<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 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)
Delaware 13-3159796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
106 Charles Lindbergh Boulevard, Uniondale, New York 11553
(Address of principal executive offices) (Zip Code)
516-222-0023
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report.)
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
At January 31, 2000 the registrant had outstanding 21,767,187 shares of common
stock, $.01 par value.
<PAGE> 2
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I - FINANCIAL INFORMATION.......................................... 1
Item 1. Financial Statements
Consolidated Balance Sheets
- December 31, 1999 (unaudited) and September 30, 1999........ 1
Consolidated Statements of Operations
- Three months ended December 31, 1999 and 1998 (unaudited)... 2
Consolidated Statements of Cash Flows
- Three months ended December 31, 1999 and 1998 (unaudited)... 3
Notes to Consolidated Financial Statements (unaudited)........ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 13
PART II - OTHER INFORMATION............................................. 14
Item 1. Legal Proceedings............................................. 14
Item 2. Changes in Securities and Use of Proceeds..................... 14
Item 3. Defaults Upon Senior Securities............................... 14
Item 4. Submission of Matters to a Vote of Security Holders........... 14
Item 5. Other Information............................................. 14
Item 6. Exhibits and Reports on Form 8-K.............................. 14
SIGNATURES.............................................................. 16
EXHIBIT INDEX........................................................... 17
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ............................................... $ 16,045,297 $ 8,863,887
Investment securities ................................................... 10,257,221 9,997,967
Receivables, including amounts due from related parties of $204,991 and
$363,580 and trade receivables of $248,055 and $236,067 at December 31,
1999 and September 30, 1999, respectively ............................. 1,644,702 1,033,917
Receivable from sale of Anaderm common stock ............................ -- 3,645,136
Interest receivable ..................................................... 153,555 171,340
Grants receivable ....................................................... 90,458 343,509
Prepaid expenses and other .............................................. 1,082,689 1,088,318
------------- -------------
Total current assets .................................................. 29,273,922 25,144,074
------------- -------------
Property, equipment and leasehold improvements - net .................... 9,819,519 10,915,589
Compound library assets - net ........................................... 3,730,538 4,197,085
Loans to officers and employees ......................................... 3,333 3,333
Other assets ............................................................ 99,327 370,955
Intangible assets - net ................................................. 1,338,630 6,400,292
------------- -------------
$ 44,265,269 $ 47,031,328
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ................................... $ 3,469,257 $ 5,229,672
Unearned revenue - current .............................................. 1,242,739 5,185,410
Loans payable - current ................................................. 166,656 166,656
------------- -------------
Total current liabilities ............................................. 4,878,652 10,581,738
------------- -------------
Other liabilities:
Unearned revenue - long-term ............................................ 386,905 404,762
Loans payable - long-term ............................................... 236,128 277,791
Deferred acquisition costs .............................................. 340,907 711,037
Accrued postretirement benefit cost ..................................... 1,534,623 1,691,054
------------- -------------
Total liabilities ..................................................... 7,377,215 13,666,382
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares
issued at December 31, 1999 and September 30, 1999 .................... -- --
Common stock, $.01 par value; 50,000,000 shares authorized, 22,511,188
shares issued at December 31, 1999 and 22,404,096 shares issued at
September 30, 1999 .................................................... 225,112 224,041
Additional paid-in capital .............................................. 105,643,562 105,173,158
Accumulated deficit ..................................................... (62,124,892) (65,640,618)
Accumulated other comprehensive losses .................................. (423,026) (333,933)
------------- -------------
43,320,756 39,422,648
Less: treasury stock, at cost; 939,641 shares at December 31, 1999 and
865,386 shares at September 30, 1999 .................................. (6,432,702) (6,057,702)
------------- -------------
Total stockholders' equity .......................................... 36,888,054 33,364,946
------------- -------------
Commitments and contingencies
$ 44,265,269 $ 47,031,328
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Collaborative program revenues,
principally from related parties .... $ 5,999,084 $ 3,992,278
Technology access fee ................. 3,500,000 --
Sales of products and services ........ 254,163 310,950
Other research revenue ................ 90,458 300,915
License revenue ....................... 25,000 50,000
------------ ------------
9,868,705 4,654,143
------------ ------------
Expenses:
Research and development .............. 8,370,911 4,723,488
Production and service costs .......... 221,739 365,408
Selling, general and administrative ... 1,877,221 1,601,781
Amortization of intangibles ........... 313,341 365,185
------------ ------------
10,783,212 7,055,862
------------ ------------
Loss from operations ..... (914,507) (2,401,719)
Other income (expense):
Net investment income ................. 723,722 231,318
Other expense - net ................... (39,333) (21,764)
Gain on sale of diagnostics business .. 3,745,844 --
------------ ------------
Net income (loss) ........................ $ 3,515,726 $ (2,192,165)
============ ============
Weighted average number of shares of
common stock outstanding:
Basic ................................. 21,559,280 21,402,121
============ ============
Diluted ............................... 22,158,035 21,402,121
============ ============
Net income (loss) per weighted average
share of common stock outstanding:
Basic ................................. $ .16 $ (.10)
============ ============
Diluted ............................... $ .16 $ (.10)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................................... $ 3,515,726 $ (2,192,165)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Gain on sale of diagnostics business ............................. (3,745,844) --
Gain on sale of investments ...................................... (487,594) --
Depreciation and amortization .................................... 744,200 467,726
Amortization of library assets ................................... 466,547 440,507
Amortization of intangibles assets ............................... 313,341 365,186
Accretion of deferred acquisition costs .......................... 4,870 10,030
Changes in assets and liabilities, net of the effects of the sale of
diagnostics business:
Receivables ...................................................... 3,031,337 (92,073)
Interest receivable .............................................. 17,785 49,287
Grants receivable ................................................ 253,051 35,234
Prepaid expenses and other ....................................... (5,971) 62,981
Other assets ..................................................... 7,248 9,721
Accounts payable and accrued expenses ............................ (1,705,325) (1,214,055)
Unearned revenue ................................................. (3,743,645) (9,688)
Accrued postretirement benefit cost .............................. 75,000 60,000
------------ ------------
Net cash used in operating activities ................................... (1,259,274) (2,007,309)
------------ ------------
Cash flows from investing activities:
Net proceeds from sale of diagnostics business ....................... 8,636,104 --
Purchases of investments ............................................. (293,624) (5,039,816)
Maturities and sales of investments .................................. 737,599 6,362,970
Additions to property, equipment and leasehold improvements .......... (310,995) (214,607)
------------ ------------
Net cash provided by investing activities ............................... 8,769,084 1,108,547
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options, employee stock
purchase plan, and other ........................................... 96,475 104,631
Payments on loan payable, net ........................................ (41,663) (15,017)
Purchase of treasury stock ........................................... (375,000) --
------------ ------------
Net cash (used in) provided by financing activities ..................... (320,188) 89,614
------------ ------------
Net increase in cash and cash equivalents ............................... 7,189,622 809,148
Effect of exchange rate changes on cash and cash equivalents ............ (8,212) (81,392)
Cash and cash equivalents at beginning of period ........................ 8,863,887 11,315,166
------------ ------------
Cash and cash equivalents at end of period .............................. $ 16,045,297 $ 10,424,626
============ ============
Non-cash activities:
Issuance of common stock in satisfaction of deferred
acquisition costs .................................................. $ 375,000 $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of OSI
Pharmaceuticals, Inc. and its subsidiaries (the "Company" or "OSI") as of
December 31, 1999 and September 30, 1999, their results of operations for the
three months ended December 31, 1999 and 1998 and their cash flows for the three
months ended December 31, 1999 and 1998. Certain reclassifications have been
made to the prior period financial statements to conform them to the current
presentation.
It is recommended that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto in the
Company's annual report on Form 10-K for the fiscal year ended September 30,
1999. Results for interim periods are not necessarily indicative of results for
the entire year.
(2) Comprehensive Income (Loss)
Comprehensive income (loss) for the three months ended December 31, 1999 and
1998 was as follows:
<TABLE>
<CAPTION>
For the three months ended
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Net income (loss) $ 3,515,726 $(2,192,165)
Other comprehensive income (loss):
Foreign currency translation adjustments (54,723) (81,392)
Unrealized holding losses arising during
period (34,370) (33,660)
----------- -----------
(89,093) (115,052)
----------- -----------
Total comprehensive income (loss) $ 3,426,633 $(2,307,217)
=========== ===========
</TABLE>
The components of accumulated other comprehensive losses were as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
---- ----
<S> <C> <C>
Cumulative foreign currency translation
adjustment $(222,026) $(167,303)
Unrealized losses on short-term investments (201,000) (166,630)
--------- ---------
Accumulated other comprehensive losses $(423,026) $(333,933)
========= =========
</TABLE>
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<PAGE> 7
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(3) Net Income (Loss) per Common Share
A reconciliation between the numerators and the denominators of the basic and
diluted income (loss) per share computation is as follows:
<TABLE>
<CAPTION>
For the three months ended
December 31,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income (loss) available for common stockholders $ 3,515,726 $ (2,192,165)
============ ==============
Weighted average common shares 21,559,280 21,402,121
Effect of dilutive stock options 598,755 --
------------ --------------
Weighted average common and potential common shares
outstanding 22,158,035 21,402,121
============ ==============
Basic income (loss) per share $ .16 $ (.10)
============ ==============
Diluted income (loss) per share $ .16 $ (.10)
============ ==============
</TABLE>
For the three months ended December 31, 1999, 1,982,899 stock options were not
included in the net income per share calculation because their effect would have
been anti-dilutive. For the three months ended December 31, 1998, all stock
options were not included because their effect would have been anti-dilutive.
(4) Sale of Diagnostics Business
On November 30, 1999, the Company completed the sale of assets of its
diagnostics business to The Bayer Corporation ("Bayer") including the assets of
the Company's wholly-owned subsidiary, Oncogene Science Diagnostics, Inc.
("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 Company's diagnostics business. The Company
recorded a gain on the sale of approximately $3.7 million during the quarter
ended December 31, 1999. The net gain was calculated as follows (in thousands):
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<PAGE> 8
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<S> <C>
Cash received from Bayer $9,151
Accrued expenses assumed by Bayer 599
Net book value of fixed assets sold (611)
Net book value of patent costs (intangibles) (4,748)
Professional and legal fees incurred (172)
Commission costs paid (315)
Other related costs (158)
--------
Gain on sale of diagnostics business $3,746
======
</TABLE>
In connection with the sale, the Company and OSDI entered into certain
agreements with Bayer including an assignment and assumption of the lease with
respect to the OSDI facility located in Cambridge to Bayer 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,
Bayer may make additional contingent payments of $1.25 million if certain
conditions are met in the future.
(5) Collaborative Research and License Agreement with Tanabe
As more fully discussed in Note 5(c) to the Company's consolidated financial
statements in the Company's annual report on Form 10-K for the fiscal year ended
September 30, 1999, the Company entered into a Collaborative Research and
License Agreement, effective as of October 1, 1999, with Tanabe Seiyaku Co.,
Ltd. ("Tanabe"). The collaboration is focused on discovering and developing
novel pharmaceutical products to treat diabetes. The agreement is for a term of
four years, with the option to extend for an additional two-year period. Tanabe,
however, has the right to terminate the agreement after two years under certain
circumstances. On the effective date of the agreement, Tanabe was required to
pay the Company a non-refundable technology access fee of $3.5 million and to
fund the Company's research and development activities during the term of the
agreement. 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 had been recorded in unearned revenue in the accompanying consolidated
balance sheet as of September 30, 1999. During the first quarter ended December
31, 1999, the Company recognized as revenue the technology access fee of $3.5
million in accordance with its accounting policy. The Company also recognized as
revenue $474,583 of the deferred research funding based on research costs
incurred during the quarter. 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
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<PAGE> 9
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
responsibility for further development and marketing of a lead compound in
exchange for milestone and royalty payments to the Company. Concurrent with
execution of the Tanabe agreement, the Company and Tanabe entered into an
Amended and Restated Collaborative Research, License, and Alliance Agreement
with Vanderbilt University ("Vanderbilt"). Vanderbilt will assist the Company in
fulfilling its obligations under the Tanabe/OSI research program by providing
access to Vanderbilt's drug discovery resources, including laboratories and
assays. During the quarter ended December 31, 1999, the Company paid a one-time
success fee of $500,000 to Vanderbilt as well as other direct costs of $250,000
in connection with the Company entering into the Tanabe agreement, both amounts
of which are included in research and development expenses in the accompanying
statement of operations for the quarter ended December 31, 1999.
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 requirements of SAB No. 101, and has not yet determined whether the
implementation of SAB No. 101 will have a material effect on its financial
position or results of operations, particularly as it relates to the technology
access fee from Tanabe recognized in the first quarter.
(6) License to R.W. Johnson Pharmaceutical Research Institute
Effective December 21, 1999, the Company granted to The R.W. Johnson
Pharmaceutical Research Institute, a Johnson & Johnson company, a non-exclusive,
non-transferable, worldwide, royalty-bearing license of the Company's gene
transcription patent estate for the discovery, development and commercialization
of products for human therapeutic purposes (other than the discovery or
development of cosmeceuticals, and not any in vitro or in vivo diagnostic or
other purpose). Commencing April 24, 2002, the scope of the non-exclusive
license will be expanded to include the discovery, development or
commercialization of cosmeceuticals, without any additional consideration. The
license will continue in full force and effect until the last expiration date of
the underlying patents. R.W. Johnson will pay the Company an up-front license
fee and annual fees together with milestone payments and royalties based on the
development and sale of products derived from the licensed patents. The Company
has exclusive control over prosecution, maintenance and enforcement of the
patents subject to the license agreement.
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<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
Revenues for the three months ended December 31, 1999 were approximately $9.9
million, an increase of $5.2 million or 112%, compared to revenues of $4.7
million for the three months ended December 31, 1998. This increase includes a
one-time technology access fee of $3.5 million from Tanabe Seiyaku Co., Ltd.
Collaborative research and development agreements with Pfizer Inc., Anaderm
Research Corporation, Aventis Pharmaceutical Inc. (formerly Hoechst Marion
Roussel, Inc.), Sankyo Company, Ltd., Solvay Pharmaceuticals, B.V. and Tanabe
accounted for substantially all of the Company's collaborative program revenues
for the three months ended December 31, 1999. Total collaborative revenues
increased approximately $2.0 million or 50% for the three months ended December
31, 1999, compared to the three months ended December 31, 1998. Increases in
collaborative revenues were related to the expansion of the Pfizer/Anaderm
program on April 23, 1999, for the discovery and development of cosmeceuticals.
A research agreement with Solvay, assumed by the Company on July 30, 1999 with
the acquisition of certain assets from Cadus Pharmaceutical Corporation, also
contributed to the increase in collaborative revenues. This program is directed
toward G-protein coupled receptor, or GPCR, drug discovery. A research agreement
with Tanabe, initiated on October 1, 1999, also contributed to the increase in
collaborative revenues. This program is directed toward the discovery and
development of small molecule drugs for the treatment of non-insulin dependent,
or Type 2, diabetes mellitus. Collaborative revenues were partially offset by
the conclusion in June 1999 of the Company's funded collaborative research
agreement with Helicon Therapeutics, Inc. and the termination of the diagnostics
collaboration with The Bayer Corporation, upon the sale of the Company's
diagnostics business to Bayer on November 30, 1999.
Sales revenue, representing primarily service revenue from the Company's Aston
Molecules Ltd. and Oncogene Science Diagnostics, Inc., subsidiaries, decreased
approximately $57,000 or 18% for the three months ended December 31, 1999,
compared to the three months ended December 31, 1998. The decrease was primarily
due to the sale of the diagnostics business to Bayer. Other research revenues,
representing primarily government grants and other research grants, decreased
approximately $210,000 or 70% for the three months ended December 31, 1999,
compared to the three months ended December 31, 1998. The decrease was due to a
reduction in the number of government grant applications submitted, in an effort
to focus the Company's research and development resources on a smaller number of
targets.
The technology access fee represents the payment of $3.5 million from Tanabe in
conjunction with the new collaborative research agreement, as more fully
described in Note (5) of the accompanying consolidated financial statements.
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<PAGE> 11
EXPENSES
Operating expenses increased by approximately $3.7 million or 53% for the three
months ended December 31, 1999, compared to the three months ended December 31,
1998. Research and development expenses increased by approximately $3.6 million
or 77% for the three months ended December 31, 1999, compared to the three
months ended December 31, 1998. The increase was related, in part, to the Cadus
asset acquisition on July 30, 1999, which included the assumption of operations
of Cadus' fully-equipped research facility in Tarrytown, New York and the
retention of 47 employees. The increase was also related to the GPCR-directed
drug discovery program, which was included in the Cadus asset acquisition. The
research agreement with Tanabe, which includes a one-time fee of $500,000 paid
to Vanderbilt University, also contributed to the increase in research and
development expenses. The Company and Vanderbilt will continue an existing
discovery alliance in diabetes to develop lead compounds and will work together
with Tanabe to establish proof-of-principle for drug candidates. Also
contributing to the increase in research and development expenses was the
expansion of the Company's collaboration with Anaderm for the discovery and
development of novel compounds to treat pigmentation disorders, wrinkles and
baldness, as well as the expansion of the Company's medicinal chemistry facility
at its Aston subsidiary in the United Kingdom, to accommodate the increased
chemistry efforts required in the expanded Anaderm collaboration.
Production and service costs decreased approximately $144,000 or 39% for the
three months ended December 31, 1999, compared to the three months ended
December 31, 1998. The decrease was primarily related to the sale of the
Company's diagnostics business to Bayer.
Selling, general and administrative expenses increased approximately $275,000 or
17% for the three months ended December 31, 1999, compared to the three months
ended December 31, 1998. The increase was primarily related to the additional
administration expenses associated with the acquired operations in Tarrytown
from the Cadus asset acquisition, the expansion of the Aston subsidiary in the
United Kingdom, and the Company's current corporate development activities.
Amortization of intangibles for the three months ended December 31, 1999
decreased $52,000 or 14% compared to the three months ended December 31, 1998.
The decrease was related to the inclusion of the Company's diagnostic patent
estate in the sale of the diagnostics business to Bayer, which eliminated the
related amortization expense effective November 30, 1999.
OTHER INCOME AND EXPENSE
During the quarter ended December 31, 1999, the Company recognized a one-time
gain of approximately $3,746,000 on the sale of the assets of its diagnostics
business as more fully discussed in Note(4) of the accompanying financial
statements. Net investment income increased approximately $492,000 or 213% for
the three months ended December 31, 1999, compared to the three months ended
December 31, 1998. This increase was a result of a gain of approximately
$488,000 from the sale of 36,676 shares of Tularik Inc. common stock in December
1999.
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<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, working capital (representing primarily cash, cash
equivalents and investment securities) aggregated approximately $24.4 million.
The Company is dependent upon collaborative research revenues, 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, 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. The Company's capital requirements, however, 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 drug discovery platform (including possible additional joint
ventures, collaborations and acquisitions), potential milestone payments, and
the time and expense required to obtain governmental approval of products, some
of which factors are beyond the Company's control.
One of the Company's strategic objectives is to manage its financial resources
and the growth of its drug discovery and development programs so as to balance
its proprietary efforts with its funded collaborations. In pursuing this
objective, the Company has 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 pursue internal proprietary drug
discovery programs and enhance its drug discovery technologies.
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 COMPLIANCE
The Company has been aware of the challenges associated with the inability of
certain systems to properly format information after December 31, 1999. The Y2K
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, or a temporary inability to process
transactions, send invoices, or engage in normal business activities. The
Company's efforts to be prepared
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<PAGE> 13
for Y2K appear to have been successful, however problems relating to Y2K could
be discovered in the future.
The Company worked to resolve the potential impact of Y2K on the processing of
date-sensitive information by the Company's computerized information systems.
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's financial records are stored on an
Oracle-based system which is Y2K compliant. In conjunction with its Y2K efforts,
the Company surveyed material third parties with whom it regularly deals,
including collaborative partners, suppliers and vendors, to ensure readiness and
non-disruption to the Company's operations and supply chain. Based on current
information, the Company does not anticipate any material disruption in its
operations.
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 on the Company's
financial position, results of operations, or cash flows in future periods.
NEW ACCOUNTING PRONOUNCEMENT
On December 3, 1999, the Securities and Exchange Commission, or SEC, issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," or 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 requirements of SAB No. 101, particularly as it relates
to the technology access fee from Tanabe recognized in the first quarter of
fiscal year 2000, 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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," or SFAS 133, which is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000, as amended by SFAS 137. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In accordance with SFAS 133, an entity is required to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's
-11-
<PAGE> 14
gain and losses to offset related results on the hedged item in the income
statement and requires that a company formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. The Company
does not believe that the implementation of SFAS 133 will have a material effect
on its results of operations and financial position.
FORWARD-LOOKING STATEMENTS
Certain of the matters and subject areas discussed in this report that are not
statements of current or historical fact are "forward-looking statements" that
convey information about potential future circumstances and developments. These
forward-looking statements are necessarily based on various assumptions, involve
known and unknown risks and generally are subject to the inherent risks and
uncertainties surrounding expectations regarding future occurrences. As a
result, the Company's actual future experience may differ materially from the
results, achievements or performance described or implied in such statements.
Factors that might cause the Company's actual future experience to differ
materially from the forward-looking statements include, but are not limited to,
(i) the Company's absence of commercialized drug products, (ii) the Company's
dependence on third parties for clinical development and commercialization of
potential products, (iii) the potential failure of the Company's lead compounds
currently in clinical trials to progress successfully through clinical
development, (iv) the potential failure of any drug candidates that emerge from
the Company's discovery operations to progress successfully to or through
clinical development, (v) competition, (vi) government regulation, (vii)
pharmaceutical pricing and (viii) the effect of any internal or external Y2K
problems. Certain of these and additional factors that may cause the Company's
actual future experience to differ materially from the forward-looking
statements contained in this report are discussed in the Company's annual report
on Form 10-K for the fiscal year ended September 30, 1999.
-12-
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's cash flow and earnings are subject to fluctuations due to changes
in interest rates in its investment portfolio of debt securities, to the fair
value of equity instruments held, and, to an immaterial extent, to foreign
currency exchange rates. The Company maintains an investment portfolio of
various issuers, types and maturities. These securities are generally classified
as available-for-sale and, consequently, are recorded on the balance sheet at
fair value with unrealized gains or losses reported as a component of
accumulated other comprehensive losses included in stockholders' equity. The
Company's investments in certain biotechnology companies are carried on either
the equity method of accounting or at cost for equity securities that do not
have readily determinable fair values. Other-than-temporary losses are recorded
against earnings in the same period the loss was deemed to have occurred. The
Company does not currently hedge this exposure and there can be no assurance
that other-than-temporary losses will not have a material adverse impact on the
Company's results of operations in the future.
-13-
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
License to R.W. Johnson Pharmaceutical Research Institute
Effective December 21, 1999, the Company granted to The R.W. Johnson
Pharmaceutical Research Institute, a Johnson & Johnson company, a non-exclusive,
non-transferable, worldwide, royalty-bearing license of the Company's gene
transcription patent estate for the discovery, development and commercialization
of products for human therapeutic purposes (other than the discovery or
development of cosmeceuticals, and not any in vitro or in vivo diagnostic or
other purpose). Commencing April 24, 2002, the scope of the non-exclusive
license will be expanded to include the discovery, development or
commercialization of cosmeceuticals, without any additional consideration. The
license shall continue in full force and effect until the last expiration date
of the underlying patents. R.W. Johnson will pay the Company an up-front license
fee and annual fees together with milestone payments and royalties based on the
development and sale of products derived from the licensed patents. The Company
has exclusive control over prosecution, maintenance and enforcement of the
patents subject to the license agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Certificate of Incorporation, as amended (1)
3.2 Amended and Restated By-Laws (2)
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<PAGE> 17
27 Financial Data Schedule
----------
(1) Included as an exhibit to the Company's quarterly
report on Form 10-Q for the quarter ended March 31,
1999, filed on May 14, 1999, and incorporated herein
by reference.
(2) Included as an exhibit to the Company's current
report on Form 8-K, filed on January 8, 1999, and
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
The Company filed a current report on Form 8-K on December 15,
1999 with the Securities and Exchange Commission via EDGAR,
pertaining to the sale of certain assets of the Company
related to its wholly-owned subsidiary, Oncogene Science
Diagnostics, Inc. and its diagnostics business. The earliest
event covered by the report occurred on November 30, 1999.
-15-
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
OSI PHARMACEUTICALS, INC.
--------------------------------------------
(Registrant)
Date: February 14, 2000 /s/ Colin Goddard, Ph.D.
--------------------------------------------
Colin Goddard, Ph.D.
President and Chief Executive Officer
Date: February 14, 2000 /s/ Robert L. Van Nostrand
--------------------------------------------
Robert L. Van Nostrand
Vice President and Chief Financial Officer
(Principal Financial Officer)
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<PAGE> 19
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation, as amended (1)
3.2 Amended and Restated By-Laws (2)
27 Financial Data Schedule
- ----------
(1) Included as an exhibit to the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 1999, filed on May 14, 1999, and incorporated
herein by reference.
(2) Included as an exhibit to the Company's current report on Form 8-K, filed
on January 8, 1999, and incorporated herein by reference.
-17-
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