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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
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(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)
<TABLE>
<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
</TABLE>
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 $91,026,970. 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.
This Form 10-K/A is being filed to amend two items of the annual report on
Form 10-K of OSI Pharmaceuticals, Inc. for the fiscal year ended September 30,
1999, which was filed with the Securities and Exchange Commission on December
29, 1999 and amended on January 25, 2000. Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, Liquidity and Capital
Resources, is amended to add additional information with respect to the
acquisition by the Registrant of certain assets from Cadus Pharmaceutical
Corporation; and Item 8, Consolidated Financial Statements and Supplementary
Data, Notes to Consolidated Financial Statements, footnote number 1(h) is
amended to provide additional disclosure regarding accounting for certain of the
Registrant's investments and footnote number 3(a) is amended to revise the
disclosure regarding the Cadus acquisition.
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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
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York, and retained 47 employees who have since been employed in ongoing and
expanding programs at both 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
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predetermined formula in the agreement. On September 23, 1999, the Company
exercised its right and sold to 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.
In connection with this acquisition, the Company recognized a charge for
in-process research and development of $806,000. This charge represents the
value of in-process technology acquired from Cadus for five GPCRs that have
specific clinical applications. This technology was in the early stages of
development by Cadus on the date of the acquisition. As discussed above, the
Company also assumed Cadus' facility lease in Tarrytown, New York and hired 47
Cadus employees that will increase the Company's future level of cash
consumption. The Company anticipates that the continued development of the
acquired technology will require significant financial resources and it will
take five to seven years before any of the technologies is developed into a
commercially viable product, if ever. The Company intends to seek research
collaborations to partially or fully fund these development costs. In addition,
certain Cadus employees will be reassigned to conduct research for the Company's
other funded research collaborations. The risks of successfully commercializing
the acquired technology are the same as the risks associated with the Company's
other research activities.
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
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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, 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.
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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.
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."
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements:
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C>
Independent Auditors' Report.......................................... 7
Consolidated Balance Sheets -- September 30, 1999 and 1998............ 8
Consolidated Statements of Operations -- Years ended September 30,
1999, 1998 and 1997................................................. 9
Consolidated Statements of Stockholders' Equity -- Years ended
September 30, 1999, 1998 and 1997................................... 10
Consolidated Statements of Cash Flows -- Years ended September 30,
1999, 1998 and 1997................................................. 11
Notes to Consolidated Financial Statements............................ 12
</TABLE>
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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
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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.
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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.
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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
10
<PAGE> 12
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.
11
<PAGE> 13
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.
12
<PAGE> 14
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.
13
<PAGE> 15
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
As further discussed in notes 5(b) and (i), the Company received equity
interests in two research and development companies in exchange for research
services provided to these companies. The Company has recorded its investment in
the two companies based on the cost of services rendered to such companies. The
Company recognizes its share of the operating losses of these companies based on
its percentage ownership interest under the equity method of accounting.
(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.
14
<PAGE> 16
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(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 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>
15
<PAGE> 17
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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 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 in-process R&D was valued based on the income
approach that focuses on the income-producing capability of the assets. The
underlying premise of this approach is that the value of an asset can be
measured by the present worth of the net economic benefit (cash receipts less
cash outlays) to be received over the life of the asset. Significant assumptions
and estimates used in the valuation of in-process R&D included: the stage of
development for each of the five projects; future revenues based on royalties;
growth rates for each product; individual product revenues; product sales
cycles; the estimated life of a product's underlying technology of seven years
from the date of introduction; future operating expenses; and a discount rate of
60% to reflect present value and risk of developing the acquired technology into
commercially viable products.
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
16
<PAGE> 18
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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>
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>
17
<PAGE> 19
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<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.
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
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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 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
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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
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.
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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 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
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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.
(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
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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 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,
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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 development 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
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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 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
25
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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 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
26
<PAGE> 28
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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.
27
<PAGE> 29
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>
28
<PAGE> 30
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.
29
<PAGE> 31
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
30
<PAGE> 32
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>
(c) 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.
(d) 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.
(e) 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.
31
<PAGE> 33
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 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
32
<PAGE> 34
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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 September 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
33
<PAGE> 35
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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.
(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
34
<PAGE> 36
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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 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.
35
<PAGE> 37
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/ ROBERT L. VAN NOSTRAND
------------------------------------
Robert L. Van Nostrand
Vice President and Chief Financial
Officer
Date: May 22, 2000
36
<PAGE> 38
INDEX TO EXHIBITS
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EXHIBIT
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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)
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+20 10 License Agreement, dated March 18, 1997, between the Company and The Dow Chemical
Company(11)
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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
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* Filed as an exhibit to the Company's annual report on Form 10-K for the
fiscal year ended September 30, 1999, filed on December 29, 1999.
** 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.
<PAGE> 40
(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.
(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 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, No. 333-2451 and No. 333-31474) 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, as amended, of OSI
Pharmaceuticals, Inc.
/s/ KPMG LLP
Melville, New York
May 22, 2000
