On
September 23, 1999, by letter to Pfizer, OSI exercised its right to require
Anaderm or Pfizer to purchase all of the shares of common stock of Anaderm held
by it. On November 10, 1999, Pfizer purchased such shares from OSI for an agreed
upon purchase price and OSI's obligations under the stockholder agreement
terminated.
Tanabe Seiyaku Co., Ltd.
Effective as of October 1, 1999, OSI entered into a Collaborative Research
and License Agreement with Tanabe. The collaboration is focused on discovering
and developing novel pharmaceutical products to treat diabetes.
Under the agreement, OSI is responsible for identification of targets
(subject to Tanabe's approval), assay development, screening of compounds from
OSI's library and Tanabe's library against identified targets, identification of
seed compounds meeting certain criteria specified in the agreement, optimization
of such seed compounds, and identification of lead compounds meeting certain
criteria specified in the agreement. Tanabe maintains responsibility for further
development and marketing of a lead compound in exchange for milestone and
royalty payments to OSI.
If Tanabe determines to initiate further development of lead compounds
identified by OSI, OSI will grant to Tanabe exclusive, worldwide licenses to,
among other things, use, manufacture and sell all products containing such lead
compounds directed to the identified targets. In exchange for these licenses,
Tanabe will
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pay OSI license fees and royalties on product sales. The duration of the
licenses is coextensive with the lives of the patents related to the licensed
compound or ten years from the first commercial sale, whichever is longer. If
Tanabe determines not to initiate further development of a lead compound or if
Tanabe discontinues development of candidate compounds, OSI will have the sole
and exclusive right to develop, use, manufacture and sell all products resulting
from the collaboration, and it will pay royalties to Tanabe. Each of the parties
has rights and obligations to prosecute and maintain patent rights related to
specified areas of the research and development under the agreement.
Generally, OSI is prohibited during the term of the contract from pursuing
independently or having sponsored or sponsoring research and development of
compounds and products in the diabetes area relating to the identified targets
in the agreement. Tanabe is prohibited from sponsoring research relating to the
identified targets and from being sponsored by another pharmaceutical company
with respect to research relating to the identified targets. The agreement is
for a term of four years, with the option to extend for an additional two year
period. Tanabe, however, has the right to terminate the agreement after two
years under certain circumstances. On the effective date of the agreement,
Tanabe was required to pay OSI a technology access fee of $3.5 million. Such
payment was advanced on September 28, 1999. Tanabe has committed to provide
research funding to OSI in an aggregate amount up to approximately $16 million.
Vanderbilt University
Effective as of April 28, 1998, OSI entered into a Collaborative Research,
Option and Alliance Agreement with Vanderbilt University to conduct a
collaborative research program and seek a corporate partner to fund a technology
collaboration for the discovery and development of drugs to treat diabetes. The
collaborative research was funded by OSI in exchange for which OSI received an
option to negotiate a commercially reasonable, worldwide, exclusive license from
Vanderbilt to develop, make, use, and sell products derived from the research
program. OSI and Vanderbilt committed equal resources to the program, including,
among other things, access to all their respective laboratory facilities and
dedicated teams of research scientists. OSI had certain rights and obligations
to prosecute and maintain patent rights related to specified areas of the
research under the agreement. The agreement was for a term of one year, and was
extended until the execution of a third-party research collaboration agreement
by OSI -- i.e., the agreement with Tanabe.
Concurrently with the execution of the Tanabe Agreement, OSI and Tanabe
entered into an Amended and Restated Collaborative Research, License and
Alliance Agreement with Vanderbilt with an effective date of August 31, 1999.
This agreement amends and restates the agreement from April, 1998 to add Tanabe
as a party to the agreement with respect to certain sections and to amend
certain other provisions to clarify Vanderbilt's role in the OSI/Tanabe research
program. The term of the research program conducted by OSI and Vanderbilt
commenced on April 28, 1998 and will end upon termination of the contract period
under the Tanabe Agreement unless mutually extended by OSI and Vanderbilt.
The OSI/Vanderbilt research program is comprised of two parts: research
directed toward the targets identified in the Tanabe Agreement and research
directed toward additional targets which are not targets under the Tanabe
Agreement. OSI may offer to Tanabe any of the additional targets for inclusion
in the OSI/ Tanabe research program. As part of the OSI/Vanderbilt research
program, Vanderbilt will assist OSI in fulfilling its obligations under the
Tanabe/OSI research program by providing access to Vanderbilt's drug discovery
resources, including laboratories and assays.
OSI will provide funding to Vanderbilt to conduct the OSI/Vanderbilt
research program. A portion of such funding will come from Tanabe's funding of
the OSI/Tanabe research program. OSI will also pay to Vanderbilt a percentage of
the revenues (milestone and royalty payments) it receives from Tanabe and any
other third party which is commercializing products resulting from the
OSI/Vanderbilt research program. The percentage received by Vanderbilt will vary
in accordance with the extent to which Vanderbilt technology and patents
contributed to the product giving rise to such revenue. OSI also paid Vanderbilt
a one-time success fee of $500,000 in October, 1999 in respect of OSI entering
into the Tanabe Agreement.
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Sankyo Company, Ltd.
Effective as of February 12, 1997, OSI entered into a Collaborative
Research and License Agreement with Sankyo to be conducted in partnership with
MRC Collaborative Center, London, U.K. The collaboration is focused on
discovering and developing novel pharmaceutical products to treat influenza.
OSI is responsible for conducting research as directed by the research
committee, including, without limitation, compound screening in exchange for
research funding from Sankyo. Sankyo has the responsibility and the exclusive
right to conduct pre-clinical and clinical development of all candidate
compounds in exchange for milestone payments to OSI.
OSI and MRC CC have granted to Sankyo exclusive, worldwide licenses to,
among other things, use, manufacture and sell all products resulting from the
collaboration. In exchange for these licenses, Sankyo will pay to OSI and MRC CC
license fees and royalties on product sales. The duration of the licenses is
coextensive with the lives of the patents related to the licensed compound. If
Sankyo discontinues development of all candidate compounds, OSI will have the
sole and exclusive right to develop, use, manufacture and sell all products
resulting from the collaboration, and it will pay royalties to Sankyo. Each of
the parties has rights and obligations to prosecute and maintain patent rights
related to specified areas of the research under the agreement.
Generally, OSI, Sankyo and MRC CC are prohibited during the term of the
agreement from pursuing or sponsoring research and development of compounds and
products in the anti-influenza area other than pursuant to the agreement. The
agreement is for a term of three years, with the option to extend for an
additional one or two year period upon conditions and terms acceptable to OSI,
Sankyo and MRC CC. The agreement is subject to early termination in the event of
certain defaults by the parties. In November, 1999, OSI and Sankyo renewed the
collaboration for an additional two years.
Hoechst Marion Roussel, Inc. (HMRI)
Pursuant to the Amended Collaborative Research and License Agreement
effective April 1, 1997, OSI and HMRI are conducting joint research and
development activities, which focus specifically on OSI's expertise in live-cell
assay technology. OSI conducts the lead seeking (screening) phase of the drug
discovery process against a variety of targets in various disease areas. HMRI is
responsible for all lead optimization and development activities. OSI has
identified several compounds, which HMRI is optimizing for further development.
The most advanced of these compounds are in lead optimization for individual
targets in atherosclerosis and arthritis.
Under this collaboration, OSI is responsible for achieving objectives
outlined in the annual research plans. HMRI is responsible for assisting OSI in
the pursuit of such objectives, including advancing the pharmacological
assessment of compounds identified by OSI, determining the chemical structure of
the selected compounds, identifying and selecting development candidates,
pursuing clinical development and regulatory approval, and developing
manufacturing methods and pharmaceutical formulations for the selected
candidates. HMRI is responsible for funding the costs of OSI's discovery
efforts. As of September 30, 1999, OSI had recognized an aggregate of $22.8
million in research funding from HMRI and its predecessors.
OSI has granted to HMRI an exclusive, worldwide license (and rights to
acquire additional licenses) with respect to, among other things, the use,
manufacture and sale of products resulting from OSI's lead seeking efforts
against these individual drug targets. In exchange for these licenses, HMRI will
pay royalties to OSI on sales of such products. OSI and HMRI have mutually
exclusive rights and obligations to prosecute and maintain certain patent rights
related to various specified areas of the research.
Generally, OSI is prohibited during the term of the collaboration from
pursuing or sponsoring research independent of HMRI if it relates to the
identified targets in the areas of collaboration with HMRI without the approval
of the research committee. HMRI is generally prohibited from using the gene
transcription method independent of OSI to discover novel human therapeutic
products without the approval of the research committee. The agreement expires
on the later of March 31, 2002 or the last to expire of any obligations of HMRI
to pay royalties. The agreement may be terminated early by either party upon the
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occurrence of certain defaults by the other party. Any termination by OSI
resulting from an HMRI default will cause a termination of certain of HMRI's
license rights. HMRI will retain its license rights if it terminates the
agreement in response to a default by OSI. As of September 30, 1999 HMRI held
1,590,909 shares of common stock of OSI. This included a warrant to purchase
500,000 shares of OSI's common stock for $5.50 per share which expired on
December 10, 1999.
Effective as of January 1, 1997, OSI entered into a Collaborative Research
and License Agreement with HMRI to develop orally active, small molecule
inducers of erythropoietin gene expression for the treatment of anemia due to
chronic renal failure and anemia associated with chemotherapy for AIDS and
cancer. This collaboration identified active lead compounds that were advanced
to a pre-clinical development stage. This research effort, however, did not
achieve sufficient data to warrant further development. Consequently, in October
1998, this program was terminated.
Solvay Pharmaceuticals, B.V.
With the acquisition of the assets of Cadus, OSI purchased a Collaborative
Research and License Agreement effective as of November 1, 1995 which Cadus had
with Solvay. The collaboration is directed toward GPCR drug discovery in
differing fields of use. OSI's fields of use include cancer, asthma and
inflammatory diseases. Solvay's fields of use include cardiovascular, central
nervous system disorders and gastrointestinal diseases.
Under the agreement, the parties are to develop and manufacture screens
that incorporate targets which are the subject of the agreement. The screens are
to enable Solvay and OSI to test compounds for biological activity as part of
their respective drug discovery efforts in their respective fields. The parties
are responsible for the identification of targets and OSI undertakes assay
development using funds from Solvay. In exchange for milestone and royalty
payments, Solvay maintains sole responsibility for pre-clinical and clinical
development as well as marketing and commercialization of any lead compound it
discovers from its use of the screens developed as part of the collaboration.
Under the agreement, Cadus granted to Solvay a worldwide license in
Solvay's fields of use to, among other things, use and practice the screens to
identify and confirm potential human therapeutics. The license is exclusive for
the term of the research program, or longer if Solvay has identified or
confirmed a potential product during the exclusive period, and non-exclusive for
five years following the research program. In exchange for these licenses,
Solvay will pay OSI, as Cadus' successor, license fees and royalties on product
sales. If Solvay discontinues the development of candidate compounds, OSI, as
Cadus' successor, will have the sole and exclusive right to develop, use,
manufacture and sell all products resulting from the collaboration, and OSI will
pay milestones and royalties to Solvay. Each of the parties has rights and
obligations to prosecute and maintain patent rights related to specified areas
of the research under the agreement. The term of the research program is until
December 31, 2000.
Novartis Pharma AG
OSI entered into an agreement with Novartis in April 1995 for the
development of TGF-Beta 3 for various indications. TGF-Beta 3 is a naturally
occurring human growth factor, first isolated by OSI, that exerts either
stimulatory or inhibitory effects depending upon the particular cell type to
which it is applied. This agreement granted to Novartis an exclusive, worldwide
license to use and sell TGF-Beta 3 products for wound healing and oral
mucositis, as well as certain other indications, in exchange for royalty
payments to OSI on the sale of TGF-Beta 3 products. During 1998, Phase II
clinical trials being conducted by Novartis for both wound healing and oral
mucositis failed to achieve their primary clinical end points. Consequently, no
further clinical development of TGF-Beta 3 by Novartis for either wound healing
or oral mucositis has been anticipated.
On May 31, 1999, the parties amended their agreement. The parties changed
certain terms of the agreement including the definition of licensed indications,
the supply of TGF-Betas, the amount of royalty payments, and the schedules of
OSI's patents and applications and Novartis' patents. Specifically, oral
mucositis and the healing of soft wound tissue were removed from the licensed
indications. Novartis
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acknowledged in the amendment that it has discontinued development of products
for the indications of oral mucositis and healing of soft wound tissue. The
parties agreed that all licenses which were granted to Novartis with respect to
the discontinued indications are terminated and that OSI is free to continue
development work and to grant licenses to third parties with respect to the
discontinued indications. OSI is also free to use the results of any development
work with respect to the discontinued indications carried out by Novartis prior
to the date of the amendment provided that OSI pays to Novartis royalties and/or
certain other agreed-upon amounts with respect to sales of products resulting
from any continued development work by OSI or its licensee. Under the amendment,
the new licensed indications are bone, cartilage and tendon repair. Novartis'
option was changed in the amendment from an option to include in the definition
of licensed indications all indications not already included to (a) an exclusive
option to include in licensed indications the treatment of transplant patients
(e.g., graft protection), the treatment of ischemia (e.g., angina pectoris and
peripheral vascular disease), the treatment of stroke patients, and the
treatment of inflammatory bowel disease, and (b) a non-exclusive option to
include any other additional indications relating to TGF-Betas (other than the
discontinued indications). The payment terms for the option were also amended
and the time period to exercise the option was extended until May 31, 2003.
Helicon Therapeutics, Inc.
In July 1997, OSI, Cold Spring Harbor Laboratory and Hoffman-La Roche Inc.
formed Helicon, a new Delaware corporation. In exchange for approximately 30% of
Helicon's outstanding capital stock, OSI contributed to Helicon molecular
screening services and a nonexclusive license with respect to certain screening
technology. Cold Spring Harbor Laboratory contributed a royalty-free license to
commercialize certain technology relating to genes associated with long-term
memory in exchange for a portion of Helicon's outstanding capital stock.
Hoffman-La Roche contributed cash for a portion of Helicon's outstanding capital
stock.
The parties entered into various collaborative research and license
agreements pursuant to which they were to jointly pursue the discovery,
development and commercialization of novel drugs for the treatment of long-term
memory disorders and other central nervous system dysfunctions. The initial term
of the collaborative program was three years, commencing as of July 1, 1997. As
of July 1, 1999, Hoffman-La Roche terminated its participation in the program,
the terms of which termination are currently being negotiated. Helicon received
funding from Hoffman-La Roche for the first two years of the program. OSI may
provide to Helicon OSI personnel to conduct screening and services and a license
to use OSI's compound library for research purposes. OSI is currently
contributing funds to Helicon on an as-needed basis in amounts tied to the costs
of conducting research activities.
BioChem Pharma, Inc.
Pursuant to an agreement, dated March 19, 1999, OSI and BioChem (formerly
BioChem Pharma (International) Inc.) amended their Collaborative Research,
Development and Commercialization Agreement, effective as of May 1, 1996,
terminating certain provisions contained therein, including, without limitation,
provisions establishing the research program. Under the agreement, OSI granted
BioChem a worldwide, irrevocable, exclusive license, and right to grant
sublicenses, in a certain anti-viral target for a license fee of $2 million
which is included in license fee income in the accompanying consolidated
statement of operations for the year ended September 30, 1999. In addition, each
party will be free to independently pursue the discovery of new compounds in the
Hepatitis B and HIV areas without incurring any responsibility to the other
party. To the extent BioChem completes any clinical trials or pursues any
regulatory approvals for any products covered by the license it will pay
milestones to OSI. In addition, to the extent BioChem commercializes certain
compounds arising out of the joint venture, it will pay royalties to OSI.
INTELLECTUAL PROPERTY
OSI believes that patents and other proprietary rights are vital to its
business. OSI's policy is to protect its intellectual property rights in
technology developed by its scientific staff by a variety of means, including
applying for patents in the United States and other major industrialized
countries. The Company also relies
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upon trade secrets and improvements, unpatented proprietary know-how and
continuing technological innovations to develop and maintain its competitive
position. In this regard, OSI seeks restrictions in its agreements with third
parties, including research institutions, with respect to the use and disclosure
of OSI's proprietary technology. OSI also has confidentiality agreements with
its employees, consultants and scientific advisors.
OSI currently owns 13 U.S. patents and 41 foreign patents. In addition, OSI
currently has 24 pending applications for U.S. patents, 1 of which has been
allowed, and 33 applications for foreign patents, 2 of which have been allowed.
Further, other institutions have granted exclusive rights under their United
States and foreign patents and patent applications to OSI.
Included in the above, OSI has 6 applications for U.S. patents and 6
applications for foreign patents pending which contain composition of matter and
method of use claims for its receptor-subtype specific adenosine receptor
antagonist compounds. The Company intends to aggressively seek patent protection
for all lead compounds discovered or developed in OSI owned development
programs.
OSI has assembled a strong gene transcription patent position. OSI
currently has five issued patents in this expanding patent estate. These include
U.S. Patent Nos. 5,863,733 and 5,665,543 which cover the use of reporter genes
in many cell-based transcription assays used for drug discovery. U.S. Patent No.
5,776,502 covers methods of modulating gene transcription in-vivo using any low
molecular weight compound. Also U.S. Patent Nos. 5,580,722 and 5,846,720 cover
modulation of genes associated with cardiovascular disease. OSI has additional
patent applications pending which should further enhance OSI's patent position
in the area of gene transcription. The Company believes that this technology is
in widespread use throughout the pharmaceutical biotechnology sectors. OSI is
conducting a non-exclusive out-licensing program for this patent estate.
Currently OSI has licensed this technology to Aurora Biosciences Corporation and
Pharmacia & UpJohn SpA. Under these agreements, OSI receives annual fees
together with milestones and royalty payments from small-molecule gene
transcription modulators developed and marketed as pharmaceutical products. OSI
expects to execute similar additional license agreements with third parties that
use this technology.
There can be no assurance that patents will be issued based upon OSI's
pending patent applications or any applications which it may file in the future,
that any patent issued will adequately protect a commercially marketable product
or process, or that any patent issued will not be circumvented or infringed by
others or declared invalid or unenforceable. Moreover, there can be no assurance
that others may not independently develop the same or similar technology or
obtain access to OSI's proprietary technology. OSI is aware of patents issued to
other entities with respect to technology potentially useful to it and, in some
cases, related to products and processes being used or developed by OSI. OSI
currently cannot assess the effect, if any, that these patents may have on its
operations in the future. The extent to which efforts by other researchers
resulted or will result in patents and the extent to which the issuance of
patents to other entities would have a material adverse effect on OSI or would
force OSI to seek licenses from such other entities currently is unknown as is
the availability to OSI of licenses from such other entities, and whether, if
available, licenses from other entities can be obtained on terms acceptable to
OSI.
COMPETITION
The pharmaceutical and biotechnology industries are intensely competitive.
OSI faces, and will continue to face, intense competition from organizations
such as large pharmaceutical companies, biotechnology companies, academic and
research institutions and government agencies. OSI faces significant competition
from industry participants who are pursuing the same or similar technologies as
those which constitute OSI's technology platform and from organizations that are
pursuing pharmaceutical products or therapies that are competitive with OSI's
potential products. Most of the major pharmaceutical organizations competing
with OSI have greater capital resources, greater R&D staffs and facilities, and
greater experience in drug development, obtaining regulatory approval and
pharmaceutical product manufacturing and marketing. OSI's major competitors
include fully integrated pharmaceutical companies, such as Merck & Co., Inc.,
Glaxo
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Wellcome Inc. and SmithKline Beecham plc, that conduct extensive drug discovery
efforts and are developing novel small molecule pharmaceuticals, as well as
numerous smaller companies.
With respect to OSI's small molecule drug discovery programs, other
companies have potential drugs in clinical trials to treat disease areas for
which OSI is seeking to discover and develop drug candidates. These competing
drug candidates may be further advanced in clinical development than are any of
OSI's potential products in its small molecule programs and may result in
effective, commercially successful products. Even if OSI and its collaborative
partners are successful in developing effective drugs, there can be no assurance
that OSI's products may be able to compete effectively with these products.
Furthermore, OSI cannot be certain that its competitors will not succeed in
developing and marketing products that either are more effective than those that
may be developed by OSI and its collaborative partners or are marketed prior to
any products developed by OSI or its collaborative partners.
In the cancer field, OSI's lead drug candidates are being developed by its
partner Pfizer. CP-358,774, an EGFR inhibitor and the most advanced drug
candidate, is currently in Phase II trials. At least two competitors,
Astra-Zeneca and Imclone also have compounds in clinical testing for this
target. CP-609,754, currently in Phase I trials, is being developed as a
farnesyl transferase inhibitor and has recently entered Phase I clinical trials.
This target is also the subject of active research and development at several
other companies including Merck & Co., Inc. and Johnson & Johnson. The
OSI/Pfizer alliance has a major effort in the area of angiogenesis. Several
other biotechnology and pharmaceutical companies are pursuing novel therapeutics
for angiogenesis including Bristol-Myers Squibb Co., Entremed, Inc. and Sugen,
Inc. (Pharmacia & UpJohn, Inc.).
Companies pursuing different but related fields also present significant
competition for OSI. For example, research efforts with respect to gene
sequencing and mapping are identifying new and possibly superior target genes.
In addition, alternative drug discovery strategies, such as rational drug
design, may prove more effective than those pursued by OSI. Furthermore,
competing entities may have access to more diverse compounds for testing by
virtue of larger compound libraries or through combinatorial chemistry skills or
other means. These include Pharmacopeia, Inc., CombiChem, Inc., ArQule, Inc. and
AxyS Pharmaceuticals, Inc., all of which have major collaborations with leading
pharmaceutical companies. OSI cannot be sure that competitors will not succeed
in developing technologies or products that are more effective than those of OSI
or that would render OSI's products or technologies obsolete or noncompetitive.
OSI's technology platform consists of a variety of cell free and live-cell
assay systems, gene transcription technologies, high throughput drug screening,
and medicinal, combinatorial and natural product chemistry. Pharmaceutical and
biotechnology companies and others are active in all of these areas. Ligand
Pharmaceuticals Inc. and Aurora Biosciences, publicly owned companies, employ
live-cell assays, gene transcription, and high throughput robotics in their drug
discovery operations. Numerous other companies use one or more of these
technologies. Several companies, including Tularik Inc., Signal Pharmaceuticals
Inc. and Scriptgen Pharmaceuticals, Inc., pursue drug discovery using gene
transcription methods. Other organizations may acquire or develop technology
superior to that of OSI.
OSI believes that its ability to compete successfully will be based on,
among other things, its ability to create and maintain scientifically advanced
technology, attract and retain scientific personnel with a broad range of
expertise, obtain patent protection or otherwise develop proprietary products or
processes, enter into collaborative arrangements, and, independently or with its
collaborative partners, conduct clinical trials, obtain required government
approvals on a timely basis, and commercialize its products.
GOVERNMENT REGULATION
OSI and its collaborative partners are subject to, and any potential
products discovered and developed must comply with, comprehensive regulation by
the FDA in the United States and by comparable authorities in other countries.
These national agencies and other federal, state, and local entities regulate,
among other things, the pre-clinical and clinical testing, safety,
effectiveness, approval, manufacture, labeling, marketing, export, storage,
record keeping, advertising, and promotion of pharmaceutical and diagnostic
products.
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The process required by the FDA before pharmaceutical products may be
approved for marketing in the United States generally involves: (i) pre-clinical
laboratory and animal tests, (ii) submission to FDA of an investigational new
drug application (IND), which must become effective before clinical trials may
begin, (iii) adequate and well controlled human clinical trials to establish the
safety and efficacy of the drug for its intended indication, (iv) submission to
the FDA of a new drug application (NDA) or, in the case of biological products,
such as TGF-Beta 3, a product license application (PLA), and (v) FDA review of
the NDA or PLA in order to determine, among other things, whether the drug is
safe and effective for its intended uses. There is no assurance that FDA review
process will result in product approval on a timely basis, if at all.
Pre-clinical tests include laboratory evaluation of product chemistry and
formulation, as well as animal studies, to assess the potential safety and
efficacy of the product. Certain pre-clinical tests must comply with FDA
regulations regarding current GLP. The results of the pre-clinical tests are
submitted to the FDA as part of an IND and are reviewed by the FDA prior to the
commencement of clinical trials.
Clinical trials are conducted under protocols that detail matters such as
the objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as
part of the IND.
Clinical trials are typically conducted in three sequential phases, which
may overlap. During Phase I, when the drug is initially given to human subjects,
the product is tested for safety, dosage tolerance, absorption, metabolism,
distribution and excretion. Phase II involves studies in a limited patient
population to: (i) evaluate preliminarily the efficacy of the product for
specific, targeted indications, (ii) determine dosage tolerance and optimal
dosage, and (iii) identify possible adverse effects and safety risks. Pivotal or
Phase III trials are undertaken in order to further evaluate clinical efficacy
and to further test for safety within an expanded patient population. The FDA
may suspend or terminate clinical trials at any point in this process if it
concludes that clinical subjects are being exposed to an unacceptable health
risk.
FDA approval of OSI's and its collaborators' products, including a review
of the manufacturing processes and facilities used to produce these products,
will be required before they may be marketed in the United States. The process
of obtaining approvals from the FDA can be costly, time consuming and may be
affected by unanticipated delays. There can be no assurance that approvals of
OSI's proposed products, processes or facilities will be granted on a timely
basis, if at all. Any failure to obtain or delay in obtaining such approvals
would have a material adverse effect on OSI's business, financial condition and
results of operations. Moreover, even if regulatory approval is granted, the
approval may include significant limitations on indicated uses for which a
product could be marketed.
Among the conditions for NDA approval is the requirement that the
prospective manufacturer's manufacturing procedures conform to good
manufacturing practices, or GMP, requirements, which must be followed at all
times. In complying with those requirements, manufacturers (including a drug
sponsor's third-party contract manufacturers) must continue to expend time,
money and effort in the area of production and quality control to ensure
compliance. Domestic manufacturing establishments are subject to periodic
inspections by the FDA in order to assess, among other things, GMP compliance.
To supply products for use in the United States, foreign manufacturing
establishments must comply with GMP and are subject to periodic inspection by
the FDA or by regulatory authorities in some countries under reciprocal
agreements with the FDA.
Both before and after approval is obtained, a product, its manufacturer and
the holder of the NDA for the product are subject to comprehensive regulatory
oversight. Violations of regulatory requirements at any stage, including the
pre-clinical and clinical testing process, the approval process, or thereafter
(including after approval) may result in various adverse consequences, including
the FDA's delay in approving or refusal to approve a product, withdrawal of an
approved product from the market, and the imposition of criminal penalties
against the manufacturer and NDA holder. In addition, later discovery of
previously unknown problems may result in restrictions on the product,
manufacturer or NDA holder, including withdrawal of the product from the market.
Furthermore, new government requirements may be established that could delay or
prevent regulatory approval of OSI's products under development.
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For marketing outside the United States, OSI and its collaborators and the
drugs developed by them, if any, will be subject to foreign regulatory
requirements governing human clinical trials and marketing approval for drugs.
The requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country. In addition,
before a new drug may be exported from the United States, it must be the subject
of an approved NDA or comply with FDA regulations pertaining to INDs.
In addition to regulations enforced by the FDA, OSI must also comply with
regulations under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and future federal, state or local regulations.
OSI's R&D activities involve the controlled use of hazardous materials,
chemicals and various radioactive compounds. Although OSI believes that its
safety procedures for handling and disposing of hazardous materials comply with
the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, OSI could be held liable for any
damages, which could exceed OSI's resources.
EMPLOYEES
OSI believes that its success is largely dependent upon its ability to
attract and retain qualified personnel in scientific and technical fields. As of
November 30, 1999, OSI employed 195 persons worldwide (144 in the United
States), of whom 158 were primarily involved in R&D activities, with the
remainder engaged in executive and administrative capacities. Although OSI
believes that it has been successful to date in attracting skilled and
experienced scientific personnel, competition for personnel is intense and there
can be no assurance that OSI will continue to be able to attract and retain
personnel of high scientific caliber. OSI considers its employee relations to be
good.
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CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
(Cautionary Statements under the Private Securities Litigation Reform Act of
1995, as amended)
This report contains forward-looking statements that do not convey
historical information, but relate to predicted or potential future events, such
as statements of OSI's plans, strategies and intentions, or its future
performance or goals for OSI's product development programs. These statements
can often be identified by the use of forward-looking terminology such as
"believes," "expects," "intends," "may," "will," "should" or "anticipates" or
similar terminology. The statements involve risks and uncertainties and are
based on various assumptions. Investors and prospective investors are cautioned
that these statements are only projections. In addition, any forward-looking
statement that OSI makes is intended to speak only as of the date on which OSI
made the statement. OSI will not update any forward-looking statement to reflect
events or circumstances that occur after the date on which the statement is
made. The following risks and uncertainties, among others, may cause OSI's
actual results to differ materially from those described in forward-looking
statements made in this report or presented elsewhere by management from time to
time.
Although OSI has potential products that appear to be promising at early
stages of development, all of OSI's products will require significant research
and development and may not reach the market for a number of reasons, conditions
which would limit OSI's revenue potential.
Potential products may be found ineffective or cause harmful side effects
during pre-clinical testing or clinical trials, fail to receive necessary
regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical to produce, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. There is no guarantee
that OSI's or its collaborative partners' product development efforts will be
successfully completed, that required regulatory approvals will be obtained or
that any products, if introduced, will be successfully marketed or achieve
customer acceptance.
To date, OSI has generated no revenue from the sale of pharmaceutical
products. Except for CP-358,774, with respect to which Pfizer has completed
Phase I safety and toxicity studies and has initiated Phase II clinical trials,
and CP-609,754 for which Pfizer has opened an IND for Phase I clinical trials,
all of the lead compounds in OSI's small molecule drug discovery programs are in
either a discovery or pre-clinical evaluation phase. Any products resulting from
OSI's development programs are not expected to be commercially available for
several years, if at all.
OSI's live-cell assays are novel as a drug discovery method and have not
yet been shown to be successful in the development of any commercialized drug.
Furthermore, OSI's drug discovery assays are focused on several target genes and
other molecular targets, the functions of many of which have not yet been fully
determined. OSI's live-cell assay technology may not result in lead compounds
that will be safe and useful. Development of new pharmaceutical products is
highly uncertain. Consequently, OSI's drug discovery technology may not result
in any commercially successful products.
Failure to obtain required governmental approvals will delay or preclude
OSI's partners from marketing drugs discovered or developed by OSI or limit the
commercial use of these products.
Prior to marketing by a collaborative partner, any new drug discovered by
OSI must undergo an extensive regulatory approval process in the United States
and other countries. This regulatory process, which includes pre-clinical
testing and clinical trials of each compound to establish its safety and
efficacy, can take many years and require the expenditure of substantial
resources. Moreover, data obtained from pre-clinical and clinical activities are
susceptible to varying interpretations that could delay, limit or prevent
regulatory approval.
Even if OSI obtains regulatory approval, a marketed product and its
manufacturer are subject to continuing review, including post-marketing
surveillance. Discovery of previously unknown problems with a product of OSI or
its manufacturer may have adverse effects on OSI's business, financial condition
and results of operations, including the withdrawal of the product from the
market. Violations of regulatory requirements at any stage may result in various
unfavorable consequences to OSI, including the FDA's delay in approving or its
refusal to approve a product, withdrawal of an approved product from the market
and the imposition of
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criminal penalties against the manufacturer and the new drug application holder.
Although Pfizer submitted an investigational new drug application, or IND, to
the FDA with respect to the epidermal growth factor receptor inhibitor
CP-358,774 and CP-609,754 for farnesylation, OSI has not submitted an IND for
any product candidate, and no product candidate has been approved for
commercialization in the United States or elsewhere. OSI intends to file INDs
for product candidates in its internal proprietary programs, but to rely on its
partners to file INDs in its collaborative programs. No assurance can be given
that OSI or any of its collaborative partners will be able to conduct clinical
testing or obtain the necessary approvals from the FDA or other regulatory
authorities for any products.
If OSI or its collaborative partners do not successfully develop,
commercialize, manufacture and market product candidates, OSI may never achieve
product revenues or profitability.
OSI has had net operating losses since its inception in 1983. At September
30, 1999, OSI's accumulated deficit was approximately $65.6 million. OSI's
losses have resulted principally from costs incurred in R&D, and from general
and administrative costs associated with OSI's operations. These costs have
exceeded OSI's revenues, which to date have been generated principally from
collaborative research agreements.
OSI expects to incur substantial additional operating expenses over the
next several years as a result of increases in its expenses for R&D, including
enhancements in its drug discovery technologies and with respect to its internal
proprietary projects. If OSI does not obtain additional third party funding for
these expenses, OSI expects that the expenses will result in increased losses
from operations. OSI does not expect to generate revenues from the sale of its
small molecule products for several years. OSI's future profitability depends,
in part, on:
- OSI's collaborative partners obtaining regulatory approval for
products derived from its collaborative research efforts;
- OSI's collaborative partners successfully producing and marketing
products derived from technology or rights licensed from OSI; and
- OSI's entering into agreements for the development, commercialization,
manufacture and marketing of any products derived from OSI's internal
proprietary programs.
OSI's future capital requirements will depend on many factors, which
include:
- Continued scientific progress in its R&D programs;
- Size and complexity of its R&D programs;
- Progress of pre-clinical testing and early stage clinical trials;
- Time and costs involved in obtaining regulatory approvals for its
product candidates;
- Costs involved in filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights;
- Competing technological and market developments;
- Establishment of additional collaborative arrangements;
- Costs of manufacturing arrangements;
- Costs of commercialization activities; and
- Costs of product in-licensing and strategic acquisitions, if any.
OSI intends to seek additional funding through arrangements with corporate
collaborators and may seek additional funding through public or private sales of
OSI's securities, including equity securities. Additional funding may not be
available on reasonable or acceptable terms, if at all. Furthermore, any
additional equity financings would be dilutive to OSI's stockholders. If
adequate funds are not available, OSI may be required to curtail significantly
one or more of its R&D programs or obtain funds through arrangements with
collaborative partners or others that may require OSI to relinquish its rights
to a number of its technologies or product candidates. If funding from one or
more of its collaborative programs were reduced or terminated, OSI would be
forced to devote additional internal resources to product development, scale
back or terminate selected development programs or seek alternative
collaborative partners.
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OSI's products may be subject to delays in manufacture if collaborative
partners or outside contractors give other products greater priority than OSI's
products.
The manufacture of OSI's candidate products for clinical trials and the
manufacture of resulting products for commercialization purposes are subject to
current good manufacturing practices regulations promulgated by the FDA. OSI
relies on collaborative partners or outside contractors to manufacture its
products in their FDA approved manufacturing facilities. OSI's collaborative
agreements allow its collaborative partners significant discretion in electing
to pursue or not to pursue the activities upon which it relies. The Company
cannot control the amount and timing of resources its collaborative partners
devote to its programs or potential products. OSI's products may be in
competition with other products for priority of access to these facilities. For
this and other reasons, there can be no assurance that OSI's collaborative
partners will manufacture OSI's products in an effective or timely manner. If
not performed in a timely manner, the clinical trial development of OSI's
product candidates or their submission for regulatory approval could be delayed,
and OSI's ability to deliver products on a timely basis could be impaired or
precluded. OSI may not be able to enter into any necessary third party
manufacturing arrangements on acceptable terms if at all. OSI's current
dependence upon others for the manufacture of its products could adversely
affect its future profit margin, if any, and its ability to commercialize
products on a timely and competitive basis.
OSI's limited experience in conducting clinical trials and reliance on the
pharmaceutical companies with which it collaborates for clinical development and
regulatory approvals may cause delays, terminations or setbacks in OSI's
business.
To date, only two product candidates have entered clinical trials in OSI's
small molecule drug discovery operations. Only one of the compounds discovered
using OSI's small molecule discovery technology has been proven safe in humans
and none have yet demonstrated efficacy. The failure of OSI to increase the
number of product candidates eligible for clinical trials and unsuccessful
completion of clinical trials in the future could adversely affect OSI's
business, condition and results of operation.
If OSI is unable to protect its intellectual property rights, its ability
to develop and commercialize its technology and products will be severely
limited.
OSI's success depends, in part, on its or its collaborative partners'
ability to:
- Obtain patent protection for product candidates;
- Maintain trade secret protection; and
- Operate without infringing on the proprietary rights of third parties.
The degree of future protection for OSI's proprietary rights will remain
uncertain if:
- OSI's pending patent applications are not approved for any reason;
- OSI is unable to develop additional proprietary technologies that are
patentable; or
- Patents issued do not provide OSI with a competitive advantage.
Furthermore, OSI cannot be sure that third parties:
- Will not independently develop similar or alternative technologies;
- Duplicate any of OSI's technologies;
- If patents are issued to OSI, design around OSI's patented
technologies; or
- Will not challenge issued patents.
OSI may incur substantial costs protecting its proprietary rights or
defending against charges of infringement of other's proprietary rights.
OSI is seeking to license to other companies rights to practice under OSI's
gene transcription patent estate. OSI believes technology and practices covered
by these patents are in widespread use in the pharmaceutical and biotechnology
industries. To date, OSI has granted two licenses to use its gene transcription
patent. If other pharmaceutical and biotechnology firms which use OSI's patented
technology are not willing to negotiate license arrangements with OSI on
reasonable terms, OSI may have to choose between (i) abandoning its licensing
strategy, or (ii) initiating legal proceedings against those firms. Legal
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action, including patent infringement litigation, would be extremely costly.
Consequently, OSI's strategy to commercialize its gene transcription patent
estate through licensing may not be successful.
If OSI is unable to maintain or enter into arrangements with collaborative
partners, its ability to proceed with R&D programs, manufacturing and the sale
of its product candidates will be severely limited.
OSI's limited resources and business strategy require it to enter into
collaborative arrangements with various research partners. OSI is largely
dependent on its collaborative partners for:
- Pre-clinical testing;
- Clinical development;
- Regulatory approval;
- Manufacturing and marketing products;
- Compound libraries;
- Patent protection and proprietary technology; and
- Funding.
Like many small biopharmaceutical companies, OSI's business strategy
includes funding from larger pharmaceutical companies to collaborate with to
support its R&D programs and the commercialization of OSI's product candidates.
In trying to attract partners to collaborate with, OSI faces serious competition
from other small biopharmaceutical companies and even in-house R&D staffs of
larger pharmaceutical companies. Failure to enter into collaborative agreements
on acceptable terms could have material adverse effects on OSI's business,
financial condition and results of operation.
If any of OSI's collaborative partners breach or terminate their agreements
with OSI or otherwise fail to conduct its collaborative activities successfully
in a timely manner, OSI's pre-clinical or clinical development,
commercialization of product candidates or research programs would be delayed or
terminated.
OSI faces potential problems with its collaborative partners which could
affect its success including:
- Competition with its collaborators;
- Potential disputes with collaborators concerning ownership rights to
developed technology;
- Short term of collaborative agreements which may require their
renewal;
- Delays; and
- Consolidations of pharmaceutical companies.
OSI's success depends, in large part, on the efforts of its collaborative
partners. Potential disagreements between collaborators and OSI, such as
disputes over ownership rights to any technology developed together, could lead
to delays in the collaborative R&D programs, or the commercialization of product
candidates. If OSI is confronted with disputes with its collaborative partners,
it may face costly delays to its research and development programs and even
litigation.
Because OSI generally agrees not to conduct independently, or with any
third party, any research that is competitive with the research conducted under
its collaborative programs, its collaborative relationships may have the effect
of limiting the areas of research OSI may pursue.
Under its collaborative research agreements with most of its partners, OSI
is prohibited, during the terms of the agreements, from pursuing or sponsoring
research aimed at the discovery of drugs which are the subject of the
collaborations. OSI's collaborative partners, however, may develop, either alone
or with others, products that are similar to or competitive with the products or
potential products that are the subject of OSI's collaborations with their
partners. Competing products, either developed by the collaborative partners or
to which the collaborative partners have rights, may mean their withdrawal of
support for OSI's product candidates, which may result in the impairment of
OSI's business, financial condition and results of operations.
Because all of OSI's collaborative programs with pharmaceutical companies
have terms of six or fewer years, which is generally less than the period
required for the discovery, clinical development and commerciali-
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zation of most drugs, the continuation of any of OSI's drug discovery and
development programs may be dependent on the periodic renewal of OSI's
collaborative arrangements.
All of OSI's collaborative research agreements may be terminated under
various circumstances. Some of OSI's collaborative research agreements provide
that, upon expiration of a specified period after commencement of the agreement,
its collaborative partners have the right to terminate the agreement on short
notice without cause. The termination or non-renewal of any collaborative
relationship could set back OSI's efforts in R&D.
Consolidations among companies with which OSI is engaged in collaborative
research can result in the diminution or termination of, or delays in, one or
more of OSI's collaborative programs.
In 1995, the pharmaceutical operations of three companies with which OSI
had collaborative research agreements, Hoechst AG, Hoechst Roussel
Pharmaceuticals, Inc. and Marion Merrell Dow Inc. were combined into one entity,
HMRI. This combination resulted in delays in OSI's collaborative programs with
each of the constituent companies and a reduction in the aggregate funding
received by OSI. Continued consolidations among large pharmaceutical companies
could produce similar problems.
Failure to attract, retain and motivate skilled personnel and cultivate key
academic collaborations will delay OSI's product development programs and
adversely affect its research and development efforts.
OSI is a small company with approximately 195 employees, and its success
depends on its continued ability to attract, retain and motivate highly
qualified management and scientific personnel and on its ability to develop and
maintain important relationships with leading academic institutions and
scientists. In particular, OSI's product development programs depend on its
ability to attract and retain highly skilled chemists and clinical development
personnel. Competition for personnel and relationships is intense. If OSI loses
the services of any of these personnel, it could impede significantly the
achievement of its research and development objectives. In particular, the loss
of Colin Goddard, OSI's Chief Executive Officer, would be detrimental to OSI.
OSI does not know if it will be able to attract, retain or motivate personnel.
If the continuing efforts of government and third-party payors to contain
or reduce the costs of health care succeed, the price that OSI or any of its
collaborative partners or other licensees receives for any drugs it may discover
or develop it may develop in the future may decrease significantly.
In foreign markets, pricing and profitability of prescription
pharmaceuticals are subject to government control. In the United States, OSI
expects that there will continue to be a number of federal and state proposals
to implement similar government control. In addition, increasing emphasis on
managed care in the United States will continue to put pressure on the pricing
of pharmaceutical products. To the extent that cost control initiatives have an
adverse effect on OSI's collaborative partners, OSI's ability to commercialize
its products and to realize royalties may also be adversely affected.
If OSI's licensees or collaborative partners are required to obtain
licenses from others, OSI's royalties on any commercialized products could be
reduced by up to 50 percent.
The extent to which efforts by other researchers have resulted or will
result in patents and the extent to which the issuance of patents to others
would have a material adverse effect on OSI or would force OSI or its
collaborative partners or other licensees to obtain licenses from others, if
available, is currently unknown. OSI's products, operations or technology may
infringe upon the rights of any third party.
OSI relies on trade secrets to protect technology where patent protection
is not believed to be appropriate or obtainable. OSI has entered, and will
continue to enter, into confidentiality agreements with its employees,
consultants, licensors and collaborative partners. Without patent protection,
others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to OSI's trade secrets.
Furthermore, obligations of confidentiality may not be honored and OSI may not
be able to effectively protect its rights to proprietary information.
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The use of any of OSI's potential products in clinical trials and the sale
of any approved products may expose OSI to liability claims resulting from the
use of products or product candidates.
Potential product liability claims might be made directly by consumers,
pharmaceutical companies, including OSI's collaborative partners, or others. OSI
does not independently maintain product liability insurance coverage for claims
arising from the use of its products in clinical trials. Insurance coverage is
becoming increasingly expensive, and no assurance can be given that OSI will be
a named insured with respect to trials underway by its collaborative partners or
others or obtain insurance in the future at a reasonable cost or in sufficient
amounts to protect OSI. OSI's inability to obtain adequate liability insurance
could have a material adverse effect on OSI's business, financial condition and
results of operations. A successful product liability claim or series of claims
brought against OSI could have a material adverse effect on its business,
financial condition and results of operations.
If OSI's competitors succeed in developing technologies or products that
are more effective than its own, OSI's products or technologies may be rendered
obsolete or noncompetitive.
OSI faces significant competition from industry participants who are
pursuing the same technologies as OSI and from organizations that are pursuing
pharmaceutical products that are competitive with OSI's potential products. Most
of the organizations competing with OSI have more (1) capital resources, (2) R&D
staffs and facilities, (3) experience in drug discovery and development, (4)
experience obtaining regulatory approval and (5) experience in pharmaceutical
product manufacturing and marketing than OSI. OSI's major competitors include
fully integrated pharmaceutical companies, such as Merck & Co., Inc., Glaxo
Wellcome Inc. and SmithKline Beecham plc, that have extensive drug discovery
efforts and are developing novel small molecule pharmaceuticals, as well as
numerous smaller companies. Companies pursuing different but related fields also
present significant competition for OSI. For example, research efforts with
respect to gene sequencing and mapping are identifying new and potentially
superior target genes.
Biotechnology and related pharmaceutical technology have undergone rapid
and significant change. OSI expects the technology associated with OSI's R&D
will continue to develop rapidly. OSI's future success will depend in large part
on its ability to maintain a competitive position with respect to this
technology. Rapid technological development by OSI or others may result in
compounds, products or processes becoming obsolete before OSI recovers any
expenses incurred to develop a compound, product or process.
If OSI is unable to remedy Y2K problems, its operations, including OSI's
R&D programs and basic business enterprise, may be substantially disrupted.
OSI has worked to resolve the potential impact of the Y2K problem on the
processing of date-sensitive information by OSI's computerized information
system. OSI cannot be sure that it has identified, replaced or corrected all of
its internal computer systems successfully. OSI would then be at a competitive
disadvantage relative to companies that have successfully corrected their Y2K
problems. Other than making inquiries to third parties, OSI is not in a position
to independently verify the Y2K compliance of third parties, such as its
suppliers, vendors and collaborators. Difficulties and failure of suppliers,
vendors or collaborators to be Y2K compliant could result in risks and
uncertainties that may have a material adverse effect on OSI's business,
financial condition and results of operation.
ITEM 2. PROPERTIES
The Company leases three facilities, one located at 106 Charles Lindbergh
Boulevard, Uniondale, New York, consisting of 30,000 square feet, one located at
777 Old Saw Mill Road, Tarrytown, New York, consisting of 45,000 square feet,
and another located at 50 Charles Lindbergh Boulevard, Uniondale, New York,
consisting of 4,500 square feet. The Uniondale facility houses the Company's
principal executive offices and drug discovery laboratory. The Tarrytown
facility houses an additional laboratory, which was acquired in the Cadus asset
acquisition on July 30, 1999. The smaller facility at 50 Charles Lindbergh
Boulevard houses the Company's finance and administrative offices. The Company
also leases an 11,000 square foot facility located at 80 Rogers Street, 129
Binney Street, Cambridge, Massachusetts. As of September 30, 1999 this facility
housed the offices and laboratories of the Company's diagnostic product
operations which was sold to
25
<PAGE> 27
Bayer as of November 30, 1999. The Company also has two other wholly owned
subsidiaries, Aston and MYCOsearch, Inc., each of which lease facilities that
house their offices and drug discovery laboratories. Aston leases a 13,800
square foot facility located at 10 Holt Court South, Aston Science Park,
Birmingham, England. MYCOsearch leases two facilities, one located at Five Oaks
Office Park, 4905 Pine Cone Drive, Durham, North Carolina consisting of 4,280
square feet and the other located at 4727 University Drive, Durham, North
Carolina consisting of 8,000 square feet. The Company is currently planning to
relocate its MYCOsearch operations to its recently acquired facility in
Tarrytown. The relocation is scheduled to occur on March 31, 2000. The Company
believes that its facilities are adequate to meet current requirements. If any
of the Company's collaborative programs is expanded, the Company may need to
acquire additional space, which it believes it would be able to secure on
reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
OSI's common stock is traded in the over-the-counter market and is included
for quotation on the NASDAQ National Market under the symbol OSIP. The following
is the range of high and low sales prices by quarter for the common stock from
the first quarter of fiscal 1998 through September 30, 1999 as reported on the
NASDAQ National Market:
<TABLE>
<CAPTION>
1999 FISCAL YEAR HIGH LOW
- ---------------- ---- ---
<S> <C> <C>
First Quarter............................................... $5 7/8 $2 1/4
Second Quarter.............................................. 5 1/16 2 11/16
Third Quarter............................................... 7 1/8 4
Fourth Quarter.............................................. 7 3 15/16
</TABLE>
<TABLE>
<CAPTION>
1998 FISCAL YEAR HIGH LOW
- ---------------- ---- ---
<S> <C> <C>
First Quarter............................................... $11 1/2 $5 7/8
Second Quarter.............................................. 8 5 7/8
Third Quarter............................................... 7 7/8 5 1/8
Fourth Quarter.............................................. 6 3/4 2 29/32
</TABLE>
As of November 30, 1999, there were approximately 583 holders of record of
the common stock. OSI has not paid any dividends since its inception and does
not intend to pay any dividends in the foreseeable future. Declaration of
dividends will depend, among other things, upon future earnings, the operating
and financial condition of OSI, its capital requirements and general business
conditions.
26
<PAGE> 28
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data with
respect to OSI for each of the years in the five-year period ended September 30,
1999. The information below should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1999(a) 1998(b) 1997(c) 1996(d) 1995(e)
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues.................... $ 22,652,303 $ 19,468,337 $ 14,777,323 $ 9,718,437 $15,864,999
Expenses:
Research and
development.......... 24,484,540 19,877,339 16,804,844 14,462,644 13,992,459
Production and service
costs................ 1,753,474 813,464 635,768 134,529 1,252,990
Selling, general and
administrative....... 9,190,774 8,691,386 7,516,038 5,771,021 6,670,792
Amortization of
intangibles.......... 1,468,801 1,460,740 1,460,748 1,452,755 1,696,561
Loss from operations...... (14,245,286) (11,374,592) (11,640,075) (12,102,512) (7,747,803)
Other income -- net....... 1,155,834 1,190,124 2,053,838 2,160,377 768,744
Gain on sale of Anaderm
common stock........... 3,291,015 -- -- -- 2,720,389
Net loss.................. (9,798,437) (10,184,468) (9,586,237) (9,942,135) (4,258,670)
Basic and diluted loss per
share.................. (0.46) (0.48) (0.44) (0.50) (0.25)
Weighted average number of
shares of common stock
outstanding............ 21,450,812 21,372,655 21,604,344 19,712,274 16,757,370
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and investment
securities.............. $ 18,861,854 $ 24,418,281 $ 31,834,669 $ 47,542,745 $26,786,566
Accounts receivable....... 5,193,902 1,720,737 1,215,672 2,031,950 1,320,015
Working capital........... 14,562,336 22,268,346 29,612,616 47,181,407 26,127,781
Total assets.............. 47,031,328 50,417,980 59,585,565 73,537,054 44,057,421
Stockholders' equity...... 33,364,946 43,059,246 52,944,868 68,286,959 40,549,636
</TABLE>
- ---------------
(a) During fiscal 1999, OSI acquired Cadus' research business and sold its
equity interest in Anaderm to Pfizer. Subsequent to September 30, 1999, the
Company sold its diagnostics business to Bayer. (See Notes 3(a), 5(b) and 17
to the Consolidated Financial Statements).
(b) During fiscal 1998, OSI entered into collaborative agreements with
Fujirebio, Inc. and Vanderbilt, expanded its co-venture agreement with
Anaderm, and entered into a license agreement with Aurora (See Notes 2,
5(b), 5(d), and 5(m) to the Consolidated Financial Statements).
(c) During fiscal 1997, OSI entered into collaborative agreements with Sankyo
and Bayer, expanded its collaboration with HMRI, entered into co-venture
agreements with Sepracor and Helicon, entered into a license agreement with
Dow, and repurchased its common stock held by Becton, Dickinson and Company
(See Notes 3(b), 5 and 9(a) to the Consolidated Financial Statements).
(d) During fiscal 1996, OSI acquired MYCOsearch and Aston and completed an
offering of its common stock.
(e) During fiscal 1995, OSI sold its research products business and also sold
shares of its common stock to Novartis.
27
<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REVENUES
Total revenues of $22.7 million in fiscal 1999 increased approximately $3.2
million or 16% compared to fiscal 1998 and total revenues of $19.5 million in
fiscal 1998 increased approximately $4.7 million or 32% compared to fiscal 1997.
Collaborative program revenues increased approximately $2.0 million or 12%, in
fiscal year 1999. Collaborative research and development agreements with Pfizer,
Anaderm, HMRI, Sankyo, Bayer, Fujirebio, Helicon, and Solvay accounted for
substantially all of the Company's collaborative program revenues. Increases in
collaborative revenues were primarily due to the expansion as of April 23, 1999
of the Pfizer/Anaderm program, for the discovery and development of
cosmeceuticals, pharmacologically active compounds for use in certain cosmetic
and quality-of-life indications. This agreement could result in up to $50
million in total payments to the Company over a 6-year period. The new research
agreement with Solvay, which also contributed to the increase in collaborative
revenues, was acquired on July 30, 1999 with the acquisition of certain assets
from Cadus. This program is directed toward GPCR drug discovery in the
cardiovascular field. Collaborative revenues were partially offset by the
conclusion in October 1998 of one of the Company's funded collaborative programs
with HMRI relating to the discovery and development of orally active drugs for
the treatment of chronic anemia.
Sales revenue, representing service revenue from the Company's Aston and
OSDI subsidiaries, increased approximately $99,000 or 9% compared to the prior
year. The increase was primarily due to the growth in sales of the Company's
diagnostic tests. Other research revenue, representing primarily government
grants and other research grants, decreased approximately $435,000 or 30%
compared to the prior fiscal year. This is related to a reduction in the number
of government grants received. OSI has narrowed its grant applications to its
disease areas of focus in order to more fully leverage its resources. License
revenue increased approximately $1.5 million or 202% compared to the prior year.
This increase is primarily related to a $2 million fee resulting from a license
agreement entered into in March, 1999 with BioChem Pharma, which replaces an
earlier collaborative program focused on anti-viral drug discovery. Under the
terms of the agreement, the Company is licensing to BioChem Pharma rights to the
Company's joint technology in certain anti-viral targets. In addition to the
licensing fee, the Company will receive milestones and royalties based upon
BioChem Pharma's successful development of drugs arising from leads discovered
in the program. During fiscal 1998, the Company recognized license revenue of
approximately $752,000 from the signing of a license agreement with Aurora
Biosciences covering the Company's gene transcription patent estate.
The increase in total revenues of approximately $4.7 million in fiscal 1998
compared to fiscal 1997 was attributable to the commencement on October 1, 1997
of the funded phase of the collaborative research and license agreement among
the Company, Anaderm and Pfizer as well as an increased level of research in the
collaborative program with Sankyo to discover and develop novel pharmaceutical
products to treat influenza which commenced in February, 1999. This increase in
revenues was partially offset by a decrease in revenues related to the Company's
collaborative program with HMRI to discover and develop small molecules that
induce gene expression of the protein erythropoietin. This decrease in revenues
was attributable to the Company's receipt of a $1 million initiation fee from
HMRI for the erythropoietin, or EPO, program in fiscal 1997 and reduced funding
in connection with the extension of the first phase of this program in April,
1998. The EPO program did not achieve sufficient positive data to warrant
further development. Consequently, in October, 1998, this program was
terminated. The increase in revenue was also offset by the completion in fiscal
1997 of the funded discovery phase of the Company's collaborative program with
Wyeth-Ayerst Laboratories relating to the discovery and development of drugs for
the treatment of diabetes and osteoporosis.
EXPENSES
Research and development expenses increased by approximately $4.6 million
or 23% in fiscal 1999 compared to fiscal 1998 and increased by approximately
$3.1 million or 18% in fiscal 1998 compared to fiscal 1997. The increase in
fiscal 1999 was related to the Cadus asset acquisition on July 30, 1999. With
the acquisition, the Company assumed operations of Cadus' fully equipped
research facility in Tarrytown, New York, and retained 47 employees who have
since been employed in ongoing and expanding programs at both
28
<PAGE> 30
the Tarrytown site and at the Company's headquarters in Uniondale, New York.
Included in the acquisition is the GPCR-directed drug discovery programs. The
Company has also acquired Cadus' directed library of 150,000 small-molecule
compounds specifically designed for drug discovery in the GPCR area. The Company
recorded a charge of $806,000 for in-process R&D acquired in connection with the
Cadus asset acquisition which is included in R&D expense in fiscal 1999. Also
contributing to the increase in research and development expense is the
continued expansion of the Company's collaboration with Anaderm for the
discovery and development of novel compounds to treat pigmentation disorders,
wrinkles and baldness. The Company also expanded its medicinal chemistry
facility at its Aston subsidiary in the United Kingdom to accommodate the
increased chemistry efforts required in the expanded Anaderm collaboration.
These costs were somewhat offset by the conclusion in October, 1998 of the
Company's funded collaborative program with HMRI relating to the discovery and
development of orally active drugs for the treatment of chronic anemia.
The increase in R&D expenses in fiscal 1998 was due to the expansion of the
Company's collaboration with Anaderm and the collaborative agreement with Sankyo
for the discovery and development of novel pharmaceutical products to treat
influenza. In addition, research and development expenses include the
amortization of the Company's compound library assets which increased by
approximately $70,000 to $1.8 million in fiscal 1998 reflecting a full year of
amortization of the Dow Company compound library license acquired in March,
1997.
Production and service costs increased approximately $940,000 and $180,000
in fiscal 1999 and 1998, respectively. The increase in fiscal 1999 is related to
increased investment by the Company to continue developing its wholly owned
diagnostics subsidiary, OSDI. The increase in fiscal 1998 was also due to
continued investments in the OSDI diagnostics business as compared to the prior
period. On November 30, 1999, the Company sold its diagnostics business,
including the assets of OSDI, to Bayer.
Selling, general and administrative expenses increased approximately
$499,000 or 6% in fiscal 1999 compared to fiscal 1998 and approximately
$1,175,000 or 16% in fiscal 1998 compared to fiscal 1997. The increases in
fiscal 1999 compared to fiscal 1998 were primarily related to the increased
corporate development activity during the fiscal year and administration
expenses associated with the acquired operations in Tarrytown from the Cadus
asset acquisition. The increases between fiscal 1998 compared to fiscal 1997
were primarily related to the expenses associated with the expansion of the
Company's Aston and OSDI subsidiaries.
During fiscal 1999, the Company made the strategic decision to close down
its facilities in North Carolina and consolidate its natural products operations
into its Tarrytown facility in New York. The estimated cost of closing this
facility of approximately $535,000 has been accrued as of September 30, 1999,
and is included in R&D expense ($395,000) and selling, general and
administrative expenses ($140,000) in fiscal 1999.
Amortization of intangibles in fiscal 1999, 1998, and 1997 represents
primarily amortization of patents that resulted from the acquisition of the
cancer diagnostic business of Applied bioTechnology, Inc. in fiscal 1991 and
goodwill from the acquisition of Aston in fiscal 1996. The book value of patents
related to the Applied bioTechnology acquisition were written-off with the
transfer of these patents in the sale of the diagnostic business to Bayer on
November 30, 1999.
OTHER INCOME AND EXPENSE
Net investment income decreased approximately $177,000 or 12% in fiscal
1999 compared to fiscal 1998 and $625,000 or 30% in fiscal 1998 compared to
fiscal 1997. This decrease in fiscal 1999 was a result of the decline in
principal balance invested offset by a gain of approximately $436,000 from the
sale of 75,000 shares of Aurora Biosciences' common stock. Under the terms of a
license agreement entered into in May, 1998 with Aurora Biosciences, the Company
received 75,000 shares of Aurora Biosciences' common stock and $300,000 in cash,
for a non-exclusive license and certain sub-licensing rights. Also included in
other income is the gain recognized on the sale of Anaderm common stock. Under
the terms of the expanded Anaderm research agreement dated April 23, 1999,
between the Company and Pfizer, all shareholders of Anaderm were given the right
to require Pfizer to purchase their respective shares of Anaderm common stock
based upon a predetermined formula in the agreement. On September 23, 1999, the
Company exercised its right and sold to
29
<PAGE> 31
Pfizer all of its shares of common stock in Anaderm for approximately
$3,645,000. The sale net of the carrying value of the investment resulted in a
gain of approximately $3,291,000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, working capital (representing primarily cash, cash
equivalents and short-term investments) aggregated approximately $14.6 million.
In addition, on December 2, 1999, the Company received $9.2 million from Bayer
in the sale of assets related to its diagnostics business. Effective as of
November 30, 1999 and pursuant to an Asset Purchase Agreement dated as of
November 17, 1999, and amended November 30, 1999, the Company sold certain
assets of its diagnostics business to Bayer, including the assets of OSDI based
in Cambridge, Massachusetts. The assets sold include certain contracts,
equipment and machinery, files and records, intangible assets, intellectual
property, inventory, prepaid expenses and other assets primarily related to the
operation of the diagnostics business. Bayer intends to retain all employees of
OSDI and will maintain the unit's headquarters in Cambridge. In connection with
the sale, the Company and OSDI entered into certain agreements with Bayer
including an assignment and assumption of lease with respect to the OSDI
facility located in Cambridge and certain patent assignment and license
agreements. Certain employees of the Company and OSDI entered into employment
agreements with Bayer.
On July 30, 1999, the Company acquired certain assets from Cadus for
approximately $2.2 million in cash which included professional fees and other
costs and the assumption of certain liabilities. Forty-seven Cadus employees
were hired by the Company. The Company intends to utilize the acquired assets in
the GPCR-directed drug discovery program and the collaboration with Solvay, but
expects to deploy the balance of the assets in other research areas.
The Company also assumed Cadus' facility lease in Tarrytown, New York
(approximately 45,569 square feet) as of July 1, 1999 (approximately $898,249 in
rental payments per annum through December 31, 2002) and an equipment lease with
General Electric Capital Corporation (GECC). On August 23, 1999, the Company
elected to payoff the GECC lease in exchange for a payment of $2.8 million and
obtained ownership of the fixed assets covered by the lease agreement. On
September 21, 1999, Cadus reimbursed the Company $308,000 in exchange for those
fixed assets that have been retained by Cadus for its own use. The source of the
cash portion of the purchase price and the subsequent decision to payoff the
lease agreement with GECC was the Company's existing cash resources. Liabilities
and facility lease obligation assumed will be paid from existing cash resources
and working capital to be generated in future periods.
The Company is dependent upon collaborative research revenues, government
research grants, interest income and cash balances, and will remain so until
products developed from its technology are successfully commercialized. The
Company believes that with the funding from its collaborative research programs,
government research grants, interest income, and cash balances, its financial
resources are adequate for its operations for approximately the next three years
based on its current business plan even if no milestone payments or royalties
are received during this period. However, the Company's capital requirements may
vary as a result of a number of factors, including, but not limited to,
competitive and technological developments, funds required for further expansion
or enhancement of the Company's technology platform, (including possible
additional joint ventures, collaborations and acquisitions), potential milestone
payments, and the time and expense required to obtain governmental approval of
products, some of which factors are beyond the Company's control.
One of the Company's strategic objectives is to manage its financial
resources and the growth of its drug discovery and development programs so as to
balance its proprietary efforts and funded collaborations. In pursuing this
objective, the Company in fiscal 1999 expanded the scope of its discovery and
development activities without significantly increasing its rate of cash
consumption. The Company expects to continue its current level of expenditures
and capital investment over the next several years to enhance its drug discovery
platform and pursue internal proprietary drug discovery programs.
There can be no assurance that scheduled payments will be made by third
parties, that current agreements will not be canceled, that government research
grants will continue to be received at current levels,
30
<PAGE> 32
that milestone payments will be made, or that unanticipated events requiring the
expenditure of funds will not occur. Further, there can be no assurance that the
Company will be able to obtain any additional required funds on acceptable
terms, if at all. Failure to obtain additional funds when required would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Y2K
The Company is aware of the challenges associated with the inability of
certain systems to properly format information after December 31, 1999. The
Company has worked to resolve the potential impact of the Y2K problem on the
processing of date-sensitive information by the Company's computerized
information systems. The Y2K problem is the result of computer programs being
written using two digits (rather than four) to define an applicable year.
Substantially all of the Company's biology and chemistry databases are stored on
Oracle tables and ISIS chemical structure databases, which are Y2K compliant, as
are its Novell network servers. The Company has completed the conversion of its
financial records to an Oracle based system which is Y2K compliant. The Company
expects these systems to be operational on December 31, 1999. The Company
believes it has fully remediated its Y2K programs and does not anticipate any
material disruption in its operations as the result of any failure by the
Company to fully remediate such programs. To date, the Company has not incurred
any significant costs in addressing the Y2K problem. Based on current
information, the cost of addressing remaining potential Y2K problems associated
with the Company's internal systems and operations are not expected to have a
material adverse impact to the Company's financial position, results of
operations, or cash flows in future periods.
The Company has conducted an evaluation of the extent to which the
operations of the material third parties with whom it regularly deals may be
disrupted by any Y2K non-compliance of any of their systems. These third parties
include the Company's collaborative partners and its suppliers and vendors.
Disruption of the operations of any of its partners could delay or halt
important research and development programs, cause the loss of data or have
other unforeseen consequences. The Company has contacted significant
collaborators, suppliers, vendors and financial institutions in order to
identify potential areas of concern. Given the responses it has received from
suppliers and vendors, the Company has not deemed it necessary to seek
alternative suppliers or vendors. If the Company determines to seek other
alternative suppliers or vendors in the future because of the current suppliers'
or venders' inability to assure Y2K compliance, the Company may not be able to
find adequate replacements. Y2K problems experienced by the Company's suppliers
and vendors could cause a disruption of the Company's operations. The Company
currently is unable to estimate the likelihood of any of these risks being
realized, or if realized, the impact they may have on the Company.
The Company has developed a contingency plan with respect to electric power
which the Company believes would most significantly affect its research activity
and operations. The Company's ability to conduct its R&D programs and to
function as a viable business enterprise, however, depends on the continued
availability of these basic infrastructure systems.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1999, the Financial Accounting Standard Board issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." SFAS 137 amends SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities," which was issued in June,
1998 and was to be effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. SFAS 137 defers the effective date of SFAS 133 to all
fiscal quarters of fiscal years beginning after June 15, 2000. Earlier
application is permitted. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
The Company does not believe that the implementation of SFAS 133 will have a
material effect on its financial position or results of operations.
On December 3, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 -- "Revenue Recognition in Financial
Statements" (SAB No. 101). SAB No. 101 provides
31
<PAGE> 33
the SEC staff's views on the recognition of revenue including nonrefundable
technology access fees received by biotechnology companies in connection with
research collaborations with third parties. SAB No. 101 states that in certain
circumstances the SEC staff believes that up-front fees, even if nonrefundable,
should be deferred and recognized systematically over the term of the research
arrangement. SAB No. 101 requires registrants to adopt the accounting guidance
contained therein by no later than the first fiscal quarter of the fiscal year
beginning after December 15, 1999 (fiscal year ending September 30, 2001 for the
Company). The Company is currently assessing the financial impact of complying
with SAB No. 101 and has not yet determined whether applying the accounting
guidance of SAB No. 101 will have a material effect on its financial position or
results of operations.
FORWARD LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," in Item 1 "Business" and elsewhere in this report that are not
historical or current facts deal with potential future circumstances and
developments. The discussion of these matters and subject areas is qualified by
the inherent risks and uncertainties surrounding future expectations generally,
and these discussions may materially differ from OSI's actual future experience
involving any one or more of these matters and subject areas. These forward
looking statements are also subject generally to the other risks and
uncertainties that are described in this report in Item 1 "Business --
Cautionary Factors that May Affect Future Results."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
OSI's cash flow and earnings are subject to fluctuations due to changes in
interest rates in its investment portfolio of debt securities, to the fair value
of equity instruments held, and, to an immaterial extent, to foreign currency
exchange rates. OSI maintains an investment portfolio of various issuers, types
and maturities. These securities are generally classified as available-for-sale
and, consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a component of accumulated other
comprehensive income (loss) included in stockholders' equity. OSI's investments
in certain biotechnology companies are carried on either the equity method of
accounting or at cost for equity securities that do not have readily
determinable fair values. Other-than-temporary losses are recorded against
earnings in the same period the loss was deemed to have occurred. OSI does not
currently hedge this exposure and there can be no assurance that
other-than-temporary losses will not have a material adverse impact on OSI's
results of operations in the future.
32
<PAGE> 34
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements:
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Independent Auditors' Report................................ 34
Consolidated Balance Sheets -- September 30, 1999 and
1998........................................................ 35
Consolidated Statements of Operations -- Years ended
September 30, 1999, 1998 and 1997......................... 36
Consolidated Statements of Stockholders' Equity -- Years
ended September 30, 1999, 1998
and 1997.................................................. 37
Consolidated Statements of Cash Flows -- Years ended
September 30, 1999, 1998 and 1997......................... 38
Notes to Consolidated Financial Statements.................. 39
</TABLE>
33
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
OSI Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of OSI
Pharmaceuticals, Inc. and subsidiaries (the "Company") as of September 30, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
September 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of OSI
Pharmaceuticals, Inc. and subsidiaries at September 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
Melville, New York
December 22, 1999
34
<PAGE> 36
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,863,887 $ 11,315,166
Investment securities..................................... 9,997,967 13,103,115
Receivables, including amounts due from related parties of
$363,580 and $1,176,975 and trade receivables of
$236,067 and $258,905 at September 30, 1999 and 1998,
respectively........................................... 1,033,917 1,720,737
Receivable from sale of Anaderm common stock.............. 3,645,136 --
Interest receivable....................................... 171,340 283,908
Grants receivable......................................... 343,509 406,149
Prepaid expenses and other................................ 1,088,318 788,496
------------ ------------
Total current assets................................... 25,144,074 27,617,571
------------ ------------
Property, equipment and leasehold improvements -- net..... 10,915,589 7,996,555
Compound library assets -- net............................ 4,197,085 5,515,517
Loans to officers and employees........................... 3,333 6,433
Other assets.............................................. 370,955 1,557,903
Intangible assets -- net.................................. 6,400,292 7,724,001
------------ ------------
$ 47,031,328 $ 50,417,980
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 5,229,672 $ 4,232,540
Unearned revenue -- current............................... 5,185,410 1,116,685
Loans payable -- current.................................. 166,656 --
------------ ------------
Total current liabilities.............................. 10,581,738 5,349,225
------------ ------------
Other liabilities:
Unearned revenue -- long-term............................. 404,762 --
Loans payable -- long-term................................ 277,791 49,326
Deferred acquisition costs................................ 711,037 670,916
Accrued postretirement benefit cost....................... 1,691,054 1,289,267
------------ ------------
Total liabilities...................................... 13,666,382 7,358,734
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued at September 30, 1999 and
September 30, 1998..................................... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 22,404,096 shares issued at September 30,
1999 and 22,288,583 shares issued at
September 30, 1998..................................... 224,041 222,886
Additional paid-in capital................................ 105,173,158 104,963,082
Accumulated deficit....................................... (65,640,618) (55,842,181)
Accumulated other comprehensive (loss) income............. (333,933) 325
------------ ------------
39,422,648 49,344,112
Less: treasury stock, at cost; 865,386 shares at September
30, 1999 and 897,838 shares at September 30, 1998......... (6,057,702) (6,284,866)
------------ ------------
Total stockholders' equity............................. 33,364,946 43,059,246
------------ ------------
Commitments and contingencies............................... $ 47,031,328 $ 50,417,980
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 37
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Collaborative program revenues, principally from
related parties.................................. $ 18,166,693 $ 16,165,613 $ 12,200,801
Sales.......................................... 1,220,317 1,121,449 1,167,604
Other research revenue......................... 994,277 1,428,853 1,408,918
License revenue................................ 2,271,016 752,422 --
------------ ------------ ------------
22,652,303 19,468,337 14,777,323
------------ ------------ ------------
Expenses:
Research and development....................... 24,484,540 19,877,339 16,804,844
Production and service costs................... 1,753,474 813,464 635,768
Selling, general and administrative............ 9,190,774 8,691,386 7,516,038
Amortization of intangibles.................... 1,468,801 1,460,740 1,460,748
------------ ------------ ------------
36,897,589 30,842,929 26,417,398
------------ ------------ ------------
Loss from operations........................ (14,245,286) (11,374,592) (11,640,075)
------------ ------------ ------------
Other income (expense):
Net investment income.......................... 1,290,611 1,467,412 2,092,331
Other expense -- net........................... (134,777) (277,288) (38,493)
Gain on the sale of Anaderm common stock....... 3,291,015 -- --
------------ ------------ ------------
Net loss......................................... $ (9,798,437) $(10,184,468) $ (9,586,237)
============ ============ ============
Weighted average number of shares of common stock
outstanding.................................... 21,450,812 21,372,655 21,604,344
============ ============ ============
Basic and diluted net loss per weighted average
share of common stock outstanding.............. $ (0.46) $ (0.48) $ (0.44)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 38
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL
--------------------- PAID-IN ACCUMULATED INCOME TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT (LOSS) STOCK EQUITY
---------- -------- ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30,
1996........................ 22,175,214 $221,752 $104,347,231 $(36,071,476) $(210,548) $ -- $ 68,286,959
Comprehensive income (loss):
Net loss.................... -- -- -- (9,586,237) -- -- (9,586,237)
Unrealized holding gains on
investment securities, net
of reclassification
adjustment................ -- -- -- -- 107,493 -- 107,493
Translation adjustment...... -- -- -- -- (96,176) -- (96,176)
------------
Total comprehensive loss...... (9,574,920)
------------
Options exercised............. 74,618 746 407,503 -- -- -- 408,249
Issuance of common stock for
employee purchase plan...... 12,388 124 74,456 -- -- -- 74,580
Purchase of treasury stock.... -- -- -- -- -- (8,750,000) (8,750,000)
Issuance of treasury stock for
Dow Compound library
license..................... -- -- 34,866 -- -- 2,465,134 2,500,000
---------- -------- ------------ ------------ --------- ----------- ------------
BALANCE AT SEPTEMBER 30,
1997........................ 22,262,220 222,622 104,864,056 (45,657,713) (199,231) (6,284,866) 52,944,868
Comprehensive income (loss):
Net loss.................... -- -- -- (10,184,468) -- -- (10,184,468)
Unrealized holding gains on
investment securities, net
of reclassification
adjustment................ -- -- -- -- 116,780 -- 116,780
Translation adjustment........ -- -- -- -- 82,776 -- 82,776
------------
Total comprehensive loss...... (9,984,912)
------------
Options exercised............. 5,699 57 24,007 -- -- -- 24,064
Issuance of common stock for
employee purchase plan...... 20,664 207 75,019 -- -- -- 75,226
---------- -------- ------------ ------------ --------- ----------- ------------
BALANCE AT SEPTEMBER 30,
1998........................ 22,288,583 222,886 104,963,082 (55,842,181) 325 (6,284,866) 43,059,246
Comprehensive income (loss):
Net loss.................... -- -- -- (9,798,437) -- -- (9,798,437)
Unrealized holding gains on
investment securities, net
of reclassification
adjustment................ -- -- -- -- (185,710) -- (185,710)
Translation adjustment...... -- -- -- -- (148,548) -- (148,548)
------------
Total comprehensive loss...... (10,132,695)
------------
Options exercised............. 92,187 922 269,143 -- -- -- 270,065
Issuance of common stock for
employee purchase plan...... 23,326 233 68,097 -- -- -- 68,330
Issuance of treasury stock for
consulting services......... -- -- (127,164) -- -- 227,164 100,000
---------- -------- ------------ ------------ --------- ----------- ------------
BALANCE AT SEPTEMBER 30,
1999........................ 22,404,096 $224,041 $105,173,158 $(65,640,618) $(333,933) $(6,057,702) $ 33,364,946
========== ======== ============ ============ ========= =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
37
<PAGE> 39
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net loss.................................................... $(9,798,437) $(10,184,468) $(9,586,237)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Gain on sale of Anaderm common stock.................... (3,291,015) -- --
(Gain) loss on sale of investments...................... (435,907) 45,847 36,523
Depreciation and amortization........................... 2,574,776 1,944,344 1,518,751
In-process research and development charge on
acquisition of Cadus' research business............... 806,065 -- --
Amortization of library assets.......................... 1,761,809 1,811,583 1,101,509
Amortization of intangibles assets...................... 1,468,800 1,460,740 1,460,739
Accretion of deferred acquisition costs................. 40,121 40,120 40,121
Cashless exercise of stock options...................... -- -- 126,600
Common stock received for patent license fee............ -- (402,422) --
Issuance of treasury stock for consulting services...... 100,000 -- --
Changes in assets and liabilities, net of the effects of
the acquisition of Cadus' research business:
Receivables........................................... 680,934 (505,065) 816,278
Interest receivable................................... 112,568 191,892 4,250
Grants receivable..................................... 62,640 (226,409) 151,274
Prepaid expenses and other............................ 55,516 31,655 (196,324)
Other assets.......................................... 832,833 6,079 (72,514)
Accounts payable and accrued expenses................. 764,348 52,501 493,401
Unearned revenue...................................... 4,247,075 383,308 487,339
Accrued postretirement used in benefit cost........... 401,787 344,767 301,000
------------ ------------ -----------
Net cash provided by (used in) operating activities......... 383,913 (5,005,528) (3,317,290)
------------ ------------ -----------
Cash flows from investing activities:
Payments for acquisition of Cadus' research business...... (2,216,682) -- --
Additions to short-term investments....................... (10,676,970) (4,004,770) (4,019,935)
Maturities and sales of short-term investments............ 14,032,315 14,573,046 15,025,749
Change in other assets.................................... -- (276,200) (914,319)
Additions to property, equipment and leasehold
improvements............................................ (4,519,678) (2,188,613) (2,775,925)
Additions to compound library assets...................... (107,517) (526,694) (353,332)
Net change in loans to officers and employees............. 3,100 27,884 3,025
------------ ------------ -----------
Net cash (used in) provided by investing activities......... (3,485,432) 7,604,653 6,965,263
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from exercise of stock options, employee stock,
stock purchase plan, and other.......................... 338,395 99,290 356,230
Proceeds from loan payable................................ 500,000 -- --
Payments on loan payable, net............................. (102,741) (102,659) 68,741
Purchase of treasury stock................................ -- -- (8,750,000)
------------ ------------ -----------
Net cash provided by (used in) financing activities......... 735,654 (3,369) (8,325,029)
------------ ------------ -----------
Net (decrease) increase in cash and cash equivalents........ (2,365,865) 2,595,756 (4,677,056)
Effect of exchange rate changes on cash and cash
equivalents............................................... (85,414) 82,776 (96,176)
Cash and cash equivalents at beginning of year.............. 11,315,166 8,636,634 13,409,866
------------ ------------ -----------
Cash and cash equivalents at end of year.................... $8,863,887 $11,315,166 $8,636,634
============ ============ ===========
Non-cash activities:
Issuance of treasury stock for acquisition of Dow compound
library license........................................... -- -- $2,500,000
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 40
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of OSI Pharmaceuticals, Inc., known as Oncogene Science, Inc. prior to October
1, 1997, and its wholly-owned subsidiaries Applied bioTechnology, Inc.,
MYCOsearch, Inc., Oncogene Science Diagnostics, Inc. (OSDI) and Aston Molecules
Ltd. All intercompany balances and transactions have been eliminated. The
Company operates in one segment and utilizes a platform of drug discovery
technologies in order to discover and develop novel, small molecule compounds
for the treatment of major human diseases. It conducts the full range of drug
discovery activities, from target identification to development of drug
candidates.
(b) Revenue Recognition
Collaborative research revenues represent funding arrangements for the
conduct of research and development in the field of biotechnology and are
recognized when earned in accordance with the terms of the contracts and the
related development activities undertaken. Other research revenues are
recognized pursuant to the terms of grants which provide reimbursement of
certain expenses related to the Company's other research and development, or
R&D, activities. Collaborative and other research revenues are accrued for
expenses incurred in advance of the reimbursement and deferred for cash payments
received in advance of expenditures. Such deferred revenues are recorded as
revenue when earned (See Note 5). Patent license fee revenues are recognized
pursuant to the terms of the license agreement.
Revenue from the sale of diagnostic and research reagent products is
recognized at time of shipment. Revenues from the performance of chemistry
services provided by Aston are recognized when performed.
(c) Patents and Goodwill
As a result of the Company's R&D programs, including programs funded
pursuant to the R&D funding agreements (See Note 5), the Company has applied for
a number of patents in the United States and abroad. Such patent rights are of
significant importance to the Company to protect products and processes
developed. Costs incurred in connection with patent applications for the
Company's R&D programs have been expensed as incurred.
Patents and goodwill acquired in connection with the acquisition of Applied
bioTechnology's cancer business in October 1991 have been capitalized and are
being amortized on a straight-line basis over the remaining lives of the
respective patents, and over five years for goodwill. The goodwill acquired in
connection with the acquisition of Aston in September 1996 is being amortized on
a straight-line basis over five years. The Company continually evaluates the
recoverability of its intangible assets by assessing whether the unamortized
value can be recovered through expected future results.
(d) Deferred Acquisition Costs
Deferred acquisition costs represent common stock purchase rights issued in
connection with the Company's acquisition of Aston on September 19, 1996. The
Company issued rights exercisable at the end of three and five years following
the closing date (for an aggregate exercise price of $7,500) to obtain a number
of shares of the Company's common stock having an aggregate value of $750,000
(based on the then current market value). The present value of such rights,
which are exercisable at the end of three and five years from the closing date,
amounted to $711,037 and $670,916 as of September 30, 1999 and 1998,
respectively.
39
<PAGE> 41
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(e) Research and Development Costs
R&D costs are charged to operations as incurred and include direct costs of
research scientists and equipment and an allocation of laboratory facility and
central service. In fiscal years 1999, 1998, and 1997, R&D activities include
approximately $12,296,000, $5,772,000, and $5,052,000 of independent R&D,
respectively. Included in R&D expenses in fiscal 1999 is $806,000 of in-process
R&D acquired in connection with the acquisition of Cadus' research business (See
Note 3(a)). Independent R&D represents those R&D activities, including R&D
activities funded by government research grants, substantially all the rights to
which the Company will retain. The balance of R&D represents expenses under the
collaborative agreements and co-ventures with Pfizer Inc., Anaderm Research
Corporation, Tanabe Seiyaku Co., Ltd., Vanderbilt University, Sankyo Company,
Ltd., Hoechst Marion Roussel, Inc., Solvay Pharmaceutical, B.V., Novartis Pharma
AG, Helicon Therapeutics, Inc., Wyeth-Ayerst Laboratories, Sepracor, Inc., Bayer
Corporation, Fujirebio, Inc., and BioChem Pharma, Inc.
(f) Depreciation and Amortization
Depreciation of equipment is provided over the estimated useful lives of
the respective asset groups on a straight-line basis. Leasehold improvements are
amortized on a straight-line basis over the lesser of the estimated useful lives
or the remaining term of their lease.
Amortization of the fungal cultures and compounds acquired in connection
with the acquisition of MYCOsearch in fiscal 1996, the acquisition of Cadus
Pharmaceutical Corporation's research business in fiscal 1999 (See Note 3(a)),
and amortization of The Dow Company compound library license (See Note 3(b)) are
on a straight-line basis over five years, which represents the estimated period
over which the fungal cultures, compounds and license will be used in the
Company's R&D efforts.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(h) Investments
Investment securities at September 30, 1999 and 1998 consist of U.S.
Treasury obligations and corporate debt and equity securities. The Company
classifies its investments as available-for-sale. These securities are recorded
at their fair value. Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and are
reported as a separate component of stockholders' equity until realized.
Realized gains and losses from the sale of available-for-sale securities are
determined on a specific identification basis.
A decline in the market value of any available-for-sale security below cost
that is deemed to be other than temporary results in a reduction in carrying
amount to fair value. The impairment is charged to earnings and a new cost basis
for the security is established. Premiums and discounts are amortized or
accreted over the life of the related held-to-maturity security as an adjustment
to yield using the effective interest method. Dividend and interest income are
recognized when earned.
40
<PAGE> 42
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(i) Net Loss Per Share
Basic and diluted net loss per share is computed by dividing the net loss
by the weighted average number of common shares outstanding during the period.
The diluted loss per share presented excludes the number of common share
equivalents (stock options and warrants), since such inclusion in the
computation would be anti-dilutive.
(j) Cash and Cash Equivalents
The Company includes as cash equivalents reverse repurchase agreements,
treasury bills, and other time deposits with original maturities of three months
or less. Such cash equivalents amounted to $2,582,281 and $9,227,339 as of
September 30, 1999 and 1998, respectively.
(k) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relative to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(l) Comprehensive Income (Loss)
In October 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) 130, "Reporting Comprehensive Income". SFAS 130 establishes new
rules for the reporting and display of comprehensive income and its components.
SFAS 130 requires unrealized gains or losses on the Company's available-for-sale
securities (referred to as investment securities on the accompanying
consolidated balance sheets) and foreign currency translation adjustments, which
prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income (loss).
A summary of unrealized holding gains on investment securities, net of
reclassification adjustment is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Unrealized holding gains arising during period....... $ 250,197 $ 70,933 $ 70,970
Less: reclassification adjustment for (gains) and
losses realized in net loss........................ (435,907) 45,847 36,523
--------- -------- --------
Unrealized holding gains on investment securities,
net of reclassification adjustment................. $(185,710) $116,780 $107,493
========= ======== ========
</TABLE>
(m) Basis of Presentation
Certain reclassifications have been made to the prior period financial
statements to conform them to current presentations.
(2) LICENSE AGREEMENTS
Pursuant to a license agreement effective May 26, 1998, the Company granted
to Aurora Biosciences Corporation a non-exclusive worldwide license to practice
the technology under the Company's patent for live-cell gene transcription
assays utilizing a reporter gene. The Company also granted Aurora an option to
obtain a non-exclusive license to practice the technology under the Company's
patent concerning Methods of
41
<PAGE> 43
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Modulation. The duration of each license is to be coextensive with the life of
the last to expire of the underlying patents. Under the license agreement,
Aurora has the right to grant sublicenses. In addition, Aurora will pay the
Company an annual fee of $50,000, milestone payments and royalties on sales of
products derived from the licensed patents, if any. The Company has exclusive
control over prosecution, maintenance and enforcement of the patents subject to
the agreement. The Company received 75,000 shares of Aurora's common stock with
an estimated fair market value of $473,000 and a license fee of $300,000 upon
execution of the agreement. The shares of common stock were subsequently sold in
September 1999 at a then fair market value of $909,000. The resulting realized
gain of approximately $436,000 is included in net investment income in the
accompanying consolidated statement of operations for fiscal 1999.
Pursuant to a license agreement effective July 29, 1999, the Company
granted to Pharmacia & UpJohn SpA a non-exclusive, non-transferable, worldwide,
royalty-bearing license of certain gene transcription patents for drug discovery
and development of product candidates for human therapeutic or diagnostic
purposes (other than in the area of cosmeceuticals). Following April 24, 2002,
the scope of the non-exclusive license will be expanded to include the discovery
and development of cosmeceuticals. The duration of the license is to be
coextensive with the life of the last to expire of the underlying patents. Upon
signing the license agreement, Pharmacia & UpJohn paid the Company $100,000.
Pharmacia & UpJohn will pay OSI an annual fee of $50,000, and milestone and
royalty payments on sales of products derived from the licensed patents, if any.
The Company has exclusive control over prosecution, maintenance and enforcement
of the patents subject to the agreement.
(3) ACQUISITIONS
(a) Cadus Pharmaceutical Corporation
On July 30, 1999, the Company acquired certain assets from Cadus
Pharmaceutical Corporation for approximately $2.2 million in cash which includes
professional fees and other costs and the assumption of certain liabilities. The
acquisition was accounted for under the purchase method of accounting. The
purchase price has been allocated to the assets and the liabilities assumed
based on the fair values at the date of acquisition. The excess of the fair
value of the net assets acquired over the purchase price paid representing
negative goodwill was approximately $2.9 million. The negative goodwill was
allocated proportionately to reduce the value of the noncurrent assets acquired
and the in-process R&D which was charged to operations. The in-process R&D
charge is included in R&D expenses in the accompanying consolidated statement of
operations for the year ended September 30, 1999. The purchase price was
allocated as follows (in thousands):
<TABLE>
<S> <C>
Prepaid expenses and other current assets................... $ 362
Work force intangible....................................... 145
In-process R&D acquired..................................... 806
Compound library............................................ 336
Fixed assets................................................ 1,045
------
Total assets and in-process R&D acquired.................... 2,694
Less liabilities assumed.................................... (477)
------
Cash paid................................................... $2,217
======
</TABLE>
The Company obtained an independent valuation of the amount of in-process
R&D acquired. The value of the purchased in-process R&D from the acquisition was
determined by estimating the projected net cash flows related to products under
development, based upon the future revenues to be earned upon commercialization
of such products. The percentage of the cash flow allocated to purchased
in-process research and development was based upon the estimated percentage
complete for each of the R&D projects. These cash
42
<PAGE> 44
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
flows were discounted back to their net present value. The resulting projected
net cash flows from such projects were based on management's estimates of
revenues and operating profits related to such projects.
The assets purchased include (a) certain assets associated with certain of
Cadus' research programs (including the G-protein coupled receptor (GPCR)
directed drug discovery program and a collaboration with Solvay), (b) Cadus'
compound library of 150,000 components, (c) the purchase or license of certain
intellectual property rights, and (d) certain furniture, equipment, inventory,
and supplies. Several assets were retained by Cadus, including (a) monies in
escrow in connection with the judgment of SIBIA Neurosciences, Inc. against
Cadus, (b) cash and accounts receivable, (c) Cadus' Living Chip Technology, (d)
Cadus' Functional Genomics Program, and (e) Cadus' Research Collaboration and
License Agreement with SmithKline Beecham Corporation. Forty-seven Cadus
employees were hired by the Company. The Company intends to utilize the acquired
assets in the GPCR Directed Chemistry Program and the collaboration with Solvay,
but expects to deploy the balance of the assets in other research areas.
The Company also assumed Cadus' facility lease in Tarrytown, New York
(approximately 45,569 square feet) as of July 1, 1999 (approximately $898,249 in
rental payments per annum through December 31, 2002) and an equipment lease with
General Electric Capital Corporation (GECC). On August 23, 1999, the Company
elected to payoff the GECC lease in exchange for a payment of $2.8 million and
obtained ownership of the fixed assets covered by the lease agreement. On
September 21, 1999, Cadus reimbursed the Company $308,000 in exchange for those
fixed assets that have been retained by Cadus for its own use. The source of the
cash portion of the purchase price and the subsequent decision to payoff the
lease agreement with GECC was the Company's existing cash resources. Liabilities
and the facility lease obligation assumed will be paid from existing cash
resources and working capital to be generated in future periods.
In connection with the acquisition, the Company entered into the following
additional agreements with Cadus: (a) a Patent License Agreement, (b) a
Technology License Agreement, and (c) a Software License Agreement, pursuant to
which the Company obtained non-exclusive licenses for the use and practice of
certain of Cadus' patents, Cadus' technology and Cadus' software programs,
respectively. The Company and Cadus also entered into another Patent License
Agreement under which the Company will license back to Cadus on a non-exclusive
basis certain of the patents which were assigned to the Company as part of the
acquisition.
In connection with the acquisition, the Company adopted a Non-Qualified
Stock Option Plan for former employees of Cadus. The Company granted options to
purchase an aggregate of 415,000 shares of common stock of the Company at a
purchase price of $5.00 per share, which represents the fair value of the
Company's stock at the date granted. These options become exercisable on July
30, 2000.
The operating results of Cadus' research business have been included in the
consolidated statements of operations from July 30, 1999. The following
unaudited pro forma information presents a summary of consolidated results of
operations for the years ended September 30, 1999 and 1998 assuming the asset
acquisition had taken place as of October 1, 1998 and October 1, 1997,
respectively:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues............................................... $ 24,902 $ 22,168
Net loss............................................... (15,013) (16,452)
Net loss per share..................................... (0.70) (0.77)
</TABLE>
43
<PAGE> 45
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
The pro forma results give effect to the amortization of acquired
intangibles and reduction of investment income. The pro forma information is not
necessarily indicative of the results of operations had the asset acquisition
been affected on the assumed date.
(b) Compound Library License
On March 18, 1997, the Company entered into a license agreement with The
Dow Chemical Company giving the Company exclusive worldwide rights to use more
than 140,000 compounds for screening and potential development of small molecule
drugs and cosmeceuticals. The initial payment for the license was 352,162 shares
of the Company's common stock with a fair market value of approximately
$2,500,000. Dow Chemical is also entitled, in certain instances where
pre-existing Dow Chemical patents are in effect, to royalty payments from any
new drug products that may result from the screening of the subset of the
compound library covered by such patents. The common stock issued to Dow
Chemical was from the shares held in treasury. The Company will amortize the
license agreement cost on a straight-line basis over a five-year period, which
represents the estimated period over which the compounds will be used in the
Company's research and development efforts. Since the Company did not conduct
significant research utilizing these compounds during fiscal 1997, the Company
began amortizing the license agreement cost in October 1997 and recorded
$505,446 of amortization expense in both fiscal 1998 and 1999.
(4) INVESTMENTS
The Company invests its excess cash in U.S. Government securities and debt
and equity instruments of financial institutions and corporations with strong
credit ratings. The Company has established guidelines relative to
diversification of its investments and their maturities that should maintain
safety and liquidity. These guidelines are periodically reviewed and modified to
take advantage of trends in yields and interest rates. The Company uses the
specific identification method to determine the cost of securities sold.
The following is a summary of available-for-sale securities as of September
30, 1999 and 1998:
<TABLE>
<CAPTION>
GROSS
UNREALIZED
1999 COST (LOSSES) GAINS FAIR VALUE
- ---- ----------- -------------- ----------
<S> <C> <C> <C>
US Treasury Securities and obligations of US
Government agencies....................... $ 9,149,811 $(166,905) $8,982,906
Corporate debt securities................... 1,014,786 275 1,015,061
----------- --------- ----------
Total.................................. $10,164,597 $(166,630) $9,997,967
----------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
GROSS
UNREALIZED
1998 COST (LOSSES) GAINS FAIR VALUE
- ---- ----------- -------------- -----------
<S> <C> <C> <C>
US Treasury Securities and obligations of
US Government agencies................... $ 9,201,681 $(17,154) $ 9,184,527
Corporate debt securities.................. 3,479,932 36,234 3,516,166
Corporate equity securities................ 402,422 -- 402,422
----------- -------- -----------
Total................................. $13,084,035 $ 19,080 $13,103,115
----------- -------- -----------
</TABLE>
Net realized gains on sales of investments during fiscal 1999 were
approximately $436,000, and net realized losses on sales of investments during
1998 and 1997 were approximately $46,000 and $37,000, respectively.
44
<PAGE> 46
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
The Company also has investments in certain biotechnology companies which
are included in other noncurrent assets in the accompanying consolidated balance
sheets. The net investments are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1999 1998
-------- ----------
<S> <C> <C>
Anaderm Research Corporation......................... $ -- $ 977,471
Helicon Therapeutics, Inc............................ -- 200,000
Tularik Inc.......................................... 250,000 250,000
-------- ----------
$250,000 $1,427,471
======== ==========
</TABLE>
As further discussed in Note 5, the Company has collaborative research
agreements with Anaderm and Helicon and the investments were carried based on
the equity method of accounting. On September 23, 1999, the Company exercised
its right to require Pfizer to purchase all of its shares of Anaderm common
stock at a sale price of $3.6 million. As of September 30, 1999, the Company
recognized a gain of $3.3 million on the sale of the Anaderm common stock and
recorded a receivable of $3.6 million. On November 10, 1999, the Company
received a cash payment of this receivable from Pfizer. As of September 30,
1999, the Company has fully reserved its investment in Helicon as more fully
discussed in Note 5(i). The investment in Tularik Inc. is carried at cost and
approximates fair market value.
(5) PRODUCT DEVELOPMENT CONTRACTS
(a) Pfizer
Effective April 1, 1996, the Company and Pfizer renewed their ten-year-old
collaboration for a new five-year term by entering into new Collaborative
Research and License Agreements. Under these agreements, all patent rights and
patentable inventions derived from the research under this collaboration are
owned jointly by the Company and Pfizer. Under the collaborative research
agreement, Pfizer has committed to provide research funding to the Company in an
aggregate amount of approximately $18.8 million. Pursuant to a schedule set
forth in the collaborative research agreement, Pfizer will make maximum annual
research funding payments to the Company, which will gradually increase from
approximately $3.5 million in the first year of the five-year term to
approximately $4 million in the fifth year. The collaborative research agreement
will expire on April 1, 2001. It may, however, be terminated earlier by either
party upon the occurrence of certain defaults by the other party. Any
termination of the collaboration resulting from a Pfizer default will cause a
termination of Pfizer's license rights. Pfizer will retain its license rights if
it terminates the agreement in response to a default by the Company. Upon such
early termination by Pfizer, Pfizer will retain its license rights. The Company
also granted Pfizer an exclusive, worldwide license to make, use, and sell the
therapeutic products resulting from this collaboration in exchange for royalty
payments. This license terminates on the date of the last to expire of the
Company's relevant patent rights.
Effective as of April 1, 1999, the Company entered into a Development
Agreement with Pfizer for the development of certain compounds derived from the
collaborative research agreement described above for the treatment of psoriasis.
Under the Development Agreement, the Company will conduct a development program
formulated by the Company and Pfizer which includes pre-clinical and clinical
research through and including Phase II clinical trials for compounds to assess
their safety and efficacy to be developed as therapeutic agents for the
treatment of psoriasis and other related dermal pathologies. Pursuant to the
terms, Pfizer has granted to the Company an exclusive, with the exception of
Pfizer, license to make and use the compounds for all research purposes in the
development program other than the sale or manufacture for sale of products or
processes. At the end of the development program, Pfizer must notify the Company
of its intention to continue development and commercialization of a compound
within three (3) months following
45
<PAGE> 47
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
receipt of the data package from the clinical studies. If Pfizer does so notify
the Company of such intention, it will have an exclusive, world-wide license,
with the right to grant sublicenses, to make, use, sell, offer for sale and
import products developed in the course of the development program subject to
the reimbursement of clinical development costs. If Pfizer fails to notify the
Company of such intention, the Company will receive an exclusive, world-wide,
royalty-bearing license, including the right to grant sublicenses, to
manufacture, use, sell, offer for sale and import products developed in the
course of the development program. The Company, however, has the right to refuse
to accept this license. The party receiving the license must pay milestone and
royalty payments as consideration therefor. The duration of the licenses is
coextensive with the lives of patents related to the licensed compounds. Each of
the parties has rights and obligations to prosecute and maintain patent rights
related to specified areas of the research under the Development Agreement. The
Development Agreement is subject to early termination in the event of certain
defaults by the parties.
(b) Anaderm
In April 1996, in connection with the formation of Anaderm, the Company
entered into a Stockholders' Agreement (1996 Stockholders' Agreement) among the
Company, Pfizer, Anaderm, New York University and certain NYU faculty members,
and a Collaborative Research Agreement among the Company, Pfizer and Anaderm.
Anaderm issued common stock to Pfizer and the Company and options to purchase
common stock to NYU and the faculty members. NYU and the faculty members have
since exercised their options fully, and until November 10, 1999 Pfizer held
82%, the Company held 14% and NYU and the faculty members collectively held 4%
of Anaderm's common stock. In exchange for its 14% of the outstanding shares of
Anaderm common stock, the Company provided formatting for high throughput
screens and conducted compound screening for 18 months at its own expense under
the 1996 Research Agreement. The term of the 1996 Research Agreement was three
years. During the initial phase of the agreement (the first 18 months), the
Company was required to provide at its own cost formatting for high throughput
screens and perform screening of its own compounds and those compounds provided
by Pfizer. Upon the termination of the initial phase, the board of directors of
Anaderm made a determination that the initial phase was successfully completed.
With Pfizer's approval, the funded phase commenced on October 1, 1997. During
this phase, Anaderm made payments to the Company equal to its research costs,
including overhead, plus 10%. Anaderm or Pfizer will pay royalties to the
Company on the sales of products resulting from this collaboration. In December
1997, the Company and Pfizer entered into an agreement for a second round of
equity financing for Anaderm. The agreement called for an equity contribution of
$14 million, of which the Company contributed $2 million in drug discovery
resources, including assay biology, high throughout screening, lead optimization
and chemistry, through 1999.
On April 23, 1999, the Company entered into an Amended and Restated
Collaborative Research Agreement (1999 Research Agreement) with Pfizer and
Anaderm to expand the collaborative program begun by the 1996 Research Agreement
and an Amended and Restated Stockholders' Agreement with Pfizer, Anaderm, NYU
and the faculty members (1999 Stockholders' Agreement). The 1999 Research
Agreement is for a term of three years. Pfizer may terminate the 1999 Research
Agreement, however, after the first or second year of the term in its sole
discretion after consultation with Anaderm and the Company to determine whether
satisfactory progress has been made in the research program during the previous
year. The 1999 Research Agreement provides for funding by Pfizer of up to $35
million in total payments to Anaderm to fund the Company's research and
development activities during the three-year term and up to $15 million in
phase-down funding following expiration of the three-year term or earlier
termination by Pfizer. In the expanded program, the Company will continue to
provide a full range of capabilities including assay biology, high throughput
screening, compound libraries, combinatorial, medicinal, and natural product
chemistry, as well as pharmaceutics, pharmacokinetics and molecular biology. The
Company anticipates a significant increase in its staffing of the program to
conduct its drug discovery efforts during the term of the 1999
46
<PAGE> 48
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Research Agreement. Anaderm or Pfizer will pay royalties to the Company on the
sales of products resulting from the collaboration.
A significant change to the 1996 Stockholders' Agreement by the 1999
Stockholders' Agreement is the addition of a right on the part of each of the
Company, NYU and each of the faculty members, exercisable at any time prior to
December 31, 1999, to require Anaderm or Pfizer to purchase all, but not less
than all, of the shares of common stock of Anaderm held by each such stockholder
for a fixed price based upon a formula as set forth in the 1999 Stockholders'
Agreement. The stockholders, also continue to have the right, exercisable at any
time subsequent to April 23, 2000, to require Anaderm or Pfizer to purchase all,
but not less than all, of the shares of common stock of Anaderm held by each
such stockholder at the "Fair Value" (as such term is defined in the 1999
Stockholders' Agreement) of such shares. In addition, Anaderm or Pfizer had the
right, exercisable at any time subsequent to April 23, 2002, to require the
Company, NYU or any faculty member to sell to Anaderm all, but not less than
all, of the shares of common stock of Anaderm held by such stockholder at the
Fair Value of such shares. In the 1996 Stockholders' Agreement, this call right
was exercisable by Anaderm only with respect to the shares owned by NYU and the
faculty members.
As of September 30, 1999, the Company has expended approximately $12.5
million, of which, $2.6 million has been capitalized as the cost of the
Company's 14% interest in Anaderm. This capitalized cost has been offset by the
Company's interest in the loss of Anaderm through September 23, 1999. As
discussed in Note 4, the Company exercised its option to sell its Anaderm common
stock to Pfizer as of September 23, 1999 for a total sale price of $3.6 million.
The Company's net investment in Anaderm at the date of the sale was
approximately $354,000 resulting in a net gain of $3.3 million on the sale of
common stock. During fiscal 1999 and 1998, the Company recorded revenue of
approximately $6.6 million and $3.5 million, respectively, from Anaderm for
contracted research activities.
(c) Tanabe
Effective as of October 1, 1999, the Company entered into a Collaborative
Research and License Agreement with Tanabe. The collaboration is focused on
discovering and developing novel pharmaceutical products to treat diabetes.
Under the agreement, the Company is responsible for identification of
targets (subject to Tanabe's approval), assay development, screening of
compounds from the Company's library and Tanabe's library against identified
targets, identification of seed compounds meeting certain criteria specified in
the agreement, optimization of such seed compounds, and identification of lead
compounds meeting certain criteria specified in the agreement. Tanabe maintains
responsibility for further development and marketing of a lead compound in
exchange for milestone and royalty payments to the Company.
If Tanabe determines to initiate further development of a lead compound
identified by the Company, the Company will grant to Tanabe exclusive, worldwide
licenses to, among other things, use, manufacture and sell all products
containing such lead compounds directed to the identified targets. In exchange
for these licenses, Tanabe will pay the Company license fees and royalties on
product sales. The duration of the licenses is coextensive with the lives of the
patents related to the licensed compound or ten years from first commercial
sale, whichever is longer. If Tanabe determines not to initiate further
development of a lead compound or if Tanabe discontinues development of
candidate compounds, the Company will have the sole and exclusive right to
develop, use, manufacture and sell all products resulting from the
collaboration, and it will pay royalties to Tanabe. Each of the parties has
rights and obligations to prosecute and maintain patent rights related to
specified areas of the research under the agreement.
Generally, the Company is prohibited during the term of the contract from
pursuing independently, having sponsored or sponsoring research and development
of compounds and products in the diabetes area
47
<PAGE> 49
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
relating to the identified targets in the agreement. Tanabe is prohibited from
sponsoring research relating to the identified targets and from being sponsored
by another pharmaceutical company with respect to research relating to the
identified targets. The agreement is for a term of four years, with the option
to extend for an additional one two year period. Tanabe, however, has the right
to terminate the agreement after two years under certain circumstances. On the
effective date of the agreement Tanabe was required to pay the Company a
technology access fee of $3.5 million. On September 28, 1999, the Company
received $4,312,500 from Tanabe which represented advanced funding of the
technology access fee of $3.5 million and research funding of $812,500 for the
first quarter of fiscal 2000. This amount has been recorded in deferred
revenue -- current in the accompanying consolidated balance sheet as of
September 30, 1999. See Note 16 for a discussion of SEC Staff Accounting
Bulletin No. 101 on revenue recognition of technology access fees.
(d) Vanderbilt
Effective as of April 28, 1998, the Company entered into a Collaborative
Research, Option and Alliance Agreement with Vanderbilt University to conduct a
collaborative research program and seek a corporate partner to fund a technology
collaboration for the discovery and development of drugs to treat diabetes. The
collaborative research was funded by the Company in exchange for which the
Company received an option to negotiate a commercially reasonable, worldwide,
exclusive license from Vanderbilt to develop, make, use, and sell products
derived from the research program. The Company and Vanderbilt committed equal
resources to the program, including, among other things, access to all their
respective laboratory facilities and dedicated teams of research scientists. The
Company had certain rights and obligations to prosecute and maintain patent
rights related to specified areas of the research under the agreement. The
agreement was for a term of one year, and was extended until the execution of a
third-party research collaboration agreement by the Company -- i.e., the
agreement with Tanabe.
Concurrently with the execution of the Tanabe agreement, the Company and
Tanabe entered into an Amended and Restated Collaborative Research, License and
Alliance Agreement with Vanderbilt with an effective date of August 31, 1999.
This agreement amended and restated the agreement from April 1998 to add Tanabe
as a party to the agreement with respect to certain sections and to amend
certain other provisions to clarify Vanderbilt's role in the OSI/Tanabe research
program. The term of the research program conducted by OSI and Vanderbilt
commenced on April 28, 1998 and will end upon termination of the contract period
under the Tanabe agreement unless mutually extended by the Company and
Vanderbilt.
The OSI/Vanderbilt research program is comprised of two parts: research
directed toward the targets identified in the Tanabe agreement and research
directed toward additional targets which are not targets under the Tanabe
agreement. The Company may offer to Tanabe any of the additional targets for
inclusion in the OSI/Tanabe research program. As part of the OSI/Vanderbilt
research program, Vanderbilt will assist the Company in fulfilling its
obligations under the Tanabe/OSI research program by providing access to
Vanderbilt's drug discovery resources, including laboratories and assays.
The Company will provide funding to Vanderbilt to conduct the
OSI/Vanderbilt research program. A portion of such funding will come from
Tanabe's funding of the OSI/Tanabe research program. The Company will also pay
to Vanderbilt a percentage of the revenues (milestone and royalty payments) it
receives from Tanabe and any other third party which is commercializing products
resulting from the OSI/Vanderbilt research program. The percentage received by
Vanderbilt will vary in accordance with the extent to which Vanderbilt
technology and patents contributed to the product giving rise to such revenue.
The Company also paid Vanderbilt a one-time success fee in the amount of
$500,000 in October, 1999 in respect of the Company entering into the Tanabe
agreement.
48
<PAGE> 50
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(e) Sankyo
Effective as of February 12, 1997, the Company entered into a Collaborative
Research and License Agreement with Sankyo to be conducted in partnership with
MRC Collaborative Center, London, U.K. The collaboration is focused on
discovering and developing novel pharmaceutical products to treat influenza. The
Company is responsible for conducting research as directed by a research
committee, including, without limitation, compound screening in exchange for
research funding from Sankyo. Sankyo has the responsibility and the exclusive
right to conduct pre-clinical and clinical development of all candidate
compounds in exchange for milestone payments to the Company. In November 1999,
the Company and Sankyo renewed the collaboration for an additional two years.
During 1997, the Company received and recorded $267,000 for a non-refundable
technology disclosure fee upon signing the agreement. During fiscal 1999 and
1998, the Company recorded revenue of approximately $2.1 million and $2.6
million, respectively, from Sankyo pursuant to this agreement.
The Company and MRC CC have granted to Sankyo exclusive, worldwide licenses
to, among other things, use, manufacture and sell all products resulting from
the collaboration. In exchange for these licenses, Sankyo will pay to the
Company and MRC CC license fees and royalties on product sales. The duration of
the licenses is coextensive with the lives of the patents related to the
licensed compound. If Sankyo discontinues development of all candidate
compounds, the Company will have the sole and exclusive right to develop, use,
manufacture and sell all products resulting from the collaboration, and it will
pay royalties to Sankyo.
(f) Hoechst Marion (HMRI)
Effective as of April 1, 1997, the Company and HMRI entered into an Amended
Collaborative Research and License Agreement that consolidated and extended
formerly separate collaborative programs between the Company and each of Marion,
Hoechst Roussel and Hoechst AG. This resulted from the corporate reorganization
of HMRI in July 1995 in which the pharmaceutical operations Marion, Hoechst
Roussel and Hoechst AG were combined into HMRI. This Amended Collaborative
Research and License Agreement provides for HMRI and the Company to collaborate
in the discovery and development of drugs for the treatment of various diseases.
Under this collaboration, a research committee, with equal representation
from the Company and HMRI, meets at least three times a year to evaluate the
progress of the research program, make priority and program decisions, and
prepare research plans identifying the drug targets to be pursued. New targets
are added to the program on an ongoing basis by mutual agreement. The Company is
responsible for achieving objectives outlined in the annual research plans. HMRI
is responsible for assisting the Company in the pursuit of such objectives and
for the clinical development and commercialization of drugs resulting from the
program. HMRI is responsible for funding the costs of the Company's discovery
efforts, and as of September 30, 1999, the Company has recognized an aggregate
of $22.8 million in research funding from HMRI and its predecessors.
The Company has granted to HMRI an exclusive, worldwide license (and rights
to acquire additional licenses) with respect to, among other things, the use,
manufacture and sale of products resulting from the Company's lead seeking
efforts against individual drug targets. In exchange for these licenses, HMRI
will pay royalties to the Company on sales of such products. The Company and
HMRI have mutually exclusive rights and obligations to prosecute and maintain
certain patent rights related to various specified areas of the research.
Effective as of January 1, 1997, the Company entered into a Collaborative
Research and License Agreement with HMRI to develop orally active, small
molecule inducers of erythropoietin gene expression for the treatment of anemia
due to chronic renal failure and anemia associated with chemotherapy for AIDS
and
49
<PAGE> 51
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
cancer. This collaboration identified active lead compounds that were advanced
to a pre-clinical development stage. During fiscal 1997, the Company received
and recorded as income a $1.0 million initiation fee from HMRI in connection
with this collaboration. This research effort, however, did not achieve
sufficient data to warrant further development. Consequently, in October 1998,
this program was terminated.
(g) Solvay
With the acquisition of certain assets of Cadus, the Company assumed a
Collaborative Research and License Agreement effective as of November 1, 1995
between Cadus and Solvay. The collaboration is directed toward GPCR drug
discovery in differing fields of use. The Company's fields of use include
cancer, autoimmune and inflammatory diseases. Solvay's fields of use include
central nervous system disorders, cardiovascular and gastrointestinal diseases.
The parties are to develop and manufacture screens that incorporate targets
which are the subject of the agreement. The screens are to enable Solvay and the
Company to test compounds for biological activity as part of their respective
drug discovery efforts in their respective fields. The parties are responsible
for the identification of targets and the Company undertakes assay development
using funds from Solvay. In exchange for milestone and royalty payments, Solvay
maintains sole responsibility for pre-clinical and clinical development as well
as marketing and commercialization of any lead compound it discovers from its
use of the screens developed as part of the collaboration.
Under the agreement, Cadus granted to Solvay a worldwide license in
Solvay's fields of use to, among other things, use and practice the screens to
identify and confirm potential human therapeutics. The license is exclusive for
the term of the research program, or longer if Solvay has identified or
confirmed a potential product during the exclusive period, and non-exclusive for
five years following the research program. In exchange for these licenses,
Solvay will pay the Company, as Cadus' successor, license fees and royalties on
product sales. If Solvay discontinues the development of candidate compounds,
the Company, as Cadus' successor, will have the sole and exclusive right to
develop, use, manufacture and sell all products resulting from the
collaboration, and the Company will pay milestones and royalties to Solvay. Each
of the parties has rights and obligations to prosecute and maintain patent
rights related to specified areas of the research under the agreement. The term
of the research program is until December 31, 2000. The Company is to receive
$2.5 million per year in research funding plus cost of living adjustments. The
Company recorded revenue of $447,000 from Solvay for the two months ended
September 30, 1999.
(h) Novartis
The Company entered into an agreement with Novartis in April 1995 (1995
Agreement) for the development of TGF-Beta 3 for various indications. TGF-Beta 3
is a naturally occurring human growth factor, first isolated by the Company,
that exerts either stimulatory or inhibitory effects depending upon the
particular cell type to which it is applied. This agreement granted to Novartis
an exclusive, worldwide license to use and sell TGF-Beta 3 products for wound
healing and oral mucositis, as well as certain other indications, in exchange
for royalty payments to the Company on the sale of TGF-Beta 3 products.
During 1998, Phase II clinical trials being conducted by Novartis for both
wound healing and oral mucositis failed to achieve their primary clinical end
points. Consequently, no further clinical development of TGF-Beta 3 by Novartis
for either wound healing or oral mucositis has been anticipated.
In May 1999, certain terms of the 1995 Agreement including the definition
of licensed indications, the supply of TGF-Betas, the amount of royalty
payments, and the schedules of the Company's patents and applications and
Novartis' patents were amended. Specifically, oral mucositis and the healing of
soft wound tissue were removed from the licensed indications. Novartis
acknowledged that it has discontinued develop-
50
<PAGE> 52
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
ment of products for the indications of oral mucositis and healing of soft wound
tissue. The parties agreed that all licenses theretofore granted to Novartis
with respect to such discontinued indications are terminated and that the
Company is free to continue development work and to grant licenses to third
parties with respect to such discontinued indications. The Company is also free
to use the results of any development work with respect to the discontinued
indications carried out by Novartis prior to the date of the amendment provided
that the Company pays to Novartis royalties and/or certain other agreed-upon
amounts with respect to sales of products resulting from any such continued
development work by the Company or a licensee thereof. Under the amendment, the
new licensed indications are bone, cartilage and tendon repair. Under the
amended agreement, Novartis' exclusive option has been amended to include in the
definitions of licensed indications, the treatment of transplant patients (e.g.,
graft protection), the treatment of ischemia (e.g., angina pectoris and
peripheral vascular disease), the treatment of stroke patients, and the
treatment of inflammatory bowel disease, and Novartis also has a non-exclusive
option to include any other additional indications relating to TGF-Betas (other
than the discontinued indications) upon payment of a milestone payment. The
exercise of the option will result in Novartis making a milestone payment of
$5.0 million or purchasing $5.0 million of the Company's common stock at a per
share price equal to 115% of the average closing price for the 30-day period
ending on the date of purchase. The time period to exercise the option was
extended until May 31, 2003. The Company's agreement with Novartis ends upon the
expiration of the last of the Company's patents relating to TGF-Beta 3.
(i) Helicon
In July 1997, the Company, Cold Spring Harbor Laboratory and Hoffman-La
Roche Inc. formed Helicon Therapeutics, Inc., a new Delaware corporation. In
exchange for approximately 30% of Helicon's outstanding capital stock, the
Company contributed to Helicon molecular screening services and a nonexclusive
license with respect to certain screening technology. Such services were
completed in fiscal 1998. Cold Spring Harbor Laboratory contributed a
royalty-free license to commercialize certain technology relating to genes
associated with long-term memory in exchange for a portion of Helicon's
outstanding capital stock. Hoffman-La Roche contributed cash for a portion of
Helicon's outstanding capital stock. Certain individuals associated with Cold
Spring Harbor Laboratory hold the remaining outstanding capital stock of
Helicon.
The parties entered into various collaborative research and license
agreements pursuant to which they were to jointly pursue the discovery,
development and commercialization of novel drugs for the treatment of long-term
memory disorders and other central nervous system dysfunctions. The Company and
Cold Spring Harbor Laboratory conducted research under the program, which was
funded by Helicon (except for the molecular screening services that the Company
contributed to Helicon). Helicon received this funding from Hoffman-La Roche for
the first two years of the program. Hoffman-La Roche terminated the program at
the end of the second year and the terms of termination are being negotiated.
Helicon had granted to Hoffman-La Roche a worldwide license to commercialize
pharmaceutical products resulting from the collaborative program in exchange for
certain milestone payments and royalties on Hoffman-La Roche's sales of such
products. The Company is currently contributing funds to Helicon on an as-needed
basis in amounts required to cover the costs of conducting research activities,
which amounts are charged to R&D expense.
As of September 30, 1998, the Company had capitalized $1.0 million as the
cost of the Company's 30% interest in Helicon, which was offset by the Company's
equity interest in the losses of Helicon and a reserve for impairment based on
the uncertainty of Helicon's future profitability. The Company's net investment
in Helicon at September 30, 1998 of $200,000 was included in other assets in the
accompanying consolidated balance sheet. At September 30, 1999, this investment
was reduced by recognition of the Company's equity interest in Helicon's net
losses and the balance of the equity interest has been written off in
recognition of the impairment of the investment upon the termination of the
Hoffman-La Roche research collaboration. The
51
<PAGE> 53
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Company recorded revenue of $642,000 and $203,000 from Helicon in fiscal 1999
and 1998, respectively, in connection with its collaborative research and
license agreement.
(j) Wyeth-Ayerst
Effective December 31, 1991, the Company entered into a collaborative
research agreement with Wyeth. This agreement was extended and expanded in
January 1994 for an additional three years through December 31, 1996 to provide
for additional funding of approximately $4.3 million. The Company had received
approximately $1.6 million annually in research and development funding from
Wyeth pursuant to this collaborative agreement. The funded portions of the
research collaboration expired on December 31, 1996. To the extent Wyeth
commercializes any products derived from this collaboration, it will pay certain
royalties to the Company on sales of such products, if any.
(k) Sepracor
Pursuant to an Amendatory and Collaborative Agreement dated March 31, 1998,
the Company and Sepracor amended their Collaborative Research, Development and
Commercialization Agreement dated March 7, 1997, terminating certain provisions
contained therein, including, without limitation, provisions establishing the
research program. Each party will be free to independently pursue the discovery
of new compounds in the anti-infective area without incurring any responsibility
to the other party. To the extent Sepracor commercializes certain compounds
arising out of the joint venture, however, it will pay royalties to the Company.
The Company provided discovery biology and certain other services to Sepracor
until September 1, 1998, in exchange for fees. In fiscal 1999, the Company had
received approximately $74,000 in funding from Sepracor pursuant to the amended
agreement.
(l) Bayer
Effective January 1, 1997, the Company and Bayer entered into an agreement
to develop serum-based cancer diagnostic products. Under the agreement, the
Company granted to Bayer licenses to manufacture, use and sell clinical
diagnostic products based on the Company's cancer diagnostic technology in
exchange for royalties on net sales. Bayer owns all the technology, and has the
exclusive right to commercialize automated clinical diagnostic products derived
from the collaboration. The Company retained rights and was actively selling
non-automated, or manual, versions of these tests to the clinical research
market and retained the right to commercialize automated the manual versions in
the clinical diagnostic market. Bayer's license is perpetual with respect to
non-patented technology and would terminate with respect to patented technology
upon the expiration of the last to expire of the Company's patents. Bayer
provided funding for the Company's research under the collaboration in the
amount of $1.5 million for each of the first two contract years, and $1 million
for each subsequent year. After the first two contract years, the Company was
required to provide up to $500,000 in annual funding for the collaboration to
the extent the Company derived net revenues from out-licensing any cancer
diagnostics technology or the sale of any clinical diagnostic or clinical
research products. The agreement was to terminate on December 31, 2002. Bayer
had the right to terminate the agreement at any time after December 31, 1997
upon 12 months notice. Upon the sale of the Company's diagnostic business to
Bayer, the agreement terminated. During fiscal 1999 and 1998, the Company
recorded revenue of approximately $1.1 million and $1.5 million, respectively,
from Bayer pursuant to this agreement. See Note 17 for sale of the Company's
diagnostic business to Bayer on November 30, 1999.
(m) Fujirebio
The Company, through its wholly-owned subsidiary OSDI, entered into a
Research Collaboration and License Agreement with Fujirebio effective April 1,
1998, creating a collaborative program focused on
52
<PAGE> 54
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
discovering and developing certain proprietary cancer assays and commercializing
cancer products. Under the agreement, Fujirebio funded the Company's research
and development of cancer assays over a four-year term. The Company provided
Fujirebio with antibodies, antigens and other substances necessary to
manufacture the diagnostic products derived from the collaboration. Further, the
Company granted to Fujirebio a non-exclusive license to, among other things,
develop, manufacture and sell the products developed pursuant to the
collaboration in exchange for license fees and royalties on product sales. The
duration of the license was coextensive with the lives of the patents related to
the licensed products. Each of the parties had rights and obligations to
prosecute and maintain patent rights related to specified areas of the research
under the agreement. The agreement was subject to early termination by either
party in the event of certain defaults. Upon the sale of the Company's
diagnostics business to Bayer, the agreement was assigned to Bayer. During
fiscal 1999, the Company recorded $433,333 of revenue under this agreement. See
Note 17 for sale of the Company's diagnostic business on November 30, 1999.
(n) BioChem
Pursuant to an Agreement, dated March 19, 1999, the Company and BioChem
Pharma, Inc. (formerly BioChem Pharma (International) Inc.) amended their
Collaborative Research, Development and Commercialization Agreement, effective
as of May 1, 1996, terminating certain provisions contained therein, including,
without limitation, provisions establishing the research program. Under the
amended agreement, BioChem received from the Company a worldwide, irrevocable,
exclusive license, and right to grant sublicenses, in a certain anti-viral
target for a license fee of $2 million in cash, which is included in license fee
income in the accompanying consolidated statement of operations for the year
ended September 30, 1999. In addition, each party will be free to independently
pursue the discovery of new compounds in the Hepatitis B and HIV areas without
incurring any responsibility to the other party. To the extent BioChem completes
any clinical trials or pursues any regulatory approvals for any products covered
by the license, it will pay milestones to the Company. In addition, to the
extent BioChem commercializes certain compounds arising out of the joint
venture, it will pay royalties to the Company.
(o) Other
Under the terms of aforementioned collaborative research agreements, the
collaborative partners will pay the Company royalties ranging from 2% to 8% of
net sales of products resulting from these research programs. To date, the
Company has not received any royalties pursuant to these agreements. The Company
or its collaborative partners may terminate each of the collaborative research
programs upon the occurrence of certain events.
The Company does not intend to conduct late-stage clinical trials,
manufacturing or marketing activities with respect to any of its product
candidates in the foreseeable future. The Company is dependent on the companies
with which it collaborates for the pre-clinical testing, clinical development,
regulatory approval, manufacturing and marketing of potential products developed
under its collaborative research programs. The Company's collaborative
agreements allow its collaborative partners significant discretion in electing
to pursue or not to pursue any of these activities. The Company cannot control
the amount and timing of resources its collaborative partners devote to the
Company's programs or potential products. If any of the Company's collaborative
partners were to breach or terminate its agreements with the Company or
otherwise fail to conduct its collaborative activities successfully in a timely
manner, the pre-clinical or clinical development or commercialization of product
candidates or research programs could be delayed or terminated. Any such delay
or termination could have a material adverse effect on the Company's business,
financial condition and results of operations.
53
<PAGE> 55
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Total program research revenues under the aforementioned agreements are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Related Parties:
Pfizer...................................... $ 4,001,043 $ 3,682,056 $ 3,622,363
Hoechst Marion............................ 2,420,787 4,301,263 5,136,257
BioChem Pharma............................ 80,000 100,000 517,888
Anaderm................................... 6,633,536 3,467,203 388,254
Helicon................................... 641,640 203,437 --
----------- ----------- -----------
Total related parties.................. 13,777,006 11,753,959 9,664,762
Bayer..................................... 1,125,000 1,500,000 1,125,000
Sankyo.................................... 2,082,570 2,614,297 1,011,039
Sepracor.................................. 74,416 197,357 --
Solvay.................................... 447,368 -- --
SmithKline Beecham........................ 227,000 -- --
Fujirebio................................. 433,333 100,000 --
Wyeth..................................... -- -- 400,000
----------- ----------- -----------
Total.................................. $18,166,693 $16,165,613 $12,200,801
=========== =========== ===========
</TABLE>
Included in receivables are the following amounts due from related parties:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1999 1998
-------- ----------
<S> <C> <C>
Pfizer...................................................... $108,987 $ 125,975
Hoechst Marion.............................................. 59,317 74,623
Anaderm..................................................... -- 803,240
Helicon..................................................... 195,276 173,137
-------- ----------
Total.................................................. $363,580 $1,176,975
======== ==========
</TABLE>
(6) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are recorded at cost and
consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
ESTIMATED --------------------------
LIFE (YEARS) 1999 1998
------------- ----------- -----------
<S> <C> <C> <C>
Laboratory equipment....................... 5-15 $14,209,633 $10,728,319
Office furniture and equipment............. 5-10 4,870,206 3,945,292
Automobile equipment....................... 3 119,654 122,775
Leasehold improvements..................... Life of lease 6,582,509 5,520,703
----------- -----------
25,782,002 20,317,089
Less: accumulated depreciation and
amortization............................. 14,866,413 12,320,534
----------- -----------
Net property, equipment and leasehold
improvements............................. $10,915,589 $ 7,996,555
=========== ===========
</TABLE>
54
<PAGE> 56
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(7) INTANGIBLE ASSETS
The components of intangible assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Patents..................................................... $4,876,189 $5,643,401
Goodwill.................................................... 1,387,072 2,080,600
Acquired work force......................................... 137,031 --
---------- ----------
$6,400,292 $7,724,001
========== ==========
</TABLE>
The above amounts reflect accumulated amortization of $8,226,456 and
$6,757,655 at September 30, 1999 and 1998, respectively. On November 30, 1999
the Company sold all of its capitalized patents in the sale of assets of its
diagnostics business to Bayer. (See Note 17).
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at September 30, 1999 and 1998 are
comprised of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Accounts payable............................................ $1,357,400 $1,064,242
Accrued future lease escalations............................ 465,765 446,137
Accrued payroll and employee benefits....................... 638,530 350,831
Accrued incentive compensation.............................. 750,000 625,000
Accrued closing costs (see Note 15)......................... 535,000 --
Accrued expenses............................................ 1,482,977 1,746,330
---------- ----------
$5,229,672 $4,232,540
========== ==========
</TABLE>
(9) STOCKHOLDERS' EQUITY
(a) Stock Redemption
On February 18, 1997, the Company repurchased all 1.25 million shares of
the Company's common stock held by Becton for an aggregate price of $8.75
million. The Company's collaborative research agreement with Becton had ended on
its scheduled expiration date of September 30, 1996.
(b) Stock Option Plans
The Company has established five stock option plans for its employees,
officers, directors and consultants, including a stock option plan adopted upon
the acquisition of Cadus' research business (See Note 3(a)). The plans are
administered by the Compensation Committee of the Board of Directors, which may
grant either non-qualified or incentive stock options. The Committee determines
the exercise price and vesting schedule at the time the option is granted.
Options vest over various periods and may expire no later than 10 years from
date of grant. The total authorized shares under these plans is 5,400,000.
55
<PAGE> 57
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
The following table summarizes changes in the number of common shares
subject to options in the stock option plans:
<TABLE>
<CAPTION>
EXERCISE PRICE
---------------------------------------
WEIGHTED
SHARES LOW HIGH AVERAGE
--------- ----- ----- --------
<S> <C> <C> <C> <C>
Balance at September 30, 1996
Unexercised................................... 2,218,057 $1.75 $9.32 $5.67
Granted..................................... 907,500 6.50 7.09 6.82
Exercised................................... (84,618) 2.50 9.25 4.32
Forfeited................................... (55,887) 3.50 9.00 5.19
---------
Balance at September 30, 1997
Unexercised................................. 2,985,052 $1.75 $9.32 $6.07
Granted..................................... 840,250 3.25 6.75 5.26
Exercised................................... (5,699) 3.50 9.25 4.22
Forfeited................................... (37,872) 3.75 9.00 6.66
---------
Balance at September 30, 1998
Unexercised................................. 3,781,731 $1.75 $9.32 $5.89
Granted..................................... 996,258 2.94 6.00 4.36
Exercised................................... (92,187) 1.75 4.13 2.93
Forfeited................................... (251,033) 1.94 9.00 4.38
---------
Balance at September 30, 1999
Unexercised................................. 4,434,769 $1.75 $9.32 $5.70
---------
</TABLE>
At September 30, 1999, the Company has reserved 4,243,406 shares of its
authorized common stock for all shares issuable under options. At September 30,
1999, 1998, and 1997 options exercisable were 3,077,028, 2,454,082 and
1,290,829, respectively.
Information regarding stock options outstanding as of September 30, 1999,
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
----------------------- EXERCISABLE
WEIGHTED --------------------------
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
PRICE RANGE (IN THOUSANDS) PRICE LIFE (IN THOUSANDS) PRICE
- ----------- -------------- -------- ----------- -------------- --------
<S> <C> <C> <C> <C> <C>
Under $4.50............. 1,718 $3.91 6.52 1,243 $3.89
$4.50 - $7.00........... 1,942 6.01 7.69 1,061 6.41
Over $7.00.............. 775 8.89 6.57 773 8.89
</TABLE>
Stock option grants are set at the closing price of the Company's common
stock on the date of grant and the related number of shares granted are fixed at
that point in time. Therefore under the principles of APB Opinion No. 25, the
Company does not recognize compensation expense associated with the grant of
stock options. SFAS 123, "Accounting for Stock-Based Compensation," requires the
use of option valuation models to determine the fair value of options granted
after 1995. Pro forma information regarding net loss and loss per share shown
below was determined as if the Company had accounted for its employee stock
options and shares sold under its stock purchase plan under the fair value
method of SFAS 123.
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997 respectively: risk-free
56
<PAGE> 58
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
interest rates of 5.75%, 4.38% and 5.84%; dividend yields of 0%; volatility
factors of the expected market price of the Company's common stock of 60.7%,
64.9% and 65.8% and expected life of the options 3.7 years for all three years.
These assumptions resulted in weighted-average fair values of $2.22, $2.87 and
$3.61 per share for stock options granted in 1999, 1998 and 1997, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect on
net loss for the periods presented is not representative of the pro forma effect
on net income or loss in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1996. Pro forma information in future years will reflect the amortization of a
larger number of stock options granted in several succeeding years. The
Company's pro forma information is as follows (in thousands, except per share
information):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Pro forma net loss.................................. $12,563 $(12,802) $(11,205)
Pro forma net loss per share:
Basic............................................. $ (0.59) $ (0.57) $ (0.51)
</TABLE>
(a) Preferred Stock
During 1999, the Company adopted certain amendments to its certificate of
incorporation which included the authorization of 5,000,000 shares of preferred
stock with a par value of $.01 per share with such designations, preferences,
privileges, and restrictions as may be determined from time to time by the
Company's Board of Directors.
(b) Sale of Common Stock and Warrant to Marion Merrell Dow
In December 1992, the Company entered into the common stock purchase and
common stock warrant purchase agreements with Marion Merrell Dow. The Company
issued 1,090,909 shares of common stock at $5.50 per share and a warrant to
purchase up to 500,000 additional shares at $5.50 per share which was
exercisable until December 10, 1999. The proceeds to the Company were $6
million.
(c) Employee Stock Purchase Plan
On May 1, 1993, the Company adopted an Employee Stock Purchase Plan under
which eligible employees may contribute up to 10% of their base earnings toward
the quarterly purchase of the Company's common stock. The employees purchase
price is derived from a formula based on the fair market value of the common
stock. No compensation expense is recorded in connection with the plan. During
fiscal 1999, 1998 and 1997, 23,326, 20,664 and 12,388 shares were issued with
55, 52 and 48 employees participating in the plan, respectively.
(10) INCOME TAXES
There is no provision (benefit) for federal or state income taxes, since
the Company has incurred operating losses since inception and has established a
valuation allowance equal to the total deferred tax assets.
57
<PAGE> 59
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
The tax effect of temporary differences, net operating loss carry forwards
and research and development tax credit carry forwards as of September 30, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards....................... $ 19,530,528 $ 16,942,035
Research and development credits........................ 867,171 874,246
Intangible assets....................................... 695,702 797,137
Other................................................... 2,845,293 2,041,480
------------ ------------
23,938,694 20,654,898
Valuation allowance..................................... (23,938,694) (20,654,898)
------------ ------------
$ -- $ --
============ ============
</TABLE>
As of September 30, 1999, the Company has available federal net operating
loss carry forwards of approximately $57 million which will expire in various
years from 2000 to 2019, and may be subject to certain annual limitations. The
Company's research and development tax credit carry forwards expire in various
years from 2000 to 2019.
(11) COMMITMENTS AND CONTINGENCIES
(a) Lease Commitments
The Company leases office, operating and laboratory space under various
lease agreements.
Rent expense was approximately $1,533,000, $1,090,000 and $1,081,000 for
the fiscal years ended September 30, 1999, 1998, and 1997, respectively.
The following is a schedule by fiscal years of future minimum rental
payments required as of September 30, 1999, assuming expiration of the leases
for the two Uniondale facilities on July 31, 2003 and June 30, 2006,
respectively, the Durham facility on October 31, 2004, the Tarrytown facility on
June 30, 2008, the Birmingham facility on April 30, 2006, and the transfer of
the Cambridge facility on November 30, 1999 to Bayer (see Note 17).
<TABLE>
<S> <C>
2000........................................................ $ 1,958,475
2001........................................................ 1,931,941
2002........................................................ 1,950,877
2003........................................................ 2,000,365
2004........................................................ 1,829,898
2005 and thereafter......................................... 4,140,403
-----------
$13,811,959
===========
</TABLE>
(b) Contingencies
The Company has received several letters from other companies and
universities advising the Company that various products being marketed and
research being conducted by the Company may be infringing on existing patents of
such entities. These matters are presently under review by management and
outside counsel for the Company. Where valid patents of other parties are found
by the Company to be in place, management will consider entering into licensing
arrangements with the universities and/or other companies or modify the
58
<PAGE> 60
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
conduct of its research. The Company's future royalties, if any, may be reduced
by up to 50% if its licensees or collaborative partners are required to obtain
licenses from third parties whose patent rights are infringed by the Company's
products, technology or operations. In addition, should any infringement claims
result in a patent infringement lawsuit, the Company could incur substantial
costs in defense of such a suit, which could have a material adverse effect on
the Company's business, financial condition and results of operations,
regardless of whether the Company were successful in the defense.
(c) Borrowings
As of September 30, 1999, the Company had a line of credit with a
commercial bank in the amount of $10 million. This line expires annually on
March 31st, and its current rate of interest is prime plus 3/4. There were no
amounts outstanding under the line of credit as of September 30, 1999. In
addition, in 1999, the Company obtained a secured loan of $500,000 from the same
bank. The loan is payable over a three-year period, with monthly principal
payments of $13,888, plus interest at 8.12%. The carrying value of the loan
approximates fair value at September 30, 1999, based on borrowing rates
currently available for similar loans with similar terms.
(12) RELATED PARTY TRANSACTIONS
Effective January 1, 1995, the Company compensates its independent outside
directors on a $1,500 retainer per month. For the years ended September 30,
1999, 1998 and 1997, such fees amounted to $141,000, $135,000 and $126,000,
respectively. The Company also has compensated directors for consulting services
performed. For the years ended September 30, 1999, 1998 and 1997, consulting
services in the amounts of $465,000, $157,000 and $144,000, respectively, were
paid by the Company pursuant to these arrangements.
One director is a partner in a law firm which represents the Company on its
patent and license matters. Fees paid to this firm for the years ended September
30, 1999, 1998 and 1997 were approximately $525,000, $604,000 and $404,000,
respectively.
During fiscal 1997, the Board of Directors of the Company approved the
cashless exercise of certain stock options held by a director. The Company
recorded a charge of $126,750, which represents the fair market value of the
common stock issued.
A board member is an officer of Cold Spring Harbor Laboratory which was a
founder of Amplicon (which was acquired by Tularik) and Helicon. The Company's
chairman was a member of the board of directors of Anaderm through September 23,
1999 and is on the board of directors of Helicon. An executive officer of the
Company is vice president of Helicon. A board member is the chief executive
officer and a board member of Helicon. The Company has investments in Tularik
and Helicon and has collaborative research agreements with Anaderm and Helicon.
A board member is on the faculty of Vanderbilt with which the Company has a
collaborative research agreement. He also has a consulting agreement with the
Company. A board member is a controlling member of MEHTA Partners, LLC with
which the Company has a strategic and financial services arrangement. During
fiscal 1999, the Company paid MEHTA Partners, LLC $75,000 in cash and issued
32,452 shares of treasury stock with a fair value of $100,000 in exchange for
consulting services received.
(13) EMPLOYEE SAVINGS AND INVESTMENT PLAN
The Company sponsors an Employee Savings and Investment Plan under Section
401(k) of the Internal Revenue Code. The plan allows employees to defer from 2%
to 10% of their income on a pre-tax basis through contributions into designated
investment funds. For each dollar the employee invests up to 6% of his or her
earnings, the Company will contribute an additional 50 cents into the funds. For
the years ended Septem-
59
<PAGE> 61
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
ber 30, 1999, 1998, and 1997, the Company's expenses related to the plan were
approximately $203,000, $197,000 and $233,000, respectively.
(14) EMPLOYEE RETIREMENT PLAN
On November 10, 1992, the Company adopted a plan which provides
postretirement medical and life insurance benefits to eligible employees, board
members and qualified dependents. Eligibility is determined based on age and
service requirements. These benefits are subject to deductibles, co-payment
provisions and other limitations.
The Company utilizes SFAS 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions" to account for the benefits to be provided by the
plan. Under SFAS No. 106 the cost of post-retirement medical and life insurance
benefits is accrued over the active service periods of employees to the date
they attain full eligibility for such benefits. As permitted by SFAS 106, the
Company elected to amortize over a 20 year period the accumulated postretirement
benefit obligation related to prior service costs.
On October 1, 1998, the Company adopted SFAS 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits". SFAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. SFAS 132 does
not change the method of accounting for such plans.
Net postretirement benefit cost for the years ended September 30, 1999,
1998 and 1997 includes the following components:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost for benefits earned during the
period........................................... $278,219 $220,785 $194,900
Interest cost on accumulated postretirement benefit
obligation......................................... 122,122 104,831 99,600
Amortization of unrecognized net loss.............. -- 3,327 9,600
Amortization of initial benefits attributed to past
service.......................................... 19,803 17,493 17,500
-------- -------- --------
Net postretirement benefit cost.................... $420,144 $346,436 $321,600
======== ======== ========
</TABLE>
The accrued postretirement benefit cost at September 30, 1999 and 1998 was
as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligation -- fully
eligible active plan participants......................... $2,193,325 $1,721,206
Unrecognized prior service cost............................. (203,893) --
Unrecognized cumulative net loss............................ (65,764) (181,832)
Unrecognized transition obligation.......................... (232,614) (250,107)
---------- ----------
Accrued postretirement benefit cost......................... $1,691,054 $1,289,267
========== ==========
</TABLE>
The accumulated postretirement benefit obligation was determined using a
discount rate of 7.5 percent in 1999 and in 1998 and a health care cost trend
rate of approximately 6 percent in 1998, decreasing down to 5 percent in 1999
and thereafter. Increasing the assumed health care cost trend rates by one
percentage point in each year and holding all other assumptions constant would
increase the accumulated postretirement benefit obligation as of September 30,
1999 by approximately $326,000 and the net postretirement benefit cost by
approximately $88,000. Benefits paid during fiscal 1999 and 1998 were $18,357
and $1,669, respectively.
60
<PAGE> 62
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(15) CONSOLIDATION OF FACILITIES
During fiscal 1999 the Company made the strategic decision to close down
its facilities in North Carolina and consolidate its natural products operations
into its Tarrytown facility in New York. This close down is scheduled to occur
on March 31, 2000. The fungal extract libraries and certain equipment will be
relocated to the Tarrytown facility. It is anticipated that none of the current
employees in the North Carolina facility will be relocating. Under the plan for
relocating this facility, 16 research and administrative employees will receive
a severance package which will include continued payment of four months salary,
plus four months of continuous health insurance. The leases in North Carolina
expire in 2004. The Company believes that, due to the desirable space and
location, it should be able to secure another party to take over its lease;
however, the Company has accrued an estimate of a reserve for an expected delay
in finalizing a new tenant and entering into a sublease agreement. The estimated
cost of closing this facility is approximately $535,000, and has been included
in the accompanying consolidated balance sheet in accrued expenses as of
September 30, 1999, and in R&D expense ($395,000) and selling, general and
administrative expenses ($140,000) in the accompanying consolidated statement of
operations for the year ended September 30, 1999.
(16) NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standard Board issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." SFAS 137 amends SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities," which was issued in June
1998 and was to be effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. SFAS 137 defers the effective date of SFAS 133 to all
fiscal quarters of fiscal years beginning after June 15, 2000. Earlier
application is permitted. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
The Company does not believe that the implementation of SFAS 133 will have a
material effect on its financial position or results of operations.
On December 3, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 -- "Revenue Recognition in Financial
Statements" (SAB No. 101). SAB No. 101 provides the SEC staff's views on the
recognition of revenue including nonrefundable technology access fees received
by biotechnology companies in connection with research collaborations with third
parties. SAB No. 101 states that in certain circumstances the SEC staff believes
that up-front fees, even if nonrefundable, should be deferred and recognized
systematically over the term of the research arrangement. SAB No. 101 requires
registrants to adopt the accounting guidance contained therein by no later than
the first fiscal quarter of the fiscal year beginning after December 15, 1999
(fiscal year ending September 30, 2001 for the Company). The Company is
currently assessing the financial impact of complying with SAB No. 101 and has
not yet determined whether applying the accounting guidance of SAB No. 101 will
have a material effect on its financial position or results of operations.
(17) SUBSEQUENT EVENT
On November 30, 1999, the Company sold assets of its diagnostics business
to Bayer including the assets of the Company's wholly-owned diagnostics
subsidiary, OSDI, based in Cambridge, Massachusetts. The assets sold include
certain contracts, equipment and machinery, files and records, intangible
assets, intellectual property, inventory, prepaid expenses and other assets
primarily related to the operations of the diagnostics business. In connection
with the sale, the Company and OSDI entered into certain agreements with Bayer
including an Assignment and Assumption of Lease with respect to the OSDI
facility located in Cambridge and certain patent assignment and license
agreements. Certain employees of the Company and OSDI entered
61
<PAGE> 63
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
into employment agreements with Bayer. Under the terms of the agreement, the
Company will receive $9.2 million up-front from Bayer with additional contingent
payments of $1.25 million to be made to the Company by 2001. Bayer intends to
retain all employees of OSDI and will maintain the unit's headquarters in
Cambridge. The Company expects to record a gain on the sale of approximately
$3.5 million in the first quarter of fiscal 2000. The assets sold to Bayer
include approximately $4.9 million of unamortized patent costs and approximately
$600,000 of fixed assets, net of depreciation and amortization as of September
30, 1999.
62
<PAGE> 64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's Proxy Statement for its 2000 Annual
Meeting to be filed with the Securities and Exchange Commission not later than
120 days after September 30, 1999 (the 2000 Proxy).
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's 2000 Proxy.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's 2000 Proxy.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's 2000 Proxy.
63
<PAGE> 65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements are included in
Part II, Item 8 of this report:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) All schedules are omitted as the required information is
inapplicable or the information is presented in the financial
statements or related notes.
(3) The exhibits listed in the Index to Exhibits are attached or
incorporated herein by reference and filed as a part of this report.
(b) Reports on Form 8-K
None.
64
<PAGE> 66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
OSI PHARMACEUTICALS, INC.
By: /s/ COLIN GODDARD, PH.D.
------------------------------------
Colin Goddard, Ph.D.
President and Chief Executive
Officer
Date: December 29, 1999
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the days indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ COLIN GODDARD, PH.D. President and Chief December 29, 1999
- --------------------------------------------------- Executive Officer and
Colin Goddard, Ph.D. Director
/s/ ROBERT L. VAN NOSTRAND Vice President and Chief December 29, 1999
- --------------------------------------------------- Financial Officer
Robert L. Van Nostrand
/s/ G. MORGAN BROWNE Director December 29, 1999
- ---------------------------------------------------
G. Morgan Browne
/s/ GARY E. FRASHIER Chairman of the Board of December 29, 1999
- --------------------------------------------------- Directors
Gary E. Frashier
/s/ JOHN H. FRENCH, II Director December 29, 1999
- ---------------------------------------------------
John H. French, II
/s/ EDWIN A. GEE, PH.D Director December 29, 1999
- ---------------------------------------------------
Edwin A. Gee, Ph.D
/s/ DARYL K. GRANNER, M.D. Director December 29, 1999
- ---------------------------------------------------
Daryl K. Granner, M.D.
/s/ WALTER M. LOVENBERG, PH.D. Director December 29, 1999
- ---------------------------------------------------
Walter M. Lovenberg, Ph.D.
/s/ STEVEN M. PELTZMAN Director December 29, 1999
- ---------------------------------------------------
Steven M. Peltzman
Director December , 1999
- ---------------------------------------------------
Viren Mehta
/s/ JOHN P. WHITE Director December 29, 1999
- ---------------------------------------------------
John P. White, Esquire
</TABLE>
65
<PAGE> 67
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
2.1 + Asset Purchase Agreement, dated July 30, 1999, by and
between Cadus Pharmaceutical Corporation and the Company(1)
2.2 OSI Pharmaceuticals, Inc. Non-Qualified Stock Option Plan
for Former Employees of Cadus Pharmaceutical Corporation(1)
2.3 + Asset Purchase Agreement, dated November 17, 1999, by and
among the Company, Oncogene Science Diagnostics, Inc. and
Bayer Corporation(2)
2.4 Amendment No. 1 to Asset Purchase Agreement, dated November
30, 1999(2)
3.1 Certificate of Incorporation, as amended(3)
3.2 Amended and Restated By-Laws(4)
4.1 Form of Preferred Stock Plan, dated as of June 23, 1999,
between the Company, and the Bank of New York, as Rights
Agent, including Terms of Series SRP Junior Participating
Preferred Stock (Exhibit A thereto), Summary of Rights to
Purchase Preferred Stock (Exhibit B thereto), and Form of
Right Certificate (Exhibit C thereto)(5)
10.1 1985 Stock Option Plan (filed as an exhibit to the Company's
registration statement on Form S-8 (file no. 33-8980) and
incorporated herein by reference)
10.2 1989 Incentive and Non-Qualified Stock Option Plan (filed as
an exhibit to the Company's registration statement on Form
S-8 (file no. 33-38443) and incorporated herein by
reference)
10.3 1993 Incentive and Non-Qualified Stock Option Plan, as
amended (filed as an exhibit to the Company's registration
statement on Form S-8 (file no. 33-64713) and incorporated
herein by reference)
10.4 Stock Purchase Plan for Non-Employee Directors (filed as an
exhibit to the Company's registration statement on Form S-8
(file no. 333-06861) and incorporated herein by reference)
10.5 1995 Employee Stock Purchase Plan (filed as an exhibit to
the Company's registration statement on Form S-8 (file no.
333-06861) and incorporated herein by reference)
10.6 1997 Incentive and Non-Qualified Stock Option Plan (filed as
an exhibit to the Company's registration statement on Form
S-8 (file no. 333-39509) and incorporated herein by
reference)
10.7 + Collaborative Research Agreement, dated April 1, 1996,
between the Company and Pfizer Inc.(6)
10.8 + License Agreement, dated April 1, 1996, between the Company
and Pfizer Inc.(6)
10.9 + Stockholders' Agreement, dated April 23, 1996, among Anaderm
Research Corp., the Company, Pfizer Inc., New York
University and certain individuals(6)
10.10+ Collaborative Research Agreement, dated April 23, 1996,
amount the Company, Pfizer Inc. and Anaderm Research
Corp.(6)
10.11 Form of Warrants issued by the Company to the former
stockholders of MYCOsearch, Inc. and their designees
covering an aggregate of 100,000 shares of common stock(6)
10.12 Employment Agreement, dated April 11, 1996, between the
Company and Dr. Barry Katz(6)
10.13 Common Stock Purchase Warrant granted to Marion Merrell Dow,
Inc. dated December 11, 1992(7)
10.14 Collaborative Agreement, dated April 19, 1995, between the
Company and Novartis Pharma AG(8)
10.15 Letter Agreement, dated April 19, 1995, between the Company
and Novartis Pharma AG(8)
10.16 Registration Rights Agreement, dated April 19, 1995, between
the Company and Novartis Pharma AG(8)
10.17+ Agreement, dated September 27, 1996, between the Company and
Becton, Dickinson and Company(9)
10.18+ Collaborative Research and License Agreement, dated January
1, 1997, between the Company and Bayer Corporation(10)
10.19+ Collaborative Research, Development and License Agreement,
dated February 12, 1997, by and among the Company, Sankyo
Company, Ltd., and MRC Collaborative Center(11)
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
10.20+ License Agreement, dated March 18, 1997, between the Company
and The Dow Chemical Company(11)
10.21+ Amended and Restated Collaborative Research and License
Agreement, effective April 1, 1997, by and among the
Company, Hoechst Marion Roussel, Inc. and Hoechst
Aktiengesellschaft(12)
10.22+ Stock Subscription Agreement, dated July 17, 1997, by and
between the Company and Helicon Therapeutics, Inc.(7)
10.23+ License and Services Agreement, dated July 17, 1997, by and
between the Company and Helicon Therapeutics, Inc.(7)
10.24+ Stockholders' Agreement, dated July 17, 1997, by and among
Helicon Therapeutics, Inc. and certain stockholders of
Helicon Therapeutics, Inc.(7)
10.25+ Convertible Preferred Stock Purchase Agreement, dated July
17, 1997, by and among Helicon Therapeutics, Inc., the
Company, Hoffman-La Roche, Inc. and Cold Spring Harbor
Laboratory(7)
10.26+ Collaborative Research and License Agreement, effective July
1, 1997, by and between Hoffman-La Roche, Inc. and Helicon
Therapeutics, Inc.(7)
10.27 Employment Agreement, dated April 30, 1998, between the
Company and Colin Goddard, Ph.D.(13)
10.28+ Amendatory and Collaborative Agreement, dated as of March
31, 1998, by and between the Company and Sepracor, Inc.(13)
10.29+ Research Collaboration and License Agreement, dated April 1,
1998, by and among the Company, Oncogene Science
Diagnostics, Inc. and Fujirebio, Inc.(13)
10.30+ License Agreement, dated May 26, 1998, by and between the
Company and Aurora Biosciences Corporation(13)
10.31 Consulting Agreement, dated October 1, 1998, between the
Company and Gary E. Frashier(14)
10.32+ Agreement, dated March 19, 1999, by and between the Company
and BioChem Pharma Inc.(15)
10.33+ Collaborative Research Agreement, dated April 23, 1999, by
and among Pfizer, Inc., the Company and Anaderm Research
Corp.(1)
10.34+ Anaderm Research Corp. Amended and Restated Stockholders'
Agreement, dated April 23, 1999(1)
10.35+ Development Agreement, dated April 1, 1999, by and between
Pfizer Inc. and the Company(1)
10.36 Amendment No. 1, dated May 31, 1999, by and between Novartis
Pharma AG and the Company(1)
10.37+ Amendment No. 2, dated April 13, 1999, by and between
Novartis Pharma AG and the Company(1)
10.38+* Collaborative Research, License and Alliance Agreement,
dated August 31, 1999, by and among the Company and
Vanderbilt University
10.39+* Collaborative Research and License Agreement, dated October
1, 1999, by and between the Company and Tanabe Seiyaku Co.
Ltd.
21 * Subsidiaries of the Company
23 * Consent of KPMG LLP, independent public accountants
27 * Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
+ Portions of this exhibit have been redacted and are subject to a
confidential treatment request filed with the Secretary of the Securities
and Exchange Commission pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended.
(1) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
fiscal quarter ended June 30, 1999 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's current report on Form 8-K filed on
December 15, 1999, and incorporated herein by reference.
<PAGE> 69
(3) Filed as an exhibit to the Company's quarterly report filed on Form 10-Q
for the quarter ended March 31, 1999, filed on May 24, 1999, and
incorporated herein by reference.
(4) Filed as an exhibit to the Company's current report on Form 8-K filed on
January 8, 1999, and incorporated herein by reference.
(5) Filed as an exhibit to the Company's current report on Form 8-K filed on
June 28, 1999, and incorporated herein by reference.
(6) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
fiscal quarter ended March 31, 1996, as amended, and incorporated herein by
reference.
(7) Filed as an exhibit to the Company's annual report on Form 10-K for the
fiscal year ended September 30, 1997, and incorporated herein by reference.
(8) Filed as an exhibit to the Company's annual report on Form 10-K for the
fiscal year ended September 30, 1995, as amended, and incorporated herein
by reference.
(9) Filed as an exhibit to the Company's annual report on Form 10-K for the
fiscal year ended September 30, 1996 and incorporated herein by reference.
(10) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
fiscal quarter ended December 31, 1996 and incorporated herein by
reference.
(11) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
fiscal quarter ended March 31, 1997 and incorporated herein by reference.
(12) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
fiscal quarter ended June 30, 1997 and incorporated herein by reference.
(13) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
fiscal quarter ended June 30, 1998 and incorporated herein by reference.
(14) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
fiscal quarter ended December 31, 1998 and incorporated herein by
reference.
(15) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
fiscal quarter ended March 31, 1999 and incorporated herein by reference.
<PAGE> 1
EXHIBIT 10.38
Portions of Exhibit 10.38 have been redacted and are the subject of a
confidential treatment request filed with the Secretary of the Securities and
Exchange Commission.
<PAGE> 2
================================================================================
AMENDED AND RESTATED
COLLABORATIVE RESEARCH, LICENSE
AND ALLIANCE AGREEMENT
BY AND BETWEEN
OSI PHARMACEUTICALS, INC.
AND
VANDERBILT UNIVERSITY
EFFECTIVE AS OF AUGUST 31, 1999
================================================================================
<PAGE> 3
AMENDED AND RESTATED
COLLABORATIVE RESEARCH, LICENSE AND ALLIANCE AGREEMENT
This AMENDED AND RESTATED COLLABORATIVE RESEARCH, LICENSE AND ALLIANCE
AGREEMENT (the "Agreement") effective as of August 31, 1999, by and between OSI
PHARMACEUTICALS, INC. ("OSI"), a Delaware corporation, with offices at 106
Charles Lindbergh Boulevard, Uniondale, New York 11553, and VANDERBILT
UNIVERSITY (the "University"), through its Vanderbilt University Medical Center
("VUMC") and Vanderbilt Diabetes Center ("VDC"), located in Nashville,
Tennessee. The University, VUMC and VDC are referred to herein collectively as
"VU".
WHEREAS, OSI is a leading drug discovery company which has assembled a
strong platform of technologies for drug discovery; and
WHEREAS, VU is a recognized leader in both clinical and basic research in
the field of diabetes; and
WHEREAS, OSI and VU entered into a Collaborative, Research, Option and
Alliance Agreement, effective as of April 28, 1998 (the "Original Agreement"),
in order to create an alliance between them that would combine their strengths
and better position OSI to offer a strategic partnership with a major
pharmaceutical company or large biotechnology company for drug discovery in the
area of diabetes which would provide mutual benefit to OSI and VU; and
WHEREAS, OSI and Tanabe Seiyaku Co., Ltd, a Japanese company
<PAGE> 4
("Tanabe"), have entered into a Collaborative Research and License Agreement, on
even date herewith with an effective date of October 1, 1999 (the "Tanabe
Agreement"), in the area of diabetes; and
WHEREAS, OSI and VU desire to amend and restate the Original Agreement in
order to (i) reflect OSI's entering into the Tanabe Agreement, (ii) provide for
assistance given by VU to OSI in order for OSI to fulfill its obligations under
the Tanabe Research Collaboration (as hereinafter defined) and (iii) set forth
the parameters of the OSI/VU Research Program (as hereinafter defined).
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and agreements contained in this Agreement and intending to be legally
bound, the parties agree as follows:
1. Definitions.
Whenever used in this Agreement, the terms defined in this Article 1 shall
have the meanings specified.
1.1. "Affiliate" of an entity means any corporation or other legal entity
owning, directly or indirectly, more than fifty percent (50%) of the voting
capital shares or similar voting rights of such entity; any corporation or other
legal entity more than fifty percent (50%) of the voting capital shares or
similar voting rights of which is owned, directly or indirectly, by such entity;
or any corporation or other legal entity more than fifty percent (50%) of the
voting capital shares or similar voting rights of which is owned, directly or
indirectly, by a corporation or other legal entity which owns, directly or
indirectly, more than fifty percent (50%) of the voting capital shares or
similar voting rights of such entity.
4
<PAGE> 5
1.2. "Alliance" means the strategic alliance described in Section 2.1
hereof.
1.3. "Alliance Research Program" means the research program conducted by
OSI and VDC pursuant to Section 2.2 hereof.
1.4. "Alliance Term" has the meaning set forth in Section 7.1 hereof.
1.5. "Confidential Information" means VU Confidential Information, OSI
Confidential Information and Tanabe Confidential Information, either separately
or collectively, as may be applicable.
1.6. "Consultant/Investigators" mean those persons, each of whom is an
employee of VU, listed on Exhibit A, attached hereto, who are parties to
Consultancy Agreements with OSI.
1.7. "Effective Date" means August 31, 1999.
1.8. "Event of Default" has the meaning set forth in Section 7.3.1 hereof.
1.9. "Field" means drug discovery in the area of diabetes.
1.10. "Investigators" mean those persons, each of whom is an employee of
VU, listed on Exhibit B, attached hereto, which Exhibit may be amended or
supplemented from time to time by mutual agreement of the parties.
1.11. "Joint Patent" means the patents and patent applications owned or
filed jointly by VU and OSI, both foreign and domestic, arising in the course of
conducting the Alliance Research Program, including patents and patent
applications arising from Joint Technology, which are not VU Patents nor OSI
Patents, including, without limitation, all substitutions, extensions,
Supplementary Protection Certificates,
5
<PAGE> 6
reissues, renewals, divisions, continuations, continuations in part, utility
models and certificates of invention thereof, all of which shall be from time to
time identified to the VU/OSI Research Committee.
1.12. "Joint Technology" means any and all inventions and patents,
discoveries, methods, ideas, works of authorship, know-how, show-how, data,
clinical and preclinical results, information, and any physical, chemical or
biological material, including any replication or any part of such material,
techniques and Technology, whether or not patentable or subject to other forms
of protection, (a) which have been, since the Original Effective Date, or are,
following the Effective Date, jointly made, created, developed, written,
conceived, or reduced to practice, on the one hand, by employees of, or
consultants to, OSI, and, on the other hand, Investigators and other employees
of VU (whether such research was conducted at VU or OSI) and
Consultant/Investigators (if such research was conducted at VU) and funded
solely by OSI pursuant to this Agreement, and which arise directly out of, or as
a direct result of research in the course of conducting the Alliance Research
Program, (b) in which, in accordance with the United States laws of
inventorship, OSI and VU each own an undivided interest therein, and (c) which,
where necessary, are permitted to be "Joint Technology" by agreement with one or
more Investigators. Joint Technology includes all rights relating to the
protection of trade secrets and confidential information, and any right
analogous to those set forth in this Section, which relate to, are embodied in
or are appurtenant to such discoveries, methods, ideas, etc.
1.13. "Materials" has the meaning set forth in Section 2.4.2 hereof.
1.14. "Original Effective Date" means April 28, 1998, the effective date of
6
<PAGE> 7
the Original Agreement.
1.15. "OSI Confidential Information" means all information about any
element of OSI Technology which is disclosed by OSI to VU, and designated
"Confidential" in writing by OSI at the time of such disclosure (or, if
disclosed orally, within 30 days thereafter), subject to the exceptions set
forth in Section 4.6 hereof.
1.16. "OSI Patents" means the patents and patent applications owned or
filed by OSI, both foreign and domestic, arising in the course of conducting the
Alliance Research Program, including, without limitation, all substitutions,
extensions, Supplementary Protection Certificates, reissues, renewals,
divisions, continuations, continuations in part, utility models and certificates
of invention thereof.
1.17. "OSI Technology" means Technology (a) owned or licensed as of the
Original Effective Date hereof or (b) acquired during the Alliance Term by OSI
or its Affiliates but only to the extent that OSI is legally entitled to
disclose such acquired Technology and use it in the Alliance Research Program,
or (c) made, created, developed, written, conceived or reduced to practice by
employees of, or consultants to, OSI during the Alliance Term, including
specifically, any Technology developed by OSI at OSI together with the
Consultant/Investigators in their capacity as consultants pursuant to their
respective Consultancy Agreements, that, in each case, is directly related to
the Alliance Research Program.
1.18. "Other Agreement" means an agreement entered into by OSI with a Third
Party for the purpose of commercializing any Products resulting from the VU/OSI
Research Program.
1.19. "Products" means a product derived from the Alliance Research
7
<PAGE> 8
Program or from the Tanabe Research Collaboration sold for the prevention,
treatment or management of any disease state in a human patient or any other
human therapeutic indication, in each case directed to a Target.
1.20. "Tanabe Confidential Information" means all information about any
element of Tanabe Technology which is disclosed by Tanabe to OSI and designated
"Confidential" in writing at the time of such disclosure (or, if disclosed
orally, within 30 days thereafter), subject to the exceptions set forth in
Section 4.6 hereof.
1.21. "Tanabe Research Collaboration" means the collaboration between OSI
and Tanabe pursuant to the Tanabe Agreement.
1.22. "Tanabe Targets" means those VU/OSI Targets which are set forth on
Exhibit C, attached hereto, which Exhibit may be amended or supplemented from
time to time by OSI to include other VU/OSI Targets or to remove a Target.
1.23. "Targets" means the target areas of the Alliance Research Program and
shall specifically include the Tanabe Targets and the VU/OSI Targets.
1.24. "Technology" means and includes all tangible or intangible know-how,
trade secrets, inventions (whether or not patentable), data, clinical and
preclinical results and any physical, chemical or biological material that
pertain to the development of human therapeutic products, including all
laboratory notebooks, research plans, cultures, strains, vectors, genes and gene
fragments and their sequences, cell lines, hybridoma cell lines, monoclonal and
polyclonal antibodies, proteins and protein fragments, non-protein chemical
structures and methods for synthesis, structure-activity relationships, computer
models of chemical structures, computer software, assay methodology, processes,
materials and methods for production, recovery and
8
<PAGE> 9
purification of nature products, formulas, plans, specifications,
characteristics, equipment and equipment designs, marketing surveys and plans,
business plans and experience.
1.25. "Term" has the meaning set forth in Section 7.2 hereof.
1.26. "Third Party" means any individual, estate, trust, partnership, joint
venture, association, firm, corporation, company or other entity, other than the
parties hereto, Tanabe and their respective Affiliates and successors.
1.27. "U.S. Federal Government" means the federal government of the United
States.
1.28. "VU Confidential Information" means all information about any element
of VU Technology which is disclosed by VU to OSI and designated "Confidential"
in writing at the time of such disclosure (or, if disclosed orally, within 30
days thereafter), subject to the exceptions set forth in Section 4.6 hereof.
1.29. "VU Patents" means the patents and patent applications owned or filed
by VU, both foreign and domestic, and included in the Alliance Research Program
by mutual agreement of OSI and VU, including, without limitation, all
substitutions, extensions, Supplementary Protection Certificates, reissues,
renewals, divisions, continuations, continuations in part, utility models and
certificates of invention thereof, all of which shall be from time to time
identified to OSI.
1.30. "VU Technology" means Technology (a) owned or licensed as of the
Original Effective Date, or developed or acquired during the Alliance Term by
VU, and, in each case, included as of the Original Effective Date or
subsequently included in the Alliance Research Program by mutual agreement of
OSI and VU, but only to the
9
<PAGE> 10
extent that VU is legally entitled to disclose such acquired Technology and use
it in the Alliance Research Program or (b) made, created, developed, written,
conceived or reduced to practice by employees of VU, including, without
limitation, the Investigators and the Consultant/Investigators, and funded by a
combination of funds provided by OSI hereunder and funds from the U.S. Federal
Government, arising directly out of, or as a direct result of research in the
course of conducting the Alliance Research Program.
1.31. "VU/OSI Research Committee" has the meaning specified in Section 2.3
hereof.
1.32. "VU/OSI Research Program" has the meaning set forth in Section 2.2.1.
1.33. "VU/OSI Targets" are the targets set forth on Exhibit D, attached
hereto, which Exhibit may be modified from time to time by the VU/OSI Research
Committee with agreement of the Investigators, Consultant/Investigators and VU
inventors of proprietary targets.
2. Alliance/Alliance Research Program
2.1. Alliance.
2.1.1. On the Original Effective Date OSI and VU formed a strategic
alliance (the "Alliance") for the Alliance Term (as amended hereby) for the
purposes of (a) conducting the Alliance Research Program as described in Section
2.2 hereof, and (b) combining their respective strengths for the purpose of
facilitating OSI's efforts in partnering with a major pharmaceutical company or
large biotechnology company.
10
<PAGE> 11
2.1.2. On even date herewith, OSI has entered into the Tanabe
Agreement which provides for the following:
(a) OSI will collaborate with Tanabe on drug discovery in
the area of diabetes. Such drug discovery will be directed toward the Tanabe
Targets;
(b) Tanabe will fund the drug discovery research conducted
by OSI under the Tanabe Research Collaboration;
(c) Tanabe acknowledges and agrees that a portion of the
research funding provided to OSI under the Tanabe Research Collaboration will be
used by OSI to fund a portion of VU's research hereunder;
(d) OSI will be entitled to certain milestone payments and
royalties with respect to products resulting from the Tanabe Research
Collaboration; and
(e) OSI has granted to Tanabe an exclusive option, during
the Contract Period (as defined in the Tanabe Agreement) and for ** thereafter,
to acquire worldwide exclusive licenses or sublicenses in connection with the
Tanabe Research Collaboration, including, without limitation, (i) licenses in
respect of OSI's rights in Joint Technology, and Joint Patents hereunder, and
(ii) sublicenses under the licenses in and to VU Technology, VU Patents and VU's
rights in Joint Technology and Joint Patents granted to OSI hereunder.
2.1.3. As part of the Alliance Research Program VU will assist OSI in
fulfilling its responsibilities under the Tanabe Research Collaboration as
directed by the VU/OSI Research Committee. Specifically, subject to appropriate
administrative and Investigator approval, VU shall provide OSI with access to
its drug discovery resources, including laboratories undertaking (i) the
identification and validation of new Targets; (ii) animal models for testing the
efficacy of drug candidates; and (iii) clinical trials for testing the safety
and efficacy of drug candidates. VU also agrees that its Investigators will
provide to Tanabe, at OSI's request ** technology for assays developed by OSI
and/or VU for purposes
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of the Tanabe Research Collaboration. Tanabe intends to screen, by itself or
through its Affiliates, its natural products library against the Tanabe Targets
using such assay technology and will provide the results of such screening to
OSI for use in the Tanabe Research Collaboration.
2.1.4. During the Alliance Term, the Consultant/Investigators,
pursuant to their respective Consultancy Agreements, and the Investigators,
pursuant to the form of agreement which is attached hereto as Exhibit E, shall
not accept funding for research in the Field involving Tanabe Targets from a
Third Party other than the U.S. Federal Government and not-for-profit entities,
e.g., the American Diabetes Association and the Juvenile Diabetes Foundation.
The parties acknowledge that VU may be required to grant to such not-for-profit
entities in the future a non-exclusive and non-transferable license under VU
Technology and VU Patents created or discovered with support of funds from such
not-for-profit entities and, in such case, VU shall promptly notify OSI and
Tanabe of the grant of such license. VU may perform unrestricted independent
research in the Field.
2.2. Alliance Research Program.
2.2.1. During the Alliance Term, OSI and VDC shall conduct a research
program (the "Alliance Research Program") as directed by the VU/OSI Research
Committee. The aim of the Alliance Research Program is to discover and develop
new Products in the Field. The Alliance Research Program shall be comprised of
two parts: (a) research directed towards the Tanabe Targets and (b) research
(the "VU/OSI Research Program") directed towards the VU/OSI Targets which are
not the
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Tanabe Targets. VU acknowledges and agrees that OSI, in its sole discretion, may
offer to Tanabe, for inclusion in the Tanabe Research Collaboration, any VU/OSI
Targets which are not theretofore Tanabe Targets.
2.2.2. The Alliance Research Program shall be funded by OSI as
follows:
(a) Payment by OSI to VU of collaboration access fees of **
per year commencing October 1, 1999 and continuing for the remainder of the
Alliance Term;
(b) Payment by OSI to VU of ** per year commencing October
1, 1999 and continuing for the remainder of the Alliance Term (greater amounts
may be approved by the VU/OSI Research Committee) to fund basic research,
fee-for-service work and clinical trials (subject, in the case of clinical
trials, to approval by the VU/OSI Research Committee and VU's Institutional
Review Board) for the VU/OSI Research Program; and
(c) Funding by OSI (from the funding provided by Tanabe for
the Tanabe Research Collaboration) to VU in an amount ** per year commencing
October 1, 1999 and continuing for the remainder of the Alliance Term (greater
amounts may be approved by the VU/OSI Research Committee ) for basic research,
fee-for-service work and clinical trials (subject, in the case of clinical
trials, to approval by the VU/OSI Research Committee and VU's Institutional
Review Board) for VU's assistance in the Tanabe Research Collaboration.
2.2.3. In addition to the payments and funding provided for in
Section 2.2.2 above, OSI shall pay to VU the following amounts in respect of
milestones and royalties received by OSI:
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(a) ** of the total revenues received by OSI pursuant to the
Tanabe Agreement or any Other Agreement in the form of milestone and royalty
payments where such revenues are derived solely from VU Technology or VU Patents
licensed to OSI pursuant to Section 5.1 hereof;
(b) ** of the total revenues received by OSI pursuant to the
Tanabe Agreement or any Other Agreement in the form of milestone and royalty
payments where such revenues are derived from Joint Technology or Joint Patents;
and
(c) ** of the total revenues received by OSI pursuant to the
Tanabe Agreement or any Other Agreement in the form of milestone and royalty
payments where such revenues are not derived from VU Technology, VU Patents,
Joint Technology or Joint Patents.
OSI shall make such payments to VU within 30 days following receipt
by OSI of any such revenues. Such payments shall be accompanied by a statement
showing in detail the nature of such revenues.
2.2.4. OSI shall also pay to VU a one-time success fee of ** on
October 1, 1999. Such fee shall be in respect of OSI entering into the Tanabe
Agreement.
2.2.5. OSI has entered into Consultancy Agreements with each of the
Consultant/Investigators which provide, inter alia, that such
Consultant/Investigators will participate in the Alliance Research Program, such
participation being consistent with the policies of VU. VU has acknowledged that
at or promptly following the Original Effective
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Date (a) each Consultant/Investigator notified his or her department chair of
his or her entering into a Consultancy Agreement and (b) in accordance with its
policies regarding conflicts of interest, the Professor and Chair of Molecular
Physiology and Biophysics and/or the Dean of the VU School of Medicine did not
object to the Consultant/Investigators entering into such Consultancy
Agreements. From time to time upon recommendation of the VU/OSI Research
Committee and consistent with VU policy, OSI will offer consultancy
arrangements, on a per diem basis, to additional Investigators and other VU
personnel.
2.3. VU/OSI Research Committee.
2.3.1. The parties have established a VU/OSI Research Committee,
which shall exist for the Alliance Term for the following purposes and for any
other purpose specifically set forth in this Agreement:
(a) to manage the Alliance Research Program consistent with
VU's educational and research objectives;
(b) to modify the research outline for the Alliance Research
Program as appropriate, and to coordinate and make recommendations regarding
publication and communication of research results obtained from the exchange of
information and materials that relate to the Alliance Research Program; and
(c) to monitor the Alliance's participation in the Tanabe
Research Collaboration.
2.3.2. Membership. VDC and OSI each has appointed, in its sole
discretion, four members to the VU/OSI Research Committee. Substitutes may be
appointed at any time. As of the Effective Date, the members are:
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VDC Appointees OSI Appointees
** **
2.3.3. Chair. The VU/OSI Research Committee shall be chaired by one
of the members appointed by OSI. The chair shall establish the agenda for
meetings.
2.3.4. Meetings. The VU/OSI Research Committee shall meet from time
to time, at places and on dates mutually agreed to by the parties.
Representatives of VU or OSI or both, in addition to members of the VU/OSI
Research Committee, may attend such meetings at the invitation of either party.
2.3.5. Minutes. The VU/OSI Research Committee shall keep accurate
minutes of its deliberations and shall record all proposed decisions and all
actions recommended or taken. The minutes shall be delivered in draft form to
all Committee members within 10 working days after each meeting. The party
hosting the meeting shall be responsible for the preparation of the minutes.
Draft minutes shall be edited by the chair and shall be issued in final form
only with the chair's approval and agreement.
2.3.6. Decisions. All decisions or actions of the VU/OSI Research
Committee shall be made by majority of the members (including the chair). In the
event of a tie vote of the VU/OSI Research Committee, the chair will have the
deciding vote.
2.3.7. Expenses. OSI shall bear all expenses related to the
participation on the VU/OSI Research Committee.
2.3.8. Subcommittees. The VU/OSI Research Committee
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shall have authority to appoint subcommittees (which may include persons who are
not members of the VU/OSI Research Committee) and delegate to such subcommittees
powers and duties determined by the VU/OSI Research Committee.
2.4. Reports, Materials and Records.
2.4.1. Reports. During the Alliance Term, VU and OSI shall each
furnish to the VU/OSI Research Committee:
(a) summary written reports within 15 days after the end of
each calendar quarter, commencing on the Effective Date, describing its progress
under the Alliance Research Program; and
(b) comprehensive written reports within 30 days after the
end of each calendar year, describing in detail the work accomplished by it
under the Alliance Research Program during the year and discussing and
evaluating the results of such work.
2.4.2. Materials. OSI and VU shall, during the Alliance Term, as a
matter of course as described in the outline for the Alliance Research Program
or upon the written request of a party, furnish to the requesting party samples
of biochemical, biological or synthetic chemical materials ("Materials") which
are part of the Joint Technology, OSI Technology or VU Technology and which are
necessary for such party to carry out its Alliance Research Program
responsibilities. Such Materials may be supplied to Tanabe for the purpose of
Tanabe to carry out its rights and
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responsibilities under the Tanabe Research Collaboration. Such Materials shall
be considered Confidential Information of the supplying party.
2.5. Laboratory Facilities and Personnel. OSI and VU, subject to
appropriate administrative approval, shall each provide suitable laboratory
facilities, equipment and personnel for the work to be done by each of them
diligently to carry out their respective activities under the Alliance Research
Program.
2.6. Diligent Efforts. VU and OSI each shall use commercially reasonable
diligent efforts to achieve the objectives of the Alliance Research Program.
2.7. Tanabe Access to VU Technology. In order to assist OSI in carrying
out the Tanabe Research Collaboration, as promptly as possible after the
Effective Date and as agreed to by the Investigators pursuant to the form of
agreement attached hereto as Exhibit E, VU will provide Tanabe with any VU
Technology relating to the Tanabe Targets. As agreed to by the Investigators
pursuant to such form of agreement, VU will also promptly provide Tanabe with VU
Technology relating to any VU/OSI Target which is not a Tanabe Target which OSI
offers to Tanabe and which Tanabe determines to include in the Tanabe Research
Collaboration. VU acknowledges that Tanabe shall be entitled to use, have
reasonable access to and be disclosed VU Technology in order to achieve the
objectives of the Tanabe Agreement.
2.8. Tanabe Visiting Scientists. VU will appoint ** Tanabe visiting
scientists who will receive ** appointments as Visiting Scholars at any time
during the Alliance Term for the purpose of assisting OSI in carrying out the
Tanabe Research Collaboration (the actual number of such Tanabe visiting
scientists shall be determined at Tanabe's sole discretion). The length of stay
of such visiting scientists shall not be less than **. Tanabe shall have
responsibility for obtaining proper visa authorization for the visiting
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scientists. Tanabe agrees to indemnify VU against any claims for workers
compensation and other costs from injury incurred with respect to the visiting
scientists. Tanabe shall undertake to provide that the visiting scientists will
agree to abide by all VU rules and regulations applicable to their place of
research and made known to them.
2.9. Inspection. VU shall keep for seven years from the expiration of the
Alliance Term complete and accurate records of its expenditures of the payments
received from OSI. VU shall make its records available for inspection by an
independent certified public accountant selected by Tanabe during regular
business hours at the place or places where such records are customarily kept,
upon reasonable notice from Tanabe, to the extent reasonably necessary to verify
the accuracy of the expenditures and required reports. This right of inspection
shall not be exercised more than once in any calendar year and not more than
once with respect to records covering any specific period of time, unless a
subsequent inspection reveals discrepancies which may have also occurred during
such prior period of time. Tanabe agrees to hold in strict confidence all
information concerning such expenditures, other than their total amounts, and
all information learned in the course of any audit or inspection, except to the
extent that it is necessary for Tanabe to reveal the information in order to
enforce any rights it may have pursuant to the Tanabe Agreement or if disclosure
is required by law. The failure of Tanabe to request verification of any
expenditures before the expiration of the seven-year period referred to above
shall be considered acceptance of the accuracy of the invoices for such
expenditures, and Vanderbilt shall have no obligation to maintain any records
pertaining to such expenditures beyond the seven-year period.
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2.10. Joint Technology. OSI and VU each represents and agrees that all
employees and other persons acting on its behalf in performing its obligations
under this Agreement shall be obligated to assign to such party or as such party
shall direct (to the extent the agreeing party is legally entitled to disclose
and use the same in the Alliance Research Program), all rights of such employee
or other person in Joint Technology or Joint Patents made or developed by such
employee or other person.
3. Funding of the Alliance Research Program for Year One.
3.1. Research Grant. The parties hereto acknowledge that on or
about each of April 28, 1998, October 28, 1998 and April 28, 1999, OSI paid to
VDC ** . Such amounts constituted a research grant to VDC used to support
research conducted by a post-doctoral fellow reporting to ** for the development
of ** .
3.2. Collaboration Access Fee. The parties hereto acknowledge that
on April 28, 1998, OSI paid to VDC ** (the "Access Fee") as consideration for
(a) the option granted to OSI set forth in Section 5.1 of the Original
Agreement, and (b) subject to appropriate VU administrative approval, full and
complete access to VDC laboratories and other facilities during the Alliance
Term for the purpose of conducting the Alliance Research Program.
4. Treatment of Confidential Information.
4.1. Confidentiality.
4.1.1. Subject to the disclosure obligations set forth in Sections
4.3 and 4.4 hereof and publication rights set forth in Section 4.2 hereof, (a)
VU agrees that during the Alliance Term and for five years thereafter, it will
keep confidential, and will cause its Affiliates to keep confidential, all OSI
Confidential Information and all Tanabe Confidential Information, and neither VU
nor any of its Affiliates shall use OSI Confidential Information
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or Tanabe Confidential Information except as expressly permitted in this
Agreement, and (b) each of OSI and Tanabe agrees that during the Alliance Term
and for five years thereafter, it will keep confidential, and will cause its
Affiliates to keep confidential, all VU Confidential Information, and none of
OSI, Tanabe nor any of their respective Affiliates shall use VU Confidential
Information except as expressly permitted in this Agreement.
4.1.2. Each of VU, OSI and Tanabe acknowledges that the OSI
Confidential Information, the Tanabe Confidential Information and VU
Confidential Information constitutes highly valuable, proprietary, confidential
information, and each party agrees that any disclosure of any other party's
Confidential Information to any officer, employee or agent of such party or of
any of its Affiliates shall be made only if and to the extent necessary to carry
out its responsibilities under this Agreement and shall be limited to the
greatest extent possible consistent with such responsibilities. Subject to
Section 4.6 hereof, each party agrees not to disclose any other party's
Confidential Information to any Third Parties under any circumstance without
written permission. Each party shall take such action, and shall cause its
Affiliates to take such action, to preserve the confidentiality of any other
party's Confidential Information as they would customarily take to preserve the
confidentiality of their own confidential information.
4.1.3. Each party represents that all of its employees and
consultants participating in the Alliance Research Program who shall have access
to any other party's Confidential Information are bound by agreement to maintain
such information in confidence.
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4.2. Publication. Section 4.1 hereof to the contrary notwithstanding, the
Investigators and the Consultant/Investigators shall be free to publish or
present the results obtained in the course of the Alliance Research Program. In
such event, VU will provide OSI with a copy of such manuscript or presentation
at least 30 days prior to the date of submission for publication or
presentation. If any patentable Technology would be disclosed in such
publication, publication may be delayed up to 90 additional days for the purpose
of filing a patent application in VU's name or, in the case of Joint Technology,
in the name of both VU and OSI.
4.3. Publicity. Except as required by federal or state laws, rules or
regulations, and except as necessary to carry out the purposes of this Agreement
and the Tanabe Agreement, no party may disclose the existence of this Agreement
nor the research described in it except with the written consent of the other
party, which consent shall not be unreasonably withheld. Neither party will
issue a press release with regard to matters relating to this Agreement without
the other party's consent, which consent shall not be unreasonably withheld. The
party desiring to make any such public announcement or other disclosure shall
provide the other party with a written copy of the proposed announcement or
disclosure in sufficient time prior to the proposed public release to allow such
other party to comment upon the nature, text and timing of such announcement or
disclosure prior to the proposed public release.
4.4. Disclosure of Inventions. Each party shall promptly inform the other
party about all Technology that is conceived, made or developed in the course of
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carrying out the Alliance Research Program by employees of that party solely or
jointly with employees of the other party.
4.5. Restrictions on Transferring Materials. VU and OSI recognize that the
Materials which are part of OSI Technology, VU Technology, or Joint Technology
or any Materials transferred by Tanabe represent valuable commercial assets.
Therefore, throughout the Alliance Term and for ** thereafter (unless the other
party consents thereto, which consent shall not be unreasonably withheld), each
of OSI and VU agree not to transfer to any Third Party any such Materials which
constitute Technology owned solely by the other party(s) to this Agreement.
Additionally, throughout the Alliance Term and for ** thereafter, OSI and VU
agree not to transfer to any Third Party any Materials which are part of the
Joint Technology, unless prior consent for any such transfer is obtained from
the other party, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, each party may use such Materials without
restriction for research and academic purposes only (not directed toward the
commercial development of compounds or products). Accordingly, each party grants
to the other party a nonexclusive, irrevocable, worldwide, royalty-free license
to use its Materials for research and academic purposes.
4.6. Permitted Use of Confidential Information. Nothing contained herein
will in any way restrict or impair any party's right to use, disclose or
otherwise deal with any Confidential Information which:
(a) at the time of disclosure is properly in the public domain or
thereafter becomes part of the public domain by publication or otherwise through
no breach of this Agreement by the party receiving such information;
(b) the party receiving such information can establish by
competent evidence that such information was properly in its possession prior to
the time of the disclosure;
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(c) is independently and properly made available as a matter of
right to the party receiving such information by a Third Party who is not
thereby in violation of a confidential relationship;
(d) is information which is required to be included in patent
applications filed under Article 6; provided, however, that VU Confidential
Information or OSI Confidential Information shall not be disclosed in any such
patent application or otherwise without the prior written consent of VU or OSI,
respectively, which consent shall not be unreasonably withheld; or
(e) is information which is required to be disclosed to
customers, users and prescribers of a Product, or which is reasonably necessary
to disclose in connection with the marketing of a Product; or
(f) is information required to be disclosed by law or by a court
order, in each of which cases the disclosing party shall timely inform the other
and use its best efforts to limit the disclosure and maintain confidentiality to
the extent possible and will permit the other party to limit such disclosure.
5. License.
5.1. License. VU hereby grants to OSI an exclusive license, including
the right to sublicense, under the VU Technology, the VU Patents, and VU rights
in the Joint Technology and Joint Patents to develop, make, have made, use, sell
and have sold Products, which license shall be exclusive (even as to VU) for so
long as OSI or a sublicensee thereof is obligated to pay royalties. As
consideration for such license, OSI shall pay to VU the amounts provided for in
Sections 2.2.2 and 2.2.3 hereof. OSI's obligation to make such payments in
respect of royalties shall continue for so long as
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OSI is receiving royalty payments under the Tanabe Agreement or Other
Agreements. The Tanabe Agreement provides that OSI will be entitled to receive a
royalty, on a country-by-country basis, for as long as a Product is covered by a
valid patent in such country or ** following first commercial sale of such a
Product, whichever is longer.
5.2. Reservation of VU Rights. VU reserves the right to use VU
Technology, the VU Patents, and VU rights in the Joint Technology and Joint
Patents for its own research and academic purposes. VU also reserves the right
to make research reagents and assays which are part of VU Technology and VU
Patents available under appropriate material transfer agreements to academic
researchers at other universities and not-for-profit research entities.
5.3. Federal Government Rights Reserved. Notwithstanding the license
granted herein, the U.S. Federal Government shall receive all the rights to VU
Technology or VU Patents created or discovered with support of funds from the
U.S. Federal Government required by law or regulation to be reserved to the U.S.
Federal Government. The parties agree that the U.S. Federal Government is hereby
granted a non-exclusive, non-transferable, irrevocable, royalty-free license to
practice or have practiced on its behalf throughout the world the VU Technology
or VU Patents created or discovered with support of funds from the U.S. Federal
Government. All rights granted in this Agreement are expressly granted subject
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to the rights of the U.S. Federal Government and such rights are specifically
reserved to the U.S. Federal Government by this Agreement.
5.4. Warranties and Indemnities.
5.4.1. Nothing in this Agreement shall be construed as:
(a) a warranty or representation by VU as to the validity or
scope of VU Patent Rights;
(b) a warranty or representation by VU that anything made,
used, sold, or otherwise disposed of through the license granted herein is or
will be free from infringement of patents, copyrights, trademarks, or other
proprietary rights of third parties;
(c) subject to the provisions of Section 6.2, an obligation
by VU to bring or prosecute actions or suits against third parties for
infringement; or
(d) granting by implication, estoppel, or otherwise any
licenses under patents of VU or other persons other than VU Patent Rights,
regardless of whether such patents are dominant or subordinate to any VU Patent
Rights.
5.4.2. (a) OSI shall indemnify, defend and hold harmless VU and its
trustees, officers, faculty, staff, employees, students, agents and
representatives, and their respective successors, heirs and assigns (the
"Indemnitees"), against any liability, damage, loss or expenses (including
reasonable attorneys' fees and expenses of litigation) incurred by or imposed
upon the Indemnitees or any one of them in connection with any claims, suits,
actions, demands or judgments arising out of any theory of law (including,
without limitation, actions in the form of tort, warranty, or
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strict liability) concerning any product, process or service made, used or sold
pursuant to any right or license granted under this Agreement. Such indemnity
obligation shall include claims and expenses related to infringement of a third
party's rights by the Product.
(b) OSI agrees, at its own expense, to provide attorneys
reasonably acceptable to VU to defend against any actions brought or filed
against any party indemnified hereunder with respect to the subject of indemnity
contained herein, whether or not such actions are rightfully brought.
5.4.3. UNLESS EXPRESSLY PROVIDED HEREIN, VU MAKES NO REPRESENTATIONS
AND EXTENDS NO WARRANTIES OF ANY KIND EXPRESS OR IMPLIED. THERE ARE NO EXPRESS
OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR
THAT USE OF A PRODUCT WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR
OTHER RIGHTS OF THIRD PARTIES.
5.4.4. Regarding the indemnity and hold harmless provisions, under
Paragraph 5.4.2(a), VU shall give prompt written notice to OSI of the
commencement of any action, suit, or proceeding for which indemnification may be
sought, and OSI, through counsel reasonably acceptable to VU, shall assume the
defense thereof; provided, however, that VU shall be entitled to participate in
any such action, suit, or proceeding with counsel of its own choice, but at its
own expense. If OSI fails to assume the defense within a reasonable time, VU may
assume such defense and the reasonable fees and expenses of its attorneys will
be covered by the indemnity provided for in Paragraph 5.4.2(a). Notwithstanding
anything in this Paragraph to the
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contrary, OSI shall not, without the written consent of VU, which consent shall
not be unreasonably withheld:
(a) Settle or compromise any action, suit, or proceeding or
consent to the entry of any judgment which does not include as an unconditional
term thereof the delivery by the claimant or plaintiff to VU of a written
release from all liability in respect of such action, suit, or proceeding; or
(b) Settle or compromise any action, suit, or proceeding in
any manner which may adversely affect VU.
5.4.5. Insurance. (a) Beginning at the time as any Product enters
clinical trials, OSI shall procure and maintain comprehensive general product
liability and tort liability insurance in amounts not less than ** per
occurrence and ** annual aggregate and name the Indemnitees as additional
insureds. Such comprehensive general liability insurance shall provide (i)
product liability coverage and (ii) broad form contractual liability coverage
for OSI's indemnification under this Agreement. OSI agrees that no amount
greater than the sum of ** shall be deductible under OSI's primary coverage for
VU and OSI against any claims or suits arising from alleged defects in Products.
(b) OSI represents and warrants that its product liability
and general tort liability is of the occurrence-based rather than claims-made
type. Within thirty (30) days after the date on which clinical trials with
respect to a Product commences hereunder, OSI shall provide VU with a
certificate or certificates of insurance evidencing that VU has been named as an
additional insured party. It is expressly agreed by the parties that the
provisions of this Article regarding insurance
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treatment.
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shall in no way limit OSI's indemnity obligations, except to the extent that
OSI's insurer (s) actually pays VU amounts for which VU is entitled to be
indemnified under this Agreement, nor shall VU have any obligation to pursue any
insurer as a precondition to its rights to be indemnified by OSI. As used in
this Article, the term "VU" shall include VU, and its officers, directors,
agents and employees. If OSI does not obtain replacement insurance within such
thirty (30) day period specified above, VU shall have the right to terminate
this Agreement effective at the end of such thirty (30) day period without
notice or any additional waiting periods.
(c) OSI shall maintain such comprehensive general product
liability and tort liability insurance beyond the expiration or termination of
this Agreement during (i) the period that any Product is being commercially
distributed or sold by OSI or by a sublicensee or agent of OSI and (ii) a period
not less than the statute of limitations for product liability claims in the
state in which the product is being used.
5.5. Paid-Up License. Provided that OSI has satisfied all of its
obligations to pay royalties with respect to a particular Product under the
license agreement described in Section 5.1 above, OSI shall have a paid-up
exclusive royalty-free license to manufacture, have manufactured, use, sell and
have sold such Product in each country after the expiration of OSI's last
obligation to pay royalties with respect to such Product in such country.
5.6. Rights to Joint Technology. Provided that VU shall have fully
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performed its obligations hereunder, OSI hereby grants to VU a non-exclusive,
worldwide, royalty-free license under any OSI rights in the Joint Technology for
academic and research uses only. Provided that OSI shall have fully performed
its obligations hereunder, VU hereby grants to OSI a non-exclusive worldwide,
royalty-free license under any VU rights in the Joint Technology for research
purposes only.
6. Patents.
6.1. Provision of Services for Filing, Prosecution and Maintenance
of Patent Rights. OSI shall provide to VU, at VU's request, certain services
relating to the filing, prosecution and maintenance of VU Patents, Joint Patents
and patents which support Technology developed by VU which is not VU Technology
(the "Non-Licensed VU Patents"). Such services shall be provided by OSI's
technology assessment team and OSI's outside patent counsel working on VU's
behalf and shall include provision of advice on patentability of inventions and
assistance in filing initial applications for letters patent. The costs and
expenses for such services shall be borne by OSI if such services relate to
Joint Patents and patents and applications under Joint Technology. The costs and
expenses for such services shall initially be borne by OSI if such services
relate to VU Patents and patents and applications under VU Technology if the
foregoing have been licensed to OSI pursuant to Section 5.1 hereof. VU shall pay
OSI for any such services at cost if such services relate to Non-Licensed VU
Patents.
6.2. Legal Action. If, under the Tanabe Agreement, either OSI or
Tanabe determine it necessary to take legal action to prevent unlawful
disclosure or infringement of patent rights held by such party and further
determine it necessary or desirable for VU to join any such suit, action or
proceeding, VU shall execute all papers
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and perform such other acts as may be reasonably necessary to permit OSI or
Tanabe, as the case may be, to act in VU's name but at no cost to VU and with
reasonable compensation to VU employees for their time in assisting OSI or
Tanabe.
6.3. Hold Harmless. VU agrees to defend, protect, indemnify, and
hold harmless OSI and any sublicensee of OSI (including without limitation
Tanabe), from and against any loss or expense arising from any proven claim of a
Third Party that it has been granted rights by VU, and that OSI or any
sublicensee of OSI (including without limitation Tanabe) in exercising their
rights granted to OSI by VU pursuant to this Agreement, has infringed upon such
rights granted to such Third Party by VU.
7. Term, Termination and Disengagement.
7.1. Term of Alliance Research Program. The term of the Alliance
Research Program (the "Alliance Term") commenced on the Original Effective Date,
extended hereby effective as of the first anniversary of the Original Effective
Date, pursuant to Section 7.1 of the Original Agreement, and shall terminate on
the date of termination of the Contract Period as defined in the Tanabe
Agreement unless extended by mutual agreement between the parties hereto. The
provisions of the Tanabe Agreement regarding term and termination of such
Agreement are attached hereto, for informational purposes only, as Exhibit F.
7.2. Term of the Agreement. The term of this Agreement (the "Term")
shall continue until the expiration or termination of the last obligation of OSI
to make the payments provided for in Sections 2.2.2, 2.2.3 and 5.1 in respect of
royalties on a country-by-country basis and shall include the Alliance Term.
7.3. Termination Upon an Event of Default.
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7.3.1. The following events shall constitute events of default
("Events of Default"):
(a) Any material representation or warranty by OSI or VU, or
any of their officers, under or in connection with this Agreement shall prove to
have been incorrect in any material respect when made.
(b) OSI or VU shall fail in any material respect to perform or
observe any material term, covenant or understanding contained in this
Agreement, including, without limitation, the making of any payments required
hereunder, or in any of the other documents or instruments delivered pursuant
to, or concurrently with, this Agreement, and any such failure shall remain
unremedied for 30 days after written notice to the failing party.
7.3.2. Upon the occurrence of an Event of Default, the party not
responsible may, by notice to the other party, terminate this Agreement. If VU
is the terminating party, at VU's option the license granted in Section 5.1
shall terminate. If VU exercises such option, it shall, simultaneously with the
termination of the license granted to OSI, grant to Tanabe the license set forth
in Section 5.1 hereof and Tanabe agrees to be bound by the provisions of Section
5.1. If OSI is the terminating party, the license granted in Section 5.1 shall
remain in effect until the expiration of the Term.
7.4. Survival. Upon termination pursuant to Section 7.3.2 hereof, the
following sections of this Agreement shall survive such termination if the
license in Section 5.1 continues: Sections 1, 4, 5, 9 and 10. Upon termination
pursuant to Section 7.3.2 hereof, the following sections of this Agreement shall
survive such termination if the license in Section 5.l does not continue:
Sections 1, 4, 9 and 10.
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8. Representations and Warranties.
8.1. By OSI and VU. OSI and VU each represents and warrants as
follows:
8.1.1. Authority. It has all requisite power and authority, corporate
or otherwise, to execute, deliver and perform this Agreement.
8.1.2. No Conflict. The execution, delivery and performance by it of
this Agreement do not and will not (a) violate any provision of any law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award
presently in effect having applicability to it or any provision of its charter
or by-laws or (b) result in a breach of or constitute a default under any
material agreement, mortgage, lease, license, permit or other instrument or
obligation to which it is a party or by which it or its properties may be bound
or affected.
8.1.3. Binding Obligation. This Agreement is a legal, valid and
binding obligation of it enforceable against it in accordance with its terms and
conditions, except as such enforceability may be limited by applicable
bankruptcy, insolvency, moratorium, reorganization or similar laws, from time to
time in effect, affecting creditor's rights generally.
8.2. By OSI. OSI represents and warrants as follows:
8.2.1. Status. It is a corporation, validly existing and in good
standing under the laws of Delaware, and has all requisite power and authority,
corporate or otherwise, to conduct its business as now being conducted, and to
own, lease and operate its properties.
8.2.2. Due Authorization. The execution, delivery and
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performance by it of this Agreement have been duly authorized by all necessary
corporate action.
9. Further Assurances. Each of the parties agrees and covenants promptly
to execute and deliver, or cause to be executed and delivered, to the other
party such additional documents or instruments as the other party may reasonably
deem necessary or desirable to carry out or implement any provision of this
Agreement and the transactions contemplated hereby.
10. Notices. All notices shall be mailed via certified mail, return
receipt requested, telecopy or courier addressed as follows, or to such other
address as may be designated from time to time:
If to VU:
Notices related to sponsored research to:
Thomas F. Barnes
Associate Director of Sponsored Research
Vanderbilt University Medical Center
CCC-3322 Medical Center North
Nashville, TN 37232-2103
Notices related to patent application, patents and licenses to:
Larry R. Steranka, Ph.D.
Director, Office of Technology Transfer
Vanderbilt University
1207 17th Ave So, Suite 210
Nashville, TN 37212
Payments under Paragraphs 2.2.3 and 2.2.4 to:
Larry R. Steranka, Ph.D.
Director, Office of Technology Transfer
Vanderbilt University
1207 17th Ave So, Suite 210
Nashville, TN 37212
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Payments under Paragraph 2.2.2 to:
Stephen M. Todd
Assistant Director Financial Management
Vanderbilt University Medical Center
CC-2102C Medical Center North
Nashville, TN 37232-2220
If to OSI: At its address as set forth at the beginning of
this Agreement
Attention: Chief Executive Officer
Telecopy: (516) 745-6429
Notices shall be deemed given as of the date of receipt.
11. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of New York, except those laws relating to choice of law
or conflicts of law.
12. Miscellaneous.
12.1. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective legal representatives,
successors and permitted assigns.
12.2. Headings. Paragraph headings are inserted for convenience of
reference only and do not form a part of this Agreement.
12.3. Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original.
12.4. Amendment; Waiver; etc. This Agreement may be amended,
modified, superseded or canceled, and any of the terms may be waived, only by a
written instrument executed by each of OSI and VU or, in the case of waiver, by
OSI or Vanderbilt, whichever is waiving compliance. Notwithstanding the
foregoing, Sections 2.1.3, 2.1.4, 2.4.2, 2.7, 2.8, 2.9. 4, 5.1, 5.2, 5.3, 6.2,
6.3, 7.3.2, 11, 12.4, 12.6 and the
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<PAGE> 36
applicable definitions in Section 1 which relate to any of such sections may be
amended, modified, superseded or canceled, and any of the terms may be waived,
only by a written instrument executed by each of OSI, VU and Tanabe or, in the
case of waiver, by OSI, Vanderbilt or Tanabe, whichever is waiving compliance.
In addition, OSI and Vanderbilt may not modify, amend or cancel any provision of
this Agreement in a manner which adversely affects Tanabe without Tanabe's
written consent. The delay or failure of any party at any time or times to
require performance of any provision shall in no manner affect the rights at a
later time to enforce the same.
12.5. No Third Party Beneficiaries. No person not a party to this
Agreement, including any employee of any party to this Agreement, shall have or
acquire any rights by reason of this Agreement. Nothing contained in this
Agreement shall be deemed to constitute the parties partners, principal, agent
or employee with each other or any Third Party.
12.6. Assignment and Successors. This Agreement may not be assigned
by either party (including Tanabe), except that the parties (including Tanabe)
may assign this Agreement and their rights and interests, in whole or in part,
to any of their Affiliates, or any purchaser of all or substantially all of its
assets or to any successor corporation resulting from any merger or
consolidation with or into such corporation, provided that such assignor shall
remain primarily liable for its obligations hereunder.
12.7. Export Control. In performing this Agreement, the parties shall
comply with all applicable laws and regulations with respect to the export of
Products and Materials, including all Export Administration Regulations of the
United States
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<PAGE> 37
Department of Commerce. These laws and regulations among other things, prohibit
or require a license for the export of certain types of technical data to
certain specified countries. Tanabe hereby agrees and gives written assurance
that it will comply with all United States laws and regulations controlling the
export of commodities and technical data, that it will be solely responsible for
any violation of such by it or its Affiliates and that it will defend and hold
VU harmless in the event of any legal action of any nature occasioned by such
violation.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives.
VANDERBILT UNIVERSITY
By: /s/ Lee E. Limbird
---------------------------------------------
Name: Lee E. Limbird, Ph.D.
Title: Associate Vice Chancellor for Research
By: /s/ Larry R. Steranka
---------------------------------------------
Name: Larry R. Steranka, Ph.D.
Title: Director, Office of Technology Transfer
OSI PHARMACEUTICALS, INC.
By: /s/ Colin Goddard
---------------------------------------------
Name: Colin Goddard, Ph.D.
Title: President and Chief Executive Officer
For purposes of Sections 2.1.3, 2.1.4, 2.4.2, 2.7, 2.8, 2.9, 4, 5.1, 5.2, 5.3,
6.2, 6.3, 7.3.2, 11, 12.4, 12.6 and applicable definitions set forth in Article
1 only:
TANABE SEIYAKU CO., LTD.
By:/s/ Shoei Nakashima
- -----------------------
Name: Shoei Nakashima
Title: Managing Director of the Board
Executive, Research & Development Headquarters
General Manager, Discovery Research Laboratory
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Acknowledged and Agreed:
**
- ----------------
** This portion has been redacted pursuant to a request for confidential
treatment.
39
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EXHIBIT A
CONSULTANT/INVESTIGATORS
**
- ----------------
** This portion has been redacted pursuant to a request for confidential
treatment.
40
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EXHIBIT B
LIST OF INVESTIGATORS
**
- ----------------
** This portion has been redacted pursuant to a request for confidential
treatment.
41
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EXHIBIT C
TANABE TARGETS
**
- ----------------
** This portion has been redacted pursuant to a request for confidential
treatment.
42
<PAGE> 43
EXHIBIT D
VU/OSI TARGETS
**
- ----------------
** This portion has been redacted pursuant to a request for confidential
treatment.
43
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EXHIBIT E
FORM OF INVESTIGATOR AGREEMENT
[DATE]
OSI PHARMACEUTICALS, INC.
106 CHARLES LINDBERGH BOULEVARD
UNIONDALE, NEW YORK 11553
LADIES AND GENTLEMEN:
REFERENCE IS MADE TO THE AMENDED AND RESTATED COLLABORATIVE RESEARCH, LICENSE
AND ALLIANCE AGREEMENT BY AND BETWEEN VANDERBILT UNIVERSITY ("VU") AND OSI
PHARMACEUTICALS, INC. ("OSI"), WITH AN EFFECTIVE DATE OF AUGUST __, 1999 (THE
"AGREEMENT"). THE UNDERSIGNED, _________ ____________, HEREBY ACKNOWLEDGES THAT
HE OR SHE IS AN EMPLOYEE OF VU AND AGREES TO BE NAMED AS AN INVESTIGATOR UNDER
THE TERMS OF THE AGREEMENT. THE UNDERSIGNED FURTHER ACKNOWLEDGES THAT HE OR SHE
HAS READ AND UNDERSTANDS SECTION 2.1.3, SECTION 2.1.4, SECTION 2.7 AND EXHIBIT C
(ANNEXED) OF THE AGREEMENT AND HEREBY AGREES, AS AN INVESTIGATOR, TO BE BOUND BY
SUCH SECTIONS.
VERY TRULY YOURS,
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EXHIBIT F
TERM AND TERMINATION
PROVISIONS
OF TANABE AGREEMENT
8. Term, Termination and Disengagement
8.1. Term.
8.1.1 Term of Contract Period. The term of the Contract Period shall
commence on the Effective Date and shall expire on the fourth anniversary of the
Effective Date, unless extended by mutual written agreement of the parties
pursuant to Section 8.1.3, terminated by Tanabe pursuant to Section 8.1.2 hereof
or as otherwise provided in this Agreement, and shall mean the period during
which Tanabe is providing Funding Amounts pursuant to Section 3 hereof.
8.1.2 Two-Year Review. On or before the second anniversary of the
Effective Date, OSI shall deliver to Tanabe a written report indicating whether
the Two-Year Minimum Requirements have been met (the "Two Year Report"). If the
Two-Year Minimum Requirements have been met, the Contract Period will remain in
effect for the remainder of the 4-year period from the Effective Date. If the
Two-Year Minimum Requirements have not been met, within ** following receipt of
such report, Tanabe shall notify OSI in writing whether it intends to terminate
the Contract Period in accordance with the provisions of Section 8.2 hereof or
whether the Contract Period shall remain in effect for the remainder of the
4-year period from the Effective Date. If the Two Year Report indicates that the
Two Year Minimum
- ----------------
** This portion has been redacted pursuant to a request for confidential
treatment.
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Requirements have not been met but Tanabe nonetheless determines not to exercise
its right to Early Termination, Tanabe shall make the quarterly Funding Amount
for the first quarter of the third year of the Contract Period on the later of
the first day of such quarter or the day on which Tanabe provides OSI with
notice of its intent not to terminate the Contract Period.
8.1.3 Renewal. Tanabe may renew the Contract Period for an
additional period of ** years by providing written notice of its intent to renew
to OSI within four months prior to the expiration of the Contract Period.
Following delivery and receipt of such written notice, the parties will
negotiate in good faith the level of funding during the renewal period;
provided, however, that such funding, on an annual basis, shall be equal to or
greater than the aggregate Funding Amounts during the fourth year of the
Contract Period. The "Contract Period" shall be deemed to include any renewal
period. Notwithstanding the foregoing, at Tanabe's request, OSI shall, for a
period of one year following the expiration of the Contract Period (i.e., all
four years or more if extended hereby), provide to Tanabe ongoing services to be
mutually determined by the parties on a Compound-by-Compound basis or a
Target-by-Target basis. Tanabe shall pay OSI for such services an additional
Funding Amount equal **.
8.1.4 Term of Agreement. The term of this Agreement ("Term") shall
continue until the expiration or termination of the last obligation of either
party to pay royalties on a country-by-country basis and shall include the
Contract Period as well as the Drug Discovery Phase, Early Development Phase and
Clinical Development and Marketing Phase, any or all of which may be coexistent
with the Contract Period.
- -----------------
** This portion has been redacted pursuant to a request for confidential
treatment.
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8.2 Tanabe's Right to Early Termination. Tanabe shall have the right to
terminate the Contract Period following its receipt of the Two Year Report, in
accordance with the provisions set forth in Section 8.1.2 hereof, if the
Two-Year Minimum Requirements have not been met ("Early Termination"). If there
is an Early Termination, there shall be no Remaining Right Period.
8.3 Termination Upon an Event of Default. Upon the occurrence of any of
the following events ("Events of Default"), the party not responsible may, by
notice to the other party, terminate this Agreement subject to compliance with
the terms of Section 10 (Dispute Resolution), and without prejudice to any
remedy or claims it may have against the other party.
8.3.1 Incorrect Representation or Warranty. Any material
representation or warranty by OSI or Tanabe, or any of their officers, under or
in connection with this Agreement, proves to have been incorrect in any material
respect when made.
8.3.2 Failure to Perform. OSI or Tanabe fails in any material
respect to perform or observe any material term, covenant or understanding
contained in this Agreement or in any of the other documents or instruments
delivered pursuant to, or concurrently with, this Agreement, and any such
failure shall remain unremedied for 60 days after written notice to the failing
party.
8.3.3 Bankruptcy. OSI or Tanabe makes an assignment for the benefit
of its creditors, becomes insolvent, files a petition in bankruptcy, petitions
or applies to any tribunal for the appointment of a custodian, receiver or any
trustee for it or a substantial part of its assets, or commences any proceeding
under any bankruptcy,
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reorganization, arrangement, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction, whether now or hereafter in effect; or if
there has been filed any such petition or application against OSI or Tanabe, or
any such proceeding has been commenced against it, in which an order for relief
is entered or which remains undismissed for a period of 60 days or more; or OSI
or Tanabe by any act or omission indicates its consent to, approval of or
acquiescence in, any such petition, application or proceeding or order for
relief or the appointment of a custodian, receiver or any trustee for it or any
substantial part of any of its properties, or is the subject to any such
custodianship, receivership or trusteeship that continues undischarged for a
period of 60 days or more.
8.4. Effect of Expiration or Termination of the Contract Period.
8.4.1 Expiration. Upon expiration of the Contract Period as provided
in Section 8.1.1 (including the renewal period, if any, provided for in Section
8.1.3):
(a) Tanabe License to OSI. Tanabe shall grant to OSI a
royalty-free, worldwide, perpetual, non-exclusive license, including the right
to grant sublicenses, under Tanabe Technology and Tanabe's rights in
Improvements and Joint Patents, to research, develop, have developed, make, have
made, use, sell, have sold and commercialize pharmaceutical products;
(b) OSI License to Tanabe. OSI shall grant to Tanabe a
royalty-free, worldwide, perpetual, non-exclusive license, including the right
to grant sublicenses, under OSI Technology and OSI's rights in Improvements and
Joint Patents, to research, develop, have developed, make, have made, use, sell,
have sold and commercialize pharmaceutical products;
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(c) Option Payment. Following the expiration of the Contract
Period, each of Tanabe and OSI shall have the right to independently continue
development with respect to a Target with no obligation to the other Party
except as follows in subsections (c)(i) and (c)(ii):
(i) Seed Compounds after Contract Period. If, during the
Remaining Right Period, a Seed Compound on which OSI has continued development
meets the criteria of a Lead Compound as set forth on Exhibit B hereto, OSI
shall so notify Tanabe in writing and, together with such notice, shall supply
to Tanabe any Materials with respect to the Lead Compound which OSI reasonably
determines would be useful for Tanabe's evaluation of such Lead Compound. OSI
shall include in such written notice the ** by OSI in connection with the
development of such Seed Compound during the period between the expiration of
the Contract Period and the date of such notice. ** Such written notice shall
constitute an offer by OSI to Tanabe of an exclusive option to commence the
Early Development Phase with respect to such Lead Compound, and, accordingly,
take a license to such Lead Compound consistent with Section 5.1.1. As
consideration for such option, Tanabe shall pay OSI the amount of its ** (the
"Option Payment"). Tanabe shall exercise such option by sending OSI written
notice of such exercise within ** following the date of OSI's notice to Tanabe
and transfer of the Materials from OSI to Tanabe. Tanabe's notice to OSI shall
be accompanied by the Option Payment. If Tanabe determines not to exercise such
option, OSI may continue development of such Seed Compound and may commercialize
any product resulting from such Seed Compound with no further obligation to
Tanabe.
- ----------------
** This portion has been redacted pursuant to a request for confidential
treatment.
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(ii) Competitive Compound Directed Toward a Tanabe Target.
If, during the ** period after the Contract Period, any compound which OSI has
continued to develop by itself or with any Third Party meets the criteria of a
Lead Compound as set forth on Exhibit B hereto and such compound is directed
toward the same target as a Target for which Tanabe has paid the milestone of **
for the first Lead Compound pursuant to Section 3.3.2, and Tanabe is continuing
the development or commercialization of any Lead Compound directed to such
Target, OSI shall notify Tanabe in writing that such compound has met the
criteria of a Lead Compound and, together with such notice, shall supply to
Tanabe any Materials with respect to such Lead Compound identified by it which
OSI reasonably determines would be useful for Tanabe's evaluation of such Lead
Compound. OSI shall include in such written notice the ** by OSI in connection
with the development of such compound during the period between the expiration
of the Contract Period and the date of such notice. ** Such written notice shall
constitute an offer by OSI to Tanabe of an exclusive option to commence the
Early Development Phase with respect to such Lead Compound and, accordingly,
take a license to such Lead Compound consistent with Section 5.1.1. As
consideration for such option, Tanabe shall pay OSI the amount of its ** (the
"Option Payment"). Tanabe shall exercise such option by sending its written
notice of such exercise within ** following the date of OSI's notice to Tanabe
and transfer of the Materials from OSI to Tanabe. Tanabe's notice to OSI shall
be accompanied by the Option Payment. If Tanabe determines not to exercise such
option, OSI may continue development of such compound and
- ----------------
** This portion has been redacted pursuant to a request for confidential
treatment.
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may commercialize any product resulting from such compound with no further
obligation to Tanabe.
(d) Royalty Obligation. Notwithstanding anything herein to the
contrary, any licenses under Section 5.1.1 for which Tanabe has exercised its
option, and the concurrent obligation to pay royalties as provided in Section
5.5.1, shall continue, and any license under Section 5.1.2 (if in effect at such
time), and the concurrent obligation to pay royalties as provided in Section
5.5.2, shall continue;
(e) Milestone Obligation. Tanabe's obligations to pay
milestones under Sections 3.3.2 and 3.3.3 shall continue; and
(f) Transfer of Assay. OSI will transfer to Tanabe, at
Tanabe's request and ** technology for any assay developed for a Target by OSI,
its Affiliates and/or Vanderbilt under the Research Program which has not yet
been transferred to Tanabe under Section 2.2.1.
8.4.2 Early Termination if Two Year Minimum Requirements Are Not
Met. If the Two Year Report indicates that the Two Year Minimum Requirements
have not been met, and Tanabe exercises its right to Early Termination:
(a) Tanabe License to OSI. Tanabe shall grant to OSI a
royalty-free, worldwide, perpetual, non-exclusive license, including the right
to grant sublicenses, under
- ----------------
** This portion has been redacted pursuant to a request for confidential
treatment.
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Tanabe Technology and Tanabe's rights in Improvements and Joint Patents, to
research, develop, have developed, make, have made, use, sell, have sold and
commercialize pharmaceutical products;
(b) OSI License to Tanabe. OSI shall grant to Tanabe a
royalty-free, worldwide, perpetual, non-exclusive license, including the right
to grant sublicenses, under OSI Technology and OSI's rights in Improvements and
Joint Patents, to research, develop, have developed, make, have made, use, sell,
have sold and commercialize pharmaceutical products;
(c) Royalty Obligation. Notwithstanding anything herein to the
contrary, any licenses under Section 5.1.1 for which Tanabe has exercised its
option, and the concurrent obligation to pay royalties as provided in Section
5.5.1, shall continue, and any license under Section 5.1.2 (if in effect at such
time), and the concurrent obligation to pay royalties as provided in Section
5.5.2, shall continue;
(d) Milestone Obligation. Tanabe's obligations to pay
milestones under Sections 3.3.2 and 3.3.3 shall continue;
(e) Tanabe's Option. Tanabe's option to acquire any license(s)
under Section 5.1.1 shall remain in effect; and
(f) Transfer of Assay. OSI will provide to Tanabe, at Tanabe's
request and ** technology for any assay developed for a Target by OSI , its
Affiliates and/or Vanderbilt during the Research Program and which has not yet
been transferred to Tanabe under Section 2.2.1.
- -----------------
** This portion has been redacted pursuant to a request for confidential
treatment.
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8.4.3 Termination Upon an Event of Default. If this Agreement is
terminated due to an Event of Default as set forth in Section 8.3, (a) if Tanabe
is the terminating party, (i) Tanabe shall have the right to have the option set
forth in Section 5.1.1 and all licenses already granted under Section 5.1.1
remain in effect, in which case, Tanabe's obligations to make the milestone
payments set forth in Sections 3.3.2 and 3.3.3 and the royalty obligations set
forth in Section 5.5.1 shall also remain in effect, and (ii) the licenses
granted by Tanabe in Section 5.1.2 shall terminate and (b) if OSI is the
terminating party, (i) the licenses granted by Tanabe in Section 5.1.2 shall
remain in effect, (ii) Tanabe's option in Section 5.1.1 shall terminate, and
(iii) OSI shall have the right to determine whether any licenses granted by OSI
under Section 5.1.1 remain in effect or are terminated. If such licenses granted
by OSI remain in effect, Tanabe's obligations under Sections 3.3.2, 3.3.3 and
5.5.1 shall also remain in effect. If such licenses are terminated, then all of
Tanabe's rights with respect to the Lead Compound(s) which are the subject of
such terminated licenses (except Tanabe's ownership interest in Improvements and
Tanabe Technology) shall revert to OSI and OSI shall be granted the license set
forth in Section 5.1.2 with respect to such Lead Compounds and the royalty
obligations set forth in Section 5.5.2 shall also remain in effect. The
terminating party shall also be granted by the defaulting party a royalty-free,
worldwide, perpetual, non-exclusive license, including the right to grant
sublicenses, under OSI Technology (if OSI is the defaulting party) or Tanabe
Technology (if Tanabe is the defaulting party) and under the defaulting party's
rights in Improvements and Joint Patents, to research, develop, have developed,
make, have made, use sell, have sold and commercialize pharmaceutical products.
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8.5. Survival. Upon expiration pursuant to Section 8.1.4 hereof, the
following sections of this Agreement shall survive such termination: Sections 1,
2.8, 4, 5.2, 5.5.5, 5.5.6, 7, 10, 11 and 12 hereof. Upon termination pursuant to
Section 8.2 or 8.3 hereof, the following sections of this Agreement shall
survive such termination if OSI has a worldwide license as provided in Section
5.1.2 hereof: Sections 1, 2.8, 3.1.4, 4, 5.1.2, 5.2, 5.3, 5.4, 5.5.2, 5.5.3,
5.5.4, 5.5.5, 5.5.6, 5.6, 6, 7, 10, 11 and 12 hereof. Upon termination pursuant
to Section 8.2 or 8.3 hereof, the following sections of this Agreement shall
survive such termination if Tanabe has a worldwide license as provided in
Section 5.1.1 hereof: Sections 1, 2.8, 3.1.4, 3.3.2, 3.3.3, 4, 5.1.1, 5.2, 5.3,
5.4, 5.5.1, 5.5.3, 5.5.4, 5.5.5, 5.5.6, 5.6, 6, 7, 10, 11 and 12 hereof. Upon
termination pursuant to Section 8.2 or 8.3 hereof, if neither party has (or
exercises its option to obtain) a worldwide license as provided in Section 5.1
hereof, the following sections of this Agreement shall survive: 1, 2.8, 3.1.4,
4, 5.5.5, 5.5.6, 6, 10, 11 and 12 hereof.
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EXHIBIT 10.39
Portions of Exhibit 10.39 have been redacted and are the subject of a
confidential treatment request filed with the Secretary of the Securities and
Exchange Commission.
<PAGE> 2
================================================================================
COLLABORATIVE
RESEARCH AND LICENSE AGREEMENT
BY AND BETWEEN
TANABE SEIYAKU CO., LTD.
AND
OSI PHARMACEUTICALS, INC.
EFFECTIVE AS OF OCTOBER 1, 1999
================================================================================
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. Definitions...........................................................2
1.1 "Affiliate"...................................................2
1.2 "Assay Materials".............................................2
1.3 "Budget"......................................................2
1.4 "Budgeted Amount".............................................2
1.5 "Clinical Development and Marketing Phase"....................2
1.6 "Compound"....................................................3
1.7 "Confidential Information"....................................3
1.8 "Contract Period".............................................3
1.9 "Dispute".....................................................3
1.10 "Drug Discovery Phase"........................................3
1.11 "Early Development Phase".....................................3
1.12 "Early Termination"...........................................3
1.13 "Effective Date"..............................................3
1.14 "Event of Default"............................................3
1.15 "FDA".........................................................3
1.16 "Field".......................................................4
1.17 "Fourth Year FTE Rate"........................................4
1.18 "FTE".........................................................4
1.19 "FTE Rate"....................................................4
1.20 "Funding Amount"..............................................4
1.21 "Improvements"................................................4
1.22 "IND".........................................................4
1.23 "Joint Management Committee"..................................4
1.24 "Joint Patents"...............................................4
1.25 "Lead Compound"...............................................5
1.26 "Materials"...................................................5
1.27 "NDA".........................................................5
1.28 "Net Sales"...................................................5
1.29 "Option Period"...............................................6
1.30 "Option Payment"..............................................7
1.31 "OSI Compound"................................................7
1.32 "OSI Confidential Information"................................7
1.33 "OSI Patents".................................................7
1.34 "OSI Product".................................................7
1.35 "OSI Technology"..............................................7
1.36 "Pharmaceutical Partner"......................................8
1.37 "Products"....................................................8
1.38 "Remaining Right Period"......................................8
1.39 "Research Plan"...............................................8
1.40 "Research Program"............................................9
1.41 "Royalty-Receiving Party".....................................9
</TABLE>
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<TABLE>
<S> <C> <C> <C>
1.42 "Seed Compound"..................................................................................9
1.43 "Selling Party"..................................................................................9
1.44 "Steering Committee".............................................................................9
1.45 "Tanabe Compound"................................................................................9
1.46 "Tanabe Confidential Information"................................................................9
1.47 "Tanabe Patents"................................................................................10
1.48 "Tanabe Product"................................................................................10
1.49 "Tanabe Technology".............................................................................10
1.50 "Targets".......................................................................................10
1.51 "Technology"....................................................................................10
1.52 "Term"..........................................................................................11
1.53 "Third Party"...................................................................................11
1.54 "Third Year FTE Rate"...........................................................................11
1.55 "Two Year Minimum Requirements".................................................................11
1.56 "Two Year Report"...............................................................................11
1.57 "Valid Claim"...................................................................................12
1.58 "Withholding Tax"...............................................................................12
2. Collaboration Between the Parties.......................................................................12
2.1 Research Plan...................................................................................12
2.2 Allocation of Responsibilities for the Research Program.........................................12
2.2.1 Responsibility of OSI.:...............................................................12
2.2.2 Compound Withdrawal...................................................................14
(a) Compound Exchange............................................................14
(b) Withdrawal of Seed Compound..................................................14
2.2.3 Commencement of Early Development Phase...............................................15
(a) OSI Participation...........................................................16
(b) Tanabe's Designation as Lead Compound........................................16
(c) Tanabe's Responsibility for Clinical Development and Marketing Phase.........17
2.3 Exclusivity.....................................................................................17
2.3.1 ** .:..............................................................................17
(a) ** .......................................................................17
(b) ** .......................................................................17
2.3.2 ** ................................................................................17
2.3.3 Development Of Other Products Directed Towards Targets................................17
</TABLE>
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<TABLE>
<S> <C> <C> <C>
2.4. Committees..........................................................................18
2.4.1 Steering Committee........................................................18
(a) Activities.:.....................................................18
(b) Membership.......................................................18
(c) Chairs...........................................................19
(d) Meetings.........................................................19
(e) Minutes..........................................................19
(f) Decisions........................................................19
(g) Expenses.........................................................20
2.4.2 Joint Management Committee................................................20
(a) Activities.......................................................20
(b) Membership.......................................................21
(c) Co-Chairs........................................................21
(d) Meetings.........................................................21
(e) Minutes..........................................................22
(f) Decisions........................................................22
(g) Expenses.........................................................22
2.4.3 Subcommittees.............................................................22
2.4.4 Future Committees.........................................................23
2.5 Reports and Materials...............................................................23
2.5.1 Disclosure of Technology and Improvements.................................23
2.5.2 Reports...................................................................23
2.5.3 Materials.................................................................24
2.6 Laboratory Facilities and Personnel.................................................24
2.7 Tanabe Visiting Scientist...........................................................25
2.8 Ownership of Improvements...........................................................26
3. Funding of the Research Program.............................................................27
3.1 Contract Period Funding.............................................................27
3.1.1 Budgeted Amount...........................................................27
3.1.2 Adjustments...............................................................28
3.1.3 Progress Pursuant to the Research Plan....................................28
3.1.4 Inspection of Funding Amount..............................................28
3.1.5 Minimization of Expenditures..............................................30
3.2 Sharing of Responsibilities in the Early Development Phase..........................30
3.3 Technology Access Fee and Milestone Payments........................................30
3.3.1 Technology Access Fee.....................................................30
3.3.2 Early Development Phase Milestones........................................30
3.3.3 Clinical Development and Marketing Phase Milestones.......................31
4. Treatment of Confidential Information.......................................................31
4.1 Confidentiality.....................................................................31
4.1.1 Confidentiality and Non-Use Obligations...................................31
4.1.2 Disclosure of Confidential Information....................................32
</TABLE>
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<TABLE>
<S> <C> <C> <C>
4.1.3 Employees and Consultants.................................................33
4.2 Publication.........................................................................33
4.3 Press Release.......................................................................33
4.4 Restrictions on Transferring Materials..............................................34
4.5 Permitted Use of Confidential Information...........................................35
5. Licenses and Royalties......................................................................36
5.1. Grant of Licenses...................................................................36
5.1.1 Option to Tanabe..........................................................36
5.1.2 License to OSI............................................................36
5.2 Paid-Up License.....................................................................37
5.3 Obligations to Exploit the Products.................................................38
5.4 Sublicenses.........................................................................38
5.5 Royalty Payments, Accounting for Royalties, Records and Withholding Tax.............38
5.5.1 Royalty Payments by Tanabe................................................38
5.5.2 Royalty Payments by OSI...................................................39
5.5.3 Payment Dates.............................................................39
5.5.4 Accounting................................................................39
5.5.5 Records...................................................................40
5.5.6 Withholding Taxes.........................................................41
(a) ** ...........................................................41
(b) Withholding to be Borne by Royalty-Receiving Party...............41
5.6 Payment to Vanderbilt...............................................................42
6. Provisions Concerning the Filing, Prosecution and Maintenance of Patent Rights..............42
6.1 OSI Filing, Prosecution and Maintenance.............................................42
6.2 Tanabe Filing, Prosecution and Maintenance..........................................42
6.3 Legal Action........................................................................43
6.3.1 Actual or Threatened Disclosure or Infringement...........................43
6.3.2 Defense of Infringement Claims............................................45
6.3.3 Third Party Licenses......................................................46
6.3.4 No Selling Party..........................................................47
6.3.5 Acquisition of Rights from Third Parties..................................47
7. Hold Harmless...............................................................................48
</TABLE>
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<TABLE>
<S> <C> <C>
8. Term, Termination and Disengagement.........................................................48
8.1 Term................................................................................48
8.1.1 Term of Contract Period...................................................48
8.1.2 Two-Year Review...........................................................49
8.1.3 Renewal...................................................................49
8.1.4 Term of Agreement.........................................................50
8.2 Tanabe's Right to Early Termination.................................................50
8.3 Termination Upon an Event of Default................................................50
8.3.1 Incorrect Representation or Warranty......................................51
8.3.2 Failure to Perform........................................................51
8.3.3 Bankruptcy................................................................51
8.4 Effect of Expiration or Termination of the Contract Period..........................51
8.4.1 Expiration................................................................52
(a) Tanabe License to OSI...........................................52
(b) OSI License to Tanabe...........................................52
(c) Option Payment...................................................52
(d) Royalty Obligation...............................................54
(e) Milestone Obligation.............................................54
(f) Transfer of Assay................................................55
8.4.2 Early Termination if Two Year Minimum Requirements Are Not Met............55
(a) Tanabe License to OSI...........................................55
(b) OSI License to Tanabe...........................................55
(c) Royalty Obligation...............................................55
(d) Milestone Obligation.............................................56
(e) Tanabe's Option..................................................56
(f) Transfer of Assay................................................56
8.4.3 Termination Upon an Event of Default......................................56
8.5 Survival............................................................................57
9. Representations and Warranties..............................................................58
9.1 Representations and Warranties Made by Tanabe and OSI...............................58
9.1.1 Status....................................................................58
9.1.2 Authority.................................................................58
9.1.3 Binding Obligation........................................................58
9.1.4 No Conflicting Obligations................................................58
9.1.5 Good Title................................................................59
9.1.6 Right to Grant Licenses...................................................59
9.2 Representations and Warranties Made by OSI..........................................59
9.2.1 Vanderbilt Agreement......................................................59
9.2.2 No Litigation.............................................................59
</TABLE>
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<TABLE>
<S> <C> <C>
10. Dispute Resolution..........................................................................59
10.1 ** ..............................................................................59
10.2. Arbitration.........................................................................59
11. Notices.....................................................................................60
12. Governing Law...............................................................................61
13. Force Majeure...............................................................................61
14. Miscellaneous...............................................................................61
14.1 Binding Effect......................................................................61
14.2 Headings............................................................................61
14.3 Interpretation......................................................................61
14.4 Counterparts........................................................................61
14.5 Amendment; Waiver; etc..............................................................62
14.6 No Third Party Beneficiaries........................................................62
14.7 Assignment and Successors...........................................................62
14.7.1 Affiliates................................................................62
14.7.2 Assignment................................................................62
14.8 Entire Agreement....................................................................63
</TABLE>
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COLLABORATIVE RESEARCH AND LICENSE AGREEMENT
This COLLABORATIVE RESEARCH AND LICENSE AGREEMENT (this "Agreement")
effective as of October 1, 1999, by and between TANABE SEIYAKU CO., LTD.
("Tanabe"), a corporation organized under the laws of Japan, with offices at
2-10 Dosho-Machi 3-chome, Chuo-ku, Osaka, Japan, and OSI PHARMACEUTICALS, INC.
("OSI"), a Delaware corporation, with its principal office at 106 Charles
Lindbergh Boulevard, Uniondale, New York 11553 U.S.A.
W I T N E S S E T H :
WHEREAS, OSI is a leading drug discovery company which has assembled a
strong platform of technologies for drug discovery;
WHEREAS, OSI and Vanderbilt University, through its Vanderbilt
University Medical Center and Vanderbilt Diabetes Center (collectively
"Vanderbilt"), are jointly conducting a research program in the area of
diabetes, pursuant to an Amended and Restated Collaborative Research, License
and Alliance Agreement between OSI and Vanderbilt (and Tanabe for certain
sections therein) dated as of even date herewith (the "Vanderbilt Agreement");
WHEREAS, Tanabe is a leading pharmaceutical company and has the
capability for preclinical and clinical development, manufacturing and marketing
of pharmaceutical products for the prevention, treatment and management of human
diseases, including agents directed to diabetes;
WHEREAS, Tanabe wishes to collaborate with OSI, and OSI wishes to
collaborate with Tanabe, in the research and development of pharmaceutical
products directed toward the prevention, treatment and management of diabetes on
the terms and conditions set forth herein; and
<PAGE> 10
WHEREAS, OSI wishes to contribute to, and provide for the benefit of,
the collaboration between OSI and Tanabe certain results from OSI's
collaboration with Vanderbilt pursuant to the Vanderbilt Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and agreements contained in this Agreement and intending to be
legally bound, the parties agree as follows:
1. Definitions.
Whenever used in this Agreement, the terms defined in this
Section 1 shall have the meanings specified.
1.1 "Affiliate" shall mean any corporation or other legal
entity owning, directly or indirectly, more than fifty percent (50%) of the
voting capital shares or voting rights of Tanabe or OSI; any corporation or
other legal entity more than fifty percent (50%) of the voting capital shares or
voting rights of which is owned, directly or indirectly, by Tanabe or OSI; or
any corporation or other legal entity more than fifty percent (50%) of the
voting capital shares or voting rights of which is owned, directly or
indirectly, by a corporation or other legal entity which owns, directly or
indirectly, more than fifty percent (50%) of the voting capital shares or voting
rights of Tanabe or OSI.
1.2 "Assay Materials" shall mean any reagents, cell
lines, antibodies, antigens and other substances relating to the assays provided
by OSI to Tanabe pursuant to Section 2.2.1 hereof.
1.3 "Budget" shall have the meaning set forth in Section
3.1.1.
1.4 "Budgeted Amount" shall have the meaning set forth in
Section 3.1.1
1.5 "Clinical Development and Marketing Phase" shall
mean, on a Compound-by-Compound basis, the period commencing with Phase III
clinical trials and shall
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continue through the marketing of a Product.
1.6 "Compound" shall mean any OSI Compound or Tanabe
Compound, either collectively or separately, as applicable.
1.7 "Confidential Information" shall mean Tanabe
Confidential Information and OSI Confidential Information, either separately or
collectively, as may be applicable.
1.8 "Contract Period" shall mean the period during which
OSI is conducting the Research Program jointly with Tanabe. The initial term and
the extension thereof is set forth in Section 8.1 hereof.
1.9 "Dispute" shall have the meaning set forth in Section
10.2.
1.10 "Drug Discovery Phase" shall mean, on a
Compound-by-Compound basis, the period commencing with initial research and
development of a Compound aimed at a Product and shall conclude upon the
transfer of the Materials of a Lead Compound after the identification thereof.
The Drug Discovery Phase shall include identification of the Targets, assay
development, screening, identification of Seed Compounds, optimization of Seed
Compounds and identification of Lead Compounds.
1.11 "Early Development Phase" shall mean, on a
Compound-by-Compound basis, the period commencing upon the determination by
Tanabe to initiate the optimization of a Lead Compound pursuant to Section
2.4.1(f) hereof and concluding upon the completion of all of the Phase II
clinical trials. The Early Development Phase shall include the identification of
an IND candidate.
1.12 "Early Termination" shall have the meaning set forth
in Section 8.2.
1.13 "Effective Date" shall mean October 1, 1999.
1.14 "Event of Default" shall have the meaning set forth
in Section 8.3 hereof.
1.15 "FDA" shall mean the United States Food and Drug
Administration.
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1.16 "Field" shall mean the discovery, development,
manufacture and marketing of human therapeutic products for the treatment,
prevention or management of diabetes.
1.17 "Fourth Year FTE Rate" shall have the meaning set
forth in Section 3.1.
1.18 "FTE" shall have the meaning set forth in Section 2.6
hereof.
1.19 "FTE Rate" shall have the meaning set forth in
Section 3.1 hereof.
1.20 "Funding Amount" shall have the meaning set forth in
Section 3.1 hereof.
1.21 "Improvements" shall mean any and all inventions and
patents, discoveries, methods, ideas, works of authorship, know-how, data,
clinical and preclinical results, information, and any physical, chemical or
biological material, including any replication or any part of such material,
techniques and Technology, whether or not patentable or subject to other forms
of protection, which (i) are made, created, developed, written, conceived, or
reduced to practice, or which are licensed or otherwise acquired from Third
Parties (to the extent the disclosing party is legally enabled to disclose and
use the same in the Research Program), in the course of, arising out of, or as a
result of conducting the Research Program, and (ii) are related to the Targets.
Improvements include all rights relating to the protection of trade secrets and
Confidential Information, and any right analogous to those set forth in this
Section 1.21, which relate to, are embodied in or are appurtenant to such
discoveries, methods, ideas, etc.
1.22 "IND" shall mean an Investigational New Drug
application filed with the FDA and any equivalent foreign filing.
1.23 "Joint Management Committee" has the meaning
specified in Section 2.4.2 hereof.
1.24 "Joint Patents" shall mean the patents and patent
applications owned or filed jointly in the name of Tanabe and OSI (and
Vanderbilt, where applicable), both inside and
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<PAGE> 13
outside the United States, arising in the course of conducting the Research
Program, including patents and patent applications arising from Improvements,
which relate to the research, development, manufacture, composition, derivative,
use or sale of Compounds or Products, including, without limitation, all
substitutions, extensions, Supplementary Protection Certificates, reissues,
renewals, divisions, continuations, continuations in part, utility models and
certificates of invention thereof, all of which shall be from time to time
identified to the Joint Management Committee.
1.25 "Lead Compound" shall mean a Compound and its
derivatives (i) which meets all of the criteria set forth on Exhibit B attached
hereto, or (ii) which Tanabe has designated in writing as a Lead Compound as set
forth in Section 2.2.3(b).
1.26 "Materials" shall have the meaning set forth in
Section 2.5.3 hereof.
1.27 "NDA" shall mean any and all applications (New Drug
Applications) submitted to the FDA under Sections 505, 507 or 512 of the Food,
Drug & Cosmetic Act and applicable regulations related to a Product, and any
equivalent foreign filing.
1.28 "Net Sales" shall mean the gross revenues from the
first sales of a Product by the Selling Party, its Affiliates and/or its
sublicensees to Third Parties, less deductions for:
(a) standard transportation charges,
including insurance, consistent with custom in the industry;
(b) import, export, sales, use and
excise taxes, tariffs and duties paid or allowed by the Selling Party, its
Affiliates and/or its sublicensees, and any other governmental charges imposed
upon the production, importation, use or sale of a Product;
(c) discounts (including retroactive
price reductions or a statutorily required reimbursement) mandated by or granted
in response to state, provincial or federal law or regulation;
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<PAGE> 14
(d) allowances or credits to customers
on account of recalls, rejection or return (including for spoiled, damaged and
outdated goods) in the ordinary course of business;
(e) rebates paid or credited to any
government or agency or any Third Party payor, administrator or contractee; and
(f) customary discounts and rebates
paid or credited by the Selling Party, its Affiliates and/or its sublicensees.
The computation of Net Sales shall not include sales between
or among the Selling Party and its Affiliates or sublicensees, except where such
Affiliates or sublicensees are end users.
1.29 "Option Period" shall mean the ** period following
the expiration of the Contract Period on the fourth anniversary of the Effective
Date or such later date if the
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<PAGE> 15
Contract Period is renewed pursuant to Section 8.1.3 hereof.
1.30 "Option Payment" shall have the meaning set forth in
Section 8.4.1(c).
1.31 "OSI Compound" shall mean (a) any compound and
derivative thereof from OSI's compound library and (b) any product and
derivative thereof from OSI's natural products library, in each case, which is
selected by OSI in its sole discretion.
1.32 "OSI Confidential Information" shall mean all
information about any element of OSI Technology which is disclosed by OSI to
Tanabe, and designated "Confidential" in writing by OSI at the time of such
disclosure (or, if disclosed orally, within ** thereafter), subject to the
exceptions set forth in Section 4.5 hereof.
1.33 "OSI Patents" shall mean the patents and patent
applications owned by, filed by or licensed to OSI, its Affiliates and/or
Vanderbilt, both inside and outside the United States, which are not Joint
Patents, and the Valid Claims of which patents and patent applications cover the
research, development, manufacture, use or sale of the Compounds or the
Products, including, without limitation, all substitutions, extensions,
Supplementary Protection Certificates, reissues, renewals, divisions,
continuations, continuations in part, utility models and certificates of
invention thereof, all of which shall be, from time to time, identified to the
Joint Management Committee.
1.34 "OSI Product" shall mean a pharmaceutical product
containing a Lead Compound derived from an OSI Compound which is directed to a
Target and which is sold for the prevention, treatment or management of any
disease state in a human patient or any other human therapeutic indication.
1.35 "OSI Technology" shall mean Technology (a) which is
not an
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<PAGE> 16
Improvement and (b) which is owned by or licensed to OSI, its Affiliates and/or
Vanderbilt as of the Effective Date or during the Contract Period (including any
VU Technology (as defined in the Vanderbilt Agreement) licensed to OSI by
Vanderbilt pursuant to the Vanderbilt Agreement), that may be useful or
necessary for work on any of the Targets and that may be applicable to the
objectives of this Agreement, but only to the extent that either OSI, its
Affiliates or Vanderbilt is legally entitled to disclose such acquired
Technology and use it to achieve the objectives of this Agreement.
1.36 "Pharmaceutical Partner" shall mean any entity (other
than an academic institution or an entity which provides research services for a
fee) which is in the business of drug discovery and/or marketing. Pharmaceutical
Partner shall specifically not include Tanabe.
1.37 "Products" shall mean the OSI Products and the Tanabe
Products, collectively or separately, as may be applicable.
1.38 "Remaining Right Period" shall mean the ** period
following the expiration of the Contract Period on the fourth anniversary of the
Effective Date or such later date if the Contract Period is renewed pursuant to
Section 8.1.3 hereof.
1.39 "Research Plan" shall mean the written research plan
to be carried out during the Contract Period by Tanabe and OSI together with
Vanderbilt as described in Section 2.1 hereof and the first year Research Plan
is attached hereto as Exhibit E.
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1.40 "Research Program" shall mean the collaborative
research program to be carried out during the Contract Period by Tanabe and OSI
together with Vanderbilt pursuant to Section 2 hereof and attached hereto as
Exhibit D.
1.41 "Royalty-Receiving Party" shall mean the party which
has granted a license under Section 5.1.1 or Section 5.1.2.
1.42 "Seed Compound" shall mean (a) a Compound and its
derivatives which meets all of the criteria set forth on Exhibit A attached
hereto or (b) a Compound which has been designated by the Joint Management
Committee as a Seed Compound.
1.43 "Selling Party" shall mean the party holding a
license under Section 5.1.1 or 5.1.2.
1.44 "Steering Committee" shall have the meaning set forth
in Section 2.4.1 hereof.
1.45 "Tanabe Compound" shall mean (a) any compound and
derivative thereof from Tanabe's compound library, and (b) any product and
derivative thereof from Tanabe's natural products library, in each case, which
is selected by Tanabe at its sole discretion.
1.46 "Tanabe Confidential Information" shall mean all
information about any element of Tanabe Technology which is disclosed by Tanabe
to OSI and designated "Confidential" in writing at the time of such disclosure
(of, if disclosed orally, within ** thereafter), subject to the exceptions set
forth in Section 4.5 hereof.
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1.47 "Tanabe Patents" shall mean the patents and patent
applications owned by, filed by or licensed to Tanabe and/or its Affiliates,
both inside and outside the United States, which are not Joint Patents, and the
Valid Claims of which patents and patent applications cover the research,
development, manufacture, use or sale of the Compounds or the Products,
including, without limitation, all substitutions, extensions, Supplementary
Protection Certificates, reissues, renewals, divisions, continuations,
continuations in part, utility models and certificates of invention thereof, all
of which shall be, from time to time, identified to the Joint Management
Committee.
1.48 "Tanabe Product" shall mean a pharmaceutical product
containing a Lead Compound derived from a Tanabe Compound which is directed to a
Target and which is sold for the prevention, treatment or management of any
disease state in a human patient or any other human therapeutic indication.
1.49 "Tanabe Technology" shall mean Technology (a) which
is not an Improvement and (b) which is owned by or licensed to Tanabe and/or its
Affiliates as of the Effective Date or during the Contract Period, that may be
useful or necessary for work on the Targets and that may be applicable to the
objectives of this Agreement, but only to the extent that Tanabe or its
Affiliates is legally entitled to disclose such acquired Technology and use it
to achieve the objectives of this Agreement.
1.50 "Targets" shall mean the targets which have been
identified as the subject of the research carried out under the Research Program
as listed on Exhibit C, which list may be supplemented or amended from time to
time as provided in Section 2.4.1(f) hereof.
1.51 "Technology" shall mean and include all tangible or
intangible know-how, trade secrets, inventions (whether or not patentable),
data, clinical and preclinical results and any
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<PAGE> 19
physical, chemical or biological material that pertain to the development of
human therapeutic products, including all laboratory notebooks, research plans,
cultures, strains, vectors, genes and gene fragments and their sequences, cell
lines, hybridoma cell lines, monoclonal and polyclonal antibodies, proteins and
protein fragments, non-protein chemical structures and methods for synthesis,
structure-activity relationships, computer models of chemical structures,
computer software, assay methodology, processes, materials and methods for
production, recovery and purification of nature products, formulas, plans,
specifications, characteristics, equipment and equipment designs, marketing
surveys and plans, business plans and experience.
1.52 "Term" shall have the meaning set forth in Section
8.1.4 hereof.
1.53 "Third Party" shall mean any individual, estate,
trust, partnership, joint venture, association, firm, corporation, company or
other entity, other than the parties hereto and their respective Affiliates,
sublicensees and successors. Third Party shall include, without limitation,
Vanderbilt.
1.54 "Third Year FTE Rate" shall have the meaning set
forth in Section 3.1.
1.55 "Two Year Minimum Requirements" shall mean (a)
completion of high throughput screening of a minimum of ** and up to ** (the
number of Tanabe Compounds shall be decided by Tanabe at its discretion) against
each of ** Targets; and (b) identification of ** from different Targets.
1.56 "Two Year Report" shall have the meaning set forth in
Section 8.1.2.
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1.57 "Valid Claim" shall mean a claim of an issued patent
so long as such claim shall not have been disclaimed by the party(s) owning such
patent, or shall not have been held invalid or unenforceable in a final decision
rendered by a tribunal of competent jurisdiction from which no appeal has been
or can be taken.
1.58 "Withholding Tax" shall mean the withholding of tax
at the source of income.
2. Collaboration Between the Parties.
2.1 Research Plan. During the first year of the Contract
Period, the Research Program will be conducted pursuant to the Research Plan
annexed hereto as Exhibit E. Thereafter, the Research Plan for each succeeding
year during the Contract Period shall be prepared and approved by the Steering
Committee at a meeting of the Steering Committee held prior to the end of each
year until the end of the Contract Period and shall be set forth within the
minutes of such meeting. The Research Plan shall be in line with the Research
Program annexed hereto as Exhibit D.
2.2 Allocation of Responsibilities for the Research
Program.
2.2.1 Responsibility of OSI. As between OSI and
Tanabe, the Drug Discovery Phase shall be the sole responsibility of OSI,
subject to the last three sentences of this Section 2.2.1, and shall be funded
in accordance with Section 3.1 hereof. Pursuant to the Research Program and the
Vanderbilt Agreement, OSI shall work together with Vanderbilt to fulfill its
responsibilities during the Drug Discovery Phase. OSI will use its commercially
reasonable and diligent efforts, and shall undertake to ensure that Vanderbilt
uses its commercially reasonable and diligent efforts, to achieve the objectives
of the Research Program. OSI's responsibilities shall include:
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(a) identification of Targets;
(b) assay development;
(c) screening of the OSI Compounds and
the Tanabe Compounds against the Targets;
(d) identification of Seed Compounds
which meet the criteria set forth on Exhibit A, attached hereto;
(e) optimization of Seed Compounds; and
(f) identification of Lead Compounds
which meet the criteria set forth on Exhibit B, attached hereto.
OSI shall fulfill its responsibilities in the Drug Discovery Phase by
using its own, its Affiliates' and/or Vanderbilt's (i) drug discovery resources
(e.g., compound libraries, library design, automation, building blocks,
informatics, computation tools, high throughput screening capacity, medicinal
chemistry, high speed analoging, combinatorial chemistry, automated synthesis,
automated determination of pharmaceutical parameters, in vivo pharmacology,
array assays), (ii) transcription technology, and (iii) any assay high
throughput screening formatted for the Target.
As part of the Drug Discovery Phase, OSI will provide to Tanabe, at
Tanabe's request and at ** Technology for any assays developed by OSI, its
Affiliates and/or Vanderbilt for purposes of the Research Program. OSI shall
supply to Tanabe, at Tanabe's request, bulk Assay Materials, the cost of which
shall be ** . Tanabe will screen its natural products library against the
Targets
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treatment.
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using such assay technology and bulk Assay Materials and will provide the
results of such screening to OSI for use in the Research Program.
2.2.2 Compound Withdrawal.
(a) Compound Exchange. Tanabe may
supply Tanabe Compounds to other Pharmaceutical Partners for screening against
such Pharmaceutical Partners' targets. If any activity of such Tanabe Compounds
is identified in such other Pharmaceutical Partner's screening, Tanabe may
withdraw such Tanabe Compound from the Research Program provided that such
Compound has not met the criteria set forth on Exhibit A for a Seed Compound.
Notwithstanding anything to the contrary set forth in this Agreement, each party
understands and agrees that the supply of Compounds to Pharmaceutical Partners
by Tanabe for screening against targets of such Pharmaceutical Partners may
unknowingly result in overlap between such targets and the Targets hereunder and
Tanabe shall be entitled to engage in such Pharmaceutical Partners' research
program even after such overlap becomes known to Tanabe upon the activity
identification of such Compound in any such other Pharmaceutical Partner's
screening and such Compound shall not be subject to milestone/royalty payments
hereunder. In no event shall Tanabe, in connection with any such Compound supply
or exchange, disclose Confidential Information, Technology, or Patents of OSI or
knowingly permit any such Pharmaceutical Partner to screen Compounds against
targets which are Targets hereunder.
(b) Withdrawal of Seed Compound. During
the Contract Period, OSI and Tanabe shall not (i) withdraw any Compound which
meets the criteria of or is otherwise identified as a Seed Compound from the
Research Program, or (ii) include any Compound which meets the criteria of or is
otherwise identified as a Seed Compound in a collaboration research program with
any Third Party (except Vanderbilt under the Vanderbilt
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Agreement).
2.2.3 Commencement of Early Development Phase. The
Early Development Phase with respect to a Lead Compound shall be the
responsibility of Tanabe, subject to the provisions set forth in subsection (a)
below. Tanabe shall use commercially reasonable and diligent efforts to achieve
the objectives of the Research Program. To achieve the objectives of the Early
Development Phase and the Clinical Development and Marketing Phase, Tanabe will
use commercially reasonable and diligent efforts and standard procedures
consistent with those used with Tanabe's own internal compounds and products of
like potential to (i) assess safety and efficacy of the selected Lead Compounds
in animals and in human patients under conditions designed to yield data
suitable for inclusion in submission(s) necessary to obtain market
authorization, (ii) develop manufacturing methods and pharmaceutical
formulations for those selected Lead Compounds, and (iii) develop strategies
and/or enter into appropriate partnering arrangements in order to effectively
commercialize Products on a worldwide basis. In connection with the foregoing,
Tanabe agrees to hold at least one meeting per year of its product development
team at which the progress of the Early Development Phase and/or the Clinical
Development and Marketing Phase, as the case may be, shall be reported. OSI
shall be provided with 60 days prior written notice of such team meetings and
shall have the right to attend such meetings at OSI's cost.
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(a) OSI Participation. Promptly after
the identification of a Lead Compound by OSI and/or Vanderbilt pursuant to
Section 2.2.1, OSI shall transfer the Materials of the Lead Compound to Tanabe,
and Tanabe shall determine, within ** following such transfer of Materials,
whether to initiate the Early Development Phase with respect to such Lead
Compound. Thereafter, OSI and Tanabe shall discuss the extent of OSI's
participation, or OSI's participation together with Vanderbilt, in the Early
Development Phase with respect to such Lead Compounds. Tanabe shall have the
option to assume sole responsibility for the Early Development Phase or to share
responsibility with OSI or OSI together with Vanderbilt. If Tanabe determines
that OSI or OSI together with Vanderbilt shall assume certain responsibilities,
such responsibilities shall be funded in accordance with Section 3.2 hereof.
(b) Tanabe's Designation as Lead
Compound. Tanabe may, upon written notice to OSI, designate any Compound as a
Lead Compound at any time during the Contract Period and, subject to the
provisions of Section 8.4.1(c), the Remaining-Right Period, provided that such
Compound has resulted from the Drug Discovery Phase. In such case, OSI shall
transfer the Materials of the Lead Compound to Tanabe and Tanabe shall initiate
the Early Development Phase with respect to such Lead Compound within ** after
such transfer, which initiation shall be deemed to be an exercise by Tanabe of
the option granted to it in Section 5.1.1.
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(c) Tanabe's Responsibility for
Clinical Development and Marketing Phase. The Clinical Development and Marketing
Phase with respect to a Lead Compound shall be the sole responsibility of
Tanabe, subject to the provisions regarding reversion of the exclusive
option/exclusive license set forth in Section 5.1.2 hereof.
2.3 Exclusivity.
2.3.1 **
(a) **
(b) **
2.3.2 **
2.3.3 Development Of Other Products Directed
Towards Targets. If (i) a product is derived as a result of the exercise of a
non-exclusive license with respect to VU Technology or VU Patents (as such terms
are defined in the Vanderbilt Agreement) granted by Vanderbilt to not-for-profit
entities or the U.S. Federal Government under Sections 2.1.4 and 5.3 of the
Vanderbilt Agreement, and (ii) such a product is directed toward the same Target
as a Product developed hereunder, and (iii) as a result of the development and
commercial sale of such product the commercial viability of the Product
developed hereunder is jeopardized or negatively affected, then OSI and Tanabe
will negotiate in good faith the modification of the milestone and royalty
payments set forth in Sections 3.3.2, 3.3.3 and 5.5 with respect to such
Product.
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2.4 Committees.
2.4.1 Steering Committee.
(a) Activities. The parties shall
establish a Steering Committee (the "Steering Committee"), which shall remain in
existence for the Contract Period and which may co-exist with any other
committees which may be formed pursuant to Sections 2.4.2, 2.4.3 and 2.4.4
hereof, for the following purposes:
(i) to prepare and approve the
Research Plan for each year in advance of the beginning of such year during the
Contract Period in accordance with the provisions of Section 2.1 hereof; and
(ii) to prepare and approve the
Budget for each year during the Contract Period.
(b) Membership. Tanabe and OSI each
shall appoint, in its sole discretion, ** from either its own or its Affiliates'
directors, officers, or employees to the Steering Committee. Substitutes may be
appointed at any time with the prior written approval of the other party, which
approval shall not be unreasonably withheld or delayed. The members initially
shall be:
<TABLE>
<CAPTION>
Tanabe Appointees OSI Appointees
----------------- --------------
<S> <C>
** **
</TABLE>
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(c) Chairs. The Steering Committee
shall be chaired by one of the members appointed by Tanabe. The chair shall
establish the agenda for meetings and coordinate follow-up actions.
(d) Meetings. The Steering Committee
shall meet at least ** per year, at places and on dates selected by each party
in turn. In addition to members of the Steering Committee, representatives of
Tanabe and OSI, and their respective Affiliates, and Vanderbilt may attend such
meetings at the invitation of either party; however, such invitees shall not be
entitled to vote in any matter which comes before the Steering Committee.
(e) Minutes. The Steering Committee
shall keep accurate minutes of its deliberations and shall record all proposed
decisions and all actions recommended or taken. The minutes shall be delivered
in draft form to all Steering Committee members within 10 working days after
each meeting. The party hosting the meeting shall be responsible for the
preparation of the minutes. Draft minutes shall be edited by the chair and shall
be issued in final form only with the chair's approval and agreement. The
minutes for the final meeting of each year shall include the approved Research
Plan for the next succeeding year and, from time to time as provided for herein,
reports on progress under the Research Plan then in effect.
(f) Decisions. All decisions or actions
of the Steering Committee shall be made by majority of the members (including
the chair), subject to the last sentence of this Section 2.4.1(f). ** .
Notwithstanding the foregoing, only the Tanabe
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representatives on the Steering Committee shall have the right to make decisions
and actions with respect to the following issues:
(i) **
(ii) **
(g) Expenses. Tanabe and OSI shall each
bear all expenses of their respective members related to the participation on
the Steering Committee.
2.4.2 Joint Management Committee.
(a) Activities. The parties shall
establish a Joint Management Committee (the "Joint Management Committee") which
shall remain in existence for the Contract Period for the following purposes:
(i) to direct the
implementation of the Research Plans;
(ii) to modify the Research
Plans as appropriate;
(iii) to coordinate and monitor
publication of research results obtained from the exchange of information and
Materials that relate to the Research Programs;
(iv) to coordinate and monitor
patent applications with respect to Tanabe Patents and OSI Patents to be filed
during the Contract Period; and
(v) to determine which party
is responsible for the following activities relating to Improvements and/or
Joint Patents: (a) filing applications for letters patent on any patentable
invention included in Improvements; (b) prosecuting all
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pending and new patent applications involving Improvements, and responding to
oppositions filed by Third Parties against the grant of letters patent for such
applications, provided that the prosecuting party shall also provide to the
other party copies of all documents relating to prosecution of all patent
applications and/or oppositions filed by Third Parties; and (c) maintaining in
force any letters patent included in Joint Patents by duly filing all necessary
papers and paying any fees required by the patent laws of the particular country
in which such letters patent were granted.
(b) Membership. Tanabe and OSI each
shall appoint, in its sole discretion, ** from either its own or its Affiliates'
directors, officers or employees to the Joint Management Committee. Substitutes
may be appointed at any time with the prior written approval of the other party,
which approval shall not be unreasonably withheld or delayed. The members
initially shall be:
<TABLE>
<CAPTION>
Tanabe Appointees OSI Appointees
----------------- --------------
<S> <C>
** **
</TABLE>
(c) Co-Chairs. The Joint Management
Committee shall be co-chaired by one of the Tanabe appointees and one of the OSI
appointees. The co-chairs shall together establish the agenda for meetings and
coordinate follow-up actions.
(d) Meetings. The Joint Management
Committee shall meet at least ** per year, at places and on dates selected by
each party in turn. In addition to the members of the Joint Management
Committee, representatives of Tanabe and OSI, and their
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respective Affiliates, and Vanderbilt may attend such meetings at the invitation
of either party; however, such invitees shall not be entitled to vote in any
matter which comes before the Joint Management Committee. In addition to such
meetings, the members of the Joint Management Committee shall exchange
information as frequently as possible, by means of telephone, facsimile, e-mail
or other method of communication.
(e) Minutes. The Joint Management
Committee shall keep accurate minutes of its deliberations and shall record all
proposed decisions and all actions recommended or taken. The minutes shall be
delivered in draft form to all Joint Management Committee members within ten
working days after each meeting. The party hosting the meeting shall be
responsible for the preparation of the minutes. Draft minutes shall be edited by
the co-chairs and shall be issued in final form only with the co-chairs'
approval and agreement.
(f) Decisions. **
(g) Expenses. Tanabe and OSI shall each
bear all expenses of their respective members related to the participation on
the Joint Management Committee.
2.4.3 Subcommittees. The Steering Committee shall
have authority to appoint subcommittees (in addition to the Joint Management
Committee provided for in Section 2.4.2 hereof) and delegate to such
subcommittees powers and duties determined by the Steering Committee. Such
subcommittees may include persons who are not members of the Joint Management
Committee. A subcommittee meeting (face-to-face, telephone conference or video
conference) shall be held as agreed by the parties.
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2.4.4 Future Committees. During the Contract
Period, the parties will discuss the necessity for and composition of other
future committees.
2.5 Reports and Materials.
2.5.1 Disclosure of Technology and Improvements.
Promptly following the Effective Date, OSI shall provide to Tanabe any OSI
Technology related to the Targets which is in the possession of OSI, its
Affiliates and/or Vanderbilt as of the Effective Date, subject to, in the case
of Vanderbilt, the consent of the Investigators (as such term is defined in the
Vanderbilt Agreement). OSI shall continue to provide additional OSI Technology
to Tanabe from time to time during the Contract Period promptly upon becoming
aware of the existence of such additional OSI Technology. Each party shall
promptly inform the other party of all Improvements concerning the Targets that
are conceived, made or developed in the course of carrying out the Research
Program solely by employees of, or consultants to, that party or jointly with
employees of, or consultants to, the other party. OSI shall likewise promptly
inform Tanabe of all Improvements concerning the Targets that are conceived,
made or developed in the course of carrying out the Research Program solely by
employees of, or consultants to, Vanderbilt or jointly with employees of, or
consultants to OSI, subject to the consent of the Vanderbilt Investigators. This
Agreement shall not be construed to obligate a party to disclose to the other
party any Technology which does not concern the Targets or potential Targets
except to the extent necessary or useful for Tanabe's evaluation in acquiring
the license for OSI's potential product pursuant to Section 2.3.1.
2.5.2 Reports. During the Contract Period, OSI
shall furnish to the Joint Management Committee summary written reports within
15 days after the end of each calendar month, commencing on the Effective Date,
describing the progress of OSI and Vanderbilt under
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the Research Program. During the Research Program, Tanabe shall furnish to the
Joint Management Committee quarterly summary written reports within 15 days
after the end of each calendar quarter, commencing on the Effective Date,
describing its progress under the Research Program. The Joint Management
Committee shall provide to the Steering Committee a summary written report of
the progress of the Research Program prior to each meeting of the Steering
Committee.
2.5.3 Materials. OSI and Tanabe shall, during the
Contract Period, whether in accordance with the Research Plans or upon the
written request of a party, furnish to the requesting party samples of
biochemical, biological or synthetic chemical materials ("Materials") which are
part of the Improvements, OSI Technology or Tanabe Technology, and which are
useful or necessary for such party to carry out its rights and responsibilities
under the Research Plans and this Agreement.
2.6 Laboratory Facilities and Personnel. OSI and Tanabe
shall each provide suitable laboratory facilities, equipment and personnel for
the work to be done by each of them to diligently carry out their respective
activities under the Research Program and OSI shall undertake that Vanderbilt
shall provide the same. During the Contract Period, OSI will assign duties under
the Research Plans to the full-time equivalent ("FTE") of ** scientists during
the first year, ** scientists during the second year, and ** scientists during
each of the third and fourth years of the Contract Period. Immediately upon
assignment of any Ph.D. scientists to the Research Program, OSI shall provide to
Tanabe the resume/curricula vitae of all such
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Ph.D. scientists who will be engaged in the Research Program as FTEs, ** . In
principle, ** of the total personnel time of FTEs allocated to the Research
Program shall be performed by such Ph.D. scientists. OSI itself shall employ, in
addition to those personnel employed at Vanderbilt, ** biologists or
pharmacologists in the Field for the purpose of evaluation of Seed Compounds and
Lead Compounds.
2.7 Tanabe Visiting Scientist. OSI shall undertake that
Tanabe may dispatch ** Tanabe scientists to the Vanderbilt Diabetes Center as
staff members at any time during the Contract Period. The length of stay for
such visiting scientists shall not be less than ** . In addition, during all
phases of the Contract Period, including without limitation, target
identification, assay development, screening and chemistry for the
identification of the Lead Compounds, OSI shall accept, at its research
facilities in Uniondale, New York and at its Affiliate's research facilities in
Aston, England, ** Tanabe visiting scientist(s) to participate in the work for
the Research Program under OSI's direction upon mutually agreed confidentiality
terms and conditions. With respect to the OSI facility located in Uniondale, New
York, Tanabe visiting scientists may visit such facility for up to ** during
each calendar year and ** Tanabe visiting scientists may be present at any one
visit. Notwithstanding the foregoing, OSI shall accept the additional visit of
Tanabe visiting scientists when any assay related to the Targets is transferred
to Tanabe. With respect to OSI's Affiliate's facility located in Aston, England,
OSI shall accept Tanabe visiting scientists to visit such facility for up to **
during any one calendar year. The detailed scheduling of such visits and the
number of visiting scientists to be included in any such visits shall be
reasonably mutually determined
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by OSI and Tanabe. Tanabe shall be responsible for all expenses relating to
visas, transportation, lodging, salaries and benefits of such Tanabe visiting
scientist(s) and OSI shall be responsible for all such expenses as laboratory
space, office space, instruments, equipment and materials, necessary to allow
such Tanabe visiting scientist to engage in the work for the Research Program.
The Tanabe visiting scientist(s) shall be required to execute all
confidentiality agreements as are used from time to time by OSI. The Tanabe
visiting scientist(s) shall have access to all information, OSI Technology, OSI
Confidential Information and Improvements which are necessary or useful in order
to achieve the objectives of this Agreement or which may concern the Targets;
provided, however, that due to the fact that OSI is and will continue to be
conducting other research and development activities sponsored by Third Parties
other than the Research Program, OSI shall have sole and unfettered discretion
to exclude such Tanabe visiting scientist(s) from participation in any
activities in order to protect the confidentiality of such other activities.
2.8 Ownership of Improvements. OSI and Tanabe shall own
jointly all Improvements made or discovered either solely or jointly by Tanabe
and/or OSI and/or their respective employees during the Research Program. Any
Improvements which are Joint Technology under the Vanderbilt Agreement shall be
owned jointly by OSI, Tanabe and Vanderbilt. Each party represents and agrees
that all employees and other persons acting on its behalf in performing its
obligations under this Agreement shall be obligated to assign to such party or
as such party shall direct (to the extent such party is legally enabled to
disclose and use the same in the Research Program), all Improvements made or
developed by such employee or other person. OSI and Tanabe each agrees to
undertake to enforce such obligations (to the extent each party is legally
enabled to disclose and use the same in the Research Program), including, where
appropriate, by legal action, considering, among other things, the commercial
value of
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such Improvements. OSI shall undertake to have Vanderbilt agree to such
obligations with respect to Joint Technology under the Vanderbilt Agreement to
the same extent OSI is obligated hereunder.
3. Funding of the Research Program.
3.1 Contract Period Funding. During the Contract Period,
Tanabe shall pay to OSI its total actual research costs in carrying out the
Research Plans (the "Funding Amounts") at the rate (the "FTE Rate") of ** per
FTE during the first year of the Contract Period, ** per FTE during the second
year of the Contract Period, ** per FTE during the third year of the Contract
Period (the "Third Year FTE Rate"), and ** per FTE during the fourth year of the
Contract Period (the "Fourth Year FTE Rate"). The Funding Amounts for any given
period shall be calculated by ** . The aggregate Funding Amounts which Tanabe
shall be obligated to pay hereunder during each year during the Contract Period
shall not exceed ** during the first year of the Contract Period, ** during the
second year of the Contract Period, ** during the third year of the Contract
Period, and ** during the fourth year of the Contract Period. If the aggregate
Funding Amounts for a year exceed the Budgeted Amount for such year, OSI shall
bear such excess unless such excess had been approved by the Steering Committee.
3.1.1 Budgeted Amount. Prior to the beginning of
each year (or part thereof) during the Contract Period, the Steering Committee
shall approve a budget (the "Budget") of the Funding Amounts by OSI and
Vanderbilt necessary to fulfill the duties
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assigned under the Research Plan for such year (the "Budgeted Amount"). The
Budgeted Amount shall not be less than ** for the first year of the Contract
Period, ** for the second year of the Contract Period, ** for the third year of
the Contract Period, and ** for the fourth year of the Contract Period. The
Budget for each year shall be consistent with the provisions of Section 2.6 and
Section 3.1 hereof. The Budget will be in form and detail as the Steering
Committee shall determine and shall be delivered to both parties in time to be
included in each party internal budgeting process.
3.1.2 Adjustments. Tanabe shall make prepayments
to OSI of the Budgeted Amount quarterly in advance for work scheduled to be
performed by OSI and/or Vanderbilt during any calendar quarter. Adjustments as
necessary to reflect the work actually performed by OSI and Vanderbilt shall be
made at the end of each quarter. Within 30 days of the close of a calendar
quarter, OSI shall invoice Tanabe for an amount equal to the Funding Amount for
such quarter. ** If the aggregate Funding Amount for a year exceeds the Budgeted
Amount and if the Steering Committee approved such excess in writing, ** .
3.1.3 Progress Pursuant to the Research Plan. The
amount of the Funding Amount for each quarter shall be based on the work in
progress pursuant to the Research Plan and the associated annual Budget.
3.1.4 Inspection of Funding Amount. OSI shall
keep, and shall undertake to have Vanderbilt keep, for seven years from the
expiration of the Contract Period complete and accurate records of OSI's and
Vanderbilt's expenditures of the Funding
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Amounts received by OSI. The records shall conform to generally accepted
accounting principles as applied to a similar company similarly situated. Tanabe
shall have the right at its own expense during the Contract Period and during
the subsequent seven-year period to obtain from an independent certified public
accountant selected by Tanabe, an audit of said records to verify the accuracy
of such expenditures, pursuant to the Research Plan. OSI shall make, and shall
undertake to have Vanderbilt make, its records available for inspection by the
independent certified public accountant during regular business hours at the
place or places where such records are customarily kept, upon reasonable notice
from Tanabe, to the extent reasonably necessary to verify the accuracy of the
expenditures and required reports. This right of inspection shall not be
exercised more than once in any calendar year and not more than once with
respect to records covering any specific period of time, unless a subsequent
inspection reveals discrepancies which may have also occurred during such prior
period of time. Tanabe agrees to hold in strict confidence all information
concerning such expenditures, other than their total amounts, and all
information learned in the course of any audit or inspection, except to the
extent that it is necessary for Tanabe to reveal the information in order to
enforce any rights it may have pursuant to this Agreement or if disclosure is
required by law or competent authorities. The failure of Tanabe to request
verification of any expenditures before the expiration of the seven-year period
referred to above shall be considered acceptance of the accuracy of the invoices
for such expenditures, and OSI and Vanderbilt shall have no obligation to
maintain any records pertaining to such expenditures beyond the seven-year
period. The results of the inspection shall be binding on both parties. **
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3.1.5 Minimization of Expenditures. OSI agrees to
use good faith efforts to conduct and to have Vanderbilt conduct the research
contemplated under this Agreement efficiently so as to minimize the Funding
Amounts made under this Agreement.
3.2 Sharing of Responsibilities in the Early Development
Phase. If, pursuant to Section 2.2.3, Tanabe determines that OSI or OSI together
with Vanderbilt shall share in the responsibilities of the Early Development
Phase, the parties shall mutually determine the number of additional FTEs which
shall be allocated to such responsibilities and Tanabe shall fund such
additional FTEs at the applicable FTE Rate in accordance with Section 3.1
hereof.
3.3 Technology Access Fee and Milestone Payments.
3.3.1 Technology Access Fee. Tanabe will pay to
OSI a technology access fee of ** in cash on the Effective Date.
3.3.2 Early Development Phase Milestones. Upon a
determination by Tanabe to initiate the Early Development Phase with respect
only to the first Lead Compound among all the Compounds within the same Target,
Tanabe shall make a cash milestone payment to OSI of ** . Upon IND approval in
the first country among the U.S., Japan and any of the countries in the European
Union (i.e., Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the
United Kingdom of Great Britain and Northern Ireland (the "European Union
Countries")), with respect only to the first Lead Compound among all the
Compounds within the same Target, Tanabe shall make an additional cash milestone
payment to OSI of ** .
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3.3.3 Clinical Development and Marketing Phase
Milestones. With respect to each Lead Compound, (i) upon the initiation of the
first Phase III clinical trials for the first indication in the first country
among the U.S., Japan and the European Union Countries, Tanabe shall make a
one-time cash milestone payment to OSI of ** (ii) upon filing of the first NDA
for the first indication in the first country among the U.S., Japan and any of
the European Union Countries, Tanabe shall make a one-time cash milestone
payment to OSI of ** and (iii) upon approval of the NDA for the first indication
in the first country among the U.S., Japan and in the European Union Countries,
Tanabe shall make a one-time cash milestone payment to OSI of ** . For each
Product for which Net Sales by Tanabe, its Affiliates and sublicensees in a
given year exceed ** worldwide, Tanabe shall pay OSI a one-time cash milestone
payment of **
4. Treatment of Confidential Information
4.1 Confidentiality.
4.1.1 Confidentiality and Non-Use Obligations.
Subject to the disclosure obligations set forth in Sections 2.5.1 and 4.3 hereof
and publication rights set forth in Section 4.2 hereof, (i) Tanabe agrees that
during the Contract Period and for five years thereafter, it will keep
confidential, and will cause its Affiliates to keep confidential, all OSI
Confidential Information, and neither Tanabe nor any of its Affiliates shall use
OSI Confidential Information except as expressly permitted in this Agreement and
(ii) OSI agrees
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that during the Contract Period and for five years thereafter, it will keep
confidential, and will cause its Affiliates to keep confidential, all Tanabe
Confidential Information, and neither OSI nor any of its Affiliates shall use
Tanabe Confidential Information except as expressly permitted in this Agreement.
4.1.2 Disclosure of Confidential Information.
Tanabe and OSI acknowledge that the OSI Confidential Information and Tanabe
Confidential Information constitute highly valuable, proprietary, confidential
information, and each party agrees that any disclosure of the other party's
Confidential Information to any officer, employee or agent of such party or of
any of its Affiliates shall be made only if and to the extent necessary to carry
out its responsibilities under this Agreement and shall be limited to the
greatest extent possible consistent with such responsibilities. Subject to
Section 4.5 hereof, each party agrees not to disclose the other party's
Confidential Information to any Third Parties under any circumstance without
written permission of the other party; provided, however, that OSI may disclose
Tanabe Confidential Information to Vanderbilt, to the extent necessary in order
for OSI to perform its obligations under this Agreement and to the extent
Vanderbilt is obligated at least under the same degree of confidentiality and
non-use obligation as OSI is obligated hereunder. Each party shall take such
action and shall cause its Affiliates to take such action, and OSI will cause
Vanderbilt to make such action, to preserve the confidentiality of each other
party's Confidential Information as they would customarily take to preserve the
confidentiality of their own confidential information. Notwithstanding the
foregoing, the party that is granted the right to sublicense pursuant to Section
5.1 hereof shall be permitted to disclose any Improvement or the other party's
Confidential Information to any sublicensees of the Products (including
potential sublicensees) to the extent necessary or useful to exercise the
sublicense rights granted to it under Section 5.1.
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4.1.3 Employees and Consultants. Each party
represents that all of its employees and consultants participating in the
Research Program who shall have access to the other party's Confidential
Information are bound by agreement to maintain such information in confidence.
4.2 Publication. Section 4.1 hereof to the contrary
notwithstanding, the results obtained in the course of the Research Program
(including, without limitation, such results obtained by Vanderbilt under the
Vanderbilt Agreement) may be submitted for publication following scientific
review by the Joint Management Committee or any other committee charged with
such review and subsequent approval by OSI's and Tanabe's management. After
receipt of the proposed publication by Tanabe's and OSI's management, written
approval or disapproval shall be provided within 30 days for a manuscript,
within 30 days for an abstract for presentation at, or inclusion in the
proceedings of, a scientific meeting, and within 30 days for a transcript of an
oral presentation to be given at a scientific meeting. If any patentable
Technology is included in such publication or scientific meeting, the disclosure
thereof shall be delayed up to 90 additional days from the scheduled publication
date for the purpose of filing a patent application. The contribution of each
party shall be noted in all publications or presentations by acknowledgment or
co-authorship, whichever is appropriate. OSI shall undertake that Vanderbilt's
publication rights are restricted to the same extent as OSI is obligated
hereunder.
4.3 Press Release. Except as required by law, no party
may disclose the existence of this Agreement nor the research described in it
except with the written consent of the other party, which consent shall not be
unreasonably withheld or delayed. Neither party will issue a press release with
regard to matters relating to this Agreement without the other party's consent,
which consent shall not be unreasonably withheld. The party desiring to make any
such press release or other disclosure shall provide the other party with a
written copy of the proposed
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announcement or disclosure in sufficient time prior to the proposed press
release to allow such other party to comment upon the nature, text and timing of
such announcement or disclosure prior to the proposed press release.
Notwithstanding the foregoing, OSI may disclose the existence or the content of
this Agreement to Vanderbilt in order to enter into the Vanderbilt Agreement;
provided, however, that OSI shall obligate Vanderbilt at least under the same
degree of confidentiality and non-use obligation as OSI is obligated hereunder.
4.4 Restrictions on Transferring Materials. Tanabe and
OSI recognize that the Materials which are part of OSI Technology, Tanabe
Technology or Improvements represent valuable commercial assets. Therefore,
throughout the Contract Period and for ** thereafter (unless the other party
consents thereto, which consent shall not be unreasonably withheld or delayed),
each of OSI and Tanabe agrees not to transfer to any Third Party any such
Materials which constitute Technology owned solely by the other party to this
Agreement; provided, however, that OSI may transfer any such Materials to
Vanderbilt to the extent necessary in order for OSI to perform its obligations
under this Agreement and to the extent Vanderbilt is obligated at least under
the same degree of confidentiality and non-use obligation as OSI is obligated
hereunder. Additionally, throughout the Contract Period and for ** thereafter,
OSI and Tanabe agree not to transfer to any Third Party any Materials which are
part of the Improvements (except that OSI may transfer any such Materials to
Vanderbilt to
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** This portion has been redacted pursuant to a request for confidential
treatment.
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the extent necessary in order for OSI to perform its obligations under this
Agreement), unless prior consent for any such transfer is obtained from the
other party, which consent shall not be unreasonably withheld or delayed, and
unless such Third Party agrees as a condition of any such transfer not to
transfer the Materials further and to use the Materials only for academic
purposes not directed toward the development of compounds or products.
Notwithstanding the foregoing, the party granted the right to sublicense
pursuant to Section 5.1 hereof shall be permitted to supply Materials to any
sublicensees of the Products (including potential sublicensees) to the extent
necessary or useful to exercise the sublicense rights granted to it under
Section 5.1.
4.5 Permitted Use of Confidential Information. Nothing
contained herein will in any way restrict or impair any party's right to use,
disclose or otherwise deal with any Confidential Information which:
(a) at the time of disclosure is
properly in the public domain or thereafter becomes part of the public domain by
publication or otherwise through no breach of this Agreement by the party
receiving such information;
(b) the party receiving such
information can establish by competent evidence that such information was
properly in its possession prior to the time of the disclosure;
(c) is independently and properly made
available as a matter of right to the party receiving such information by a
Third Party (including, for purposes of this subsection sublicensees) who is not
thereby in violation of a confidential relationship;
(d) is information which is required to
be included in patent applications filed hereunder or required to be provided to
a government agency in order to obtain approvals to market Products; provided,
however, that Tanabe Confidential Information or OSI Confidential Information
shall not be disclosed in any such patent application or otherwise
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without the prior written consent of Tanabe or OSI, respectively, which consent
shall not be unreasonably withheld or delayed;
(e) is information which is required to
be disclosed to customers, users and prescribers of a Product, or which is
reasonably necessary to disclose in connection with the marketing of a Product;
or
(f) is information required to be
disclosed by law or by a court order or by competent authorities, in each of
which cases the disclosing party shall timely inform the other and use its best
efforts to limit the disclosure and maintain confidentiality to the extent
possible and will permit the other party to limit such disclosure.
5. Licenses and Royalties
5.1 Grant of Licenses.
5.1.1 Option to Tanabe. OSI hereby grants to
Tanabe an exclusive option, exercisable at any time during the Contract Period
and the Remaining Right Period, prior to commencement of the Early Development
Phase, to acquire, with respect to a Lead Compound, a worldwide exclusive
license, including the right to sublicense, under the OSI Technology, the OSI
Patents and OSI and/or Vanderbilt's rights in the Improvements and Joint Patents
to develop, have developed, make, have made, use, sell and have sold Products,
which license shall be exclusive (even as to OSI) (a) for so long as Tanabe is
obligated to pay a royalty under Section 5.5.1 hereof and (b) thereafter in
accordance with Section 5.2 hereof. The terms of any such license are set forth
in Sections 5.2 through 5.5 hereof. The option granted by OSI under this Section
5.1.1 shall automatically be deemed to be exercised by Tanabe by its decision to
initiate the Early Development Phase with respect to a Lead Compound.
5.1.2 License to OSI. In the event that (a) a Seed
Compound meets the criteria of a Lead Compound as set forth on Exhibit B and
Tanabe does not determine to initiate,
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directly or through its Affiliates or sublicensees, the Early Development Phase
with respect to such Lead Compound within ** following the transfer of the
Materials of the Lead Compound after the identification thereof by OSI and/or
Vanderbilt, or (b) Tanabe fails to commence, directly or through its Affiliates
or sublicensees, the Clinical Development and Marketing Phase with respect to a
Lead Compound within ** following completion of all of the Phase II clinical
trials for such Lead Compound unless such failure is beyond the reasonable
control of Tanabe, the exclusive option or exclusive license, as the case may
be, with respect to such Lead Compound, including, without limitation, the right
to complete development and the right to market a Product, shall revert to OSI
and Tanabe shall grant to OSI a worldwide exclusive license, including the right
to sublicense, under the Tanabe Technology, the Tanabe Patents and the Tanabe
rights in the Improvements and Joint Patents to develop, have developed, make,
have made, use, sell and have sold Products, which such license shall be
exclusive (even as to Tanabe) (a) for so long as OSI is obligated to pay a
royalty under Section 5.5.2 hereof and (b) thereafter in accordance with Section
5.2 hereof. The terms of any such license are set forth in Sections 5.2 through
5.5 hereof.
5.2 Paid-Up License. Provided that Tanabe or OSI, as the
case may be, has satisfied all of its obligations to pay royalties hereunder
with respect to a Product, such party shall have a paid-up exclusive
royalty-free license to manufacture, have manufactured, use, sell
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treatment.
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and have sold such Product in each country after the expiration of such party's
last obligation to pay royalties on its Net Sales of such Product in such
country.
5.3 Obligations to Exploit the Products. Either Tanabe or
OSI, as the case may be, shall use commercially reasonable and diligent efforts
to exploit the Products. This requirement shall be deemed satisfied if such
party uses substantially the same degree of diligence it uses with respect to
products of similar commercial potential developed by such party outside of this
Agreement.
5.4 Sublicenses. If either Tanabe or OSI grants a
sublicense pursuant to Section 5, such party shall guarantee that any
sublicensee fulfills all of its obligations under this Agreement. In the event
Tanabe or OSI grants sublicenses under Section 5 to others to develop, have
developed, make, have made, use, sell or have sold Products, such sublicenses
shall include an obligation of the sublicensees to account for and report all
Net Sales of Products on the same basis as if such sales were Net Sales of
Products by such party, and such party shall pay royalties to the other party
under this Agreement as if the Net Sales of the sublicensee were Net Sales of
the sublicensor.
5.5 Royalty Payments, Accounting for Royalties, Records
and Withholding Tax.
5.5.1 Royalty Payments by Tanabe. Tanabe shall pay
to OSI a royalty of (a) ** of the Net Sales made by Tanabe, its Affiliates and
sublicensees of each Tanabe Product, and (b) ** of the Net Sales made by Tanabe,
its Affiliates and sublicensees of each OSI Product. Tanabe shall continue to
pay royalties on Net Sales of each Product on a country-
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treatment.
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by-country basis so long as the manufacture, use and/or sale of such Product
would infringe a Valid Claim of an OSI Patent or a Joint Patent with respect to
such Product in such country or for ** following the date of first commercial
sale of such Product, whichever is longer. Upon the request of OSI, Tanabe will,
at its option, identify OSI on the packaging of all Products on which Tanabe is
obligated to pay royalties, subject to legal and commercial requirements on a
country-by-country basis and in a manner in accordance with such legal and
commercial requirements.
5.5.2 Royalty Payments by OSI. In the event that
the exclusive option or the exclusive license, as the case may be, with respect
to a Lead Compound revert to OSI and OSI is granted the license set forth in
Section 5.1.2 hereof, OSI shall pay to Tanabe a royalty of ** of Net Sales by
OSI, its Affiliates or sublicensees of each such Product. OSI shall continue to
pay such royalty on Net Sales of each Product commercialized by OSI, its
Affiliates or sublicensees on a country-by-country basis so long as the
manufacture, use and/or sale of such Product would infringe a Valid Claim of a
Tanabe Patent or a Joint Patent with respect to such Product in such country or
for ** following the date of first commercial sale of such Product, whichever is
longer.
5.5.3 Payment Dates. Royalties shall be paid by
Tanabe or OSI, as the case may be, on Net Sales within 90 days after the end of
each calendar quarter in which such Net Sales are made. Such payments shall be
accompanied by a statement showing the Net Sales of each Product in each country
and a calculation of the amount of royalty due.
5.5.4 Accounting. The Net Sales used for computing
the royalties payable to OSI by Tanabe, or to Tanabe by OSI, as the case may be,
shall be computed and
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** This portion has been redacted pursuant to a request for confidential
treatment.
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paid in U.S. Dollars. For purposes of determining the amount of royalties due
with respect to Net Sales in any foreign currency, the amount shall be computed
generally by converting the foreign currency amount into U.S. Dollars using for
each quarter's calculation the foreign currency exchange rate on the last day of
such quarter or such other method as is consistent with internal foreign
currency translation procedures of the Selling Party, as actually used by the
Selling Party on a consistent basis in preparing its audited financial
statements.
5.5.5 Records. Tanabe or OSI, as the case may be,
shall keep for seven years from the date of each payment of royalties complete
and accurate records of Net Sales made by such party, its Affiliates and
sublicensees of each Product in sufficient detail to allow the accruing
royalties to be determined accurately. The Royalty-Receiving Party shall have
the right for a period of seven years after receiving any report or statement
with respect to royalties due and payable to obtain, at its expense, from the
independent certified public accountant selected by the Royalty-Receiving Party,
an audit of the relevant records of the Selling Party to verify such report or
statement. The Selling Party shall make its records available for inspection by
such independent certified public accountant during regular business hours at
such place or places where such records are customarily kept, upon reasonable
notice from the Royalty-Receiving Party, to the extent reasonably necessary to
verify the accuracy of the reports and payments. Such inspection right shall not
be exercised more than once in any calendar year nor more than once with respect
to sales in any given period, unless a subsequent inspection reveals
discrepancies which may have also occurred during such period. Such independent
certified public accountant shall report to the Royalty-Receiving Party only as
to the accuracy of the Net Sales computation and royalty payments. The
Royalty-Receiving Party agrees to hold in strict confidence all information
concerning royalty payments and reports, and all information learned in the
course of any audit or inspection, except to the extent necessary for such party
to reveal
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such information in order to enforce its rights under this Agreement or
disclosure is required by law or by the competent authorities. The failure of
the Royalty-Receiving Party to request verification of any report or statement
during the seven-year period shall be considered acceptance of the accuracy of
such report, and the Selling Party shall have no obligation to maintain records
pertaining to such report or statement beyond the seven-year period. The results
of the inspection shall be binding on both parties.
5.5.6 Withholding Taxes.
(a) **
(b) Withholding to be Borne by
Royalty-Receiving Party. Any Withholding Tax imposed on any amounts under
Section 5.5 hereof shall be deducted from the amount otherwise due. The Selling
Party will assist the Royalty-Receiving Party in minimizing the Withholding Tax
applicable to any payment made by the Selling Party hereunder and in claiming
tax refunds at the Royalty-Receiving Party's request by providing such documents
and providing such other reasonable cooperation as may be necessary to assist
the Royalty-Receiving Party in receiving a tax refund or in claiming a foreign
tax credit and shall, upon the Royalty-Receiving Party's request, give proper
evidence from time to time as to the payment of such Withholding Tax.
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treatment.
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5.6 Payment to Vanderbilt. OSI shall be responsible for
any payment which will be made to Vanderbilt for Vanderbilt's participation in
the Research Program, including, without limitation, any payment necessary to
obtain a license from Vanderbilt, and Tanabe shall not be obliged to make any
payment other than specifically set forth herein.
6. Provisions Concerning the Filing, Prosecution and Maintenance
of Patent Rights.
The following provisions relate to the filing, prosecution and
maintenance of OSI Patents and Tanabe Patents:
6.1 OSI Filing, Prosecution and Maintenance. OSI shall
have the exclusive right and obligation:
(a) to file applications on any
patentable invention relating to OSI Technology;
(b) to prosecute all pending and new
patent applications with respect to OSI Patents, and to respond to oppositions
filed by Third Parties against the grant of OSI Patents; and
(c) to maintain in force all OSI
Patents by duly filing all necessary papers and paying any fees required by the
patent laws of the particular country in which such OSI Patents were granted.
6.2 Tanabe Filing, Prosecution and Maintenance. Tanabe
shall have the exclusive right and obligation:
(a) to file applications on any
patentable invention relating to Tanabe Technology;
(b) to prosecute all pending and new
patent applications with respect to Tanabe Patents, and to respond to
oppositions filed by Third Parties against the grant
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of Tanabe Patents; and
(c) to maintain in force all Tanabe
Patents by duly filing all necessary papers and paying any fees required by the
patent laws of the particular country in which such Tanabe Patents were granted.
6.3 Legal Action.
6.3.1 Actual or Threatened Disclosure or
Infringement. When information comes to the attention of either Tanabe or OSI to
the effect that a Tanabe Patent, OSI Patent or Joint Patent or Improvement
relating to a Compound or Product have been or are threatened to be unlawfully
disclosed or that any of the rights granted by this Agreement have been or are
threatened to be unlawfully infringed, such party shall notify the other party
in writing and the Selling Party shall have the right at its expense to take
such action as it may deem necessary to prosecute or prevent such unlawful
disclosure or infringement, including the right to bring or defend any suit,
action or proceeding involving any such disclosure or infringement. The Selling
Party shall notify the Royalty-Receiving Party promptly of the receipt of any
such information and of the commencement of any such suit, action or proceeding.
If the Selling Party determines that it is necessary or desirable for the
Royalty-Receiving Party to join any such suit, action, or proceeding, the
Royalty-Receiving Party shall execute all papers and perform such other acts as
may be reasonably required to permit the Selling Party to act in the
Royalty-Receiving Party's name. If Tanabe is the Selling Party, and Tanabe
determines that it is necessary or desirable for Vanderbilt to join any such
suit, action, or proceeding, OSI shall undertake to have Vanderbilt execute all
papers and perform such
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other acts as may be reasonably required to permit Tanabe to act in Vanderbilt's
name but at no cost to OSI or Vanderbilt ** . In the event that the Selling
Party brings a suit, it shall have the right first to reimburse itself out of
any sums recovered in such suit or in its settlement for all reasonable costs
and expenses of every kind and character, including reasonable attorneys' fees,
involved in the prosecution of any suit, and ** of any funds that shall remain
from said recovery shall be distributed to the Royalty-Receiving Party and ** of
such funds shall be retained by the Selling Party.
If the Selling Party does not, within ** days after giving
notice to the Royalty-Receiving Party of the above-described information, notify
the Royalty-Receiving Party of the intent of the Selling Party to bring suit
against any infringer, the Royalty-Receiving Party shall have the right to bring
suit for such alleged infringement, but it shall not be obligated to do so, and
may cause the Selling Party to be joined as a party plaintiff, if appropriate,
in which event the Royalty-Receiving Party shall hold the Selling Party free,
clear, and harmless from any and all costs and expenses of such litigation,
including attorneys' fees, and any sums recovered in any such suit or in its
settlement shall belong to the Royalty-Receiving Party. However, ** of any such
sums received by the Royalty-Receiving Party, after deduction of the costs and
expenses of litigation, including attorneys' fees paid, shall be paid to the
Selling Party and ** of such sums shall be retained by the Royalty-Receiving
Party. Each party shall always have the right to be represented by counsel of
its own selection and at its own expense in any suit instituted by the other for
infringement, under the terms of this Section. If the Selling Party lacks
standing to bring any such suit, action, or proceeding, then the
Royalty-Receiving Party shall do so at the request of the Selling Party and at
the Selling Party's expense.
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treatment.
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6.3.2 Defense of Infringement Claims. If OSI or
Tanabe, or any of their respective Affiliates or sublicensees or their
customers, is sued by a Third Party for infringement of a patent because of the
research, development, manufacture, use or sale of a Compound or Product, the
party which has been sued shall promptly notify the other in writing of the
institution of such suit. The Selling Party shall have the right (including the
right to exclusive control of the defense of any such suit, action, or
proceeding and the exclusive right to compromise, litigate, settle, or otherwise
dispose of any such suit, action, or proceeding), but not the obligation, to
control the defense or settlement of any such suit, action, or proceeding and
the Royalty-Receiving Party shall furnish to the Selling Party all necessary
information and assistance in connection therewith. The Selling Party shall bear
** of the expense (including, without limitation, any sums paid to such Third
Party as damages), and the Royalty-Receiving Party shall bear ** of the expense
(including, without limitation, any sums paid to such Third Party as damages);
provided that the sole obligation of the Royalty-Receiving Party will be paid by
a ** reduction of all royalties then payable and payable thereafter to the
Royalty-Receiving Party until the Royalty Receiving Party's ** share of the
expenses of such suit are deducted on a global basis, and not on a
patent-by-patent basis nor country-by-country basis. If such suit results in any
award or settlement paid in favor of Tanabe or OSI, such amount shall be shared
in the same proportion as the expenses of such suit have been actually borne by
such parties. The share of the expenses of any suit of the Royalty-Receiving
Party shall be limited to the foregoing royalty reduction and ** . It is agreed
that if one party conducts the defense, the other shall have the right to be
represented
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by advisory counsel of its own selection, at its own expense, and shall
cooperate fully in the defense of such suit and furnish to the other all
evidence and assistance in its control.
6.3.3 Third Party Licenses. If Tanabe and OSI
agree that the development, manufacture, use, or sale by Tanabe or OSI, as the
case may be, of a Product in any country would infringe a patent owned by a
Third Party, the Selling Party shall attempt to obtain a license under such
patent. If the Selling Party obtains a license under such patent, ** of any
payments made by the Selling Party to such Third Party shall be deductible from
royalty payments due from the Selling Party to the Royalty-Receiving Party;
provided, however, that in no event shall royalties payable to the
Royalty-Receiving Party be reduced by more than ** as a result of all such
deductions. All such computations, payments, and adjustments of ** shall be made
on a country-by-country and patent-by-patent basis. If either Tanabe or OSI is
of the opinion that such development, manufacture, use, or sale would not
infringe such patent owned by a Third Party, the Selling Party may, at its
election and expense, bring suit against such Third Party seeking a declaration
that such Third Party patent is invalid or not infringed by such party's
development, manufacture, use or sale of such Product, or may bring opposition,
nullity, or other proceedings against such patent, as appropriate. If the
Selling Party chooses not to bring such a suit or is successful in such suit,
the Selling Party shall continue to pay royalties in such country as provided in
Section 5. If the Selling Party is unsuccessful in such suit, it shall join the
Royalty-Receiving Party in an attempt to obtain a license under such patent to
the extent that the terms and conditions to obtain such license from
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treatment.
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such Third Party are commercially feasible, and royalty payments made to such
Third Party for such license shall be as provided in this Section.
6.3.4 No Selling Party. For purposes of this
Section 6.3, if there is no Selling Party (because no license has yet been
granted under Section 5.1.1 or Section 5.1.2), all references to "Selling Party"
shall be deemed to be references to OSI and all references to "Royalty-Receiving
Party" shall be deemed to be references to Tanabe except that if the actual or
threatened unlawful disclosure or infringement solely relates to a Tanabe
Patent, then all references in this Section 6.3 to "Selling Party" shall be
deemed to be references to Tanabe and all references to "Royalty-Receiving
Party" shall be deemed to be references to OSI.
6.3.5 Acquisition of Rights from Third Parties.
Subject to OSI's rights with respect to potential pharmaceutical products in the
Field licensed-in by OSI during the Contract Period as set forth in Section
2.3.1 hereof, OSI and Tanabe shall, during the Contract Period, promptly notify
the Joint Management Committee in writing of any and all opportunities to
acquire in any manner from Third Parties (except Vanderbilt under the Vanderbilt
Agreement) enabling technologies or patents relating to the Targets which may be
used in the Research Program and which were not theretofore available to the
Research Program from either Tanabe or OSI. Such opportunities shall include,
without limitation, a research collaboration with a Third Party which relates to
any of the Targets. If OSI and Tanabe mutually determine that such rights should
be acquired or a research collaboration with a Third Party should be entered
into, the notifying party shall negotiate with such Third Party to make the
acquisition or enter into the research collaboration. If such rights are
acquired or a research collaboration is entered into, such rights acquired or
resulting from such research collaboration shall be deemed part of the
Technology of the party making the acquisition or entering into the research
collaboration. Upon
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such acquisition or entering into the research collaboration, OSI and Tanabe
shall negotiate in good faith the modification (if any) of the milestone and
royalty payments set forth in Sections 3.3.2, 3.3.3 and 5.5 with respect to
Products directly resulting from such acquired technology or patents or from
such research collaboration.
7. Hold Harmless. If Tanabe grants to OSI a license hereunder,
OSI agrees to defend, protect, indemnify and hold harmless Tanabe from and
against any liability, claim, loss, cost or expense arising from any claim for
product liability based upon OSI's, its Affiliates' and/or its sublicensees'
development, manufacture, use, or sale of any Product, except to the extent such
liability, claim, loss, or expense also results from the negligence or willful
misconduct of Tanabe, its Affiliates and/or its sublicensees or their respective
employees and agents. If OSI grants to Tanabe a license hereunder, Tanabe agrees
to defend, protect, indemnify, and hold harmless OSI from and against any
liability, claim, loss, cost, or expense arising from any claim for product
liability based upon Tanabe's, its Affiliates' and/or its sublicensees'
development, manufacture, use, or sale of any Product, except to the extent such
liability, claim, loss, cost or expense also results from the negligence or
willful misconduct of OSI, its Affiliates, its sublicensees and/or Vanderbilt or
their respective employees and agents.
8. Term, Termination and Disengagement
8.1 Term.
8.1.1 Term of Contract Period. The term of the
Contract Period shall commence on the Effective Date and shall expire on the
fourth anniversary of the Effective Date, unless extended by mutual written
agreement of the parties pursuant to Section 8.1.3, terminated by Tanabe
pursuant to Section 8.1.2 hereof or as otherwise provided in this Agreement, and
shall mean the period during which Tanabe is providing Funding Amounts pursuant
to Section 3
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hereof.
8.1.2 Two-Year Review. On or before the second
anniversary of the Effective Date, OSI shall deliver to Tanabe a written report
indicating whether the Two-Year Minimum Requirements have been met (the "Two
Year Report"). If the Two-Year Minimum Requirements have been met, the Contract
Period will remain in effect for the remainder of the 4-year period from the
Effective Date. If the Two-Year Minimum Requirements have not been met, within
** following receipt of such report, Tanabe shall notify OSI in writing whether
it intends to terminate the Contract Period in accordance with the provisions of
Section 8.2 hereof or whether the Contract Period shall remain in effect for the
remainder of the 4-year period from the Effective Date. If the Two Year Report
indicates that the Two Year Minimum Requirements have not been met but Tanabe
nonetheless determines not to exercise its right to Early Termination, Tanabe
shall make the quarterly Funding Amount for the first quarter of the third year
of the Contract Period on the later of the first day of such quarter or the day
on which Tanabe provides OSI with notice of its intent not to terminate the
Contract Period.
8.1.3 Renewal. Tanabe may renew the Contract
Period for an additional period of at ** by providing written notice of its
intent to renew to OSI within four months prior to the expiration of the
Contract Period. Following delivery and receipt of such written notice, the
parties will negotiate in good faith the level of funding during the renewal
period; provided, however, that such funding, on an annual basis, shall be equal
to or greater
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than the aggregate Funding Amounts during the fourth year of the Contract
Period. The "Contract Period" shall be deemed to include any renewal period.
Notwithstanding the foregoing, at Tanabe's request, OSI shall, for a period of
one year following the expiration of the Contract Period (i.e., all four years
or more if extended hereby), provide to Tanabe ongoing services to be mutually
determined by the parties on a Compound-by-Compound basis or a Target-by-Target
basis. Tanabe shall pay OSI for such services an additional Funding Amount equal
** .
8.1.4 Term of Agreement. The term of this
Agreement ("Term") shall continue until the expiration or termination of the
last obligation of either party to pay royalties on a country-by-country basis
and shall include the Contract Period as well as the Drug Discovery Phase, Early
Development Phase and Clinical Development and Marketing Phase, any or all of
which may be coexistent with the Contract Period.
8.2 Tanabe's Right to Early Termination. Tanabe shall
have the right to terminate the Contract Period following its receipt of the Two
Year Report, in accordance with the provisions set forth in Section 8.1.2
hereof, if the Two-Year Minimum Requirements have not been met ("Early
Termination"). If there is an Early Termination, there shall be no Remaining
Right Period.
8.3 Termination Upon an Event of Default. Upon the
occurrence of any of the following events ("Events of Default"), the party not
responsible may, by notice to the other party, terminate this Agreement subject
to compliance with the terms of Section 10
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** This portion has been redacted pursuant to a request for confidential
treatment.
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(Dispute Resolution), and without prejudice to any remedy or claims it may have
against the other party.
8.3.1 Incorrect Representation or Warranty. Any
material representation or warranty by OSI or Tanabe, or any of their officers,
under or in connection with this Agreement, proves to have been incorrect in any
material respect when made.
8.3.2 Failure to Perform. OSI or Tanabe fails in
any material respect to perform or observe any material term, covenant or
understanding contained in this Agreement or in any of the other documents or
instruments delivered pursuant to, or concurrently with, this Agreement, and any
such failure shall remain unremedied for 60 days after written notice to the
failing party.
8.3.3 Bankruptcy. OSI or Tanabe makes an
assignment for the benefit of its creditors, becomes insolvent, files a petition
in bankruptcy, petitions or applies to any tribunal for the appointment of a
custodian, receiver or any trustee for it or a substantial part of its assets,
or commences any proceeding under any bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect; or if there has been filed any
such petition or application against OSI or Tanabe, or any such proceeding has
been commenced against it, in which an order for relief is entered or which
remains undismissed for a period of 60 days or more; or OSI or Tanabe by any act
or omission indicates its consent to, approval of or acquiescence in, any such
petition, application or proceeding or order for relief or the appointment of a
custodian, receiver or any trustee for it or any substantial part of any of its
properties, or is the subject to any such custodianship, receivership or
trusteeship that continues undischarged for a period of 60 days or more.
8.4 Effect of Expiration or Termination of the Contract
Period.
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8.4.1 Expiration. Upon expiration of the Contract
Period as provided in Section 8.1.1 (including the renewal period, if any,
provided for in Section 8.1.3):
(a) Tanabe License to OSI. Tanabe shall
grant to OSI a royalty-free, worldwide, perpetual, non-exclusive license,
including the right to grant sublicenses, under Tanabe Technology and Tanabe's
rights in Improvements and Joint Patents, to research, develop, have developed,
make, have made, use, sell, have sold and commercialize pharmaceutical products;
(b) OSI License to Tanabe. OSI shall
grant to Tanabe a royalty-free, worldwide, perpetual, non-exclusive license,
including the right to grant sublicenses, under OSI Technology and OSI's rights
in Improvements and Joint Patents, to research, develop, have developed, make,
have made, use, sell, have sold and commercialize pharmaceutical products;
(c) Option Payment. Following the
expiration of the Contract Period, each of Tanabe and OSI shall have the right
to independently continue development with respect to a Target with no
obligation to the other Party except as follows in subsections (c)(i) and
(c)(ii):
(i) Seed Compounds after
Contract Period. If, during the Remaining Right Period, a Seed Compound on which
OSI has continued development meets the criteria of a Lead Compound as set forth
on Exhibit B hereto, OSI shall so notify Tanabe in writing and, together with
such notice, shall supply to Tanabe any Materials with
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<PAGE> 61
respect to the Lead Compound which OSI reasonably determines would be useful for
Tanabe's evaluation of such Lead Compound. OSI shall include in such written
notice ** by OSI in connection with the development of such Seed Compound during
the period between the expiration of the Contract Period and the date of such
notice. ** . Such written notice shall constitute an offer by OSI to Tanabe of
an exclusive option to commence the Early Development Phase with respect to such
Lead Compound, and, accordingly, take a license to such Lead Compound consistent
with Section 5.1.1. As consideration for such option, Tanabe shall pay OSI the
amount of its ** (the "Option Payment"). Tanabe shall exercise such option by
sending OSI written notice of such exercise within ** following the date of
OSI's notice to Tanabe and transfer of the Materials from OSI to Tanabe.
Tanabe's notice to OSI shall be accompanied by the Option Payment. If Tanabe
determines not to exercise such option, OSI may continue development of such
Seed Compound may commercialize any product resulting from such Seed Compound
with no further obligation to Tanabe.
(ii) Competitive Compound
Directed Toward a Tanabe Target. If, during the ** period after the Contract
Period, any compound which OSI has continued to develop by itself or with any
Third Party meets the criteria of a Lead Compound as set forth on Exhibit B
hereto and such compound is directed toward the same target as a Target for
which Tanabe has paid the milestone of ** for the first Lead Compound pursuant
to Section 3.3.2, and Tanabe is continuing the development or commercialization
of any Lead Compound directed to such Target, OSI shall notify Tanabe in writing
that such compound has met the criteria of a Lead Compound and, together with
such notice, shall supply to Tanabe
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treatment.
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any Materials with respect to such Lead Compound identified by it which OSI
reasonably determines would be useful for Tanabe's evaluation of such Lead
Compound. OSI shall include in such written notice the ** in connection with the
development of such compound during the period between the expiration of the
Contract Period and the date of such notice. ** Such written notice shall
constitute an offer by OSI to Tanabe of an exclusive option to commence the
Early Development Phase with respect to such Lead Compound and, accordingly,
take a license to such Lead Compound consistent with Section 5.1.1. As
consideration for such option, Tanabe shall pay OSI the amount of its ** (the
"Option Payment"). Tanabe shall exercise such option by sending OSI written
notice of such exercise within ** following the date of OSI's notice to Tanabe
and transfer of the Materials from OSI to Tanabe. Tanabe's notice to OSI shall
be accompanied by the Option Payment. If Tanabe determines not to exercise such
option, OSI may continue development of such compound and may commercialize any
product resulting from such compound with no further obligation to Tanabe.
(d) Royalty Obligation. Notwithstanding
anything herein to the contrary, any licenses under Section 5.1.1 for which
Tanabe has exercised its option, and the concurrent obligation to pay royalties
as provided in Section 5.5.1, shall continue, and any license under Section
5.1.2 (if in effect at such time), and the concurrent obligation to pay
royalties as provided in Section 5.5.2, shall continue;
(e) Milestone Obligation. Tanabe's
obligations to pay milestones under Sections 3.3.2 and 3.3.3 shall continue; and
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treatment.
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(f) Transfer of Assay. OSI will
transfer to Tanabe, at Tanabe's request and ** technology for any assay
developed for a Target by OSI, its Affiliates and/or Vanderbilt under the
Research Program which has not yet been transferred to Tanabe under Section
2.2.1.
8.4.2 Early Termination if Two Year Minimum
Requirements Are Not Met. If the Two Year Report indicates that the Two Year
Minimum Requirements have not been met, and Tanabe exercises its right to Early
Termination:
(a) Tanabe License to OSI. Tanabe shall
grant to OSI a royalty-free, worldwide, perpetual, non-exclusive license,
including the right to grant sublicenses, under Tanabe Technology and Tanabe's
rights in Improvements and Joint Patents, to research, develop, have developed,
make, have made, use, sell, have sold and commercialize pharmaceutical products;
(b) OSI License to Tanabe. OSI shall
grant to Tanabe a royalty-free, worldwide, perpetual, non-exclusive license,
including the right to grant sublicenses, under OSI Technology and OSI's rights
in Improvements and Joint Patents, to research, develop, have developed, make,
have made, use, sell, have sold and commercialize pharmaceutical products;
(c) Royalty Obligation. Notwithstanding
anything herein to the contrary, any licenses under Section 5.1.1 for which
Tanabe has exercised its option, and the concurrent obligation to pay royalties
as provided in Section 5.5.1, shall continue, and any
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** This portion has been redacted pursuant to a request for confidential
treatment.
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license under Section 5.1.2 (if in effect at such time), and the concurrent
obligation to pay royalties as provided in Section 5.5.2, shall continue;
(d) Milestone Obligation. Tanabe's
obligations to pay milestones under Sections 3.3.2 and 3.3.3 shall continue;
(e) Tanabe's Option. Tanabe's option to
acquire any license(s) under Section 5.1.1 shall remain in effect; and
(f) Transfer of Assay. OSI will provide
to Tanabe, at Tanabe's request and ** technology for any assay developed for a
Target by OSI , its Affiliates and/or Vanderbilt during the Research Program and
which has not yet been transferred to Tanabe under Section 2.2.1.
8.4.3 Termination Upon an Event of Default. If
this Agreement is terminated due to an Event of Default as set forth in Section
8.3, (a) if Tanabe is the terminating party, (i) Tanabe shall have the right to
have the option set forth in Section 5.1.1 and all licenses already granted
under Section 5.1.1 remain in effect, in which case, Tanabe's obligations to
make the milestone payments set forth in Sections 3.3.2 and 3.3.3 and the
royalty obligations set forth in Section 5.5.1 shall also remain in effect, and
(ii) the licenses granted by Tanabe in Section 5.1.2 shall terminate and (b) if
OSI is the terminating party, (i) the licenses granted by Tanabe in Section
5.1.2 shall remain in effect, (ii) Tanabe's option in Section 5.1.1 shall
terminate, and (iii) OSI shall have the right to determine whether any licenses
granted by OSI under Section 5.1.1 remain in effect or are terminated. If such
licenses granted by OSI remain in effect, Tanabe's obligations under Sections
3.3.2, 3.3.3 and
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** This portion has been redacted pursuant to a request for confidential
treatment.
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5.5.1 shall also remain in effect. If such licenses are terminated, then all of
Tanabe's rights with respect to the Lead Compound(s) which are the subject of
such terminated licenses (except Tanabe's ownership interest in Improvements and
Tanabe Technology) shall revert to OSI and OSI shall be granted the license set
forth in Section 5.1.2 with respect to such Lead Compounds and the royalty
obligations set forth in Section 5.5.2 shall also remain in effect. The
terminating party shall also be granted by the defaulting party a royalty-free,
worldwide, perpetual, non-exclusive license, including the right to grant
sublicenses, under OSI Technology (if OSI is the defaulting party) or Tanabe
Technology (if Tanabe is the defaulting party) and under the defaulting party's
rights in Improvements and Joint Patents, to research, develop, have developed,
make, have made, use sell, have sold and commercialize pharmaceutical products.
8.5 Survival. Upon expiration pursuant to Section 8.1.4
hereof, the following sections of this Agreement shall survive such termination:
Sections 1, 2.8, 4, 5.2, 5.5.5, 5.5.6, 7, 10, 11 and 12 hereof. Upon termination
pursuant to Section 8.2 or 8.3 hereof, the following sections of this Agreement
shall survive such termination if OSI has a worldwide license as provided in
Section 5.1.2 hereof: Sections 1, 2.8, 3.1.4, 4, 5.1.2, 5.2, 5.3, 5.4, 5.5.2,
5.5.3, 5.5.4, 5.5.5, 5.5.6, 5.6, 6, 7, 10, 11 and 12 hereof. Upon termination
pursuant to Section 8.2 or 8.3 hereof, the following sections of this Agreement
shall survive such termination if Tanabe has a worldwide license as provided in
Section 5.1.1 hereof: Sections 1, 2.8, 3.1.4, 3.3.2, 3.3.3, 4, 5.1.1, 5.2, 5.3,
5.4, 5.5.1, 5.5.3, 5.5.4, 5.5.5, 5.5.6, 5.6, 6, 7, 10, 11 and 12 hereof. Upon
termination pursuant to Section 8.2 or 8.3 hereof, if neither party has (or
exercises its option to obtain) a worldwide license as provided in Section 5.1
hereof, the following sections of this Agreement shall survive: 1, 2.8, 3.1.4,
4, 5.5.5, 5.5.6, 6, 10, 11 and 12 hereof.
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9. Representations and Warranties.
9.1 Representations and Warranties Made by Tanabe and
OSI. OSI and Tanabe each represents and warrants as follows:
9.1.1 Status. It is a corporation, validly
existing and in good standing under the laws of the jurisdiction where it has
been organized, and has all requisite power and authority, corporate or
otherwise, to conduct its business as now being conducted, to own, lease and
operate its properties and to execute, deliver and perform this Agreement.
9.1.2 Authority. The execution, delivery and
performance by it of this Agreement has been duly authorized by all necessary
corporate action and the execution, delivery and performance by either party do
not and will not (a) require any consent or approval of its stockholders, (b)
violate any provision of any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to it or any provision of its charter or by-laws or (c) result in
a breach of or constitute a default under any material agreement, mortgage,
lease, license, permit or other instrument or obligation to which it is a party
or by which it or its properties may be bound or affected.
9.1.3 Binding Obligation. This Agreement is a
legal, valid and binding obligation of it enforceable against it in accordance
with its terms and conditions, except as such enforceability may be limited by
applicable bankruptcy, insolvency, moratorium, reorganization or similar laws,
from time to time in effect, affecting creditor's rights generally.
9.1.4 No Conflicting Obligations. It is not under
any obligation to any Third Party, contractual or otherwise, that is conflicting
or inconsistent in any respect with the terms of this Agreement or that would
impede the diligent and complete fulfillment of its obligations.
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9.1.5 Good Title. It has good and marketable title
to or valid leases or licenses for, all of its properties, rights and assets
necessary for the fulfillment of its responsibilities hereunder and the Research
Program, subject to no claim of any Third Party other than the relevant lessors
or licensors.
9.1.6 Right to Grant Licenses. It has the right to
grant to the other the licenses granted pursuant to this Agreement, and that the
licenses so granted do not conflict with or violate the terms of any agreement
between either of them and any Third Party.
9.2 Representations and Warranties Made by OSI. OSI
represents and warrants as follows:
9.2.1 Vanderbilt Agreement. OSI and Vanderbilt
have entered into the Vanderbilt Agreement. The Vanderbilt Agreement is not
conflicting or inconsistent with the terms of this Agreement and contains all
provisions necessary for OSI to diligently fulfill its obligations hereunder.
9.2.2 No Litigation. There is no interference
action or litigation pending with any Third Party, or to the best of OSI's
knowledge, any threatened interference action or litigation with any Third
Party, before any court or other governmental entity of competent jurisdiction
in regard to the OSI Technology.
10. Dispute Resolution.
10.1 **
10.2 Arbitration. Any dispute, controversy or claim
arising out of, relating to, or in connection with this Agreement or for the
breach, termination or validity thereof (a
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** This portion has been redacted pursuant to a request for confidential
treatment.
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"Dispute"), except for matters which shall be determined by the Steering
Committee or the Joint Management Committee as set forth in Section 2.4, shall
be finally settled by arbitration in accordance with the rules of the
International Chamber of Commerce; provided, however, that during the period of
arbitration on any Dispute the parties shall continue to fulfill their
obligations as set forth in this Agreement. The parties agree that discovery
proceedings shall be limited to: (a) the Dispute; (b) depositions of those
persons having direct knowledge of the Dispute; and (c) submission of all
documents which relate to the Dispute. The arbitration hearing shall be held in
Osaka, Japan in the English language before three arbitrators unless otherwise
mutually agreed. This Agreement shall be interpreted and construed in accordance
with the laws of the State of New York. The decision of the arbitrator shall be
binding on both parties and non-appealable. Judgment upon the award rendered by
the arbitrator shall be enforceable in any court of competent jurisdiction. Each
party agrees to submit to the personal jurisdiction of that court for purposes
of the enforcement of any such award. All fees of the arbitrator and the court
stenographer shall be paid by the party who does not prevail in the arbitration
as determined by the arbitrator. All other arbitration-related expenses shall be
borne by the party incurring such expenses.
11. Notices. All notices shall be mailed via certified mail,
return receipt requested, or telecopy or courier with confirmation of receipt,
and which shall be addressed as follows, or to such other address as may be
designated from time to time:
If to Tanabe: At its address as set forth at the beginning
of this Agreement.
Attention: President
Telecopy: 81-6-6300-2977
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If to OSI: At its address as set forth at the beginning
of this Agreement
Attention: Chief Executive Officer
Telecopy: 516-745-6429
with a copy to: Squadron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, New York 10176
Telecopy: (212) 697-6686
Attention: Barbara A. Wood, Esq.
Notices shall be deemed given as of the date of receipt.
12. Governing Law. This Agreement shall be construed in accordance
with the laws of the State of New York.
13. Force Majeure. Neither party shall be responsible for a
failure or delay in performance of any of its obligations hereunder due to force
majeure such as war, insurrection, strikes, acts of God, governmental action, or
any other contingency beyond its control. However, the party which is affected
by any force majeure shall contact the other party for discussion of possible
emergency measures.
14. Miscellaneous.
14.1 Binding Effect. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective legal
representatives, successors and permitted assigns.
14.2 Headings. Section headings are inserted for
convenience of reference only and do not form a part of this Agreement.
14.3 Interpretation. Unless expressly set forth, the use
of the singular form of terms herein shall include the plural and the use of the
plural form of terms herein shall include the singular.
14.4 Counterparts. This Agreement may be executed
simultaneously in two
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counterparts, each of which shall be deemed an original.
14.5 Amendment; Waiver; etc. This Agreement may be
amended, modified, superseded or canceled, only by a written instrument executed
by both parties, and any of the terms may be waived, by the written instrument
executed by the party waiving the claim for the other party compliance. The
delay or failure of any party at any time or times to require performance of any
provision shall in no manner affect the rights at a later time to enforce the
same.
14.6 No Third Party Beneficiaries. No person not a party
to this Agreement, including any employee of any party to this Agreement, shall
have or acquire any rights by reason of this Agreement. Both parties hereto are
independent contractors and nothing contained in this Agreement shall be deemed
to constitute either party as a partner, principal, agent or employee of the
other party or any Third Party (including sublicensees).
14.7 Assignment and Successors.
14.7.1 Affiliates. Either party may, at its sole
discretion, but with reasonable prior notice to the other party, designate and
cause its Affiliate to perform all or part of its obligations under this
Agreement or to have the benefit of all or part of its rights under this
Agreement. In any such event, the name "OSI" or "Tanabe" appearing herein shall
be deemed to be the name of such Affiliate to the extent necessary to carry out
the intent of this Section, and the performance of the obligations of such
Affiliate shall be deemed guaranteed by the party which has made such
designation.
14.7.2 Assignment. This Agreement may not be
assigned by either party without the prior written approval of the other party,
except that either party may assign this Agreement and its rights, in whole or
in part, to any of its Affiliates, or any purchaser of all or
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substantially all of its assets or to any successor corporation resulting from
any merger or consolidation with or into such corporation, provided that such
assigning party shall remain primarily liable for its obligations hereunder.
14.8 Entire Agreement. This Agreement supersedes all prior
agreements, oral or written, between the parties hereto with respect to the
subject matter hereof and contains the entire and only agreement between the
parties regarding the subject matter hereof (except as otherwise expressly
provided herein), and any representation, terms or conditions relating thereto
or in connection therewith, oral or in writing, not incorporated herein will not
be binding upon either party.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives.
TANABE SEIYAKU CO., LTD.
By: /s/ Shoei Nakashima
--------------------------------------------
Name: Shoei Nakashima
Title: Managing Director of the Board
OSI PHARMACEUTICALS, INC.
By: /s/ Colin Goddard
--------------------------------------------
Name: Colin Goddard
Title: Chief Executive Officer and President
63
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EXHIBIT A
CRITERIA FOR SEED COMPOUND
**
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** This portion has been redacted pursuant to a request for confidential
treatment.
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EXHIBIT B
CRITERIA FOR LEAD COMPOUND
**
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** This portion has been redacted pursuant to a request for confidential
treatment.
65
<PAGE> 74
EXHIBIT C
TARGETS
**
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** This portion has been redacted pursuant to a request for confidential
treatment.
66
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EXHIBIT D
RESEARCH PROGRAM
**
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** This portion has been redacted pursuant to a request for confidential
treatment.
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EXHIBIT E
RESEARCH PLAN
JULY 1999
**
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** This portion has been redacted pursuant to a request for confidential
treatment.
68
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Aston Molecules, Inc., organized under the laws of the United Kingdom
MYCOsearch Inc., incorporated under the laws of the State of Delaware
Applied bioTechnology, Inc., incorporated under the laws of the State of
Delaware
Oncogene Science Diagnostics, Inc., incorporated under the laws of the State of
Delaware
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
OSI Pharmaceuticals, Inc.
We consent to incorporation by reference in the registration statements on Forms
S-3 (No. 333-12593 and No. 333-2451) and on Forms S-8 (No. 333-39509, No.
333-06861, No. 33-64713, No. 33-60182, No. 33-38443, and No. 33-8980) of OSI
Pharmaceuticals, Inc. of our report dated December 22, 1999, relating to the
consolidated balance sheets of OSI Pharmaceuticals, Inc. and subsidiaries as of
September 30, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended September 30, 1999, which report appears in the
September 30, 1999 annual report on Form 10-K of OSI Pharmaceuticals, Inc.
/s/ KPMG LLP
Melville, New York
December 22, 1999
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<PERIOD-START> OCT-1-1998
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<CASH> 8,863,887
<SECURITIES> 9,997,967
<RECEIVABLES> 1,067,794
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<SALES> 1,220,317
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