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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-15190
OSI PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-3159796
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
106 CHARLES LINDBERGH BLVD., UNIONDALE, N.Y. 11553
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (516) 222-0023
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No []
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. []
As of November 30, 1999, the aggregate market value of the Registrant's
voting stock held by non-affiliates was $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 the aggregate market value of the
Registrant's voting stock as of November 30, 1999 as presented on this cover
page, and to amend certain information regarding the patents described under the
caption "Intellectual Property" in Part I, Item 1, 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
(the "Form 10-K"). This Form 10-K/A is also being filed to make certain
typographical, technical and grammatical changes in Part I, Item 1 of the Form
10-K.
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PART I
ITEM 1. BUSINESS
OSI Pharmaceuticals, Inc. (OSI or the Company) is a Pharmaceutical Research
and Development Organization (PRDO) that utilizes a comprehensive drug discovery
and development capability to rapidly and cost effectively discover and develop
novel, small-molecule drug candidates for commercialization by major
pharmaceutical companies.
OSI conducts its drug discovery and product development programs
independently and in collaboration with major pharmaceutical companies. The
Company derives revenues from funded collaborative alliances, milestone and
success payments and, upon the successful development and marketing of
out-licensed drug candidates, royalties on sales of these products. Using this
business model, OSI is able to leverage the research, development and financial
resources of its corporate partners to help build and sustain a large pipeline
of product opportunities. OSI's major corporate partners include Pfizer Inc.,
Tanabe Seiyaku Co. Ltd., Sankyo Company, Ltd., Solvay Pharmaceuticals, B.V.,
Novartis Pharma AG, and Hoechst Marion Roussel, Inc. Independently and in
collaboration with its various partners, OSI is involved in the discovery and
development of drugs for 45 targets. The Company has drug candidates in clinical
trials and pre-clinical development. These drug discovery efforts are primarily
focused in the areas of cancer, diabetes, cosmeceuticals, and G-protein coupled
receptor, or GPCR, directed drug discovery. OSI believes its research and
development capabilities together with its ongoing drug discovery and
development programs have positioned it as a leader in the field of drug
discovery and development. OSI was incorporated in 1983. Its NASDAQ stock symbol
is OSIP.
BACKGROUND
Drug discovery is an expensive and high risk process involving significant
attrition. Only about 1-in-16 research and development, or R&D, programs
actually results in a successful drug, and the process from concept to market
typically takes over a decade. On average, it costs more than $400 million in
research and development (including failures) to bring a drug from initial lead
identification to market.
During the 1990s, the rising cost of health care and changes in health care
management policies have fundamentally altered the pharmaceutical landscape,
putting increasing competitive pressure on the pharmaceutical industry. As
organizations strive to enhance market share and improve profit margins, major
pharmaceutical company mergers have occurred. These mergers are expected to
continue. These organizations face the challenge of consolidating and
efficiently managing large research and development organizations while striving
to meet aggressive new product requirements. In addition, many of the major
pharmaceutical companies are also facing the expiration of patent protection on
significant drug products in the next few years.
These new pressures have led to a growing emphasis on product pipeline
enhancement through the cost-effective discovery and development of novel
classes of pharmaceuticals that will meet large, unmet medical needs, can more
rapidly be brought to the marketplace, and have the potential to command premium
prices. This, in turn, has created an increased need for pharmaceutical
companies to look outside their organizations for new product candidates.
Advances in molecular biology, automation, and computing and the understanding
of the human genome have revolutionized the ways in which drug discovery is
conducted, creating the potential for accelerated discovery and development of
new generations of drugs. OSI believes that the deployment and integration of
these technologies in smaller and more nimble pharmaceutical research and
development organizations offers a rapid and cost effective vehicle for the
discovery and early development of high quality drug candidates to meet the
growing needs of the pharmaceutical industry.
Pharmaceutical companies have typically formed collaborations with
biotechnology companies in order to access new types of technologies in the
pursuit of novel drug development. OSI believes that the competitive pressures
described above have caused pharmaceutical companies to greatly reduce the
royalty rates they are willing to pay to biotechnology companies for
technological contributions to their own product development efforts. On the
other hand, OSI believes that these pressures are making pharmaceutical
companies more
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willing to pay premiums for high quality drug candidate products that have
already undergone optimization and have proven activity in development. OSI
believes that, as a prototypical PRDO, it is well-positioned to compete for this
emerging opportunity.
STRATEGY
OSI's mission is the discovery and early development of novel
pharmaceutical products that improve the human condition. Its strategy is to
build and sustain a pipeline of pharmaceutical product opportunities for
commercialization by the pharmaceutical industry thereby diversifying risk while
maintaining significant potential upside and fully capitalizing on the Company's
strengths in drug discovery. OSI's plan for accomplishing this goal consists of
the following elements:
Exploitation of the Full Range of Discovery and Early Development
Capabilities in Selected Disease Areas. OSI has built a fully integrated drug
discovery platform. This platform includes every major aspect of drug discovery
and development, from the identification of a validated drug discovery target to
the emergence of a clinically proven drug candidate. The integrated management
of these technologies is designed to accelerate the process of identifying and
optimizing high quality, small molecule drug candidates for clinical development
and then to progress these candidates through Phase II clinical trials.
In order to more independently progress product candidates to advanced
pre-clinical and clinical development, OSI intends to focus its own R&D
investments on a smaller number of targets in fewer disease areas to provide the
critical mass and expertise to effectively move these programs forward. OSI is
focused primarily on the areas of cancer, diabetes, cosmeceuticals and
GPCR-directed drug discovery. It believes that these areas represent large
market opportunities with significant, unmet medical needs and fully leverage
OSI's strengths and R&D assets. To further focus on its core drug discovery and
development programs, OSI recently completed the sale of its diagnostics
business in November 1999, including the assets of its wholly-owned subsidiary,
Oncogene Science Diagnostics, Inc., or OSDI, to Bayer Corporation. OSI's
decision to sell its diagnostics business was based on its belief that the
development of diagnostic products would require significant continued
investment that could otherwise be directed to the development of therapeutic
products.
Commercialization Strategy. In order for OSI to sustain its critical mass
and manage its cash resources through to the time when significant royalty and
milestone revenues are able to drive the growth and profitability of the
business, OSI has developed a three-pronged strategy. This strategy will provide
for a sustained revenue stream and allow OSI to retain sufficient ownership of
selected drug discovery and development assets to ultimately effect a
substantial return.
- Pharmaceutical partner-funded discovery programs. These fully-funded,
royalty bearing discovery alliances with major pharmaceutical partners
significantly support OSI's strategy. These collaborations provide risk
diversification and revenue streams that allow OSI to both sustain
critical mass and also anchor its discovery and development efforts in
the focused disease areas. In addition to funded research at OSI, the
collaborators provide significant R&D resources to support the
development of products in these programs and will, generally, fund and
manage clinical development, manufacturing and launch of successfully
developed drug candidates.
- Out-Licensing of Early Development Candidates. OSI intends to create a
business of selling drug candidate compounds as opposed to selling its
R&D capability. Over the next several years, however, OSI believes that
it is likely to create more opportunities at the IND-track stage than it
can progress into the clinical stage. OSI may license early drug
candidates that it chooses not to develop independently to third parties
(out-licensing), by exploring cash/milestone rich deal structures with
the intent of providing near-term revenue growth.
- Further Clinical Development of Selected Candidates. OSI intends to
develop selected candidates through clinical development. By focusing on
selected candidates, OSI expects to maximize the commercial value of the
resulting products. If successful, OSI intends to partner these products
with pharmaceutical companies prior to marketing in order to maximize
their full commercial potential.
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OSI is, and will remain, dependent on its collaborative partners and third
parties for the manufacture, marketing and sales of all pharmaceutical products.
RESEARCH AND DEVELOPMENT PROGRAMS
OSI utilizes its broad-based drug discovery capability in multiple drug
discovery programs encompassing a variety of major human diseases. OSI's major
programs in R&D are as follows:
Cancer
During the 1980s, cancer researchers developed a sophisticated
understanding of the role played by certain genes in the transformation of
normal cells into a cancerous state, and thus were able to identify novel
targets for drug intervention. As the decade of the 1990s comes to a close, this
new knowledge of the molecular basis of cancer has started to move from the
laboratory into the clinical arena, promising new hope for patients with many
types of cancers, including breast, colon, head and neck, and ovarian. In the
next decade, novel anticancer therapies are expected to be commercialized,
creating a new paradigm for cancer treatment, with the potential that cancer can
either be cured or managed safely over the long term. OSI believes that it is
positioned at the forefront of this unfolding revolution in the treatment of
cancer.
With Pfizer, OSI has focused since 1986 on the discovery and development of
novel classes of orally active, molecularly targeted, small molecule anticancer
drugs based on oncogenes and tumor suppressor genes and the fundamental
mechanisms underlying tumor growth. The first of these programs has yielded a
clinical candidate CP-358,774 which is a potent, selective and orally active
inhibitor of the epidermal growth factor receptor, or EGFR, a key oncogene in a
variety of cancers including ovarian, pancreatic, non-small cell lung, breast
and head and neck. Following a successful Phase I program which demonstrated
that the drug could be safely administered to patients over extended (6 month)
periods at doses that achieved the blood concentration of drug required for
anti-tumor activity in animal models, the Company entered large-scale,
multi-center Phase II clinical trials in the United States in the spring of
1999. The program includes trials in ovarian, head and neck and non-small cell
lung cancer. There are over a million new cases of solid tumors in the U.S.
every year, approximately 30% of which have a aberrant EGFR gene. The program is
designed to assess CP-358,774 both as a single agent and in combination with
existing chemotherapy regimens. CP-358,774 is representative of an emerging new
class of anti-cancer drugs that target the underlying molecular changes
involving oncogenes and tumor suppressor genes that play critical roles in the
conversion of normal cells into a cancerous state.
The OSI/Pfizer alliance has identified two other compounds, CP-609,754 and
CP-663,427, as orally active inhibitors of an enzyme termed farnesyl
transferase. CP-609,754 has advanced to Phase I clinical trials in the United
States and CP-663-427 is in advanced pre-clinical development. These compounds
may target the ras oncogene, an important target in many tumors including colon
and bladder. In addition, another compound, CP-547,632, is in advanced
pre-clinical development and is being developed as an orally available, potent
and selective inhibitor of a key protein tyrosine kinase receptor involved in
angiogenesis. Angiogenesis is the process of blood vessel growth and is induced
by solid tumors which require nutrients that will enable growth. OSI believes
that the ability to safely and effectively inhibit this process represents one
of the most exciting areas of cancer drug development. An additional 12 targets
are in active research and development in the OSI/Pfizer collaboration. The
types of novel anticancer drugs being developed in the OSI/Pfizer collaboration
are expected to be safer and more effective than standard chemotherapeutic
agents. OSI has also begun lead seeking activities in an OSI-funded cancer
research program.
Diabetes
Diabetes mellitus is a chronic, progressively debilitating disease
affecting more than 143 million people worldwide. Approximately 90-95% of the
people affected have Type II diabetes which usually develops in adults over age
40 and is most common among adults over age 55. The prevalence of diabetes is
likely to continue to grow as this age group continues to increase in size.
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Effective October 1, 1999, OSI entered into a fully-funded collaboration,
including milestone and success payment and royalties, with Tanabe to discover
and develop small molecule drugs for the treatment of Type II diabetes. OSI also
received an upfront fee upon initiation of this program. The Company is also
independently researching selected targets in this area. This collaboration is
built upon the comprehensive drug discovery alliance between OSI and Vanderbilt
University Diabetes Center, with which OSI has been collaborating since April,
1998. The targets of this collaboration will focus on the normalization of the
elevated plasma glucose levels seen in Type II diabetes.
Cosmeceuticals
Every year, consumers in the United States, Europe and Asia spend billions
of dollars on cosmetic products and services that promise to provide a youthful,
healthy or culturally desirable appearance. Some of these products are marketed
on the basis of ostensible pharmaceutical effects, such as the reduction of skin
wrinkles and pigmentation or the promotion of hair growth. OSI believes that
most of these products are not optimally effective and may have undesirable side
effects.
In 1996, OSI entered into a joint venture with Pfizer (the majority owner)
and New York University to form Anaderm Research Corporation, a company
dedicated to the application of modern tools for the discovery and development
of safe, effective, pharmacologically active agents for certain cosmetic and
quality-of-life indications, such as skin pigmentation, hair loss and skin
wrinkling. Pfizer recently financed an extensive renewal and expansion of the
Anaderm venture effective April, 1999. Under this new agreement, Anaderm will
provide up to $50 million in R&D funding to OSI over the next four to six years.
OSI will remain the sole drug discovery arm of Anaderm during this period
providing discovery biology, medicinal chemistry and pharmaceutical development
resources.
GPCR -- Directed Drug Discovery
In August, 1999, OSI purchased certain assets of Cadus Pharmaceutical
Corporation. In this acquisition, OSI acquired Cadus' drug discovery programs
focused on G-protein coupled receptors or GPCRs. These receptors are one of the
most important families of targets for drug discovery in the pharmaceutical
industry. Approximately, forty percent of the currently marketed pharmaceutical
products target GPCRs. The acquired programs include Cadus' discovery program in
adenosine receptors, an important family of GPCR's. These programs will form the
core of OSI-owned and funded candidate development programs in the coming year.
The improved understanding of the physiology, pharmacology and molecular
biology of adenosine and adenosine receptors in recent years has provided a
solid foundation for active research and development in this field. Currently,
four adenosine receptor subtypes, A(1), A(2A), A(2B) and A(3), have been
characterized and R&D efforts have led to high quality proprietary lead
compounds for each.
Several adenosine receptor compounds are under development by OSI.
Promising adenosine A(1) and adenosine A(2B) receptor targeted compounds will
undergo evaluation as candidates for asthma, with the dual goals of identifying
an IND-track candidate against both targets and simultaneously assessing and
executing the best commercialization strategy. The A(1) compound is targeted for
the treatment of the bronchoconstriction associated with the acute phase of an
asthma attack while the A(2B) compound is directed toward blocking the
inflammatory components produced by mast cells and associated with the longer
term damage caused by the disease. OSI also has potent and selective A(2A)
targeted compounds that have potential for development as both anti-angiogenesis
agents and for the treatment of Parkinson's disease. Additionally, OSI has a
selective adenosine A(3) targeted compound that is undergoing extensive
evaluation in animal models for glaucoma. The targets of Parkinson's disease and
glaucoma are examples of programs outside OSI's disease area focus and may be
out-licensed or earlier partnered in the development process.
In addition, an A(1) targeted compound, CDS-096370, has potential for use
in the treatment of congestive heart failure and renal failure. This candidate
has been licensed to Solvay for advanced pre-clinical and clinical development.
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Cholesterol Lowering
As part of OSI's long-term alliance with Hoechst Marion Roussel, or HMRI,
in gene transcription drug discovery, the parties have focused on cholesterol
lowering. The cholesterol lowering market is dominated by a class of drugs
including Lipitor and Zocor which target a key enzyme involved in the body's
metabolism of fats and cholesterol (HMG-CoA reductose inhibitors), which sell,
in total, over $12 billion a year worldwide. Three to five percent of patients
on these drugs have an elevation of certain liver enzymes which indicates some
low level of liver damage as a side effect. The OSI/HMRI program was designed to
target a new class of compounds that would avoid these complications. A compound
is in advanced pre-clinical development that operates through a novel mechanism.
This compound enhances the expression of the Low Density Lipoprotein Receptor
(LDLR), the principal mechanism by which liver cells bind LDL-cholesterol
(so-called bad cholesterol) for clearance by the body. In pre-clinical models,
this candidate is very efficacious in lowering LDL-cholesterol and are
apparently well tolerated in pre-clinical safety studies.
Psoriasis
During the last year, OSI executed an in-license agreement with Pfizer that
enabled OSI to take advantage of the extensive joint technology for
protein-tyrosine kinases that exist in the OSI/Pfizer cancer alliance and to
apply this to the treatment of mild-to-moderate psoriasis. Mild-to-moderate
psoriasis is an autoimmune disease affecting 3-6 million Americans. The disease
manifests itself in the form of scaly, thickened and reddened skin lesions.
These lesions arise as a result of hyper-proliferation of the skin and local
angiogenesis. OSI licensed a family of compounds from Pfizer that are
co-inhibitors of both EGFR, which is a key regulator of skin cell growth, and
vascular endothelial growth factor receptor, or VEGFR, which is the key mediator
of angiogenesis. OSI is currently attempting to identify a candidate for
development of a topically applied formulation for this indication. As part of
the license agreement, Pfizer has an option to recover full development and
marketing rights for this program past Phase II trials. If Pfizer executes its
option, it will reimburse OSI's clinical development costs, and pay milestone
and royalty payments on successful product development and marketing.
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The progress of these and other drug candidates as of December 1, 1999 is
summarized in the following table:
TABLE I. CURRENT PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS
This table is qualified in its entirety by reference to the more detailed
descriptions elsewhere in this report.
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DISEASE FIELD DESCRIPTION
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CANCER OSI/PFIZER FUNDED COLLABORATION WITH ROYALTIES: CLINICAL
CANDIDATES/TARGETS:
- CP 358,774 -- EGFR -- Phase II
- CP 609,754 -- Farnesylation -- Phase I
ADVANCED PRE-CLINICAL CANDIDATES/TARGETS:
- CP 663,427 -- Farnesylation -- IND Track
- CP 547,632 -- Angiogenesis -- IND Track
PRE-CLINICAL:
- 4 targets in Lead Optimization
- 8 targets in Lead Seeking
OSI OWNED:
- 1 target in Lead Seeking
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DIABETES & OBESITY OSI/TANABE FUNDED COLLABORATION WITH MILESTONES & ROYALTIES:
- 4 targets in Lead Seeking
OSI OWNED:
- 1 target in Lead Seeking
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COSMECEUTICALS OSI/PFIZER/ANADERM FUNDED COLLABORATION WITH ROYALTIES:
- 1 target in IND track
- 2 targets in Lead Optimization
- 3 targets in Lead Seeking
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GPCR DIRECTED OSI OWNED:
(ADENOSINE RECEPTORS): - 1 target in IND track
- Heart Disease - 3 targets in Lead Optimization
- Asthma/Inflammation
- Glaucoma OSI/SOLVAY FUNDED COLLABORATION WITH MILESTONES & ROYALTIES:
- Parkinson's Disease - 1 target in IND track (licensed to Solvay with milestones
& royalties)
- multiple targets in Lead Seeking
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HYPERCHOLESTEROLEMIA/ OSI/HMRI FUNDED COLLABORATION WITH ROYALTIES:
TRANSCRIPTION - 1 candidate on IND track
- 2 targets in Lead Optimization
- 4 targets in Lead Seeking
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PSORIASIS OSI OWNED WITH PFIZER OPTION:
- 1 target in Lead Optimization
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WOUND HEALING (TGF-BETA3): OSI OWNED:
- Anti-Scarring CLINICAL:
- Bone & Cartilage Repair - 1 target at the end of Phase I
OSI/NOVARTIS FUNDED COLLABORATION WITH MILESTONES &
ROYALTIES:
- 1 candidate on IND track
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INFLUENZA OSI/SANKYO FUNDED COLLABORATION WITH MILESTONES & ROYALTIES:
- 2 targets in Lead Optimization
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OSI'S DRUG DISCOVERY PLATFORM
OSI's drug discovery platform constitutes an integrated set of technologies
and capabilities covering every aspect of pre-clinical drug development. The
drug discovery approach pursued by OSI is focused on the discovery and
development of small molecule pharmaceutical products which, typically, would be
taken orally by a patient as a pill, capsule or suspension. The process begins
with a lead seeking phase. In this phase, which can take up to two years, a
combination of modern molecular biology, robotics and computational science is
used to build "assay" or test systems in which large libraries of diverse small
molecules and natural products are tested to see if any possess activity against
a drug target. Drug targets are usually genes or gene products that are shown to
be relevant to various disease states. After this initial testing, active
compounds are tested in a variety of secondary assays designed to determine
their potency and selectivity and to obtain early information on their toxicity
and mechanism of action. Active compounds surviving this selection process are
considered leads and progressed into lead optimization. During lead
optimization, which can also take up to two years, medicinal chemists synthesize
new molecules and combinatorial libraries which are structurally related to the
lead compound. These are tested extensively in order to produce a drug candidate
which has greatly improved drug like qualities, is active and well tolerated in
animal models and can be patented as a novel pharmaceutical. Having identified a
suitable drug candidate the molecule is advanced toward clinical trials, the
so-called "IND-track" phase, in which toxicological, scale-up synthesis and
clinical trial design issues are addressed. This phase usually takes one to one
and one-half years. Upon entering clinical trials (usually with an
Investigational New Drug (IND) approval from the Food and Drug Administration,
or FDA) a drug is first assessed for its safety, usually in healthy volunteers
(except for life-threatening diseases such as cancer where patient volunteers
are used). After these Phase I trials, drugs are tested in efficacy studies
(Phase II) to demonstrate activity in humans prior to extensive Phase III trials
designed to collect the data necessary to support a New Drug Application (NDA)
filing with the FDA. The entire process typically takes over a decade and is
subject to significant risk and attrition. Only approximately 1 in 16 drug
discovery projects results in a successful product and approximately seven
million compounds are tested for every successful product. The Company has,
therefore, adopted a research strategy that manages a portfolio of product
opportunities and has integrated a platform of technologies designed to rapidly
and cost-effectively enhance the overall process.
OSI's platform includes a variety of cell-free and live-cell assays,
molecular biology capabilities, high throughput robotic screening, diverse
compound libraries and combinatorial, medicinal and natural products chemistry
capabilities, together with significant pre-clinical expertise in pharmaceutics,
and pharmacokinetics. OSI's technologies are designed to accelerate the process
of identifying and optimizing high quality, small molecule drug candidates for
clinical development. OSI pioneered the development of (i) genetically
engineered live-cell assays targeting gene transcription and (ii) robotic high
throughput screening. OSI has, through acquisition and internal technology
development, added extensively to these core capabilities including, via its
Cadus asset acquisition, significant expertise in GPCR discovery and information
technology tools to support research and development. The addition of large
diverse libraries of small molecules and a broadened expertise in assay biology
and medicinal, combinatorial and pharmaceutical chemistry capabilities have
created a comprehensive drug discovery platform enabling OSI to progress leads
all the way through the discovery and pre-clinical development stages. OSI's
drug discovery platform is widely applicable to the identification and
optimization of small molecule drug candidates to treat many different diseases.
Utilizing this platform, OSI has been able to identify and optimize lead
compounds that are potent and selective, possess minimal or no cellular
toxicity, have activity in live-cells and animal models, and have progressed to
clinical trials in humans.
Assay Biology
OSI specializes in the development of a variety of drug screens that
capitalize on recent advances in understanding the human genome and its
correlation to disease. Various assay biology techniques are used to target
selected and validated gene products for drug discovery. The Company pioneered
the use of genetically engineered human cells to identify compounds that affect
transcription of target genes. These assay systems, which employ reporter gene
technology, can be utilized to discover drugs that affect the expression of
proteins
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encoded by the target genes. There are multiple sites within a cell where a drug
can act to exert a specific effect. This broadly enabling technology allows OSI
to discover compounds that exert their effects on signal transduction proteins,
transcription factors and other sites. This technology has resulted in the
issuance of five patents in its gene transcription patent estate. These patents
cover methods of modulating transcription in-vivo, the use of reporter genes in
many cell-based transcription assays used for drug discovery and the modulation
of genes associated with cardiovascular disease. OSI anticipates that future
issuances will further broaden its patent estate in this area. This technology
has been widely adopted in the biotechnology and pharmaceutical industry, and
OSI believes that the claims covered by this patent estate can be licensed for
certain monetary and technology considerations. Over the last several years OSI
broadened its assay expertise extensively. Currently, OSI is able to conduct
screens on a wide variety of different assay platforms, including enzyme assays,
immunoassays, scintillation proximity assays, protein-protein interaction assays
and receptor-ligand screens. OSI believes that this breadth of expertise enables
it to select the most appropriate assay with which to pursue drug discovery
against a novel biological target. OSI has 74 scientists involved in assay
biology as support for both drug discovery and development programs.
High Throughput Robotic Screening
OSI has been a pioneer and remains a leader in high throughput screening.
The Company has developed software and automation that enables it to manage
large compound libraries and prepare test substances for screening. OSI has
developed proprietary hardware and software systems to automate the entire drug
screening process, from the addition of the test substances to assay systems to
the analysis of the data generated from the tests. The technology has been
developed to accommodate a high degree of flexibility allowing the Company to
conduct a wide variety of assay formats in screening. In its proprietary robotic
screening facility, OSI can analyze up to 300,000 different test samples each
week, depending on the complexity of the assays. OSI's robotic systems are not
limited to any particular assay format and can be rapidly reconfigured to run a
wide variety of assays.
Diverse Compound Libraries
Access to large libraries of diverse, small molecule compounds is a key
asset in OSI's drug discovery efforts. Leads discovered from these libraries
become the proprietary starting materials from which drugs are optimized. OSI
manages over 1.5 million compounds in its compound libraries facility from its
own and several of its partners' compound libraries for high throughput
screening. OSI's proprietary libraries include its focused libraries of small
molecule compounds derived from its high-speed combinatorial analoging,
libraries of diverse, high quality small-molecule compounds that it has acquired
and its natural products library derived from its unique collection of over
70,000 fungal organisms. As part of the acquisition of assets from Cadus in
July, 1999, OSI obtained a library of 150,000 diverse, high quality small
molecule compounds directed toward GPCR discovery. In March, 1997, OSI acquired
from the Dow Chemical an exclusive worldwide license to a library of 140,000
compounds for the purposes of discovery and development of small molecular
weight pharmaceuticals and cosmeceuticals. In addition, certain collaborative
partners have made their compound libraries available for additional research
and development by OSI outside of their existing collaborative programs. For any
compound from OSI's collaborative partners' libraries that emerges as a lead in
a proprietary program, the partner typically will have the right of first
refusal to develop the compound or terminate its further development or to allow
OSI to commercialize the compound independently or with a third party in
exchange for royalty payments from OSI on product sales. OSI also continues to
expand its libraries through OSI high speed combinatorial analoging activities.
OSI employs approximately 20 scientists and research associates in its combined
screening and library management operations.
Chemistry and Lead Optimization
The pharmaceutical properties of a lead compound must be optimized before
clinical development of that compound begins. In 1996 OSI acquired Aston
Molecules Ltd., a private British company with expertise in medicinal and
combinatorial chemistry and pharmaceutical development, which are critical
elements in the lead optimization and development process. With subsequent
investments in combinatorial chemistry, an
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expansion of the Aston facility and the addition of the Cadus chemistry team in
Tarrytown, New York, this group has grown to a high quality medicinal chemistry
team of over 35 medicinal, combinatorial, computational and natural product
chemists. The group has integrated various computational techniques for
molecular modeling and diversity analysis into its lead optimization and
development activities to further enhance the speed and quality of drug
discovery at OSI.
Pre-Clinical Development
The Aston group has expertise in pharmacokinetics and pharmaceutical
chemistry and the management and generation of good laboratory practices, or
GLP, accredited data required for regulatory dossier submissions to agencies
such as the FDA. Thus, OSI is able to support the development of a drug
candidate for clinical testing. OSI has invested significant resources in
expanding this capability and in technological enhancements in this area. In
addition, OSI is implementing approaches that allow it to generate information
on the metabolic liability of lead compounds together with their physical and
chemical properties. OSI is in the process of establishing this integrated
platform of automated and semi-automated technologies in an effort to support
decision making regarding the quality of lead candidates earlier in the drug
discovery process.
Through the Cadus asset acquisition and quality hires, OSI has added to its
depth in expanding its pre-clinical development capabilities. These include the
characterization of lead compounds with respect to pharmacokinetics, potency,
efficiency and selectivity. This combined group manages the necessary studies,
including toxicology, that ultimately lead to IND applications and clinical
trials.
OSI believes that its drug discovery and lead optimization capabilities
will continue to generate high quality pre-clinical candidates. Additionally,
OSI will seek quality pre-clinical candidates to license-in for further
development. OSI has over 24 pharmaceutical chemists and pharmacologists
employed in this area.
MAJOR COLLABORATIVE PROGRAMS
OSI pursues collaborations with pharmaceutical companies to combine its
drug discovery and development capabilities with the collaborators' development
and financial resources. The collaborations provide for OSI's partners to fund
its collaborative research and development programs which are jointly managed
and pay for clinical development, manufacturing, marketing and launch costs for
any product developed. OSI receives royalties, generally in the five to eight
percent range, on sales of any resulting products. Certain collaborative
programs involve milestone payments by the partners. The collaborative partners
generally retain manufacturing and marketing rights worldwide. Generally, each
collaborative research agreement prohibits OSI from pursuing with any third
party drug discovery research relating to the drug targets being covered by
research under the collaboration, but do not block research activity in the
fields.
Pfizer Inc.
In April, 1986, Pfizer and OSI entered into a collaborative research
agreement and several other related agreements. During the first five years of
the collaboration, OSI and Pfizer focused principally on understanding the
molecular biology of oncogenes. In 1991, Pfizer and OSI renewed the
collaboration for a second five-year term and expanded the resources and scope
of the collaboration to focus on the discovery and development of cancer
therapeutic products based on mechanisms-of-action that target oncogenes and
anti-oncogenes and fundamental mechanisms underlying tumor growth. Oncogenes
play a key role in the conversion of normal cells to a cancerous state and can
cause cancer when they mutate or over express. Anti-oncogenes, or tumor
suppressor genes, encode proteins that generally function to block the
proliferative growth of particular cell types. A loss of function of certain
tumor suppressor genes can result in uncontrolled cell growth. Tumor induced
angiogenesis is a process whereby solid tumors develop the blood supply
necessary to sustain tumor growth. Effective April 1, 1996, OSI and Pfizer
renewed their collaboration for a new five-year term by entering into new
collaborative research and license agreements. All patent rights and patentable
inventions derived from the research under this collaboration are owned jointly
by OSI and Pfizer. OSI has granted Pfizer an exclusive, worldwide license to
make, use, and sell the therapeutic products resulting from
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this collaboration in exchange for royalty payments. This license terminates on
the date of the last to expire of OSI's relevant patent rights.
Pfizer is responsible for the clinical development, regulatory approval,
manufacturing and marketing of any products derived from the collaborative
research program. Generally, OSI and Pfizer are prohibited during the term of
the contract from independently pursuing or sponsoring research aimed at the
compounds or products against specific targets in the program. The collaborative
research agreement will expire on April 1, 2001. It may be terminated earlier by
either party only upon the occurrence of certain defaults by the other party.
Any termination of the collaboration resulting from a Pfizer default will cause
a termination of Pfizer's license rights. Pfizer will retain its license rights
if it terminates the agreement in response to a default by OSI. Under this
collaborative research agreement, Pfizer has committed to provide research
funding to OSI in an aggregate amount of approximately $18.8 million. Pursuant
to a schedule set forth in the collaborative research agreement, Pfizer will
make annual research funding payments to OSI, which gradually increases from a
maximum of approximately $3.5 million in the first year of the five-year term to
approximately $4 million in the fifth year.
Effective as of April 1, 1999, OSI entered into a Development Agreement
with Pfizer for the development of certain compounds derived from the
collaborative research agreement described above for the treatment of psoriasis.
Under the development agreement, OSI will conduct a development program which
includes pre-clinical and clinical research and development through and
including Phase II clinical trials for compounds to assess their safety and
efficacy to be developed as therapeutic agents for the treatment of psoriasis
and other related dermal pathologies. Pursuant to the terms of the development
agreement, Pfizer has granted to OSI an exclusive, with the exception of Pfizer,
license to make and use the compounds for all research and development purposes
in the development program other than the sale or manufacture for sale of
products or processes. At the end of the development program, Pfizer must notify
OSI of its intention to continue development and commercialization of a compound
within three months following receipt of the data package from the clinical
studies. If Pfizer notifies OSI of such intention, it will have an exclusive,
worldwide license, with the right to grant sublicenses, to make, use, sell,
offer for sale and import products developed in the course of the development
program subject to the reimbursement of clinical development costs. If Pfizer
fails to notify OSI of such intention, OSI will receive an exclusive, worldwide,
royalty-bearing license, including the right to grant sublicenses, to
manufacture, use, sell, offer for sale and import products developed in the
course of the development program. OSI, however, has the right to refuse to
accept this license. The party receiving the license must pay milestone and
royalty payments as consideration therefor. The duration of the licenses is
coextensive with the lives of patents related to the licensed compounds. Each of
the parties has rights and obligations to prosecute and maintain patent rights
related to specified areas of the research under the development agreement. The
development agreement is subject to early termination in the event of certain
defaults by the parties.
From 1986 to September 30, 1999, Pfizer paid an aggregate amount of $44.1
million to OSI in research funding. In 1986, Pfizer purchased 587,500 shares of
OSI's common stock, which constitutes approximately 2.7% of OSI's outstanding
common stock, for an aggregate purchase price of $3,525,000.
Anaderm Research Corporation
On April 23, 1996, in connection with the formation of Anaderm, OSI entered
into a Stockholders' Agreement with Pfizer, Anaderm, NYU and certain NYU faculty
members, and a Collaborative Research Agreement with Pfizer and Anaderm for the
discovery and development of novel compounds to treat conditions such as
baldness, wrinkles and pigmentation disorders. Anaderm issued common stock to
Pfizer and OSI and options to purchase common stock to NYU and the faculty
members. NYU and the faculty members exercised their options fully. In exchange
for its 14% of the outstanding shares of Anaderm's common stock, OSI provided
formatting for high throughput screens and conducted compound screening for 18
months at its own expense under the research agreement.
The term of the research agreement was three years. During the initial
phase of the agreement (the first 18 months), OSI was required to provide at its
own cost formatting for high throughput screens and perform
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screening of its own compounds and those compounds provided by Pfizer. Upon the
termination of the initial phase, the board of directors of Anaderm made a
determination that the initial phase was successfully completed. With Pfizer's
approval, the funded phase commenced as of October 1, 1997. During this phase,
Anaderm made payments to OSI equal to its research costs, including overhead,
plus 10%. Anaderm or Pfizer will pay royalties to OSI on the sales of products
resulting from this collaboration.
In December, 1997, OSI and Pfizer entered into an agreement for a second
round of equity financing for Anaderm. The agreement called for an equity
contribution of $14 million by OSI and Pfizer, of which OSI was to contribute $2
million in drug discovery resources, including assay biology, high throughput
screening, lead optimization and chemistry, through 1999. The amount to be
contributed by Pfizer included amounts which were to be used to support OSI in
its ongoing drug discovery activities under this program.
In April, 1999, OSI, Pfizer and Anaderm amended the research agreement to
expand the collaborative program. The new research agreement is for a term of
three years. Pfizer may terminate the new research agreement, however, after the
first or second year of the term in its sole discretion after consultation with
Anaderm and OSI to determine whether satisfactory progress has been made in the
research program during the previous year. The new research agreement provides
for funding by Pfizer of up to $35 million in total payments to Anaderm to fund
OSI's research and development activities during the three-year term and up to
$15 million in phase-down funding following expiration of the three-year term or
earlier termination by Pfizer. In the expanded program, OSI will continue to
provide a full range of capabilities including assay biology, high throughput
screening, compound libraries, combinatorial, medicinal, and natural product
chemistry, as well as pharmaceutics, pharmacokinetics and molecular biology. OSI
anticipates a significant increase in its staffing of the program to conduct its
drug discovery efforts during the term of the new research agreement. Anaderm or
Pfizer will pay royalties to OSI on the sales of products resulting from the
collaboration.
In April, 1999, the parties also amended the stockholders' agreement. The
amendment provided for the addition of a right on the part of each of OSI, NYU
and each of the faculty members, exercisable at any time prior to December 31,
1999, to require Anaderm or Pfizer to purchase all, but not less than all, of
the shares of common stock of Anaderm held by each such stockholder for a fixed
price. The stockholders continue to have the right, exercisable at any time
subsequent to April 23, 2000, to require Anaderm or Pfizer to purchase all, but
not less than all, of the shares of common stock of Anaderm held by each such
stockholder at a defined value. In addition, Anaderm or Pfizer had the right,
exercisable at any time subsequent to April 23, 2002, to require OSI, NYU or any
faculty member to sell to Anaderm all, but not less than all, of the shares of
common stock of Anaderm held by such stockholder at a defined value of such
shares. In the prior stockholders' agreement, this call right was exercisable by
Anaderm only with respect to the shares owned by NYU and the faculty members. On
September 23, 1999, by letter to Pfizer, OSI exercised its right to require
Anaderm or Pfizer to purchase all of the shares of common stock of Anaderm held
by it. On November 10, 1999, Pfizer purchased such shares from OSI for an agreed
upon purchase price and OSI's obligations under the stockholder agreement
terminated.
Tanabe Seiyaku Co., Ltd.
Effective as of October 1, 1999, OSI entered into a Collaborative Research
and License Agreement with Tanabe. The collaboration is focused on discovering
and developing novel pharmaceutical products to treat diabetes.
Under the agreement, OSI is responsible for identification of targets
(subject to Tanabe's approval), assay development, screening of compounds from
OSI's library and Tanabe's library against identified targets, identification of
seed compounds meeting certain criteria specified in the agreement, optimization
of such seed compounds, and identification of lead compounds meeting certain
criteria specified in the agreement. Tanabe maintains responsibility for further
development and marketing of a lead compound in exchange for milestone and
royalty payments to OSI.
If Tanabe determines to initiate further development of lead compounds
identified by OSI, OSI will grant to Tanabe exclusive, worldwide licenses to,
among other things, use, manufacture and sell all products containing such lead
compounds directed to the identified targets. In exchange for these licenses,
Tanabe will
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pay OSI license fees and royalties on product sales. The duration of the
licenses is coextensive with the lives of the patents related to the licensed
compound or ten years from the first commercial sale, whichever is longer. If
Tanabe determines not to initiate further development of a lead compound or if
Tanabe discontinues development of candidate compounds, OSI will have the sole
and exclusive right to develop, use, manufacture and sell all products resulting
from the collaboration, and it will pay royalties to Tanabe. Each of the parties
has rights and obligations to prosecute and maintain patent rights related to
specified areas of the research and development under the agreement.
Generally, OSI is prohibited during the term of the contract from pursuing
independently or having sponsored or sponsoring research and development of
compounds and products in the diabetes area relating to the identified targets
in the agreement. Tanabe is prohibited from sponsoring research relating to the
identified targets and from being sponsored by another pharmaceutical company
with respect to research relating to the identified targets. The agreement is
for a term of four years, with the option to extend for an additional two year
period. Tanabe, however, has the right to terminate the agreement after two
years under certain circumstances. On the effective date of the agreement,
Tanabe was required to pay OSI a technology access fee of $3.5 million. Such
payment was advanced on September 28, 1999. Tanabe has committed to provide
research funding to OSI in an aggregate amount up to approximately $16 million.
Vanderbilt University
Effective as of April 28, 1998, OSI entered into a Collaborative Research,
Option and Alliance Agreement with Vanderbilt University to conduct a
collaborative research program and seek a corporate partner to fund a technology
collaboration for the discovery and development of drugs to treat diabetes. The
collaborative research was funded by OSI in exchange for which OSI received an
option to negotiate a commercially reasonable, worldwide, exclusive license from
Vanderbilt to develop, make, use, and sell products derived from the research
program. OSI and Vanderbilt committed equal resources to the program, including,
among other things, access to all their respective laboratory facilities and
dedicated teams of research scientists. OSI had certain rights and obligations
to prosecute and maintain patent rights related to specified areas of the
research under the agreement. The agreement was for a term of one year, and was
extended until the execution of a third-party research collaboration agreement
by OSI -- i.e., the agreement with Tanabe.
Concurrently with the execution of the Tanabe agreement, OSI and Tanabe
entered into an Amended and Restated Collaborative Research, License and
Alliance Agreement with Vanderbilt with an effective date of August 31, 1999.
This agreement amends and restates the agreement from April, 1998 to add Tanabe
as a party to the agreement with respect to certain sections and to amend
certain other provisions to clarify Vanderbilt's role in the OSI/Tanabe research
program. The term of the research program conducted by OSI and Vanderbilt
commenced on April 28, 1998 and will end upon termination of the contract period
under the Tanabe Agreement unless mutually extended by OSI and Vanderbilt.
The OSI/Vanderbilt research program is comprised of two parts: research
directed toward the targets identified in the Tanabe agreement and research
directed toward additional targets which are not targets under the Tanabe
agreement. OSI may offer to Tanabe any of the additional targets for inclusion
in the OSI/Tanabe research program. As part of the OSI/Vanderbilt research
program, Vanderbilt will assist OSI in fulfilling its obligations under the
Tanabe/OSI research program by providing access to Vanderbilt's drug discovery
resources, including laboratories and assays.
OSI will provide funding to Vanderbilt to conduct the OSI/Vanderbilt
research program. A portion of such funding will come from Tanabe's funding of
the OSI/Tanabe research program. OSI will also pay to Vanderbilt a percentage of
the revenues (milestone and royalty payments) it receives from Tanabe and any
other third party which is commercializing products resulting from the
OSI/Vanderbilt research program. The percentage received by Vanderbilt will vary
in accordance with the extent to which Vanderbilt technology and patents
contributed to the product giving rise to such revenue. OSI also paid Vanderbilt
a one-time success fee of $500,000 in October, 1999 in respect of OSI entering
into the Tanabe agreement.
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Sankyo Company, Ltd.
Effective as of February 12, 1997, OSI entered into a Collaborative
Research and License Agreement with Sankyo to be conducted in partnership with
MRC Collaborative Center, London, U.K. The collaboration is focused on
discovering and developing novel pharmaceutical products to treat influenza.
OSI is responsible for conducting research as directed by the research
committee, including, without limitation, compound screening in exchange for
research funding from Sankyo. Sankyo has the responsibility and the exclusive
right to conduct pre-clinical and clinical development of all candidate
compounds in exchange for milestone payments to OSI.
OSI and MRC CC have granted to Sankyo exclusive, worldwide licenses to,
among other things, use, manufacture and sell all products resulting from the
collaboration. In exchange for these licenses, Sankyo will pay to OSI and MRC CC
license fees and royalties on product sales. The duration of the licenses is
coextensive with the lives of the patents related to the licensed compound. If
Sankyo discontinues development of all candidate compounds, OSI will have the
sole and exclusive right to develop, use, manufacture and sell all products
resulting from the collaboration, and it will pay royalties to Sankyo. Each of
the parties has rights and obligations to prosecute and maintain patent rights
related to specified areas of the research under the agreement.
Generally, OSI, Sankyo and MRC CC are prohibited during the term of the
agreement from pursuing or sponsoring research and development of compounds and
products in the anti-influenza area other than pursuant to the agreement. The
agreement is for a term of three years, with the option to extend for an
additional one or two year period upon conditions and terms acceptable to OSI,
Sankyo and MRC CC. The agreement is subject to early termination in the event of
certain defaults by the parties. In November, 1999, OSI and Sankyo renewed the
collaboration for an additional two years.
Hoechst Marion Roussel, Inc. (HMRI)
Pursuant to the Amended Collaborative Research and License Agreement
effective April 1, 1997, OSI and HMRI are conducting joint research and
development activities, which focus specifically on OSI's expertise in live-cell
assay technology. OSI conducts the lead seeking (screening) phase of the drug
discovery process against a variety of targets in various disease areas. HMRI is
responsible for all lead optimization and development activities. OSI has
identified several compounds, which HMRI is optimizing for further development.
The most advanced of these compounds are in lead optimization for individual
targets in atherosclerosis and arthritis.
Under this collaboration, OSI is responsible for achieving objectives
outlined in the annual research plans. HMRI is responsible for assisting OSI in
the pursuit of such objectives, including advancing the pharmacological
assessment of compounds identified by OSI, determining the chemical structure of
the selected compounds, identifying and selecting development candidates,
pursuing clinical development and regulatory approval, and developing
manufacturing methods and pharmaceutical formulations for the selected
candidates. HMRI is responsible for funding the costs of OSI's discovery
efforts. As of September 30, 1999, OSI had recognized an aggregate of $22.8
million in research funding from HMRI and its predecessors.
OSI has granted to HMRI an exclusive, worldwide license (and rights to
acquire additional licenses) with respect to, among other things, the use,
manufacture and sale of products resulting from OSI's lead seeking efforts
against these individual drug targets. In exchange for these licenses, HMRI will
pay royalties to OSI on sales of such products. OSI and HMRI have mutually
exclusive rights and obligations to prosecute and maintain certain patent rights
related to various specified areas of the research.
Generally, OSI is prohibited during the term of the collaboration from
pursuing or sponsoring research independent of HMRI if it relates to the
identified targets in the areas of collaboration with HMRI without the approval
of the research committee. HMRI is generally prohibited from using the gene
transcription method independent of OSI to discover novel human therapeutic
products without the approval of the research committee. The agreement expires
on the later of March 31, 2002 or the last to expire of any obligations of HMRI
to pay royalties. The agreement may be terminated early by either party upon the
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occurrence of certain defaults by the other party. Any termination by OSI
resulting from an HMRI default will cause a termination of certain of HMRI's
license rights. HMRI will retain its license rights if it terminates the
agreement in response to a default by OSI. As of September 30, 1999 HMRI held
1,590,909 shares of common stock of OSI. This included a warrant to purchase
500,000 shares of OSI's common stock for $5.50 per share which expired on
December 10, 1999.
Effective as of January 1, 1997, OSI entered into a Collaborative Research
and License Agreement with HMRI to develop orally active, small molecule
inducers of erythropoietin gene expression for the treatment of anemia due to
chronic renal failure and anemia associated with chemotherapy for AIDS and
cancer. This collaboration identified active lead compounds that were advanced
to a pre-clinical development stage. This research effort, however, did not
achieve sufficient data to warrant further development. Consequently, in October
1998, this program was terminated.
Solvay Pharmaceuticals, B.V.
With the acquisition of the assets of Cadus, OSI assumed a Collaborative
Research and License Agreement effective as of November 1, 1995 which Cadus had
with Solvay. The collaboration is directed toward GPCR drug discovery in
differing fields of use. OSI's fields of use include cancer, asthma and
inflammatory diseases. Solvay's fields of use include cardiovascular, central
nervous system disorders and gastrointestinal diseases.
Under the agreement, the parties are to develop and manufacture screens
that incorporate targets which are the subject of the agreement. The screens are
to enable Solvay and OSI to test compounds for biological activity as part of
their respective drug discovery efforts in their respective fields. The parties
are responsible for the identification of targets and OSI undertakes assay
development using funds from Solvay. In exchange for milestone and royalty
payments, Solvay maintains sole responsibility for pre-clinical and clinical
development as well as marketing and commercialization of any lead compound it
discovers from its use of the screens developed as part of the collaboration.
Under the agreement, Cadus granted to Solvay a worldwide license in
Solvay's fields of use to, among other things, use and practice the screens to
identify and confirm potential human therapeutics. The license is exclusive for
the term of the research program, or longer if Solvay has identified or
confirmed a potential product during the exclusive period, and non-exclusive for
five years following the research program. In exchange for these licenses,
Solvay will pay OSI, as Cadus' successor, license fees and royalties on product
sales. If Solvay discontinues the development of candidate compounds, OSI, as
Cadus' successor, will have the sole and exclusive right to develop, use,
manufacture and sell all products resulting from the collaboration, and OSI will
pay milestones and royalties to Solvay. Each of the parties has rights and
obligations to prosecute and maintain patent rights related to specified areas
of the research under the agreement. The term of the research program is until
December 31, 2000.
Novartis Pharma AG
OSI entered into an agreement with Novartis in April 1995 for the
development of TGF-Beta 3 for various indications. TGF-Beta 3 is a naturally
occurring human growth factor, first isolated by OSI, that exerts either
stimulatory or inhibitory effects depending upon the particular cell type to
which it is applied. This agreement granted to Novartis an exclusive, worldwide
license to use and sell TGF-Beta 3 products for wound healing and oral
mucositis, as well as certain other indications, in exchange for royalty
payments to OSI on the sale of TGF-Beta 3 products. During 1998, Phase II
clinical trials being conducted by Novartis for both wound healing and oral
mucositis failed to achieve their primary clinical end points. Consequently, no
further clinical development of TGF-Beta 3 by Novartis for either wound healing
or oral mucositis has been anticipated.
On May 31, 1999, the parties amended their agreement. The parties changed
certain terms of the agreement including the definition of licensed indications,
the supply of TGF-Betas, the amount of royalty payments, and the schedules of
OSI's patents and applications and Novartis' patents. Specifically, oral
mucositis and the healing of soft wound tissue were removed from the licensed
indications. Novartis
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acknowledged in the amendment that it has discontinued development of products
for the indications of oral mucositis and healing of soft wound tissue. The
parties agreed that all licenses which were granted to Novartis with respect to
the discontinued indications are terminated and that OSI is free to continue
development work and to grant licenses to third parties with respect to the
discontinued indications. OSI is also free to use the results of any development
work with respect to the discontinued indications carried out by Novartis prior
to the date of the amendment provided that OSI pays to Novartis royalties and/or
certain other agreed-upon amounts with respect to sales of products resulting
from any continued development work by OSI or its licensee. Under the amendment,
the new licensed indications are bone, cartilage and tendon repair. Novartis'
option was changed in the amendment from an option to include in the definition
of licensed indications all indications not already included to (a) an exclusive
option to include in licensed indications the treatment of transplant patients
(e.g., graft protection), the treatment of ischemia (e.g., angina pectoris and
peripheral vascular disease), the treatment of stroke patients, and the
treatment of inflammatory bowel disease, and (b) a non-exclusive option to
include any other additional indications relating to TGF-Betas (other than the
discontinued indications). The payment terms for the option were also amended
and the time period to exercise the option was extended until May 31, 2003.
Helicon Therapeutics, Inc.
In July 1997, OSI, Cold Spring Harbor Laboratory and Hoffman-La Roche Inc.
formed Helicon, a new Delaware corporation. In exchange for approximately 30% of
Helicon's outstanding capital stock, OSI contributed to Helicon molecular
screening services and a nonexclusive license with respect to certain screening
technology. Cold Spring Harbor Laboratory contributed a royalty-free license to
commercialize certain technology relating to genes associated with long-term
memory in exchange for a portion of Helicon's outstanding capital stock.
Hoffman-La Roche contributed cash for a portion of Helicon's outstanding capital
stock.
The parties entered into various collaborative research and license
agreements pursuant to which they were to jointly pursue the discovery,
development and commercialization of novel drugs for the treatment of long-term
memory disorders and other central nervous system dysfunctions. The initial term
of the collaborative program was three years, commencing as of July 1, 1997. As
of July 1, 1999, Hoffman-La Roche terminated its participation in the program,
the terms of which termination are currently being negotiated. Helicon received
funding from Hoffman-La Roche for the first two years of the program. OSI may
provide to Helicon OSI personnel to conduct screening and services and a license
to use OSI's compound library for research purposes. OSI is currently
contributing funds to Helicon on an as-needed basis in amounts tied to the costs
of conducting research activities.
BioChem Pharma, Inc.
Pursuant to an agreement, dated March 19, 1999, OSI and BioChem (formerly
BioChem Pharma (International) Inc.) amended their Collaborative Research,
Development and Commercialization Agreement, effective as of May 1, 1996,
terminating certain provisions contained therein, including, without limitation,
provisions establishing the research program. Under the amended agreement, OSI
granted BioChem a worldwide, irrevocable, exclusive license, and right to grant
sublicenses, in a certain anti-viral target for a license fee of $2 million
which is included in license fee income in the accompanying consolidated
statement of operations for the year ended September 30, 1999. In addition, each
party will be free to independently pursue the discovery of new compounds in the
Hepatitis B and HIV areas without incurring any responsibility to the other
party. To the extent BioChem completes any clinical trials or pursues any
regulatory approvals for any products covered by the license it will pay
milestones to OSI. In addition, to the extent BioChem commercializes certain
compounds arising out of the joint venture, it will pay royalties to OSI.
INTELLECTUAL PROPERTY
OSI believes that patents and other proprietary rights are vital to its
business. OSI's policy is to protect its intellectual property rights in
technology developed by its scientific staff by a variety of means, including
applying for patents in the United States and other major industrialized
countries. The Company also relies
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upon trade secrets and improvements, unpatented proprietary know-how and
continuing technological innovations to develop and maintain its competitive
position. In this regard, OSI seeks restrictions in its agreements with third
parties, including research institutions, with respect to the use and disclosure
of OSI's proprietary technology. OSI also has confidentiality agreements with
its employees, consultants and scientific advisors.
OSI currently owns 13 U.S. patents and 43 foreign patents. In addition, OSI
currently has 24 pending applications for U.S. patents, 1 of which has been
allowed, and 32 applications for foreign patents, 1 of which have been allowed.
Further, other institutions have granted exclusive rights under their United
States and foreign patents and patent applications to OSI.
Included in the above, OSI has 6 applications for U.S. patents and 6
applications for foreign patents pending which contain composition of matter and
method of use claims for its receptor-subtype specific adenosine receptor
antagonist compounds. The Company intends to aggressively seek patent protection
for all lead compounds discovered or developed in OSI owned development
programs.
OSI has assembled a strong gene transcription patent position. OSI
currently has six U.S. issued patents and two foreign issued patents in this
expanding patent estate. These include U.S. Patent Nos. 5,863,733, 5,665,543 and
5,976,793 which cover the use of reporter genes in many cell-based transcription
assays used for drug discovery. U.S. Patent No. 5,776,502 covers methods of
modulating gene transcription in-vivo using any low molecular weight compound.
Also U.S. Patent Nos. 5,580,722 and 5,846,720 cover modulation of genes
associated with cardiovascular disease. OSI has additional patent applications
pending which should further enhance OSI's patent position in the area of gene
transcription. The Company believes that this technology is in widespread use
throughout the pharmaceutical and biotechnology sectors. OSI is conducting a
non-exclusive out-licensing program for this patent estate. Currently OSI has
licensed this technology to Aurora Biosciences Corporation and Pharmacia &
UpJohn SpA. Under these agreements, OSI receives annual fees together with
milestones and royalty payments from small-molecule gene transcription
modulators developed and marketed as pharmaceutical products. OSI expects to
execute similar additional license agreements with third parties that use this
technology.
There can be no assurance that patents will be issued based upon OSI's
pending patent applications or any applications which it may file in the future,
that any patent issued will adequately protect a commercially marketable product
or process, or that any patent issued will not be circumvented or infringed by
others or declared invalid or unenforceable. Moreover, there can be no assurance
that others may not independently develop the same or similar technology or
obtain access to OSI's proprietary technology. OSI is aware of patents issued to
other entities with respect to technology potentially useful to it and, in some
cases, related to products and processes being used or developed by OSI. OSI
currently cannot assess the effect, if any, that these patents may have on its
operations in the future. The extent to which efforts by other researchers
resulted or will result in patents and the extent to which the issuance of
patents to other entities would have a material adverse effect on OSI or would
force OSI to seek licenses from such other entities currently is unknown as is
the availability to OSI of licenses from such other entities, and whether, if
available, licenses from other entities can be obtained on terms acceptable to
OSI.
COMPETITION
The pharmaceutical and biotechnology industries are intensely competitive.
OSI faces, and will continue to face, intense competition from organizations
such as large pharmaceutical companies, biotechnology companies, academic and
research institutions and government agencies. OSI faces significant competition
from industry participants who are pursuing the same or similar technologies as
those which constitute OSI's technology platform and from organizations that are
pursuing pharmaceutical products or therapies that are competitive with OSI's
potential products. Most of the major pharmaceutical organizations competing
with OSI have greater capital resources, greater R&D staffs and facilities, and
greater experience in drug development, obtaining regulatory approval and
pharmaceutical product manufacturing and marketing. OSI's major competitors
include fully integrated pharmaceutical companies, such as Merck & Co., Inc.,
Glaxo
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Wellcome Inc. and SmithKline Beecham plc, that conduct extensive drug discovery
efforts and are developing novel small molecule pharmaceuticals, as well as
numerous smaller companies.
With respect to OSI's small molecule drug discovery programs, other
companies have potential drugs in clinical trials to treat disease areas for
which OSI is seeking to discover and develop drug candidates. These competing
drug candidates may be further advanced in clinical development than are any of
OSI's potential products in its small molecule programs and may result in
effective, commercially successful products. Even if OSI and its collaborative
partners are successful in developing effective drugs, there can be no assurance
that OSI's products may be able to compete effectively with these products.
Furthermore, OSI cannot be certain that its competitors will not succeed in
developing and marketing products that either are more effective than those that
may be developed by OSI and its collaborative partners or are marketed prior to
any products developed by OSI or its collaborative partners.
In the cancer field, OSI's lead drug candidates are being developed by its
partner Pfizer. CP-358,774, an EGFR inhibitor and the most advanced drug
candidate, is currently in Phase II trials. At least two competitors,
Astra-Zeneca and Imclone also have compounds in clinical testing for this
target. CP-609,754, currently in Phase I trials, is being developed as a
farnesyl transferase inhibitor and has recently entered Phase I clinical trials.
This target is also the subject of active research and development at several
other companies including Merck & Co., Inc. and Johnson & Johnson. The
OSI/Pfizer alliance has a major effort in the area of angiogenesis. Several
other biotechnology and pharmaceutical companies are pursuing novel therapeutics
for angiogenesis including Bristol-Myers Squibb Co., Entremed, Inc. and Sugen,
Inc. (Pharmacia & UpJohn, Inc.).
Companies pursuing different but related fields also present significant
competition for OSI. For example, research efforts with respect to gene
sequencing and mapping are identifying new and possibly superior target genes.
In addition, alternative drug discovery strategies, such as rational drug
design, may prove more effective than those pursued by OSI. Furthermore,
competing entities may have access to more diverse compounds for testing by
virtue of larger compound libraries or through combinatorial chemistry skills or
other means. These include Pharmacopeia, Inc., CombiChem, Inc., ArQule, Inc. and
AxyS Pharmaceuticals, Inc., all of which have major collaborations with leading
pharmaceutical companies. OSI cannot be sure that competitors will not succeed
in developing technologies or products that are more effective than those of OSI
or that would render OSI's products or technologies obsolete or noncompetitive.
OSI's technology platform consists of a variety of cell free and live-cell
assay systems, gene transcription technologies, high throughput drug screening,
and medicinal, combinatorial and natural product chemistry. Pharmaceutical and
biotechnology companies and others are active in all of these areas. Ligand
Pharmaceuticals Inc. and Aurora Biosciences, publicly owned companies, employ
live-cell assays, gene transcription, and high throughput robotics in their drug
discovery operations. Numerous other companies use one or more of these
technologies. Several companies, including Tularik Inc., Signal Pharmaceuticals
Inc. and Scriptgen Pharmaceuticals, Inc., pursue drug discovery using gene
transcription methods. Other organizations may acquire or develop technology
superior to that of OSI.
OSI believes that its ability to compete successfully will be based on,
among other things, its ability to create and maintain scientifically advanced
technology, attract and retain scientific personnel with a broad range of
expertise, obtain patent protection or otherwise develop proprietary products or
processes, enter into collaborative arrangements, and, independently or with its
collaborative partners, conduct clinical trials, obtain required government
approvals on a timely basis, and commercialize its products.
GOVERNMENT REGULATION
OSI and its collaborative partners are subject to, and any potential
products discovered and developed must comply with, comprehensive regulation by
the FDA in the United States and by comparable authorities in other countries.
These national agencies and other federal, state, and local entities regulate,
among other things, the pre-clinical and clinical testing, safety,
effectiveness, approval, manufacture, labeling, marketing, export, storage,
record keeping, advertising, and promotion of pharmaceutical and diagnostic
products.
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The process required by the FDA before pharmaceutical products may be
approved for marketing in the United States generally involves: (i) pre-clinical
laboratory and animal tests, (ii) submission to FDA of an investigational new
drug application (IND), which must become effective before clinical trials may
begin, (iii) adequate and well controlled human clinical trials to establish the
safety and efficacy of the drug for its intended indication, (iv) submission to
the FDA of a new drug application (NDA) or, in the case of biological products,
such as TGF-Beta 3, a product license application (PLA), and (v) FDA review of
the NDA or PLA in order to determine, among other things, whether the drug is
safe and effective for its intended uses. There is no assurance that FDA review
process will result in product approval on a timely basis, if at all.
Pre-clinical tests include laboratory evaluation of product chemistry and
formulation, as well as animal studies, to assess the potential safety and
efficacy of the product. Certain pre-clinical tests must comply with FDA
regulations regarding current GLP. The results of the pre-clinical tests are
submitted to the FDA as part of an IND and are reviewed by the FDA prior to the
commencement of clinical trials.
Clinical trials are conducted under protocols that detail matters such as
the objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as
part of the IND.
Clinical trials are typically conducted in three sequential phases, which
may overlap. During Phase I, when the drug is initially given to human subjects,
the product is tested for safety, dosage tolerance, absorption, metabolism,
distribution and excretion. Phase II involves studies in a limited patient
population to: (i) evaluate preliminarily the efficacy of the product for
specific, targeted indications, (ii) determine dosage tolerance and optimal
dosage, and (iii) identify possible adverse effects and safety risks. Pivotal or
Phase III trials are undertaken in order to further evaluate clinical efficacy
and to further test for safety within an expanded patient population. The FDA
may suspend or terminate clinical trials at any point in this process if it
concludes that clinical subjects are being exposed to an unacceptable health
risk.
FDA approval of OSI's and its collaborators' products, including a review
of the manufacturing processes and facilities used to produce these products,
will be required before they may be marketed in the United States. The process
of obtaining approvals from the FDA can be costly, time consuming and may be
affected by unanticipated delays. There can be no assurance that approvals of
OSI's proposed products, processes or facilities will be granted on a timely
basis, if at all. Any failure to obtain or delay in obtaining such approvals
would have a material adverse effect on OSI's business, financial condition and
results of operations. Moreover, even if regulatory approval is granted, the
approval may include significant limitations on indicated uses for which a
product could be marketed.
Among the conditions for NDA approval is the requirement that the
prospective manufacturer's manufacturing procedures conform to good
manufacturing practices, or GMP, requirements, which must be followed at all
times. In complying with those requirements, manufacturers (including a drug
sponsor's third-party contract manufacturers) must continue to expend time,
money and effort in the area of production and quality control to ensure
compliance. Domestic manufacturing establishments are subject to periodic
inspections by the FDA in order to assess, among other things, GMP compliance.
To supply products for use in the United States, foreign manufacturing
establishments must comply with GMP and are subject to periodic inspection by
the FDA or by regulatory authorities in some countries under reciprocal
agreements with the FDA.
Both before and after approval is obtained, a product, its manufacturer and
the holder of the NDA for the product are subject to comprehensive regulatory
oversight. Violations of regulatory requirements at any stage, including the
pre-clinical and clinical testing process, the approval process, or thereafter
(including after approval) may result in various adverse consequences, including
the FDA's delay in approving or refusal to approve a product, withdrawal of an
approved product from the market, and the imposition of criminal penalties
against the manufacturer and NDA holder. In addition, later discovery of
previously unknown problems may result in restrictions on the product,
manufacturer or NDA holder, including withdrawal of the product from the market.
Furthermore, new government requirements may be established that could delay or
prevent regulatory approval of OSI's products under development.
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For marketing outside the United States, OSI and its collaborators and the
drugs developed by them, if any, will be subject to foreign regulatory
requirements governing human clinical trials and marketing approval for drugs.
The requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country. In addition,
before a new drug may be exported from the United States, it must be the subject
of an approved NDA or comply with FDA regulations pertaining to INDs.
In addition to regulations enforced by the FDA, OSI must also comply with
regulations under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and future federal, state or local regulations.
OSI's R&D activities involve the controlled use of hazardous materials,
chemicals and various radioactive compounds. Although OSI believes that its
safety procedures for handling and disposing of hazardous materials comply with
the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, OSI could be held liable for any
damages, which could exceed OSI's resources.
EMPLOYEES
OSI believes that its success is largely dependent upon its ability to
attract and retain qualified personnel in scientific and technical fields. As of
November 30, 1999, OSI employed 195 persons worldwide (144 in the United
States), of whom 158 were primarily involved in R&D activities, with the
remainder engaged in executive and administrative capacities. Although OSI
believes that it has been successful to date in attracting skilled and
experienced scientific personnel, competition for personnel is intense and there
can be no assurance that OSI will continue to be able to attract and retain
personnel of high scientific caliber. OSI considers its employee relations to be
good.
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CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
(Cautionary Statements under the Private Securities Litigation Reform Act of
1995, as amended)
This report contains forward-looking statements that do not convey
historical information, but relate to predicted or potential future events, such
as statements of OSI's plans, strategies and intentions, or its future
performance or goals for OSI's product development programs. These statements
can often be identified by the use of forward-looking terminology such as
"believes," "expects," "intends," "may," "will," "should" or "anticipates" or
similar terminology. The statements involve risks and uncertainties and are
based on various assumptions. Investors and prospective investors are cautioned
that these statements are only projections. In addition, any forward-looking
statement that OSI makes is intended to speak only as of the date on which OSI
made the statement. OSI will not update any forward-looking statement to reflect
events or circumstances that occur after the date on which the statement is
made. The following risks and uncertainties, among others, may cause OSI's
actual results to differ materially from those described in forward-looking
statements made in this report or presented elsewhere by management from time to
time.
Although OSI has potential products that appear to be promising at early
stages of development, all of OSI's products will require significant research
and development and may not reach the market for a number of reasons, conditions
which would limit OSI's revenue potential.
Potential products may be found ineffective or cause harmful side effects
during pre-clinical testing or clinical trials, fail to receive necessary
regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical to produce, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. There is no guarantee
that OSI's or its collaborative partners' product development efforts will be
successfully completed, that required regulatory approvals will be obtained or
that any products, if introduced, will be successfully marketed or achieve
customer acceptance.
To date, OSI has generated no revenue from the sale of pharmaceutical
products. Except for CP-358,774, with respect to which Pfizer has completed
Phase I safety and toxicity studies and has initiated Phase II clinical trials,
and CP-609,754 for which Pfizer has opened an IND for Phase I clinical trials,
all of the lead compounds in OSI's small molecule drug discovery programs are in
either a discovery or pre-clinical evaluation phase. Any products resulting from
OSI's development programs are not expected to be commercially available for
several years, if at all.
OSI's live-cell assays are novel as a drug discovery method and have not
yet been shown to be successful in the development of any commercialized drug.
Furthermore, OSI's drug discovery assays are focused on several target genes and
other molecular targets, the functions of many of which have not yet been fully
determined. OSI's live-cell assay technology may not result in lead compounds
that will be safe and useful. Development of new pharmaceutical products is
highly uncertain. Consequently, OSI's drug discovery technology may not result
in any commercially successful products.
Failure to obtain required governmental approvals will delay or preclude
OSI's partners from marketing drugs discovered or developed by OSI or limit the
commercial use of these products.
Prior to marketing by a collaborative partner, any new drug discovered by
OSI must undergo an extensive regulatory approval process in the United States
and other countries. This regulatory process, which includes pre-clinical
testing and clinical trials of each compound to establish its safety and
efficacy, can take many years and require the expenditure of substantial
resources. Moreover, data obtained from pre-clinical and clinical activities are
susceptible to varying interpretations that could delay, limit or prevent
regulatory approval.
Even if OSI obtains regulatory approval, a marketed product and its
manufacturer are subject to continuing review, including post-marketing
surveillance. Discovery of previously unknown problems with a product of OSI or
its manufacturer may have adverse effects on OSI's business, financial condition
and results of operations, including the withdrawal of the product from the
market. Violations of regulatory requirements at any stage may result in various
unfavorable consequences to OSI, including the FDA's delay in approving or its
refusal to approve a product, withdrawal of an approved product from the market
and the imposition of
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criminal penalties against the manufacturer and the new drug application holder.
Although Pfizer submitted an investigational new drug application, or IND, to
the FDA with respect to the epidermal growth factor receptor inhibitor
CP-358,774 and CP-609,754 for farnesylation, OSI has not submitted an IND for
any product candidate, and no product candidate has been approved for
commercialization in the United States or elsewhere. OSI intends to file INDs
for product candidates in its internal proprietary programs, but to rely on its
partners to file INDs in its collaborative programs. No assurance can be given
that OSI or any of its collaborative partners will be able to conduct clinical
testing or obtain the necessary approvals from the FDA or other regulatory
authorities for any products.
If OSI or its collaborative partners do not successfully develop,
commercialize, manufacture and market product candidates, OSI may never achieve
product revenues or profitability.
OSI has had net operating losses since its inception in 1983. At September
30, 1999, OSI's accumulated deficit was approximately $65.6 million. OSI's
losses have resulted principally from costs incurred in R&D, and from general
and administrative costs associated with OSI's operations. These costs have
exceeded OSI's revenues, which to date have been generated principally from
collaborative research agreements.
OSI expects to incur substantial additional operating expenses over the
next several years as a result of increases in its expenses for R&D, including
enhancements in its drug discovery technologies and with respect to its internal
proprietary projects. If OSI does not obtain additional third party funding for
these expenses, OSI expects that the expenses will result in increased losses
from operations. OSI does not expect to generate revenues from the sale of its
small molecule products for several years. OSI's future profitability depends,
in part, on:
- OSI's collaborative partners obtaining regulatory approval for
products derived from its collaborative research efforts;
- OSI's collaborative partners successfully producing and marketing
products derived from technology or rights licensed from OSI; and
- OSI's entering into agreements for the development, commercialization,
manufacture and marketing of any products derived from OSI's internal
proprietary programs.
OSI's future capital requirements will depend on many factors, which
include:
- Continued scientific progress in its R&D programs;
- Size and complexity of its R&D programs;
- Progress of pre-clinical testing and early stage clinical trials;
- Time and costs involved in obtaining regulatory approvals for its
product candidates;
- Costs involved in filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights;
- Competing technological and market developments;
- Establishment of additional collaborative arrangements;
- Costs of manufacturing arrangements;
- Costs of commercialization activities; and
- Costs of product in-licensing and strategic acquisitions, if any.
OSI intends to seek additional funding through arrangements with corporate
collaborators and may seek additional funding through public or private sales of
OSI's securities, including equity securities. Additional funding may not be
available on reasonable or acceptable terms, if at all. Furthermore, any
additional equity financings would be dilutive to OSI's stockholders. If
adequate funds are not available, OSI may be required to curtail significantly
one or more of its R&D programs or obtain funds through arrangements with
collaborative partners or others that may require OSI to relinquish its rights
to a number of its technologies or product candidates. If funding from one or
more of its collaborative programs were reduced or terminated, OSI would be
forced to devote additional internal resources to product development, scale
back or terminate selected development programs or seek alternative
collaborative partners.
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OSI's products may be subject to delays in manufacture if collaborative
partners or outside contractors give other products greater priority than OSI's
products.
The manufacture of OSI's candidate products for clinical trials and the
manufacture of resulting products for commercialization purposes are subject to
current good manufacturing practices regulations promulgated by the FDA. OSI
relies on collaborative partners or outside contractors to manufacture its
products in their FDA approved manufacturing facilities. OSI's collaborative
agreements allow its collaborative partners significant discretion in electing
to pursue or not to pursue the activities upon which it relies. The Company
cannot control the amount and timing of resources its collaborative partners
devote to its programs or potential products. OSI's products may be in
competition with other products for priority of access to these facilities. For
this and other reasons, there can be no assurance that OSI's collaborative
partners will manufacture OSI's products in an effective or timely manner. If
not performed in a timely manner, the clinical trial development of OSI's
product candidates or their submission for regulatory approval could be delayed,
and OSI's ability to deliver products on a timely basis could be impaired or
precluded. OSI may not be able to enter into any necessary third party
manufacturing arrangements on acceptable terms if at all. OSI's current
dependence upon others for the manufacture of its products could adversely
affect its future profit margin, if any, and its ability to commercialize
products on a timely and competitive basis.
OSI's limited experience in conducting clinical trials and reliance on the
pharmaceutical companies with which it collaborates for clinical development and
regulatory approvals may cause delays, terminations or setbacks in OSI's
business.
To date, only two product candidates have entered clinical trials in OSI's
small molecule drug discovery operations. Only one of the compounds discovered
using OSI's small molecule discovery technology has been proven safe in humans
and none have yet demonstrated efficacy. The failure of OSI to increase the
number of product candidates eligible for clinical trials and unsuccessful
completion of clinical trials in the future could adversely affect OSI's
business, condition and results of operation.
If OSI is unable to protect its intellectual property rights, its ability
to develop and commercialize its technology and products will be severely
limited.
OSI's success depends, in part, on its or its collaborative partners'
ability to:
- Obtain patent protection for product candidates;
- Maintain trade secret protection; and
- Operate without infringing on the proprietary rights of third parties.
The degree of future protection for OSI's proprietary rights will remain
uncertain if:
- OSI's pending patent applications are not approved for any reason;
- OSI is unable to develop additional proprietary technologies that are
patentable; or
- Patents issued do not provide OSI with a competitive advantage.
Furthermore, OSI cannot be sure that third parties:
- Will not independently develop similar or alternative technologies;
- Duplicate any of OSI's technologies;
- If patents are issued to OSI, design around OSI's patented
technologies; or
- Will not challenge issued patents.
OSI may incur substantial costs protecting its proprietary rights or
defending against charges of infringement of other's proprietary rights.
OSI is seeking to license to other companies rights to practice under OSI's
gene transcription patent estate. OSI believes technology and practices covered
by these patents are in widespread use in the pharmaceutical and biotechnology
industries. To date, OSI has granted two licenses to use its gene transcription
patent. If other pharmaceutical and biotechnology firms which use OSI's patented
technology are not willing to negotiate license arrangements with OSI on
reasonable terms, OSI may have to choose between (i) abandoning its licensing
strategy, or (ii) initiating legal proceedings against those firms. Legal
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action, including patent infringement litigation, would be extremely costly.
Consequently, OSI's strategy to commercialize its gene transcription patent
estate through licensing may not be successful.
If OSI is unable to maintain or enter into arrangements with collaborative
partners, its ability to proceed with R&D programs, manufacturing and the sale
of its product candidates will be severely limited.
OSI's limited resources and business strategy require it to enter into
collaborative arrangements with various research partners. OSI is largely
dependent on its collaborative partners for:
- Pre-clinical testing;
- Clinical development;
- Regulatory approval;
- Manufacturing and marketing products;
- Compound libraries;
- Patent protection and proprietary technology; and
- Funding.
Like many small biopharmaceutical companies, OSI's business strategy
includes funding from larger pharmaceutical companies to collaborate with to
support its R&D programs and the commercialization of OSI's product candidates.
In trying to attract partners to collaborate with, OSI faces serious competition
from other small biopharmaceutical companies and even in-house R&D staffs of
larger pharmaceutical companies. Failure to enter into collaborative agreements
on acceptable terms could have material adverse effects on OSI's business,
financial condition and results of operation.
If any of OSI's collaborative partners breach or terminate their agreements
with OSI or otherwise fail to conduct its collaborative activities successfully
in a timely manner, OSI's pre-clinical or clinical development,
commercialization of product candidates or research programs would be delayed or
terminated.
OSI faces potential problems with its collaborative partners which could
affect its success including:
- Competition with its collaborators;
- Potential disputes with collaborators concerning ownership rights to
developed technology;
- Short term of collaborative agreements which may require their
renewal;
- Delays; and
- Consolidations of pharmaceutical companies.
OSI's success depends, in large part, on the efforts of its collaborative
partners. Potential disagreements between collaborators and OSI, such as
disputes over ownership rights to any technology developed together, could lead
to delays in the collaborative R&D programs, or the commercialization of product
candidates. If OSI is confronted with disputes with its collaborative partners,
it may face costly delays to its research and development programs and even
litigation.
Because OSI generally agrees not to conduct independently, or with any
third party, any research that is competitive with the research conducted under
its collaborative programs, its collaborative relationships may have the effect
of limiting the areas of research OSI may pursue.
Under its collaborative research agreements with most of its partners, OSI
is prohibited, during the terms of the agreements, from pursuing or sponsoring
research aimed at the discovery of drugs which are the subject of the
collaborations. OSI's collaborative partners, however, may develop, either alone
or with others, products that are similar to or competitive with the products or
potential products that are the subject of OSI's collaborations with their
partners. Competing products, either developed by the collaborative partners or
to which the collaborative partners have rights, may mean their withdrawal of
support for OSI's product candidates, which may result in the impairment of
OSI's business, financial condition and results of operations.
Because all of OSI's collaborative programs with pharmaceutical companies
have terms of six or fewer years, which is generally less than the period
required for the discovery, clinical development and commerciali-
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zation of most drugs, the continuation of any of OSI's drug discovery and
development programs may be dependent on the periodic renewal of OSI's
collaborative arrangements.
All of OSI's collaborative research agreements may be terminated under
various circumstances. Some of OSI's collaborative research agreements provide
that, upon expiration of a specified period after commencement of the agreement,
its collaborative partners have the right to terminate the agreement on short
notice without cause. The termination or non-renewal of any collaborative
relationship could set back OSI's efforts in R&D.
Consolidations among companies with which OSI is engaged in collaborative
research can result in the diminution or termination of, or delays in, one or
more of OSI's collaborative programs.
In 1995, the pharmaceutical operations of three companies with which OSI
had collaborative research agreements, Hoechst AG, Hoechst Roussel
Pharmaceuticals, Inc. and Marion Merrell Dow Inc. were combined into one entity,
HMRI. This combination resulted in delays in OSI's collaborative programs with
each of the constituent companies and a reduction in the aggregate funding
received by OSI. Continued consolidations among large pharmaceutical companies
could produce similar problems.
Failure to attract, retain and motivate skilled personnel and cultivate key
academic collaborations will delay OSI's product development programs and
adversely affect its research and development efforts.
OSI is a small company with approximately 195 employees, and its success
depends on its continued ability to attract, retain and motivate highly
qualified management and scientific personnel and on its ability to develop and
maintain important relationships with leading academic institutions and
scientists. In particular, OSI's product development programs depend on its
ability to attract and retain highly skilled chemists and clinical development
personnel. Competition for personnel and relationships is intense. If OSI loses
the services of any of these personnel, it could impede significantly the
achievement of its research and development objectives. In particular, the loss
of Colin Goddard, OSI's Chief Executive Officer, would be detrimental to OSI.
OSI does not know if it will be able to attract, retain or motivate personnel.
If the continuing efforts of government and third-party payors to contain
or reduce the costs of health care succeed, the price that OSI or any of its
collaborative partners or other licensees receives for any drugs it may discover
or develop it may develop in the future may decrease significantly.
In foreign markets, pricing and profitability of prescription
pharmaceuticals are subject to government control. In the United States, OSI
expects that there will continue to be a number of federal and state proposals
to implement similar government control. In addition, increasing emphasis on
managed care in the United States will continue to put pressure on the pricing
of pharmaceutical products. To the extent that cost control initiatives have an
adverse effect on OSI's collaborative partners, OSI's ability to commercialize
its products and to realize royalties may also be adversely affected.
If OSI's licensees or collaborative partners are required to obtain
licenses from others, OSI's royalties on any commercialized products could be
reduced by up to 50 percent.
The extent to which efforts by other researchers have resulted or will
result in patents and the extent to which the issuance of patents to others
would have a material adverse effect on OSI or would force OSI or its
collaborative partners or other licensees to obtain licenses from others, if
available, is currently unknown. OSI's products, operations or technology may
infringe upon the rights of any third party.
OSI relies on trade secrets to protect technology where patent protection
is not believed to be appropriate or obtainable. OSI has entered, and will
continue to enter, into confidentiality agreements with its employees,
consultants, licensors and collaborative partners. Without patent protection,
others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to OSI's trade secrets.
Furthermore, obligations of confidentiality may not be honored and OSI may not
be able to effectively protect its rights to proprietary information.
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The use of any of OSI's potential products in clinical trials and the sale
of any approved products may expose OSI to liability claims resulting from the
use of products or product candidates.
Potential product liability claims might be made directly by consumers,
pharmaceutical companies, including OSI's collaborative partners, or others. OSI
does not independently maintain product liability insurance coverage for claims
arising from the use of its products in clinical trials. Insurance coverage is
becoming increasingly expensive, and no assurance can be given that OSI will be
a named insured with respect to trials underway by its collaborative partners or
others or obtain insurance in the future at a reasonable cost or in sufficient
amounts to protect OSI. OSI's inability to obtain adequate liability insurance
could have a material adverse effect on OSI's business, financial condition and
results of operations. A successful product liability claim or series of claims
brought against OSI could have a material adverse effect on its business,
financial condition and results of operations.
If OSI's competitors succeed in developing technologies or products that
are more effective than its own, OSI's products or technologies may be rendered
obsolete or noncompetitive.
OSI faces significant competition from industry participants who are
pursuing the same technologies as OSI and from organizations that are pursuing
pharmaceutical products that are competitive with OSI's potential products. Most
of the organizations competing with OSI have more (1) capital resources, (2) R&D
staffs and facilities, (3) experience in drug discovery and development, (4)
experience obtaining regulatory approval and (5) experience in pharmaceutical
product manufacturing and marketing than OSI. OSI's major competitors include
fully integrated pharmaceutical companies, such as Merck & Co., Inc., Glaxo
Wellcome Inc. and SmithKline Beecham plc, that have extensive drug discovery
efforts and are developing novel small molecule pharmaceuticals, as well as
numerous smaller companies. Companies pursuing different but related fields also
present significant competition for OSI. For example, research efforts with
respect to gene sequencing and mapping are identifying new and potentially
superior target genes.
Biotechnology and related pharmaceutical technology have undergone rapid
and significant change. OSI expects the technology associated with OSI's R&D
will continue to develop rapidly. OSI's future success will depend in large part
on its ability to maintain a competitive position with respect to this
technology. Rapid technological development by OSI or others may result in
compounds, products or processes becoming obsolete before OSI recovers any
expenses incurred to develop a compound, product or process.
If OSI is unable to remedy Y2K problems, its operations, including OSI's
R&D programs and basic business enterprise, may be substantially disrupted.
OSI has worked to resolve the potential impact of the Y2K problem on the
processing of date-sensitive information by OSI's computerized information
system. OSI cannot be sure that it has identified, replaced or corrected all of
its internal computer systems successfully. OSI would then be at a competitive
disadvantage relative to companies that have successfully corrected their Y2K
problems. Other than making inquiries to third parties, OSI is not in a position
to independently verify the Y2K compliance of third parties, such as its
suppliers, vendors and collaborators. Difficulties and failure of suppliers,
vendors or collaborators to be Y2K compliant could result in risks and
uncertainties that may have a material adverse effect on OSI's business,
financial condition and results of operation.
25
<PAGE> 27
SIGNATURE
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: January 24, 2000
66
